Just to keep some perspective. The stock market doesn't always go up. Miller's Legg Mason Opportunity Trust fund fell 85% peak to trough in the crisis, from $22.51 to $3.37. He did, however, go on to have a market-beating track record even with this decline.
https://www.sec.gov/Archives/edgar/data/1096338/000119312509046308/dncsr.htm
Most major stock indices were down significantly in 2008. The S&P 500 Index was down 37.0%, its worst year since 1937. Other U.S. indices, the Dow Jones Industrial Average (“DJIA”) and NASDAQ Composite IndexF fell 31.9% and 40.0%, respectively. Globally, stocks fared just as poorly. Major indices were down 65% in China, 46% in Hong Kong, 41% in Japan, 28% in the UK, 73% in Russia and 53% in India. Both growth and value strategies suffered as the Russell 1000 Growth IndexG dropped 38.4% and the Russell 1000 Value IndexH was down 36.9%. Financials, at the heart of many of the system’s problems underperformed other sectors. The S&P 500 Financials IndexI dropped 55.3% for the year. Sectors associated with relative stability outperformed, with the S&P 500 Index’s Consumer Staples and Health Care sectors losing 15.4% and 22.8%, respectively.
While the last quarter was the worst, credit problems plagued the markets all year long causing stocks to fall in every quarter. The U.S. financial system was at the center of the storm. Continuing trends started in 2007, credit spreads widened, home prices declined, credit issues expanded and financial companies suffered large write-downs. By mid-year, the S&P was down 12% for the year, Case-Shiller home prices had fallen 19% from the 2006 peak and unemployment had risen to 5.5%. Crude oil prices peaked in July at $147 per barrel as many believed the supply of oil would have trouble keeping up with growing demand in China, India and other emerging markets. Conditions deteriorated in the fourth quarter. In September, the government nation- alized Freddie Mac and Fannie Mae by placing them into a conservatorship. A crisis of confidence followed, and the government was forced to supply AIG with financial assistance, while Lehman Brothers declared bankruptcy. The credit system stopped functioning as investors rushed to safety, liquidity dried up and panic ensued. The day of Lehman’s bankruptcy, 3-month Treasury yields fell 66 basis pointsN (“bps”) to 0.88% and TED spreadsO jumped from 135 bps to 201 bps. One of the largest and oldest U.S. money market funds “broke the buck” dropping below a $1 net asset value (“NAV”)P and investors rushed to pull their money. The stock market suffered two consecutive crashes, in October and November, dropping over 22% month-to-date at each respective monthly low. The result of the trauma was massive losses throughout the system resulting in one of the worst declines on record. Through the November low, the S&P 500 Index had experienced a 53% correction from the October 2007 high, comparable in size to the 2000 Tech Bubble, 1973 Oil Crisis or the initial 1929 Crash (through the 1929 low). A 20% rally off the November bottom wasn’t enough to stop this from being the third worst quarter and the worst year in the post-Great Depression era. A flight to quality assets continued through year end, as evidenced by negative one- month Treasury yields.
The market made its bottom around the time the government supported Citigroup for the second time, injecting more capital into the bank and guaranteeing some of its assets against losses. Throughout the year, the government responded to the unfolding crisis with a number of measures. The Federal Reserve Board (“Fed”)Q lowered its target federal funds rateR to between 0% and 0.25% from 4.25% at the beginning of the year, and announced a variety of programs to provide liquidity to the system, including increasing lending to banks and buying mortgage-backed securities. The U.S. Department of the Treasury announced a guarantee program for money market funds in September and injected capital into banks. Congress passed a $150 billion stimulus bill in February, followed by a $700 billion bailout plan in October (the initial failure to pass this plan caused the market much angst). By the end of the year, the economy was suffering from all the harm done to the system. December’s unemployment rate reached 7.2%, crude had fallen over $100 to a low of $31.41 and deflation, rather than inflation, was the concern. Also, the National Bureau of Economic Research (“NBER”) officially declared that a recession had begun a year earlier.
For the 12 months ended December 31, 2008, Primary Class shares of Legg Mason Opportunity Trust returned -65.49%. The Fund’s unmanaged benchmark, the S&P 500 Index, returned -37.00% for the same period. The Lipper Multi-Cap Growth Funds Category Average returned -41.87% over the same time frame. Underperformance of the Fund was driven mostly by overweight positions in areas of the market most hurt by the credit crisis, namely the Financials and Housing sectors. Also, the Fund pursued a valuation-based strategy, which proved unsuccessful in a year where valuation strategies underperformed as valuation spreads reached an all-time wide of 4.5 standard deviations. Investors’ risk aversion wreaked havoc on any names with debt or deteriorating business conditions. Individual names in the Fund that most hurt performance tended to be the most levered companies, including Level 3 Communications and Domus Co-Investment Holdings (Realogy), as market fears increased about credit availability. Other top detractors included NII Holdings, Amazon.com and Eastman Kodak.
Bill Miller, CFA
Submitted January 28, 2018 at 08:30AM by UncleLongHair0 http://ift.tt/2rKvJfN
