Big wins, big losses

Heebner’s $3.6 billion CGM Focus fund hasn’t just hit a pothole in the past year. It’s fallen into a crater, losing nearly 60 percent over a 12-month period beginning on June 30 last year. That’s more than twice as bad as the Standard & Poor’s 500 index’s performance in a terrible market. CGM Focus ranked among the very worst diversified stock funds over that time.

Worried and uncertain amid failing institutions and the near meltdown of financial markets last year, Heebner moved in and out of big stock positions. Bad decisions at the wrong times snowballed, to disastrous cumulative effect.

“I made mistakes,’’ Heebner, 68, says now. “Frankly, I was looking at the most dire financial crisis of my career. I had seen bad recessions, but this one in the financial sector was much worse.’’

That decline, beginning in the middle of last year, was an abrupt reversal of fortune. It came right on the heels of a long period that was unquestionably the best of Heebner’s investing life.

Just weeks earlier, in May last year, he was lauded as “America’s hottest investor’’ on the cover of Fortune magazine. Twice I had named him Boston Capital’s mutual fund manager of the year.

Why the hubbub? Heebner had maneuvered through a series of investment cycles, betting big and winning at every turn. By the middle of 2008, the CGM Focus fund had earned an average annual return of 32 percent, while the stock market was flat through the decade to that point. You read that right: He beat the market by an average of 32 percentage points a year for 7 1/2 years.

Then everything changed. A chain of events clobbered the performance of the Focus fund, which concentrates up to 60 percent of its money in 10 top stocks.

The fund began last summer with a heavy emphasis on stocks that depend on strong demand for commodities. That strategy, which banks on global economic growth, worked wonders earlier but fell hard last summer, and Heebner couldn’t get out fast enough. Strike one.

Last fall, Heebner moved his Focus portfolio heavily into big-bank stocks, seeing a rebound opportunity. It was a good idea, but too early. Institutions seemed to teeter, and Heebner sold at a big loss. Strike two.

Soon, he moved into life insurance shares. Heebner believed the market had overestimated dangers in variable life and annuity products, buying into leading insurers. He was right but got cold feet when the stocks kept falling and sold before they bounced back. Strike three.

“Probably the worst mistakes I made were selling the banks and insurance companies at low points,’’ Heebner says. “I can only say that, looking back at conditions that looked so dire, it seemed the prudent thing to do was sell.’’

Analyst Nadia Papagiannis, of Morningstar Inc., notes the Focus fund had the ability to hedge some of the risks in its big-bet portfolio but never did so. “That’s fine when it’s your money but not when it’s other people’s money and you lose two-thirds of it,’’ she said.

“I really think this is a lottery ticket fund. I don’t think it’s for most investors,’’ Papagiannis said.

Heebner acknowledges the experience of the past year was the steepest and most sudden setback in his career. But the Focus fund still ranks among the top 5 percent of competitors over five years and its average annual return this decade, diminished to 17 percent, continues to run circles around the market.

Heebner is optimistic about stocks today, though he concedes investor confidence has been demolished. The Focus fund has improved recently, up 0.4 percent this year, but trails the market by a wide margin.

About 26 percent of Heebner’s fund is invested in bank shares now. Ford Motor Co. and Goldman Sachs Group Inc. were his biggest holdings on June 30. He says he’s bought shares of Freeport McMoRan Copper & Gold Inc., FedEx Corp., and engine maker Cummins Inc.

“You do your best investing in stocks when things are bad and over time they’re going to get better,’’ Heebner says. His mutual fund investors know very well how bad things have been.

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