Fund Profile: CGM Focus Fund
by Ann C. Logue
Ken Heebner is a legendary mutual fund manager. His built his reputation in the 1980s at Loomis Sayles & Company, which he left in 1990 to start his own money management firm. His CGM Focus Fund could keep that legend going a little longer. It helps that Heebner called the 2007 subprime crisis correctly, selling the big financial services holding in the fund early in the year and replacing them with energy companies and companies with big international exposure. Instead of getting slammed by the mortgage mess, the CGM Focus Fund posted profits from the weak dollar and the steady rise in oil prices. The fund is off to a weak start in 2008, which is no surprise given the market. But if the name of the game is buying low and selling high, this might be the time to buy.
Heebner isn’t a perfect seer; he’s had some bad years in the past, but investors in his fund have been happy more often than not. He is willing to take on a lot of volatility in the interest of long-term performance. Because CGM is his company, he can afford to do that. There’s no corporate investment committee or parent company that has to answer to a group of outside shareholders in a down year. Instead, Heebner has a team of analysts steeped in the firm’s careful approach to researching growth stocks that help him select the winners and cull the losers. They have freedom that investors at larger shops don’t always enjoy.
That freedom extends to the CGM Focus Fund’s unusually broad prospectus. The fund can invest domestically or internationally, in stocks or bonds, and in as few as 20 different securities. There are no limits on industry concentration or on stock size, although the fund usually invests in companies with a market capitalization of at least $100 million (which is tiny under current market standards). This flexible approach means that investors can never be sure what they are getting, so the fund is not a core portfolio holding. Instead, it’s an interesting adjunct that might pay off big.
Given that the fund had a 333% turnover in its last fiscal year, names on the published holdings list might not be in the fund today. However, looking at three of the recent top positions offers a little insight into the kinds of stocks that Heebner and company like. Vale Overseas Limited (NYSE: RIO) is a multinational minerals and mining company based in Brazil, and it has had strong appreciation because commodities come into fashion whenever the rest of the market is out. The next name on the recent list is CNOOC Limited (NYSE: CEO), the China National Offshore Oil Corporation, which is a play on both energy prices and the ongoing expansion in China. The third company, Vimpel-Communications (NYSE: VIP), sells mobile telephone service in Russia. All three stocks combine stable businesses with fast-growing markets, which may be a sound route to growth in such a volatile investment environment. The U.S. economy may be punk, but much of the rest of the world is booming.
The CGM Funds have no load and no 12b-1. They also have low operating expenses, with a management fee of 0.93% of assets and a total expense ratio of 1.02%, a tad lower than the category average of 1.11%. The minimum investment is $2,500 for regular accounts and $1,000 for retirement accounts. And given that portfolio turnover can be 333% or more, the CGM Focus Fund is probably best held in a retirement or other tax-advantaged structure.
The U.S. stock market started 2008 by falling off of a cliff, and this fund went right down with it. New investors may have to ride out some volatility, and current investors may have to fight the urge to flee. If history is any guide, though, it will be worth it. The CGM Focus Fund returned 58.98% in 2007, with a three-year average annual return of 32.96% and a five-year average annual return of 32.75%. That’s why it was the top-ranked fund for the 1, 3, and 5 year periods in the Large Blend category.
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