It was almost a Damascene moment. In a wide-ranging and thought-provoking interview with The New York Times last month, Bill Miller, chairman of Legg Mason Capital Management, made the following comment. "The question we are asking ourselves is: should we think more broadly about probability, about the high-impact events and protecting against them by having broader exposure to the market?" The article does not give this comment any special prominence. But for the fund management industry it is a prognostication with profound implications.
For those unfamiliar with Miller or the current situation at Legg Mason, a little context is necessary. Miller built his formidable reputation as a fund manager by beating the S&P500 for 15 consecutive years between 1990 and 2005. It is a track record that is second to none. Moreover, it was built with pure stock-picking acumen. His typical portfolio held fewer than 40 names. Miller was blowing a big fat raspberry at the efficient market hypothesis year after year. He was the champion of active fund managers everywhere and rightly so – he justified their existence.
More recently, however, things have turned sour.