Bill Miller Looks to Housing for Redemption

His Opportunity fund leads the pack with bets on homebuilders | The stocks “are not even close to reflecting that long cycle”

Charles Stein


Bill Miller, who beat the Standard & Poor’s 500-stock index at Legg Mason’s Value Trust for 15 years through 2005 before falling into a deep slump, is seeking redemption as a housing bull. Miller’s Legg Mason Capital Management Opportunity Trust has bet about a third of its holdings on a property rebound through homebuilders, mortgage real estate investment trusts, and loan insurers. The move has propelled the $945 million fund to a return of 30 percent this year through Oct. 15, surpassing 99 percent of its peers, according to data compiled by Bloomberg. “Housing fundamentals are likely to be positive for years,” says Miller, 62. “The stocks have run, but in our judgment are not even close to reflecting that long cycle.”

Miller’s winners this year include homebuilder PulteGroup, which had more than doubled as of Oct. 16 after dropping 16 percent in 2011; Ellington Financial, a mortgage bond investor that’s up 30 percent following a 22 percent decline; and companies tied to a housing rebound, such as Bank of America, the nation’s No. 4 mortgage lender in the second quarter, which gained 70 percent, to $9.44, after plunging 58 percent last year.

The Opportunity fund, which Miller has run since 1999, lost 35 percent in 2011. Miller’s willingness “to go out on a limb and buy things that look ugly” explains the performance swings, says Bridget Hughes, an analyst with research firm Morningstar. “It can be painful sometimes, but when it works, he knocks the ball out of the park.”

While conceding he was too early in expecting a turn in housing, Miller says a bounceback was “a mathematical inevitability” because the housing slump drove starts and purchases so low that pent-up demand was bound to kick in. Housing starts surged 15 percent in September to the highest level in four years.

The Opportunity fund had 13.4 percent of its assets in homebuilders as of June 30, filings show. Like Pulte, fund holding KB Home has more than doubled this year, and Lennar is up 90 percent. Miller also owns stocks with an indirect link to housing, such as discount broker E*Trade Financial, which expanded into home lending and got stuck with a troubled mortgage portfolio. Miller says that an improving housing market and the passage of time will diminish the drag from the loans.

Not all of Miller’s housing bets have worked out. Mortgage insurers Genworth Financial and MGIC Investment are down 13 percent and 53 percent this year, respectively, after losses tied to home loans. Yet investors are missing the positives, Miller says; both firms have been making money on policies written since 2008, even as they continue to “pay through the nose” on those issued from 2003 through 2006.

Robert Shiller, the Yale University professor who predicted the bursting of the dot-com and subprime-mortgage bubbles, doesn’t share Miller’s optimism. Asked about the prospects for a housing revival in an Oct. 5 interview, Shiller said, “Are we at an upward turning point? I am calling that a big question. Most likely nothing much is going to happen.” Miller’s confidence is unshaken. “The surprise,” he says, “is that the economy will get better because housing will get better.”

The bottom line With a big bet on homebuilders, Miller’s Opportunity fund has gained 30 percent this year, beating 99 percent of its peers.


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