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Holly LaFon
Holly LaFon
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CGM Mutual Fund 1st Quarter Shareholder Letter

Discussion of markets and investing

May 23, 2019 | About:

CGM Mutual Fund returned 7.2% during the first quarter of 2019 compared to a return of 13.7% for the Standard and Poor’s 500 Index (S&P 500 Index) and 3.0% for the ICE BofAML U.S. Corporate, Government and Mortgage Index*.

Following a difficult end to 2018 and despite a continuing government shutdown, U.S. stocks surged into positive territory in early 2019. While European and Asian economies showed signs of emerging stress, the U.S. economy continued to grow. In January the Labor Department reported a monthly increase of 312,000 jobs in December along with a substantial increase in average hourly earnings, up 3.2% for the year 2018. The unemployment rate remained historically low at 3.9%. The Labor Department’s Producer Price Index dropped 0.2% for the month of December and inflation remained subdued. While oil prices rose through the first quarter, the price of Brent crude, the global benchmark, remained well below its October 2018 high of $86.29. The market continued to shrug off the longest government shutdown in history which finally ended January 25, and later in January the market welcomed the news that the Federal Reserve would hold interest rates steady with no plans to raise rates at upcoming meetings. The Fed cited slowing global growth and the continuing trade dispute between the U.S. and China as its reasons for caution. The S&P 500 finished January with a return of 7.9% for its best monthly increase in more than three years.

In early February, global stocks continued to move higher in response to unexpectedly strong earnings reports that lessened concerns about an economic slowdown. U.S. stocks also advanced on signs of progress in ongoing trade negotiations between the U.S. and China. In response to China’s pledge to increase purchases of U.S. farm and energy products and services, ease restrictions on U.S. financial firms and auto manufacturers and increase the protection of U.S. intellectual property rights, the Trump administration agreed to extend its deadline for a trade deal with China and not impose a 25% increase in tariffs on $200 billion of Chinese goods. The Fed reaffirmed its “wait and see” policy and jobs data remained strong. On February 28, the Commerce Department reported Real GDP increased a solid 2.9% in 2018 and the S&P 500 Index celebrated the month’s mostly positive news by adding another 3.0% in February.

Stocks were dragged down in the first week of March in response to new signs of slowing global growth and impatience with trade negotiations between the U.S. and China. Markets were also shaken by the European Central Bank’s attempt to boost its economy by announcing that it would hold its interest rates unchanged through the end of the year. U.S. stocks pulled back on a surprisingly weak report issued by the Labor Department on March 8 that showed the U.S. added only 20,000 jobs in February. The Fed reported that U.S. manufacturing slowed with factory output declining by 0.4% in February after dropping 0.5% in January. At month-end, after a substantial government shutdown precipitated delay, the Commerce Department reported personal consumption expenditures increased only 0.1% in January after falling 0.6% in December, signifying moderating growth. However, the Labor Department reported that worker productivity, which directly impacts wages and output, increased a robust 1.9% in the fourth quarter of 2018. Inflation remained muted and the Commerce Department’s Consumer Price Index increased only 1.5% for the twelve months ended in February. Despite conflicting economic indicators, the S&P 500 managed to gain 1.8% for the month of March and closed with its biggest quarterly gain since 2009.

The 10-year U.S. Treasury bond yielded 2.7% at the start of the quarter and fell to 2.4% at the end. The yield was largely unchanged for much of the first quarter as positive economic indicators and stock market performance outweighed any evidence of an economic slowdown. The yield moved lower towards the end of March in response to significant drops in foreign government bond yields, the European Central Bank’s decision to artificially control interest rates through 2019 and low inflation rates in the U.S. The S&P 500 was priced at 18.9 times the trailing twelve month earnings at the end of the first quarter. Continued economic growth in the U.S. as compared to signs of weakness in the global economy should continue to provide favorable investment opportunities.

On March 31, 2019 CGM Mutual Fund was 26.2% invested in short-term U.S Treasury Notes. The three largest industry positions in the equity portion of the portfolio were in money center banks, oil refining and oil - independent production. The Fund’s three largest equity holdings were Banco Bradesco S.A. ADR (money center bank), Petroleo Brasileiro S.A. - Petrobras ADR (oil - independent production) and Itau Unibanco Holding S.A. ADR (money center bank).

David C. Fietze


April 1, 2019

The performance data contained in the report represent past performance, which is no guarantee of future results. The table above does not reflect the deduction of taxes a shareholder would pay on Fund distributions or the redemption of Fund shares and assumes the reinvestment of all Fund distributions.

The investment return and the principal value of an investment in the Fund will fluctuate so that investors' shares, when redeemed, may be worth more or less than their original cost. Current performance may be higher or lower than the performance data quoted.

About the author:

Holly LaFon
I'm a financial journalist with a Master of Science in journalism from Medill at Northwestern University.

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