Leading portfolio manager David Miller didn’t need to win a second-straight Lipper Fund Award to prove that he’s crushing his competition.
Miller’s multi-strategy fund is in the top 1% in the last half-decade, according to Morningstar — and not just due to a good year or two. It’s instead logged top-2% finishes in four of the last five years and is within striking distance of a fifth in six years if it continues to succeed in 2024.
That outperformance is no accident, Miller explained in a recent interview with Business Insider. The fund manager hasn’t departed from the offense-defense strategy he outlined last summer, and he’s still confused as to why more of his counterparts haven’t followed suit.
“When it comes to playing basketball or football, you’d be out of your mind to not play defense when the other team’s playing offense,” Miller said. “And yet the really weird irony is that, even though everyone knows that it’s complete common sense when it comes to playing sports, very few — if any — mutual funds actually use those offensive and defensive strategies.”
Instead of buying or shorting stocks directly, Miller employs a trend-following strategy that rides positive or negative momentum in major indexes across the US, Europe, and Japan. That frees him from the pressures of stock selection while allowing him to win in any market environment.
“You could try to pick the next Apple or Amazon, but there’s a really big problem with trying to pick the next Apple or Amazon, which is that there’s several thousand stocks out there, and there’s only a couple dozen that make virtually the entire returns of the entire stock market,” Miller said.
The top fund manager added: “So that leads people to this conclusion that maybe I should just index and put it all in the S&P 500. And frankly, that’s worked pretty well. But the problem is, if you’re in the S&P 500 from 2000 to 2002, or you’re in the S&P 500 in 2008 — there’s points in time where you can lose half your money.”
Top tips for generating income
Besides riding positive or negative trends in global equity markets, Miller said he incorporates arbitrage and income-focused strategies that are uncorrelated with stocks. Diversifying in these ways reduces risk while improving returns, the fund manager said.
“If you have a one-legged stool, a two-legged stool is better, but a three-legged stool would certainly be that much better yet in terms of the stability,” Miller said.
Retail investors can’t easily replicate Miller’s arbitrage approach since it involves borrowing in countries where interest rates are lower and lending in those where rates are higher. In fact, Miller’s firm, Catalyst Funds, partners with French bank BNP Paribas to accomplish this task.
However, Miller does have an approach to income generation that anyone can follow. He scores income by buying corporate bonds that have higher yields than US Treasurys but are still safe.
“That’s just where we want to get a return that’s a little bit better than Treasurys and park our cash and earn a five-plus yield on our capital,” Miller said.
By only investing in financially healthy firms, Miller doesn’t have to sweat his return on capital.
“If we can be in companies where there’s very little credit risk and very short-term duration, I can be pretty confident I can get a little bit better return without really having to dial up the risk lever,” Miller said.
There are several considerations when looking at corporate bonds, Miller said, including the issuing company’s debt load, cash flow, and industry. It’s safer to buy bonds of acyclical firms that aren’t beholden to swings in the economic cycle, Miller explained.
“What I’m much more concerned about isn’t how big they are, but how well-capitalized they are, how much cash do they have relative to their total amount of indebtedness?” Miller said. “It’s pretty hard to go bankrupt if you have twice as much cash as you have debt because you have enough cash to pay off your debt today if you needed to.”
After explaining his process for selecting corporate bonds, Miller mentioned a few companies with attractive debt.
Website-domain seller Verisign‘s offerings yielding 5.25% top the list since the company has minimal debt and generates reliable recurring cash flows, Miller said. He also named Constellation Brands, which sells Corona and Modelo in the US, given that demand for alcohol doesn’t wax or wane with the economic cycle. Companies in defensive sectors like consumer staples and healthcare, including McDonald’s and HCA Healthcare, also have debt worth buying, in Miller’s view.
