Miller warns on oil as US mega caps neglected

Legg Mason’s US equity veteran Bill Miller said US large caps have become “an empty stadium” as investors flock to the “overvalued” commodities sector.

The manager of the firm’s £5bn Value Equity strategy warned although energy prices are soaring, there is little value in the underlying assets.

“The mega-cap trade was crowded in 1999. It appears to be an empty stadium now as everyone is crowded into the energy, commodity and small- and mid-cap arenas,” he said.

He said commodity investors risked destroying value by speculating how much higher prices can go, and whether they had reached a level that fully reflects concerns about supply.

“I certainly do not know, but neither do they. What I do know is there is a lot of price in these assets, a lot of momentum, a lot of belief, and not a lot of value.”
The manager added it is surprising only energy and industrials outperformed the S&P 500 in Q1 on a price basis, while all other sectors underperformed.

“The last time this happened was in Q1 2000, as the tech bubble was in the process of peaking and US mega caps were the crowded trade,” he said.
“While the US stock market was strong in Q1 2011, it was also quite narrow, not usually a healthy sign, especially when the leaders are the same groups that have led the market for the past 10 years.”

Miller conceded his own performance had been hit in Q1 despite generally strong balance sheets, corporate policy supportive of equity markets, and companies trading on a 20% discount to fair value.

“All that led to a good Q1 for almost everyone except us, as what was performing and expensive got more so, and what was cheap and lagging continued to be so. This too shall pass.”