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Ken Heebner started the century making all the right moves for his CGM Focus (CGMFX) mutual fund. Deftly shifting into and out of sectors such as homebuilding and commodities, he posted returns averaging 32 percent annually from 2000 through 2007, a period when the Standard & Poor's 500-stock index returned just 1.7 percent a year. Then the magic stopped. CGM Focus, which Heebner runs from Boston, is the only domestic stock fund to trail at least 96 percent of its peers in 2008, 2009, and again this year, according to research firm Morningstar (MORN). The main culprits: bad bets on commodity and financial stocks. "He's been in all the wrong sectors at all the wrong times," says Jonathan Rahbar, a Morningstar analyst.
Even with the losses, Heebner is holding his spot atop the 10-year chart. CGM Focus returned an average of 17 percent a year in the decade ended May 31, the best record of more than 3,200 U.S. diversified mutual funds, Morningstar's data show. In second place was Lord Abbett Micro Cap Value, which gained 14 percent. Heebner, 69, the co-founder of Capital Growth Management, launched CGM Focus in 1997; it has returned 13 percent a year since then. He also manages CGM Mutual (LOMMX), which has returned 4 percent a year for the past decade, and CGM Realty (CGMRX), which gained 19 percent annually over the same stretch. He declined to be interviewed for this story.
Heebner's nosedive rivals that of Bill Miller, the high-profile Legg Mason fund manager who beat the S&P 500 for a record 15 consecutive years, then dropped to the back of the pack from 2006 through 2008. Like Miller, Heebner has lost investors, with net withdrawals of $1.8 billion since August 2008, according to Morningstar. CGM Focus' assets are now $3 billion, down from a peak of $10.3 billion in June 2008, reflecting market losses and investor withdrawals. Unlike Miller, he lagged the market last year, gaining 10 percent while U.S. stock funds on average rose 33 percent. Miller's Value Trust was up 41 percent. Steven Rogé, who invests his clients' money in mutual funds, says the ballooning of Heebner's assets in 2008 convinced him there were better places to invest. "When a fund attracts assets that quickly, we worry about a manager's ability to handle it," says Rogé, whose firm, R.W. Rogé, oversees $200 million.
Heebner is known for building big stakes in specific industries and for shifting gears quickly. CGM Focus' top 10 holdings represented 73 percent of assets of as Mar. 31, vs. 31 percent for the typical fund, according to Morningstar. The fund's turnover ratio, a measure of how much the portfolio changes in a year, is 464 percent, more than four times greater than peers. Heebner also bets on falling stock prices by selling short, a strategy that many funds don't pursue.
In 2000 and 2001, Heebner profited by betting against technology stocks. At the same time he began buying shares of homebuilders, such as Lennar (LEN), before the boom in construction and home prices. By the start of 2005, before homebuilding stocks began their decline, he had sold them and moved into energy and commodity companies. The price of oil more than tripled between the end of 2004 and the middle of 2008. "Historically he has done phenomenally well knowing when to rotate," says Rahbar.
More recently his moves have been ill-timed. Returns faltered in the second half of 2008, when Heebner's holdings in energy, metals, and agriculture stocks began to tumble. After selling the commodity stocks he bought financials, including insurers such as Hartford Financial Services (HIG), according to filings with the Securities & Exchange Commission. "The escalating financial crisis took its toll on these issues during the fall," Heebner wrote in the fund's 2008 annual report. CGM Focus dropped 48 percent for the year, compared with a decline of 37 percent by the S&P 500.
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