Old scars, fresh wounds

Ken Heebner and Dan Fuss, two of Boston's most experienced and distinguished mutual fund managers, rarely come across a kind of market peril they haven't seen before.

They managed funds through the dismal first two years of this decade. They were at their desks during the crash of 1987. And, unlike most fund managers working today, they have vivid memories of managing money through the terrible markets of 1973-74.

But all that experience hasn't helped them avoid big losses in this year's crumbling stock and bond markets. Fuss is suffering through his worst stretch in more than 30 years, piling up losses that put the Loomis Sayles Bond fund he comanages at the back of the pack of competitors. Heebner's flagship CGM Focus stock fund finds itself in a rare position this year - trailing the stock market, albeit modestly.

Heebner's fund, which tends to make big stock bets based on economic themes, started this week down 38.6 percent for 2008. The Standard & Poor's 500 stock index was off 34.8 percent.

That's not such a big gap, but it stands in stark contrast to Heebner's record running circles around the market for most of this decade. Going into 2008, CGM Focus had earned a total return of 385 percent over the previous five years. The S&P 500 gained just 83 percent during that time.

CGM Focus was beating the market again through the first half of 2008. But it started to lose that edge through the summer, fell to even by September, and then dropped behind during the market's worst days this month.

Heebner says the fund lost ground when he sold off big holdings in energy, metals, and other commodity-oriented stocks over the summer. Once market favorites, these holdings were losing ground fast. He says those positions, which had dominated the CGM Focus portfolio, are all but gone now. Financial stocks, the market sector that terrifies investors, now rank as the fund's biggest portfolio category today.

Heebner declined to name any financials stocks purchased for the fund. He said most were bought when selling pressure made the shares irresistibly cheap, not because they fit into any new economic theme.

Fuss and his bond funds were losing a little money, but only a little, in a tough market through the first eight months of this year. That wasn't so bad, especially when you consider his Loomis Sayles Bond fund had earned more than 9.5 annually over the previous decade.

Then the bottom fell out of the corporate bond market and his fund went down hard. The fund was off 25 percent for the year going into this week, compared with an average loss of 13 percent among its peers.

Looking back, Fuss says he moved back into corporate bonds too early this year. His fund had built up a big cushion of government securities, but began selling some of them to move back into company debt through the late winter and spring. By the fall, investors were selling corporate bonds in a near panic to buy US Treasury securities.

The Loomis Sayles Bond fund was also hurt by its exposure to currencies around the world. That was a plus when the dollar sagged, but it added to the fund's losses when panic set into the market. Shareholders started cashing out, withdrawing 8 percent of the fund's assets in a period of four weeks. That put pressure on Fuss to sell some assets at rock-bottom prices, though the pace of share redemptions has slowed to a trickle, he says.

Fuss and Heebner see cheap stocks and bonds today. They both sense opportunity now. But experience that comes with old scars and fresh wounds tells them to be cautious, too.

Steven Syre is a Globe columnist. He can be reached at syre@globe.com.