Ken Heebner: Dr. Adrenaline

June 9, 2011 at 11:52 pm Leave a comment

Is the market making you feel a little lost, down, or disconnected?  Then perhaps what you need is a prescription of adrenaline in the form of some CGM Focus Fund shares (CGMFX). Ken Heebner has captained the CGM Focus Fund since its 1997 inception. This hyper-volatile fund is not for the faint of heart. The concentrated fund holds a narrow portfolio (often 20-30 positions), which is managed with a very itchy trigger-finger. The eye-popping 363% turnover last year is proof of Heebner’s rapid fire approach, which equates to an average stock holding period of around three months. Although “Dr. Adrenaline” has earned the top Morningstar ranking for his Focus Fund on a 10-year basis (annualized +11.8% vs. +2.1% S&P 500 – Morningstar 6/9/11), Heebner is dead last on a 3-year basis (annualized -19.9% vs. +.4% S&P 500).

The Journey from First to Worst

How does a manager go from first to worst? Well, given the fund’s “go anywhere” mandate, Heebner became a hero when he shorted technology and internet stocks in 2000 and 2001during the bubble burst (yes, that’s correct, the Focus Fund has the ability to short securities as well). Simultaneously, Heebner went long the homebuilders and watched the massive appreciation transpire as the real estate bubble inflated. This clever maneuvering earned the fund a whopping +54% return in 2000 and an encore +47% advance in 2001, while the S&P 500 index plummeted -9% and -12%, respectively.

While Heebner captured the inflection of the tech bubble bursting, he has fared less well through the financial crisis and recovery of 2008-2011. After riding the commodities boom in 2007, on the way to an +80% killing, Heebner overstayed his welcome at the trough. Not only did his commodity stocks tank, he prematurely piled into financials and insurance companies (e.g., BAC, C, WFC, HIG). Like many other managers, Heebner underestimated the severity and scope of the financial crisis and he and his investors suffered the consequences (underperformed the S&P 500 by -11% in 2008 and -16% in 2009).

This is what Heebner had to say about the housing market in late 2007:

“It’s a narrow sector. Globally the US housing market is not that important. I think it may flatten out our retail sales and our economy may go sidewise, but I don’t think that’s going to derail this global economy.”

 

That forecast didn’t really pan out as expected and this year hasn’t exactly gotten off to a rosy start either. The fund is already down -12% in 2011, trailing the S&P 500 by an overwhelming -15% margin.

Behind the Brains

The grey-haired, 70-year-old Heebner has accumulated a lot of real world schooling before starting CGM (Capital Growth Management) in 1990. Heebner started his career as an economist with A & H Kroeger in 1965, before he decided to get his feet wet in money management as a portfolio manager at Scudder, Stevens & Clark, as well as Loomis Sayles & Co.

Heebner does not follow your ordinary run of the mill investment strategy. As the antithesis of a traditional value investor, Heebner typically buys stocks that have already appreciated in price. He is looking for stocks with a “pattern of earnings development in excess of consensus.”  Or as Heebner clarifies, “I try and find a situation where the development of the fundamentals is going to be more positive than other investors are experiencing.” When investing in the fund, Heebner combines fundamental analysis with an overlay of a top-down macroeconomic assessment.

At last check in April, Heebner was still optimistic about the prospects for equities, despite the outlook for inflation:

“I ran money from 1976 to 1980. The inflation rate went from 6 to 15. There was a lot of money to be made.”

 

In inflationary environments, Heebner advocates finding companies with earnings growth profiles that will expand faster than the compression in price-earnings ratios.

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Heebner Not Alone

Ken Heebner is certainly not the only hot-shot manager in history to suffer a cold-spell. After setting records and beating the S&P 500 index for 15 consecutive years, Bill Miller has found his fund (Legg Mason Capital Management Value Fund – LMVTX) firmly in the bottom decile of his peer group on a 1-year, 3-year, 5-year, and 10-year basis (see also Revenge of the Dunce). Moreover, Morningstar’s fund manager of the decade, Bruce Berkowitz of the Fairholme Fund (FAIRX), has also recently been hit by the performance ugly stick (see also The Invisible Giant), albeit less bad than Heebner and Miller.

When all is said and done, the flexibility afforded to Ken Heebner in managing the CGM Focus Fund has served long-term investors very well – if they were not prematurely spooked out the investments due to volatility. For those not invested in the CGM Focus Fund, or for those bored individuals looking for rollercoaster returns, Dr. Heebner may have just the adrenaline prescription you were looking for…a healthy dosage of CGM Focus Fund shares!

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

www.Sidoxia.com

DISCLOSURE: Performance data from Morningstar.com. Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct position in CGMFX, LMVTX, FAIRX, BAC, C, WFC, HIG, MORN, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

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