Mutual Funds
The Savviest Stock Picker in America
Ken Heebner names the stocks that will benefit from the strongest global economy he's ever seen.
By Manuel Schiffres, Executive Editor
From Kiplinger's Personal Finance magazine, May 2007
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Conventional Ken Heebner isn't. One of the longest-tenured managers in the fund business, he trades frenetically, runs highly concentrated portfolios, occasionally sells short to bet on lower share prices and makes judgments based on his big-picture analysis of the global economy.
And he has delivered fabulous results -- at least to those CGM shareholders who don't bail out during the gut-wrenching dives to which his funds are susceptible. His flagship, CGM Focus (symbol CGMFX; 800-343-5678), gained an annualized 19% from its launch in September 1997 to March 1, 2007. That beat Standard & Poor's 500-stock index by an average of 13 percentage points per year. But Focus, a member of the Kiplinger 25, was twice as volatile as the index. Similarly, CGM Realty (CGMRX), the top real estate fund over the past decade, with an annualized return of 20%, has been nearly one-third more volatile than the average property fund. (CGM Capital Development, run by Heebner since 1976, is closed to new investors; he also manages CGM Mutual, a balanced fund.)
Heebner drives advocates of style consistency nuts. He is agnostic on growth versus value, meaning that he'll invest in just about anything, including foreign stocks. Heebner's willingness to turn on a dime is easily seen in Focus's 2006 turnover rate of 333%. That means the fund held stocks fewer than four months, on average, last year.
On the day we visit Heebner in his 45th-floor Boston office, which overlooks the harbor and the old Custom House, he is warm but guarded. He is willing to discuss holdings listed in his funds' annual reports as of December 31. But he also makes clear that some stocks in the shareholder reports are off-limits, presumably because he has already sold them. Here are the highlights of our conversation.
KIPLINGER'S: Did the market's late-winter swoon affect your thinking?
HEEBNER: Not in the slightest.
What are some of the key trends you're focusing on? The subprime-mortgage disaster is much bigger than anyone can imagine. It won't derail the economy, but it will scare the financial community. It will slow the economy, and that's good for the stock market.
Please elaborate. This is all about housing prices rising 100% in some markets between 2000 and 2005. The move from '04 on was driven by people taking out mortgages they couldn't afford to service and using the money to bid up the prices of houses. A correction of that situation is under way, and it will intensify because of massive foreclosures. Foreclosures are up from a year ago, but it takes time for a homeowner to realize that his house is under water and that he's better off leaving and mailing in the keys. That means a lot of prime mortgages will become subprime.
What does this all mean? It means the housing market will stay weak for another year. The news will be scary, and as a result, consumer spending will slow. But slower growth will extend the duration of the business cycle because the Federal Reserve won't have to raise interest rates. On balance, this is positive for the stock market.