Heebner's big bet
Boston mutual fund manager Ken Heebner is known for a lot of things. Moderation isn't on the list.
This is one reason Heebner makes for such consistently good reading and a favorite in this space for many years. The other is the performance of his funds, which have been bumpy but mostly spectacular for the best part of the last decade.
Big, thematic investment bets that seemed obvious in retrospect made his CGM Focus fund the best performer among 416 mid-cap growth funds tracked by Lipper Inc. over the past five years (averaging annual returns of 17.2 percent) and the seventh best over the past three years (17.4 percent annually). Seven years ago, that meant shorting the technology stock boom. Later it meant buying real estate with both fists and, later still, doing the same with energy stocks.
Much more recently, Heebner has seized upon a new corner of the market: financial stocks.
Heebner's latest big turn was as much about dealing with a problem as it was about trying to seize a new opportunity. His CGM Focus fund had been beating the Standard & Poor's 500 index throughout the first half of last year, sometimes by huge margins, but suddenly sinking oil prices put a big dent in performance.
"I was over 50 percent invested in all my funds in energy stocks, and I had a very bad [third] quarter," says Heebner. The portfolio had to change.
Heebner still believes the world is using oil faster than it can be produced, and that prices should rise over time. But not in the immediate future. "For now, the rising price scenario is not operative," he says.
During the third quarter, CGM Focus lost 6.9 percent while the S&P 500 advanced 5.7 percent. But the fund pulled up nearly even with the market index by the end of the year, finishing 2006 with a gain of just under 15 percent.
Heebner remade the $2.3 billion CGM Focus portfolio by investing more than $422 million in four big investment banking stocks. The fund bought Goldman Sachs Group Inc. , Morgan Stanley , Merrill Lynch & Co., and, in a smaller amount, Lehman Brothers Holdings Inc. Heebner's balanced fund, CGM Mutual, spent another $95 million on the same sector.
Why does Heebner think the historically cyclical investment banking business is worth a plunge like that, four years into a bull market? The answer comes in two parts.
First, he believes a huge amount of wealth creation around the world, especially outside the United States, is producing a staggering amount of money in need of investment and opportunities for bankers. Second, Heebner thinks investment banks are actually making that money in the service of hedge funds and private equity firms, and profiting on their own proprietary trading desks.
"These companies have a higher growth profile now than they've had in the past, and they should be worth more money," says Heebner.
But, of course, they've appreciated a lot since the stock market started to climb four years ago. The price of Morgan Stanley shares has doubled. Goldman Sachs has nearly tripled and Merrill Lynch has gained 145 percent. Their business may be global and focused on new clients, but the fortunes of investment banks are still connected to the stock market.
"As I invested today, I am perhaps more tentative in any position I take," says Heebner. "I'm aware you increase your sensitivity to the action of the stock market" buying investment bank stocks. "The action of the stock market is harder to forecast than a lot of other things, for me at least."
If it heads south, another big portfolio change at CGM Focus may be the surest forecast.
Steven Syre is a Globe columnist. He can be reached at syre@globe.com. 
