(Bloomberg News) Kenneth Heebner ranked as America's No. 1 stock picker before losing his touch and most of his main fund's assets. The 71-year-old manager, at the bottom of his peer group for the fourth year in five, hasn't lost his swagger.
Heebner, whose CGM Focus Fund topped all diversified U.S. stock mutual funds in the decade through 2007, lost an annual average of 6.3 percent in the five years through June 26, trailing 96 percent of the same group, according to data compiled by Bloomberg. CGM Focus has been in the bottom 6 percent of the large-cap growth category every year since 2008, with the exception of 2010, when it beat 66 percent of peers.
"Most people think this is the worst time in the world to be optimistic, but my portfolio is positioned for strength in the U.S.," Heebner said in a telephone interview from his Boston office. "I am functioning in a contrarian mode."
With the U.S. economy expanding an average annual 2.4 percent per quarter since the recession ended in June 2009, the weakest recovery in six decades, Heebner acknowledges being too upbeat about the prospects for stocks such as Citigroup Inc. and Ford Motor Co. that depended on a stronger economy. The fund's assets have plunged to $1.9 billion from the June 2008 peak of $10.3 billion.
A star of the early 1980s through the mid-'90s, Heebner has bounced back before, after missing out on the 1998-99 technology-stock surge. This time, with central banks across the world running out of tools to revive their economies and governments forced to reduce spending, some analysts are questioning how long you can be contrarian before you're wrong.
"It is difficult to have any conviction he will turn it around," Kevin McDevitt, a Morningstar Inc. analyst, said in a telephone interview. Heebner works largely on his own, a labor- intensive process that may be hard to keep up, according to McDevitt.
Heebner considers himself a spotter of investment themes as well as a stock picker. The manager had 21 percent of his fund in banks and 12 percent in airlines at the end of the first quarter, according to a regulatory filing. Heebner owned 4.3 million shares of Citigroup with a value of $156 million and 14.1 million shares of Delta Air Lines Inc. valued at $140 million as of March 31.
"With a strategy that bold it is a given you are going to have some extreme performance," Russel Kinnel, director of mutual fund research at Chicago-based Morningstar, said in a phone interview.
Heebner said in the interview he still loves what he is does and has no intention of retiring. He studies reports on 25 industries, looking for trends on which he can capitalize. For much of the past decade, his instincts led him to the right spots.
In 2000 and 2001, he profited by betting against tech stocks as the Nasdaq 100 Index crashed. He began buying homebuilders such as Miami-based Lennar Corp., ahead of the multiyear run-up in home prices.
By the start of 2005, seven months before homebuilding stocks peaked, he sold them and moved into energy and commodity companies in time to catch the boom there.
"I want to be more like Ken Heebner -- he's my hero," William Danoff, manager of the $79.5 billion Fidelity Contrafund, said in a September 2008 interview with Kiplinger's Personal Finance magazine in which he described his rival's performance as "staggering."
By then, Heebner's slide had begun. In 2008, CGM Focus lost 48 percent as the global recession hurt commodity prices and a move into beaten-down financial stocks proved premature. Heebner sold his insurance stocks in the first quarter of 2009 at a loss, he wrote in a regulatory filing, which caused him to miss the nascent rally in financial companies.
"It was simply a costly trading error," he said in the interview. The fund rose 10 percent in 2009, trailing the 26 percent gain of the S&P 500, including reinvested dividends.
After a 17 percent climb in 2010, Heebner slumped again in 2011 when fears of a slowing economy triggered losses in holdings such as Dearborn, Michigan-based Ford, down 36 percent, and New York-based Citigroup, which fell 37 percent in the second half, after he added it to the fund. CGM Focus lost 26 percent in 2011, versus a 2.1 percent return for the S&P 500.
This quarter, New York-based Morgan Stanley and Irvine, California-based Western Digital Corp., a maker of disk drives and networking gear, fell as Europe's debt crisis escalated. Both stocks were among the fund's 10 largest holdings as of March 31.
Heebner's decision to sell short 10- and 30-year Treasury bonds in the first quarter went awry when investors piled into the government debt as a safe haven. In a short sale, an investor borrows and sells an asset with the goal of buying it back later for less and pocketing the difference.
"I would have done better if I had been more defensive," Heebner said.
Heebner has had "a miserable time" finding themes that work since 2008, said Jeff Tjornehoj, an analyst with Denver- based Lipper, which tracks mutual funds.
"You would hope a manager has some idea of what is coming around the corner," Tjornehoj said in a telephone interview. "I can't see a good reason to get into this fund."
Heebner isn't the only prominent manager to suffer a setback in recent years. Legg Mason Inc.'s Bill Miller, who beat the S&P 500 Index for an unprecedented 15 years through 2005, trailed the U.S. benchmark in five of the next six years. He stepped down from his main fund on April 30.
Bruce Berkowitz, named U.S. stock fund manager of the decade in 2010 by Morningstar, lost 32 percent in his Fairholme Fund last year as his bets on banks and insurers soured. The $7 billion fund has bounced back in 2012.
"Stock pickers have been riding in a little raft and these economic tidal waves have been coming along to upset everything," said Jack Ablin, chief investment officer at Chicago-based Harris Private Bank, where he oversees about $60 billion in assets.
Global economic weakness plays into Heebner's thesis that the U.S. is poised to outperform most countries, according to the manager. Diminished growth in Asia and Europe will result in lower oil and commodity prices, a de facto tax cut for U.S. consumers, Heebner said.
The real estate bust has created pent-up demand for housing that eventually will lead to another surge in building, he said. Confidence among U.S. homebuilders climbed in June to a five- year high, based on the National Association of Home Builders/Wells Fargo confidence index.
"There are forces out there driving the U.S. in a positive direction," Heebner said, without giving a specific forecast.
Not everyone shares that outlook. John Taylor, chairman of the currency hedge fund FX Concepts LLC, told a Bloomberg asset management conference in Boston on June 14 that the U.S. is being dragged into recession by Europe's debt crisis.
Neel Kashkari, head of global equities at Newport Beach, California-based Pacific Investment Management Co., said at the same meeting that the U.S. economy is slowing.
"Unemployment is not getting better, it's getting worse," Kashkari said.
Heebner isn't bothered by pessimism around him. Negative sentiment, he said in the Bloomberg News interview, "historically has been associated with maximum points of opportunity for investing." The "enormous negative publicity" about U.S. banks doesn't square with the companies' improving fundamentals, according to Heebner.
"When sentiment turns, I want to be sure to be there," he said.
Robert Kemp, who hired Heebner in 1976 at Boston-based Loomis Sayles & Co., said the recent slump hasn't changed the manager.
"He is just as talented and passionate as ever," said Kemp, the president of CGM Funds. "All he does is manage money."
Steven Roge, a portfolio manager with Bohemia, New York- based R.W. Roge & Co., said he wouldn't be surprised to see Heebner bounce back.
"He is one of the best minds in the industry and he has a streaky investment style," Roge said in a telephone interview. Roge, who helps manage $200 million for individual investors, said he's has never owned Heebner's fund because its performance is too volatile for his clients.
Heebner, who earned a master's in business administration from Harvard University, and Kemp left Loomis Sayles in 1990 to start Capital Growth Management LP, which advises four mutual funds.
Heebner's $1.6 billion CGM Realty Fund ranked No. 1 in the real estate category with a 17 percent average annual gain in the past 10 years, according to data compiled by Bloomberg. The fund has benefited from owning stocks such as Simon Property Group Inc., the world's largest real estate investment trust. Shares of the Indianapolis-based company have soared six-fold from their low point in March 2009.
Heebner, whose team includes two analysts and two traders, had 21 stocks in CGM Focus as of March 31. His 496 percent turnover ratio, a gauge of how much the portfolio changes in a year, is six times greater than the industry average, Morningstar data show.
In addition to his holdings of banks and airlines, Heebner's largest positions as of the last quarter included shares of Benton Harbor, Michigan-based appliance maker Whirlpool Corp., and D.R. Horton Inc., a homebuilder based in Fort Worth, Texas.
Investors haven't been waiting for Heebner's performance to rebound. CGM Focus Fund lost a net $2.6 billion to redemptions since the end of 2008, Morningstar estimated.
Ronald Sugameli, chief investment officer for Wellesley, Massachusetts-based Weston Financial Group Inc., where he oversees $1.7 billion for wealthy clients, is among those who dropped the fund.
"It was a combination of the underperformance and the high volatility," Sugameli said in a telephone interview.
The last time Heebner trailed the market for an extended span was in the late 1990s when he refused to join the rush into tech stocks. In the two years ended Dec. 31, 1999, CGM Focus returned 12 percent, versus 56 percent for the S&P 500.
Then, as now, he went the opposite way from most investors.
"I am completely outside the mainstream," Heebner said. "I see the mainstream in the distance."