Bill Miller is chairman and chief investment officer of LMCM and leads a highly experienced investment team consisting of nearly 50 investment professionals.
Legg Mason Capital Management assess a company's expected value by employing multiple valuation methodologies combined with rigorous business analysis, concentrating on a company's ability to generate excess cash flow, earn high returns on capital, and allocate capital efficiently. LMCM's portfolio strategy includes remaining fully invested (with no attempt made to time the market), maintaining a low turnover and constructing a focused portfolio.
LMCM's investment philosophy involves some of the following key principles:
- The value of a company is based on the sum of the present value of its future free cash flows. The intelligent generation and use of cash by companies, not accounting profits, creates shareholder value.
- Although markets broadly reflect company values, mispricings occur. LMCM views the market as a complex environment that is broadly efficient. Markets generally reflect company values, and prices quickly adjust to reflect new information. Occasionally, however, this efficiency breaks down and mis-pricings of company stock prices occur. LMCM attempts to identify and exploit these mispricings.
- Managing risk of a fund’s portfolio. LMCM manages risk by constructing a portfolio of securities with the highest probability of delivering excess returns under a range of diverse economic and stock market scenarios.
When evaluating a company, LMCM analyses three key factors: a company's competitive strategy; its financial and managerial history; and its valuation. Taking the first factor as an example, an understanding of a company’s competitive strategy helps LMCM to understand whether the company's position in the marketplace will translate into high and sustainable "returns on invested capital" (ROIC), which the firm believes is the hallmark of a good business.