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Sydnee Gatewood
Sydnee Gatewood
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Ken Heebner's CGM Mutual Fund 4th-Quarter Commentary

Discussion of markets and holdings

February 22, 2021 | About:

To Our Shareholders:

CGM Mutual Fund increased 11.5% during the fourth quarter of 2020, compared to the Standard and Poor's 500 Index (S&P 500 Index) which increased 12.2% and the ICE BofAML U.S. Corporate, Government and Mortgage Index* which returned 0.6% over the same period. For the twelve months ended December 31, 2020, CGM Mutual Fund increased 8.3% the S&P 500 Index increased 18.4% and the ICE BofAML U.S. Corporate, Government and Mortgage Index returned 7.6%.

The Year in Review and Economic Outlook

The COVID-19 pandemic dominated all aspects of life and society in 2020, with drastic consequences for both the U.S. and global economies. By midFebruary, economic activity around the world was contracting as governments ordered lockdowns and businesses ceased operations in an attempt to curtail the spread of the virus. U.S. stocks tumbled into correction territory and from February 24 to February 28 suffered their worst week since the 2008 financial crisis. Stocks continued to plunge into March and on March 12 the S&P 500 Index shed 9.5%, plummeting into bear market territory and ending the longest bull market run in U.S. history. The Federal Reserve Board reduced interest rates by 0.5% and ultimately reduced them again to near zero in an effort to stabilize markets and reduce the impact of mandatory lockdowns and business closures. The Fed also infused over $1.5 trillion into the U.S. short-term funding market and established a new quantitative easing program under which it would purchase Treasury securities and mortgagebacked securities. Other central banks around the world enacted their own emergency programs to keep markets functioning and the global economy afloat. On March 27 the Coronavirus Aid, Relief and Economic Security ("CARES") Act went into effect as the largest economic stimulus package in U.S. history. However, stocks continued to slump through the remaining days of March and the S&P 500 endured its worst quarterly performance since 2008.

Retail store closures, layoffs and employee furloughs led to soaring unemployment numbers which peaked at a record 14.8% in April according to the Labor Department. A price war between Saudi Arabia and Russia combined with shrinking oil demand drove crude prices to record lows, including a brief period where U.S. oil futures prices dropped below zero. Nevertheless, stocks rebounded strongly in April thanks in part to $2.3 trillion in additional stimulus from the Federal Reserve and a $484 billion U.S. government aid package to finance the Paycheck Protection Program and provide funding for hospitals and increased virus testing. Virus infection numbers declined slowly in U.S. hotspots through the late spring and weekly jobless claims steadily decreased through May as some retail and hospitality related businesses cautiously reopened. The Commerce Department reported that May retail sales grew 17.7% and new home sales increased by a surprising 16.6%. The market responded to the improving economic landscape and rebounded from its dismal first quarter. The S&P 500 Index returned 20% for its best quarterly performance in more than two decades.

The technology sector led stocks higher early in the summer despite regional surges in virus cases and a sobering report from the Commerce Department that U.S. gross domestic product plunged 9.5% in the second quarter. In a move that will likely keep borrowing costs low for some time, the Federal Reserve significantly altered its interest rate policy by discontinuing the practice of preemptively raising rates in anticipation of higher inflation. By the fall, technology stocks had withered pulling the broader market down while Washington squabbled over the terms of additional virus relief, U.S.-China tensions escalated, and virus cases surged across several European economies. However, robust home sales numbers from the Commerce Department and improving employment reports from the Labor Department late in the third quarter helped stocks recover.

Escalating virus infections fueled stiff headwinds for the economy through the end of the year. Unemployment claims continued to fall but at a slowing rate. Weekly unemployment claims stood at 787,000 at year-end, still a historically high number, but representing a remarkable turnaround from a peak of nearly seven million claims in late March. Stocks trended upward in response to indications of a rebounding U.S. economy. The Commerce Department reported third quarter consumer spending increased at a 40.7% annual rate and data from the Institute for Supply Management suggested U.S. manufacturing was recovering. Successful COVID-19 vaccine trials and the start of vaccinations in December introduced new optimism to the markets. A second government relief package provided additional funds to U.S. households, expanded unemployment benefits, allocated financial assistance to small businesses and earmarked more funding for vaccinations. Gradually improving economic conditions coupled with the anticipation of an accelerating recovery in the new year lifted a broad cross-section of industries, led by cyclical stocks, and drove the market to record highs to close the year.

Portfolio Strategy

CGM Mutual Fund was roughly 25.0% invested in short-term U.S. Treasury securities throughout year. The balance of the portfolio was invested in the stocks of economically-sensitive companies in anticipation of growth during 2020. The Fund had mixed results.

CGM Mutual Fund did not participate in the major gains realized in technology stocks in 2020 on account of our concerns about excessive valuations. The Fund did see gains in retail companies and automobile dealers along with losses in recreational vehicle manufacturers.

We ended the year with the Fund 75.0% invested in companies we believe are poised to benefit from the global growth we anticipate will be fueled by a combination of massive monetary and fiscal stimulus and gaining control of the COVID-19 virus.

On December 31, 2020, CGM Mutual Fund was 26.0% invested in short term U.S. Treasury securities. The equity portion of the portfolio was 16.9% invested in retail, 14.4% invested in auto and related companies and 11.2% invested in steel. The Fund's three largest equity holdings were Group 1 Automotive, Inc. (NYSE:GPI) (auto and related), Gerdau S.A. ADR (NYSE:GGB) (steel) and Asbury Automotive Group, Inc. (NYSE:ABG) (auto and related).

David C. Fietze

G. Kenneth Heebner
Portfolio Manager

January 2, 2021

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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