Putting focus on a new fund

by Stephen Butler

Does the name Ken Heebner ring a bell? He was on the cover of Money magazine in the '80s when he ran the Loomis Sayles Capital Development fund to a winning slot in the mutual fund sweepstakes of that era. Well, he's back. In fact, he never left. His success at running a large-company growth-oriented mutual fund, CGM Focus fund, speaks for itself.

The fund is up more than 30 percent for the third quarter and has averaged more than 30 percent per year for the past five years.

Remember the market collapse of the early 2000s? Ken's fund from 2000 through 2003 posted the following annual returns: Rounded to the nearest percent, they were 54 percent, 48 percent (-18 percent) and 66 percent.

For investors, the equivalent of the Holy Grail is a money manager who consistently outperforms most other efforts to manage money. That's not to say that they are always winners year after year.

I remember the headlines in the late '90 s that proclaimed "Warren Buffet doesn't get it. He doesn't invest in tech stocks." Neither did Ken, but Heebner kept soldiering on, largely out of the limelight, generating results that proved to be larger than life -- "life" being market averages.

In my Sept. 17 column, I talked about two theoretical determinants of success in the money management business. One was the possibility that high earlier scholastic standing could be a factor for a manager and the second was the practice of investing in a small number of stocks at a time.

Scholastic standing probably mattered in Heebner's case because he once worked for Scudder, Stevens and Clark. I recall from a '70s conversation with David Smith, who ran the Scudder San Francisco office in the 1960s and '70s, that the firm's recruiting strategy involved going to Stanford and Harvard business schools and paying the top students whatever it took to get them to come to work for Scudder. Some excellent money managers such as Glen Voyles, later of the amazing Jurrika and Voyles fund, were products of that recruiting approach, and I have to think that if Ken Heebner made it through the Scudder academic filter, he probably did well at a respectable graduate business school.

Although managed funds such as Fidelity Magellan are known for having more than 400 investments, Heebner's CGM Focus typically has 23 investments with a turnover ratio of 333 percent. That means that the average investment in the funds exists for an average of four months before being sold. Heebner's approach is to make an assessment of global trends and then invest in companies that stand to capitalize on those trends. A book by Matt Simmons, "Twilight in the Desert," chronicles the poor quality and grossly inflated estimates of what remains in Middle Eastern oil fields. If that's true, you can understand why a third of CGM Focus is invested in energy stocks.

The high level of turnover would be problematic for an investment in a taxable account, because all that success and rapid turnover would be triggering capital gains taxes at the end of each year. Having to pay taxes because of a wildly successful mutual fund pick is a delightful problem to have, but people who hate paying taxes more than they enjoy making money don't see it that way. That IRS Form 1099 arriving from the mutual fund spelling out the year-end tax liability leaves many gnashing their teeth. It means having to take money from the fund or harvesting losses from somewhere else to offset the gains. In a qualified retirement plan, however, taxes don't matter. You pay them years later when you start spending money from your IRA or 401(k). Obviously, the place to house a fund such as CGM Focus would be in a tax-insensitive haven, like a retirement plan.

This is not a clarion call to suggest moving all our assets to funds such as CGM Focus. However, it might pay to review the money we have allocated to the mutual fund style of so-called "large-company blend" funds (which CGM Focus is) to see how our current candidates compare. The key to creating high weighted-average returns in a portfolio is to maintain diversification and a balance between different fund types and styles. Within those style categories, however, it never hurts to be represented by the best candidates we can find.

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