Ken Heebner's CGM Mutual Fund 3rd-Quarter Commentary

Discussion of markets and holdings

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Nov 30, 2020
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To Our Shareholders:

CGM Mutual Fund increased 11.4% during the third quarter of 2020 compared to a return of 8.9% for the Standard and Poor's 500 Index (S&P 500 Index) and 0.7% for the ICE BofAML U.S. Corporate, Government and Mortgage Index*. For the first nine months of the year, CGM Mutual Fund decreased -2.9%, the S&P 500 Index returned 5.6% and the ICE BofAML U.S. Corporate, Government and Mortgage Index returned 7.0%.

After a surprisingly strong rebound in the second quarter, U.S. stocks continued climbing in July despite some mixed economic indicators. Initial unemployment claims steadily declined as fresh hiring and recalls of furloughed workers offset new layoffs. The government stimulus program and gradual reopening of businesses in several states boosted consumer spending and the Commerce Department reported June retail sales jumped 7.5%. Overall, consumer spending experienced a solid 5.6% increase for the month. The Institute for Supply Management also reported the U.S. service sector, which accounts for about two-thirds of the economy, expanded for the second straight month in June after two precarious months of contraction. However, as COVID-19 cases began to surge in several parts of the country, some states delayed or curtailed reopening plans. In the last two weeks of July, unemployment claims increased for the first time in four months as job growth slowed. At the end of the month, the Commerce Department reported that U.S. GDP experienced a record contraction in the second quarter, plummeting a staggering 9.5%. The market largely shrugged off the sobering news as the technology sector continued to lead stocks higher.

The market climbed into August as virus case numbers stabilized and promising treatment methods emerged. According to the Institute for Supply Management, U.S. manufacturing activity expanded for the second straight month in July and the Fed reported industrial production increased by 3% in July after growing 5.7% in June. Retail sales climbed an additional 1.2% in July to surpass pre-pandemic levels. The Consumer Price Index also continued to rebound, and rose 0.6% both in June and in July, reflecting rising consumer demand. On August 18, the S&P 500 Index closed at a new all-time high, having fully recovered from its first quarter correction and subsequent bear market. The index continued higher through the end of August closing at new record highs on several additional days. While technology stocks drove much of the early market recovery, the surge in late August was driven by a wider cross-section of sectors led by cyclical stocks. At the end of August, the Fed announced a significant revamping of its interest rate policy and discontinued its practice of preemptively raising rates in anticipation of higher inflation. This move will likely keep borrowing costs at their current historically low levels for an extended period of time. The market celebrated the news and the S&P 500 Index finished the month with a 7% return.

Shares of technology companies collapsed in the first half of September, dragging the broader market down with them. Stocks also lamented the government's inability to agree on a new virus relief package and pulled back on increased tensions between the U.S. and China. An uptick in virus cases across several major European economies threatened additional business lockdowns as well as the nascent global economic recovery. But the Labor Department provided some encouraging news reporting that employers added 1.4 million jobs in August. The U.S. unemployment rate fell to 8.4% in August, a significant improvement over the record-high 14.7% unemployment rate in April.

Later in September, the market welcomed news from the Commerce Department that home purchases surged to a 14-year high. This followed an earlier Commerce Department report that new single-family home sales jumped 13.9% in July to their highest level since December 2006. A strengthening labor market, rising home sales and the gradual reopening of the economy boosted the Conference Board's consumer confidence index to 101.8, its highest level since March, and drove its biggest monthly increase since April 2003. Despite some late market headwinds, improving economic conditions propelled stocks to their second consecutive strong quarterly performance.

The 10-year U.S. Treasury bond yield stayed within a narrow range of 0.5% to 0.7% during the third quarter and closed at 0.7%. The yield edged up on encouraging jobs reports and declining numbers of virus cases in the U.S. but moved lower as market weakness pushed investors to the safety of government bonds. The S&P 500 Index was priced at 31.2 times the trailing twelve-month earnings on September 30. Though the market is trading near its highest levels ever, we believe that significant opportunities exist in companies with strong fundamentals and low valuations as the economic recovery continues.

On September 30, 2020, CGM Mutual Fund was 26.1% invested in short-term U.S. Treasury Notes. The three largest industry positions in the equity portion of the portfolio were in housing and building materials, retail and consumer products. The Fund's three largest equity holdings were D.R. Horton, Inc. (

DHI, Financial), Meritage Homes Corporation (MTH, Financial) and Lennar Corporation (LEN, Financial) (housing and building materials).

David C. Fietze


October 1, 2020

The index data referenced herein is the property of ICE Data Indices, LLC, its affiliates ("ICE Data") and/or its Third Party Suppliers and has been licensed for use by Capital Growth Management Limited Partnership. ICE Data and its Third Party Suppliers accept no liability in connection with its use. See prospectus for a full copy of the Disclaimer.

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