Tuesday, July 14, 2009

Bloomberg: Ken Heebner of CGM Funds Slumps for 2nd Year

An interesting take here via Bloomberg, on Ken Heebner of CFM Focus (CGFMX) fame. (He has other funds but Focus is the darling of the group... or was) Despite a quite horrific slump this is still one of the few mutual fund managers I take an active interest in knowing what they are buying and selling. After yesterday's 3% gain, CGM Focus is still down over 10% year to date so surely it is a trying time to be invested, coming on the heels of an ugly 2008 - with almost all the damage in that year coming from July forward. Knowing Ken's style the one thing hurting him is the changed nature of the market that I talk about almost on a daily basis - everything is so short term, and the "thesis" changes from day to day, and week to week based on news events or what the algorithms are buying that day. Ken made his huge wins by making outsized bets in a sector or two and riding it for a few months (at least). That animal has not been around for nearly 2 years now, as the market has morphed into high frequency trading, program trading dominated in and out movements; the market has little memory from day to day or week to week. Commodities work for 5 weeks, than plummets. Consumer discretionary works for 4 weeks, than plummets. Transports work for 5 weeks, then plummets. Heebner has increased his trading dramatically but its still hard to keep up with the Joneses (Goldman, Citadel, DE Shaw, Renaissance) [May 6, 2008: Ken Heebner's Trading for CGM Focus Tripled in 2008] Outside of that his timing has been off by a few months; he was heavy into financials about a quarter too early [Nov 14, 2008: Ken Heebner Moves into Financials Big Time], and then did the same with insurers [Feb 18, 2009: Ken Heebner's Fourth Quarter 2008 Moves]. We were not fans of forays into either group as we wrote in each piece. Ironically if he had held on (instead of trading out) or waited to make his purchases about 75-100 days later in each sector he would of had some big wins. But timing is everything in this biz.

Also, as one of the few mutual funds who chooses to have the option of shorting, he really missed out on some huge opportunities on that side of the ledger. There were many periods these past 2 years where shorting almost anything (fish in barrel approach) would yield great results. I am curious how his hedge fund is doing and if he is doing more shorting there [Sep 10, 2008: Ken Heebner to Launch Hedge Fund]

But I'm not giving up yet based on the long term track record (still top ranked over the decade)... plus I love his style - unlike most fund managers he takes risks, doesn't believe in massive diversification which only leads you to be a glorified index fund, and has been winning over the long run more than losing. Again, it is ironic that this cover story literally marked "the top" within 30 days [May 28, 2008: Ken Heebner - America's Hottest Investor] We'll have the latest SEC filings in about a month to see how he was positioned as of June 30th.
  • Kenneth Heebner’s CGM Focus Fund is at the bottom of the heap for the second consecutive year after investments in insurers such as Hartford Financial Group Inc. and retailer Wal-Mart Stores Inc. went awry.
  • CGM Focus, with $3.6 billion in assets, trailed 96 percent of similarly managed funds in 2008 and 99 percent this year through July 9, according to data compiled by Morningstar Inc. Heebner, co-founder of Boston-based Capital Growth Management LP, had the only fund in the group with $100 million or more that ranked in the bottom 5 percent in both years, the Chicago- based research firm said.
  • “His market-timing skills have not been working for him in the past year,” Nadia Papagiannis, a mutual-fund analyst with Morningstar, said in a telephone interview.
  • “When you make bold sector bets, it’s a given you will get it wrong some of the time,” said Russel Kinnel, director of mutual-fund research at Morningstar.
  • CGM Focus was the top U.S. equity fund in 2007 as commodity-stock gains fueled an 80 percent return. Since then, the manager known as “Bigfoot” for his rapid movements in and out of stocks has lost 55 percent, including 13 percent this year. The Standard & Poor’s 500 dropped 0.87 percent, including reinvested dividends, this year through July 9.
  • The fund’s 2007 gain resulted from commodity-stock holdings that benefited from the growth in emerging markets, according to a document filed with the Securities and Exchange Commission last year. The same stocks performed well until the middle of last year, Heebner wrote in a separate filing in February. The Reuters/Jefferies CRB Index of commodities fell 50 percent in the second half of 2008, Bloomberg data show. Heebner sold most of those stakes in the third quarter of 2008 after experiencing “major losses,” he wrote. (same places we were hiding in, in 1st half 2008)
  • Heebner, 68, bought insurance stocks, including Hartford Financial Services, based in Hartford, Connecticut, and Newark, New Jersey-based Prudential Financial Inc. in the fourth quarter of 2008 and sold most of them in the first three months of this year, according to filings with the U.S. Securities and Exchange Commission. Hartford lost 52 percent in the first quarter, while Prudential fell 37 percent, according to data compiled by Bloomberg. The fund missed the stocks’ subsequent rise, as Hartford has gained 37 percent since March 31 and Prudential has climbed 81 percent. (must of been banging head against wall - I was shorting some of these myself but could only take so much pain as they scorched short sellers in the spring)
  • The fund was also hurt last year by his decision to buy shares of three banks, Citigroup Inc., Bank of America Corp. and Wells Fargo & Co., in the third quarter, he said. (again, if bought in February 2009 or even March - a huge windfall; but in latter 2008... bad news) “The escalating financial crisis took its toll on these issues during the fall,” he wrote in February.
  • Citigroup (C), based in New York, fell 67 percent in the fourth quarter; Bank of America (BAC), in Charlotte, North Carolina, fell 59 percent; and San Francisco’s Wells Fargo (WFC) fell 21 percent. The stocks were three of Heebner’s four largest holdings on Sept. 30. The fund no longer held them at the end of 2008.
  • CGM Focus ranks first among diversified funds, those that don’t focus on specific industry sectors, over the past decade, even with its decline in 2008 and 2009. The fund returned 16 percent annually in the 10 years ended in June, compared with an industry average gain of 0.2 percent, according to Morningstar.
  • Kinnel said it’s difficult to tell what moves Heebner is making at any given time because he changes his holdings so often. CGM Focus has a turnover ratio -- the frequency with which the portfolio changes -- of 504 percent. That’s four times greater than peers, Morningstar said.
  • Wal-Mart, the world’s biggest retailer, has been in Heebner’s portfolio from the start of the year through at least March 31. The Bentonville, Arkansas-based company dropped 7 percent in the first quarter and 14 percent in 2009. Heebner also owned Apollo Group Inc., the for-profit education firm that owns the University of Phoenix, and Abbott Laboratories, the Abbott Park, Illinois-based drugmaker, through the first quarter. Apollo has fallen 15 percent and Abbott has dropped 14 percent this year.
  • Investors withdrew $326 million from the fund in the first half of 2009, according to Morningstar. The fund had inflows of $3.2 billion in 2008.

[May 18, 2009: Ken Heebner's 1st Quarter 2009 - Financials and Retailers]

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