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Bill Miller, Value Trust

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The purpose of this paper is to give a peer review of the presentation team’s performance. The topic covered by the team was the role of financial market efficiency in corporate finance and its relevance to fund manager Bill Miller, Value Trust, and potential investors. We will look at the following areas in assessing the performance of the presentation team:
■ The value of supplemental readings
■ Quality and content of the concept lecture
■ Quality of the case analysis
■ Strength of the case recommendation
■ Presentation and communication skill

Value of Supplement Readings
The analysis team recommended the following additional readings: Chapter 8 of Brigham/Ehrhardt’s “Financial Management” textbook, Burton Malkiel’s “Reflections of the Efficient Market Hypothesis: 30 Years Later”, and Malkiel’s “Passive Investment Strategies and Efficient Markets”. All three recommendations are excellent sources for basic and advanced understanding of the case’s key financial concepts. “EMH: 30 Years Later”, especially, is a terrific read providing the original EMH founder’s thoughts on the theory’s relevancy even in today’s financial world.
We also would like to recommend two academic papers that offer inquisitive views of EMH and its potential fallacies. Both works - Daniel Kahneman’s Nobel prize work “Maps of Bounded Rationality” and Lawrence, McCabe, and Prakash’s “Answering Financial Anomalies: Sentiment-Based Stock Pricing” - explore the realms of behavior finance. By questioning the assumption of rational behavior in investors, a pillar of EMH, they present an opposing argument unanswered by the efficient market hypothesis. While not largely pertinent to the case, an eager mind may be engaged by the divergent point of view.
Quality and Content of the Concept Lecture The content of the lecture gave a thorough, albeit, remedial view of the mutual fund industry. The presented material invited the audience to re-visit a how mutual funds operate and re-introduced theories about the efficiencies in the industry. The majority of the content sufficiently met its objective, but many concepts would have been incompletely or inaccurately presented without clarification from the instructor. We also believe the financial concepts portion of the lecture was too elementary for the level of the audience. We felt that the information was unnecessarily concentrated on undergraduate material and did not sufficiently focus on the role of efficient market theory and its pertinence in the mutual fund industry. The quality of the lecture did not as accurately reflect the team’s solid comprehension as the written portion of the case. They were able to highlight key concepts but instructor interjection was necessary to make relational linkages that are a necessity at this level. Overall, the team did an average job in explaining the factors that contribute to market efficiency and their role in mutual funds.

Quality of the Case Analysis
The quality of the case analysis was the team’s strongest point. Key concepts of the case were identified and explained, a logical recommendation was presented, and it was tolerably supported. The team incorporated relevant exhibits, graphs and tables, to explain key concepts and to support the decisions that they made. Overall, the team achieved the level of understanding necessary to dissect a case and successfully relayed the understanding in the written document.
Presentation and Communication Skill The delivery of the presentation seemed to the biggest challenge for the team. In an effort to clarify ambiguities, the instructor was required to interject into the presentation unnecessarily. Additionally, the slide narrative was imprecise and undermined the perception of the team’s understanding of the case. An example of this is in the slide that had greater risk equaling greater reward. In the case write-up, however, the final paragraph on the last page elaborated on this point very well. However, when questioned about the accuracy of the statement there was a disconnect. The questions and demeanor of the instructor were tough but it was handled in a reasonable manner.
Strength of Case Recommendation When posed by the case to suggest an action of invest or refrain during the mid-point of 2005, the analysis team recommended not investing in Value Trust. The analysis team came to this decided conclusion after considering the efficient market hypothesis, by netting the fund’s management fees from gross NAV returns, (in this light, Miller fails to beat his fund’s benchmark), and, after considering the fund’s recent post-2005 performance. Disregarding the fund’s recent performance, (future performance is a luxury an investor in 2005 would not have had), we feel the recommendation was sufficiently strong. EMH is the strongest point; it explains away Miller’s impressive track record to pure luck, and the team makes a suitable explanation of the theory. Considering management and transaction fees of actively managed mutual funds is also a valid and supporting point. We feel, however, that the argument could have been further strengthened had the fund’s diversification, or lack thereof, been considered. Value fund held only 36 equities, and it squeezed 50% of its assets into its top 10 holdings. Basic systematic risk theory teaches us that diversifiable risk is not effectively eliminated until approximately 40-50 stocks are held in a portfolio. Comparatively, Value Trust’s peers typically hold more than 260 stocks, with 22% of assets in the top 10 holdings.
Ultimately, we agree that a rational, informed investor should not invest in Value fund in 2005, but we feel the recommendation could have more strongly supported with a discussion on diversification. Summary Overall, the presentation team’s performance was on an average level. We felt that the analysis should have more focus and elaboration on the efficiencies of the market, and less on investment vehicles and basic financial concepts. We feel that if hedge funds, 401k’s, or any other investment vehicle were discussed, we could apply the same basic rationale in making a decision about market efficiencies. Professor Plath added a dimension, to the presentation, that the may have been a bit overwhelming to the group. However, at this level you have to be able to think quickly and soundly in defending your position on a topic.

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