Market beater says crisis has bottomed out

A renowned - and very successful - fund manager has stated the Bear Stearns rescue marked the end of recent panic, writes Proinsias O'Mahony

Legendary American fund manager Bill Miller believes that the worst of the credit crisis is over and that "we have seen the bottom" in financial shares.

In his quarterly letter to shareholders, Miller, who manages over $12 billion (€7.7 billion) in assets for Legg Mason and is famous for beating the S&P 500 for 15 consecutive years between 1991 and 2005, wrote that the credit crisis "culminated this quarter in the collapse and rescue of Bear Stearns, an event that I believe (though no one knows) ended the panic phase of the credit cycle."

While accepting the "economic consequences" of reduced credit, falling house prices and increased risk aversion are "likely to take some time to play out", such issues have been "front-page news for some time" and are "well-discounted by the market".

"I think we will do better from here on, and that by far the worst is behind us," said Miller. He described valuations as "attractive" and corporate balance sheets as being in "excellent shape".

Furthermore, continued improvement in credit spreads should end write-offs in the financial sector and "we may even have some write-ups in the second half instead of writedowns".

Miller's investing style is famously contrarian. "You can get a good sense of what to buy now by looking to see what the worst performing assets or groups were over the past five or six years," he once said, while opining that most investors "want to buy today what they should have bought five or six years ago; call it the five-year psychological cycle".

One of his favourite sayings - "if it's in the papers, it's in the price" - is echoed in his latest letter, where he contended that "we have seen the bottom in financials and consumer stocks, but not necessarily the bottom in headlines about the woes in those sectors". He went on to say that the double-digit return of US housing stocks in 2008, "despite dismal headlines", was evidence that the current malaise is already priced into the market.

Critics argue that Miller has lost his touch, however, and that the latest comments are unsurprising from someone who was heavily invested in financials prior to the credit crunch. His 15-year winning streak came to an end in 2006 and he has lagged the S&P 500 since, enduring a particularly torrid time of late (his fund fell 20 per cent in the first quarter). Furthermore, Miller's February call that financials "appear to have bottomed" turned out to be embarrassingly early, with the fund's investment in Bear Stearns going belly-up over the following month.

This week has provided support to both sides of the argument. Credit Suisse, Switzerland's second-biggest bank, yesterday announced its first loss in five years on foot of a writedown of 5.3 billion Swiss francs (€3.26 billion). Nevertheless, traders shrugged off the news and the share price rose by almost 4 per cent.

Ambac, America's second-biggest bond insurer, suffered a very different fate on Wednesday after reporting $3.1 billion in subprime-related charges and an unexpectedly large operating loss of $6.93 per share (analysts had been expecting a loss of just $1.51 per share). The shares, which had already lost over 90 per cent of their value over the last year, were hammered and ended the day 43 per cent lower. Interim chief executive officer Michael Callen said "the housing market crisis continues to disrupt the global credit markets" and the firm's credit derivatives and direct mortgage portfolios were "severely impacted". In March, Callen reassured investors that "the worst may be behind us". On Wednesday, he admitted "earlier expectations have turned out to be optimistic" and it was impossible to be certain how large losses on mortgage-backed assets might be. The miserable results triggered similar selling in MBIA, the US's largest bond insurer, which declined by 25 per cent.

While panicked investor reaction to the Ambac debacle might suggest that Miller's thesis is wrong, he can contend that the overall market reaction to the news was very subdued, with indices ending the day with slight gains. In March, every Ambac-related rumour was enough to trigger huge sell-offs.

Global financial firms have announced writedowns in the region of $300 billion over the last year. Recent estimates have suggested the final figure will top $1 trillion. However, it is soaring commodity prices rather than financial woes that concern Miller, who warned that continued rises "have the potential to destabilise the global economy".

The other side of the coin is that equity markets "should do well" if commodities break "or even just stop their relentless rise". Ever the contrarian, the embattled fund manager notes that risk aversion remains high. "With most investors being fearful, I think it makes sense to allocate some capital to the greedy side of that pendulum, and that means putting cash to work in equities."