Learning from Ken about effect of higher interest rates on basic materials stocks...
Ken Heebner Writes His Own Rules
By Brenda Buttner
Special To TheStreet.com
10/23/97 12:30 PM ET
By Brenda Buttner
Special to TheStreet.com
10/23/97 12:30 AM ET
Go ahead, do what the "experts" say. Look for funds that stick strictly to a set style, never straying beyond the lines of "blue-chip value" or "small-cap growth" and fitting nicely into your asset allocation model. Find money managers who, supported by a large analytical staff, follow either a top-down or bottom-up approach to filling a portfolio, and who manage risk by owning lots of different stocks.
Yes, go ahead, listen to the experts, but at your portfolio's peril. Because you'll never find one of Ken Heebner's mutual funds there and you will have missed out on the best track record in the business.
Heebner doesn't follow the rules. He's a rapid trader who never sits in any sector for long. As for style, he'd be the first to tell you he just doesn't have one. Today, his new Focus fund may be one thing, next quarter, something else. He buys and sells without regard to neat labels like "large-cap" and "aggressive growth." He thinks less is definitely more and makes big bets on a few stocks or bonds.
His "criteria"? Well, he doesn't really have any that apply across the board. Analysts? He keeps his staff size small and makes all the judgment calls himself. (Just try getting him on the phone anytime before the market closes. He is one of the few managers I've interviewed who would rarely budge from his computer -- even for TV.)
Yes, Ken Heebner does just about everything that the experts advise you not to.
Except for one thing: He beats the Street. Over the last 15 years, his CGM Capital Development fund (closed to new investors) produced the No. 1 return of all funds. This year, the $867 million fund is yet again one of the top funds, currently boasting a 42.0% return, according to Lipper Analytical Services.
How Heebner's Funds Have Fared
Fund Name YTD
Ret 3-Yr
Avg Ann
Return Avg Ann
Ret Since
Inception LOAD/
NO-LOAD Expense
Ratio Fund Type
Cap Develop
42.0% 31.6% 15.0% no-load 0.82% cap. apprec.
Realty
25.7% 31.3% 25.4% no-load 1.00% real estate
Mutual Fund
20.8% 21.8% 10.4% no-load 0.87% balanced
Data from Lipper Analytical Services
Heebner's newest fund, Focus, is attracting a lot of interest. Opened in early September, it already has $80 million in assets. Although he expects to use the same approach that has been so successful with his Cap Dev fund, there will be some big differences. Namely, its small size means he'll be able to fill the portfolio with smaller stocks. He has no plans at present for closing the fund, however, saying that as Focus grows, so too will the size of the stocks he invests in.
So what is the stock-picker's stock-picker picking now? Well, first of all, CGM Focus will allow him to sell short. Perhaps an indication of where he thinks this market is headed? Not necessarily. He hasn't identified any shorts yet, and he's positive about the economy, but he's "nervous," especially with valuations high and the Street poised for disappointment. So, as a contrarian (perhaps the one label he'll wear), he continues to be on the outlook for opportunities, searching out industries and individual stocks that might otherwise be ignored in a highflying market. "To make money here you've got to do it with selection," Heebner says. "The market alone isn't going to carry you to higher ground."
To get to that higher ground, he's digging deep . . . and reaching high: Oil service and airline stocks are favorite sectors. His top-10 holdings in the Cap Dev fund (from June 30, the most recent date available, click here) reveal one producer of drill pipe, Tubos de Acero de Mexico (TAM:NYSE - news), though again he is cautious. "It's an expensive stock and the valuation will not permit disappointment. I watch closely new prescription activity."
Heebner's Faves (At Least Today)
STOCK WHAT HE THINKS
Warner-Lambert (WLA:NYSE - news)
"But it's an expensive stock and the valuation will not permit disappointment. I watch closely new prescription activity."
SL Green Realty (SLG:NYSE - news)
"Acquisitions could be significantly accretive to their base, so this company, which has been in the office market for 18 years, remains one of my favorites."
Moving quickly, of course, shows up in his turnover. For Cap Dev it's 178%, and capital gains are more than 10% of the net asset value for the last 12 months, according to Lipper. But one sector that he's stuck with for the last two years and still likes is REITs. He continues to see real estate investment trusts as a good defensive play in a market that seems to love being disappointed. "I've owned REITs," he says, "where results were disappointing, and a $22 stock plunges all of ... 50 cents. As an investor, the risk/reward on REITs is attractive relative to stocks."
Indeed, Heeber's real estate fund, unlike some of those at the very top of the sector's charts, is REIT-exclusive. Portfolio turnover is much lower than in Cap Dev, 57%, and capital gains are under 5% of the share price. His favorite REIT right now remains SL Green Realty (SLG:NYSE - news) (see chart above).
As for the sector, he thinks the Class B office business in Manhattan is one of the most promising areas in real estate. That's where he feels opportunities are most exciting, because with little new construction, vacancies are declining dramatically and rents moving higher just as quickly.
If you want to run with Heebner, be prepared for a bit of a ride. (I admit I've got my own seatbelt on -- my husband and I hold CGM Realty in our portfolio.) When he's right, he's been really right, and when he's wrong, well, you'll feel it. Check out 1994. That's when his Capital Development fund had a negative 23% return. "One of the key characteristics of a concentrated portfolio is that it amplifies the judgments the manager is making," Heebner says. And his judgment that year was that basic industries would pay off. "Problem was Greenspan tightened in February and caused the economy to weaken and all those industries started to disappoint."
Once he realized that, he went on to beat the market again, in both '95 and '96, one of the few active managers to do so. But his record shows you should expect volatility on both the upside and downside.
And Heebner would be one of the first to admit that. "You have to be able to look yourself in the mirror and say, `You know, I wasn't so smart.' I've had to do that more than a few times."
Hold on a second -- a fund manager admitting publicly that he was wrong? Oh, yeah, the experts would probably advise him not to do that, either.
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