Ken Heebner Downfall Supports Efficient Market Theory

By on June 28, 2010

Charles Stein at Businessweek highlights the dangers of investing with the hot hand. In the tradition of Bill Miller, Ken Heebner failed to deliver when it mattered most; when his assets under management exploded.

Ken Heebner started the century making all the right moves for his CGM Focus (CGMFX) mutual fund. Deftly shifting into and out of sectors such as homebuilding and commodities, he posted returns averaging 32 percent annually from 2000 through 2007, a period when the Standard & Poor’s 500-stock index returned just 1.7 percent a year. Then the magic stopped. CGM Focus, which Heebner runs from Boston, is the only domestic stock fund to trail at least 96 percent of its peers in 2008, 2009, and again this year, according to research firm Morningstar. The main culprits: bad bets on commodity and financial stocks. “He’s been in all the wrong sectors at all the wrong times,” says Jonathan Rahbar, a Morningstar analyst.

Stein then compares Heebner to Miller:

Heebner’s nosedive rivals that of Bill Miller, the high-profile Legg Mason fund manager who beat the S&P 500 for a record 15 consecutive years, then dropped to the back of the pack from 2006 through 2008. Like Miller, Heebner has lost investors, with net withdrawals of $1.8 billion since August 2008, according to Morningstar. CGM Focus’ assets are now $3 billion, down from a peak of $10.3 billion in June 2008, reflecting market losses and investor withdrawals. Unlike Miller, he lagged the market last year, gaining 10 percent while U.S. stock funds on average rose 33 percent. Miller’s Value Trust was up 41 percent. Steven Rogé, who invests his clients’ money in mutual funds, says the ballooning of Heebner’s assets in 2008 convinced him there were better places to invest. “When a fund attracts assets that quickly, we worry about a manager’s ability to handle it,” says Rogé, whose firm, R.W. Rogé, oversees $200 million.

SMA Comment: The sagas of Bill Miller and Ken Heebner point out the dangers of investing with someone on a winning streak. They also bolster the efficient market theory with prime examples of the inability of a “hot hand” to continue performance, with devastating results for the investors arriving late to the party.

Source: Businessweek

One Comment

  1. Mark Carter

    January 1, 2011 at 9:19 am

    If he has 15 years of outperformance, then it's likely that the guy knows what he's doing. 3 years of underperformance doesn't prove very much. Greats like Anthony Bolton, and I believe even Warren Buffett in the early/mid 70's, had similar stretches of underperformance. It just comes with the territory.

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