“Heebner is a true contrarian, who says he's most confident as an investor 'when everyone else thinks I'm nuts.'” --Â Jon Birger, Fortune Magazine
Is Ken Heebner (Trades, Portfolio) the best living fund manager? That’s the provocative question asked in the title of an article about the guru. However, that question was being asked in 2008. If you were to ask it again today, most observers would flatly say no.
Heebner has struggled since his glory years. Consider this: in 2007, his CGM Focus Fund beat the S&P 500 by 74.5%, an amazing accomplishment. In the last 10 years, though, he has averaged only 4% per year, almost three points less than the S&P 500. And that average includes the nearly 80% return he posted in 2007.
What’s going on?
Who is Heebner?
Heebner, now in his mid-70s, spent some 25 years in the trenches before starting his own firm. He began his working career as an economist with A & H Kroeger in 1965. That was followed by stints as a portfolio manager at Scudder, Stevens & Clark and at Loomis Sayles & Co. He started his own firm, Capital Growth Management, or CGM, in 1990.
He came to national prominence during the collapse of the tech bubble; according to Investing Caffeine, he shorted technology and Internet stocks in 2000 and 2001. That paid out handsomely, of course. At the same time, he was making big bets, with long positions, on the homebuilding sector and enjoyed great returns as the sector stumbled its way to the homebuilding bust of 2008.
The triumphs pre-2008 were soon reversed, however. As Investing Caffeine reports, his commodity stocks went south; he also lost ground because he expected the financials and insurance companies to recover much sooner than they did.
Many refer to his Focus Fund as the investment fund of the decade 2000 through 2009. One of those was the Wall Street Journal, which called it the Best Stock Fund of the Decade, while GuruFocus users elected him as the Investment Guru of 2007.
Heebner’s instincts and macro research served him well when he bet on the tech bubble collapse and rode up the home building bubble before 2008. Since then, however, his investment philosophy has failed to deliver the same positive returns.
What is CGM?
Heebner’s firm is Capital Growth Management LP, which is based in Boston, Massachusetts. In its 13F filing for June 30, the firm reports managing $2,338,770 in total.
That is down significantly from the firm’s heyday. The following GuruFocus chart shows how total equity assets under management dropped from $14.5 billion in June 2008 to $2.3 billion in June 2017:
The firm manages three mutual funds; they are listed below, along with their symbols and assets under management (asset details from Yahoo! Finance):
- CGM Mutual Fund (LOMMX) $399.97 million.
- CGM Focus Fund (CGMFX) $975.33 million.
- CGM Realty Fund (CGMRX) $933.5 million.
Reuters reports that another fund, the CGM Advisor Targeted Equity Fund, was liquidated in February 2016. The fund, managed by Heebner and distributed by Natixis Asset Management, had fallen on hard times. Reuters cites Lipper noting, “Over the last five years it lagged 99 percent of other large cap core funds…”
No doubt some good things have happened as well, but from a fund investor’s perspective, the news is discouraging. And many have already fled, as we see in the shrinking equity assets under management and liquidation of the CGM Advisor Targeted Equity Fund.
Heebner’s investing strategy
In the prospectus for his Focus Fund, Heebner writes the objective is to generate "reasonable long-term capital appreciation," along with keeping capital safe from undue risks. He adds that current income is a consideration in buying securities, but is not a controlling factor.
Central to achieving these goals is the fund’s management style. Heebner says CGM does not follow a particular investment style. Instead, they use a flexible approach that seeks to profit from opportunities as they come up. Generally, this involves:
- Top-down methods: the first step is to start by analyzing the broad economic factors that may affect potential candidates.
- Company/industry analysis: the fundamentals of each company and industry are examined in detail and, on a funnelling basis, attractively-valued candidates are identified.
- Selling: Heebner will sell a security if its expectations are not being met, if better opportunities present themselves or if it has reached its target price.
Holly LaFon of GuruFocus sums up the firm and its manager this way: “CGM’s style is flexible and opportunistic.” She notes they start with macroeconomic factors, then drill down into the fundamentals at the industry and company level. Also observed: “…the advisor also weaves in and out of holdings…” That may be putting it mildly. In the prospectus, Heebner reports the portfolio turnover rate in 2016 was 334% of its average value.
Jon Birger wrote in Fortune Magazine in 2008 that Heebner works long hours, chasing emerging economic trends. When he finds one, he goes all-out to capture it. When the article was being written and published, Heebner was riding high, very high, and Birger added, “Heebner, blessed with uncanny instincts, has managed to see around just about every corner in a market that has befuddled just about everyone else.”
The prospectus also outlines some of the boundaries, the few boundaries, CGM observes in its selections. They include:
- Investing in a smaller number of companies, typically 20 to 100 at a time.
- It invests in fewer companies and sectors than other diversified funds.
- Foreign, as well as domestic securities, may be held in the fund.
- No constraints on company size, however, they prefer market caps of more than $5 billion (large caps).
- The fund may go short as well as long to capitalize on stocks or sectors that are expected to decline in value.
- In addition to stocks, it may also invest in debt and fixed income, including junk bonds.
What has he bought and sold recently? James Li writes in a GuruFocus article that Heebner added three companies and cut three companies in the second quarter of 2017.
Added were:
- Copa Holdings SA (CPA, Financial): Copa is a Latin American provider of airline passenger and freight services.
- Royal Caribbean Cruises Ltd. (RCL, Financial): A global cruise company that operates 40 ships through three subsidiaries.
- Alibaba Group Holding Ltd. (BABA, Financial): Often referred to as China’s version of Amazon.com, it describes itself as "an online and mobile commerce company."
The cuts were to:
- Goldman Sachs Group Inc. (GS, Financial): The renowned financial services company.
- NVIDIA Corp. (NVDA, Financial): A major developer of computer chips, including graphics chips used for gaming, visualization and interactive experiences.
- Teradyne Inc. (TER, Financial): The company "designs, develops and manufactures automatic test systems for use in semiconductors" and more.
With a flexible management style, Heebner has had the opportunity to be a go-anywhere investor—but only after he has done his top-down macro research and intense fundamental analysis of companies and industries.
CGM Focus Fund top holdings
Portfolio-wide, this chart shows Heebner preferred financial and consumer cyclical stocks at the time of his latest reporting:
This table from Yahoo Finance shows the Focus Fund’s top 10 holdings:
Heebner’s positions in financials and consumer cyclicals come as no surprise. Looking at financials, for example, we know they have been under regulatory constraints recently and may thrive again once interest rates begin to rise.
Focus Fund performance
This GuruFocus table compares Focus Fund's performance with that of the S&P 500:
To see Heebner in his glory, we need to look at the years between 2000 and 2007:
For another perspective on Heebner’s performance, this Morningstar chart compares the fund’s performance (blue line) with that of the S&P 500 (green line) and its category peer group, Large Blend (orange line):
With the heady numbers delivered between 2000 and 2007, it is no surprise he was named fund manager of the decade by some market observers. And those numbers also allow him to boast robust since-inception numbers. Note as well, in the final chart, that Heebner’s performance in 2016 and so far in 2017 has pulled him close to his category average.
Conclusion
Since bottoming out in early 2016, Heebner seems to be getting back to form. He had logged a 16% year-to-date return at the end of July, 4% more than the S&P 500; if he can maintain that for the rest of the year he would hit the high 20s for the year.
Still, prudent investors will want to see more proof, perhaps one of two years of strong returns. Of course, with the style Heebner uses, he may be back in the doghouse by then, or soon afterward.
Investors will also want to be wary about adopting Heebner’s management style and strategy. Picking stocks the way he picks them has to be left to the patient and those willing to absorb a lot of short-term pain for potential long-term gain.
Disclosure: I do not own stocks in any of the companies listed in this article, and do not expect to buy any in the next 72 hours.
