Fund Times: Bill Miller's Case Against Commodities

In his latest commentary,  Legg Mason Value (LMVTX) manager Bill Miller argues the rush to get on the commodities bandwagon by journalists and pension funds alike is yet another sign that we're nearing a ceiling for the category's performance.

"Since the (commodities) rally we are experiencing is already bigger and longer lasting than the one that kicked off the 70's, it takes a determined optimist to say that now is time to be putting money in commodities," Miller wrote.

"The reason to own commodities may be that one believes they provide equity like returns with little correlation with equities," he wrote. "The time to own commodities is (or at least has been) when they are down, when everybody has lost money in them, and when they trade below the cost of production. That time is not now. The data showing the returns of commodities will look very different if you start measuring just after prices have tripled."

"Every commodity we can get data on trades significantly above both the average and the marginal cost of production," Miller wrote. "Copper, for example, has an average cost of production of around 90 cents per pound, and a marginal cost of about $1.30 per pound. The marginal cost should approximate the equilibrium price over time. The current price is around $3.25 per pound. It is not a question of if copper prices are going down, it is a question of when."

He goes on to say: "The US equity market has lagged those of the rest of the world by a wide margin for several years, and within our market the mega cap S&P names have lagged the small and mid caps, which are in the 7th year of relative outperformance, quite long in the tooth by historic standards. Part of the reason for the relative lack of interest in US stocks has been the relentless rise in short rates. Our central bank has been noticeably more hawkish than the rest of world, and money has flowed to where money was the easiest, outside the US. As we end our tightening cycle, and others remain engaged in theirs, our market should become relatively more attractive."

He concludes, "In general, 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. That is long term for most people, and long enough to convince them that the malaise is permanent and to have migrated their money elsewhere, such as to whatever has done best in the past 5 or 6 years. Given the choice of buying Commodities with a capital C, or buying capital C--Citigroup--at current prices, I'll take the latter. Check back in 5 years."

Vanguard Offers New ETFs
The Vanguard Group today introduced three new equity exchange-traded fund offerings to bring its lineup to 26 funds, covering both domestic and international stocks. The much-anticipated Vanguard Dividend Appreciation Index (VIG) began trading this morning on the American Stock Exchange, and it will feature an expense ratio of 0.28%. This expense ratio makes the fund the lowest-priced dividend-oriented ETF in our database. In fact, Vanguard's new fund significantly undercuts PowerShares Dividend Achievers (PFM), which charges 0.40%. The new fund seeks to track the Mergent Dividend Achievers Select Index, which is a market-cap-weighted equity index of companies with a track record of increasing their dividends over time.

Vanguard also filed registration statements with the SEC to offer two new mid-cap equity index ETFs: Vanguard Mid-Cap Value Index Fund, which will track the MSCI US Mid-Cap Value Index; and Vanguard Mid-Cap Growth Index Fund, which tracks the MSCI US Mid-Cap Growth Index. Vanguard's quantitative equity group will oversee all three funds, and all three will include VIPERs share classes.

Columbia Consolidates Fund Lineup
Columbia Management, the asset-management division of  Bank of America (BAC) continues to shrink its fund lineup through several fund mergers announced Tuesday. The fund's board of trustees has already approved the mergers; however they are all subject to shareholder approval.

The mergers involve 11 funds: Columbia Small Company Equity  will merge with Columbia Small Cap Growth II , Columbia Intermediate Core Bond  with Columbia Core Bond , Columbia Utilities  into Columbia Dividend Income , Columbia Marsico Mid Cap Growth  into  Columbia Mid Cap Growth (CLSPX), Columbia Tax-Exempt Insured  and Columbia Municipal Income  into  Columbia Tax-Exempt (COLTX), Columbia Tax-Managed Growth  and  Columbia Growth Stock  into  Columbia Large Cap Growth (GEGTX), Columbia Florida Intermediate Municipal Bond  and Columbia Texas Intermediate Municipal Bond  into  Columbia Intermediate Municipal Bond (SETMX), and  Columbia Young Investor  with  Columbia Strategic Investor (CSVFX).

This reorganization will obviously have major implications for both the holders of the merged funds and the acquiring funds, as well as the Columbia fund family as a whole, so stay tuned for upcoming analyst reports on the relevant funds.

Morgan Stanley Announces Fund Merger
In a regulatory filing released yesterday, the board of trustees of  Morgan Stanley Growth  announced plans to merge the fund with  Morgan Stanley American Opportunities , assuming shareholders approve. The combination will give American Opportunities' lead manager Dennis Lynch a $3.75 billion fund to run and should provide former Growth Fund investors with a less expensive option.

Additionally, with the departure of former American Opportunities manager Michelle Kaufman, the fund will shift strategies, from the top-down macro plays Kaufman preferred to Lynch's bottom-up stock-picking style. We're not opposed to using macroeconomic analysis for strategic decision making, but the general themes Kaufman put forward: an aging demographic, increasing dominance of the Internet, penetration of wireless communication into emerging markets, and increased global demand for commodities, seemed too broadly conceived and widely known for the team to derive a competitive advantage from them. Shareholders should fare better with Lynch.

Fee Hikes at Two Schroder Funds
Shareholders of two Schroder funds approved an increase in the funds' management fees. The new fee agreement raises the management fees of  Schroder U.S. Opportunities (SCUIX) and Schroder International Alpha (SCIEX) from 0.73% to 1.00%. It also eliminates so-called fee breakpoints, which allow for the management fees to come down (in percentage, but not absolute terms) as assets grow. This amended advisory agreement will raise the funds' expense ratios well above their respective category medians, and keep them high.

It should be noted that Schroder International Alpha is the new name of Schroder International Equity, and that the increased fees at the fund will detract from whatever alpha the rebranded fund is able to generate.

New Management at Dreyfus GNMA
Dreyfus has announced in a regulatory filing that Robert Bayston will replace Marc Seidner as lead manager of  Dreyfus GNMA (DRGMX), following Seidner's departure to lead Harvard Management Company's fixed-income division. In addition to taking the lead here, Bayston is the portfolio manager responsible for TIPS and derivatives strategies within Standish Mellon, which manages most of Dreyfus' fixed-income offerings. Bayston has worked at Standish Mellon since 1991 and has comanaged the GNMA fund since January 2005.