1. This case goes back to the year the 2005. Value Trust was an $11. 2 billion mutual fund in the middle of that year and had outperformed for the Standard & Poor’s 500 Index for 14 consecutive years. The fund was managed by William H. Miller III. During those 14 years, the fund experienced an average annual return of 14. 6%. This return outperformed the S & P 500 by 3. 67% per year. Morningstar claimed the Value Trust mutual fund fell behind the S & P 500 in 32 12-month periods out of 152 12-month periods during the 14 year time span of consistently outperforming its benchmark index.

Investment performance can be measured in many different ways. Tracking the investment’s return is a simple way of measuring investment performance. No investments are the same; therefore, each investment’s objectives may be trying to achieve different goals. Some investments are aimed to establish long-term growth, while others try to achieve short-term current income, and some are a combination of the two. When considering measuring mutual fund, or any portfolio, performance, it is important to understand the Annual Total Return of the investment.

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This is computed as the increase or decrease in net asset value plus the fund’s income distributions given as a percentage of the fund’s NAV at the beginning of the investment period. Once the annual total return is established, this can be compared to a benchmark index. There are different benchmarks to use for different investments. Commonly used benchmarks for measuring US stock returns are the Wilshire 5000 Index for the broad market, the S&P 500 Composite Index for large capitalization stocks, and the Russell 2000 Index for small stocks.

In the Value Trust mutual fund case, the most commonly used approaches for measuring performance was the percentage of the annual growth rate of the NAV assuming reinvestment (total return on investment) and the absolute dollar value today of an investment made at some point in time in the past. Those measures were then compared to the benchmark Russell 2000 Index and S & P 500 Composite Index. In making this assessment, I would use benchmarks relative to whatever market I was investing in.

For example, to evaluate the past performance of a portfolio of U. S. large-cap stocks, we may be interested in comparing its total return with that of the S&P 500 during the same period of time. In financial terms, good performance means generating the highest return while suffering minimally from the amount of risk taken on. Great performance in anything, whether it is related to finance, sports, music, you name it, deals with achieving consistent sustained excellence as well. The top performers are the people who produce consistent results over time.

Whether it be a band that has an unlimited amount of consecutively great records, or an athlete like Albert Pujols who is consistently great at hitting season after season, there is a common trend that the good performers are those who are consistent. Especially in finance, when considering the Bill Miller and Value Trust, Miller had achieved consistently better results through bull and bear markets for fourteen consecutive years. The changing economic conditions did not affect his ability to consistently outperform the S & P 500 year after year.

Miller’s investment approach was research intensive and highly concentrated, meaning that nearly 50 % of Value Trust’s assets were invested in just 10 large-cap companies. His developed strategies and investment approach worked well with the market he was investing in. 2. If my parents placed $1,000 into Legg Mason Value Trust in mid-1990, by mid-2005 their investment would be worth $7,722. 70 at a rate of 14. 6%. If they decided to place that $1,000 into the Standard & Poor 500 Index in mid-1990, the investment would be worth $4,739. 52 by mid-2005.

If my parents were more risk averse and placed the $1,000 into a certificate of deposit offered at a local bank, that investment would be worth $2,396. 56 by mid-2005. These calculations bring up the relationship between risk and return. A more conservative mutual fund manager might not take on much risk, and therefore, would yield a lower return. 4. Absolute performance is the return an asset achieves over a certain period of time. Absolute return differs from relative return because it is concerned with the return of a particular asset and does not compare it to any other measure or benchmark.

The absolute return for the Value Trust Fund stated annually, was 14. 6% on average over the fourteen year period (1990-mid2005). Relative to the S & P 500, the Value Trust Fund surpassed its benchmark index by 3. 67% annually. Value Trust earned a cumulative return of 830% from the early 1990’s to mid-2005. Value Trust Fund was a large capitalization growth stock during 2005. In order to understand this fund’s relative performance, it is useful to compare returns to the S & P 500 Composite Index and funds of similar characteristics with Bill Miller’s Value Trust.

The 10-year annualized return on Large Cap funds in the market during 2005 was 6. 94%. The 10-year annualized return on Foreign Large Cap funds was 5. 36%. Value Trust outperformed both of these benchmarks with an annualized 10-year return of 15. 04%. 6. Technical analysis involves the identification of profitable investment opportunities based on trends in stock prices, volume, market sentiment, Fibonacci numbers, etc. Fundamental analysis relies heavily on insights afforded by an analysis of the economic fundamentals of a company and its industry, supply and demand costs, growth prospects, etc.

Technical analysis evaluates a security from the charts, while fundamental analysis approaches security evaluation with the financial statements. 10. By mid-2005, I would suggest wealthy individuals in the area of equity investments to stay away from investing in Legg Mason Value Trust based on the experience and success that has led the manager of the fund to achieve throughout its ability to perform the market year after year. All investments are subject to risk, including possible loss of principal.

The value approach to investing involves the risk that those stocks deemed to be undervalued by the portfolio manager may remain undervalued. Because this Fund expects to hold a concentrated portfolio of a limited number of securities, a decline in the value of these investments would cause the Fund’s overall value to decline to a greater degree than a less concentrated portfolio. The Fund may focus its investments in certain regions or industries, thereby increasing its potential vulnerability to market volatility. All of these issues are important to take into consideration when considering investing in Value Trust.

It is evident that Bill Miller is a great mutual fund manager, and by following some of his own investment strategy ideas, it would be a poor choice to invest in Legg Mason Value Trust. In taking a long-run view, Value Trust would not be worth investing in due to its abnormally large returns that consistently beat out the market benchmark indices. This can only go on for so long, and is always an issue that bears close monitoring when it comes to investor rationality. Since the expectations on this fund are rather high, the chances are the opportunity for greater returns than the fund has been experiencing are not likely.

Bill Miller would advise investors to be cautious of investing in high expectation stocks and he would likely recommend investing in low expectation funds. Value Trust is not a low expectation fund, which make for wiser investments. At this point in time, Value Trust has been looking really good for the past twenty years and may begin to start dropping, so there should be no urgency to make an aggressive play on it. When a stock has been looking bleak, that is the time to invest. The market environment for Value Trust is optimistic, therefore bargain prices are less likely to occur and there is less room for opportunity.