America's Hottest Investor:
Never Mind The Rocky Market. After A String Of Supersmart Calls, Mutual Fund Manager Ken Heebner Is Putting Up The Best Numbers Of His Sterling Career.

By Jon Birger, Senior Writer | 29 May 2008

(Fortune Magazine)— The best mutual fund manager around— a.k.a. Ken Heebner of Capital Growth Management— looks restless. He is sitting in a conference room at Goldman Sachs's Boston office, listening to a young analyst pontificate about all the trends he thinks will sweep the markets in coming years. Oil demand outpacing supply. The rapid growth of agriculture. The increased sway of sovereign wealth funds. And on and on.

Heebner couldn't care less. His flagship fund, CGM Focus (CGMFX), has already made a killing on energy and agriculture, and Heebner has no patience for the pet theories of this or any other analyst (or economist or strategist). "I want information, not opinions," Heebner will later tell me. Then, just as the meeting is looking like a washout, Goldman analyst Marc Fox lets something slip that starts Heebner's brain whirling. Fox mentions that sovereign wealth funds are diversifying out of bonds and bank bailouts and into broad portfolios of common stocks. Coming from Goldman, the world's top trading house, this is valuable information. Heebner is one of the few fund managers who routinely engages in short-selling, and the prospect of a couple of trillion dollars flooding the equity markets should be enough to give any short-seller pause.

Immediately Heebner is peppering Fox with questions about where all this sovereign dough is going, wondering, for instance, whether Goldman is now recommending "short-busting" strategies to its worldwide clientele. (Short-busting involves trying to drive up the prices of stocks that a lot of investors have sold short.) "All I can say," Fox replies, looking a tad overwhelmed, "is you're multiple steps ahead of me."

Fox shouldn't feel too bad: Heebner is multiple steps ahead of everyone these days. At an age when most of his contemporaries have either retired or given up the daily grind of running publicly traded funds, the 67-year-old Heebner is putting up the best numbers of an already exemplary 30-year career. He's Barry Bonds without the steroids. "He's a rock star— he's Bono," quips his Irish-born (and U2-loving) analyst Catherine Columb. Given that U2 hasn't put out a good album since Joshua Tree— sorry, Catherine— Bono should feel flattered. (Of course, it's doubtful that Heebner, who by his own admission spends most of his waking hours thinking about the markets, could pick either Bonds or Bono out of a lineup.)

Just how good has Heebner been? We may well be witnessing the most dazzling run of stock picking in mutual fund history. Since May 1998, Focus has an average annualized return of 24%, the best ten-year record of any U.S. mutual fund, compared with only 4% for Standard & Poor's 500. Focus, which has $7.4 billion in assets, is already up 15% in 2008 (as of May 19), but it is 2007 that will be remembered as Heebner's pièce de résistance. Fueled by big bets on energy, fertilizer, and metals, Focus soared 80% last year, vs. 5% for the S&P 500. "I told Ken it was like he was walking between the raindrops," says CGM president Bob Kemp, who oversees sales and marketing at the firm, of the year Heebner had in 2007. "It amazes even us." Last year marked the fourth time since 2000 that the fund returned 45% or better. And it's not as if Heebner has needed the big years to make up for a lot of losses: Launched in late 1997, Focus has had only one money-losing calendar year (2002).

Peter Lynch's 14-year tenure at Fidelity Magellan has long been the gold standard for mutual fund excellence. During Lynch's best ten years— August 1977 to August 1987— Magellan recorded an average annual return of 36%, according to fund tracker Morningstar. It's a remarkable achievement, but even Lynch acknowledges that he was backed by a strong tailwind. The S&P 500 returned 19% a year over the same period. In other words, Lynch beat the market by 17 percentage points a year during his heyday. Ken Heebner has beaten the market by 20 points a year during his.

And Focus isn't the only Heebner-managed fund that's excelling. CGM Realty (a sector fund), CGM Mutual (a balanced fund that owns stocks and bonds), and CGM Capital Development (closed to new investors since 1969 and soon to be merged into Focus) have been standouts too. Realty boasts a 22% annualized return for the past ten years, sixth-best in the mutual fund universe, according to Morningstar. It's also the only fund in its category that's been bucking the real estate slump. Realty's one-year total return: 34%, vs. 6% for its nearest rival.

A True Contrarian

Even more remarkable than the raw numbers is how Heebner has earned them. Heebner is a true contrarian, who says he's most confident as an investor "when everyone else thinks I'm nuts." He works long hours trying to identify emerging trends in the economy. When he finds a promising one, he'll go all in, making huge bets on the stocks poised to benefit. Asked how long it takes him to identify those stocks, Heebner answers, "About ten minutes. I've been at this a long time." It's an investing style that will never be taught in business schools and is definitely not something any amateur should try at home. But Heebner, blessed with uncanny instincts, has managed to see around just about every corner in a market that has befuddled just about everyone else.

Never a fan of technology stocks (or of technology itself— CGM just got its first voicemail system), Heebner shorted tech and telecom stocks with gusto from January 2000 to September 2001, profiting mightily from the bursting of the bubble. In December 2000, he began buying homebuilders like D.R. Horton and Lennar, convinced that falling interest rates would be good for housing. The stocks went on a tear, and by 2004, Heebner's stake in the sector accounted for 19% of assets in Focus and 79% in Realty. But toward the end of 2004 he grew uncomfortable with the spread of what he termed "funny-money mortgages," and by January 2005— mere months before the industry started to collapse— Heebner had sold off every homebuilder share he owned.

Heebner used his homebuilder profits to load up on oil and coal stocks, positions he'd started to establish in 2004. He even bought coal stocks for the Realty fund— a move that style purists might criticize but for which Heebner makes no apologies. "I did it because it was the best thing for shareholders," he says, noting that Realty's prospectus explicitly defines "companies involved in the real estate industry" to include mining companies, which obviously own a lot of real estate.

In August 2005, Heebner doubled down on commodities by taking big stakes in copper miners Southern Copper and Phelps Dodge. The price of copper— and of copper stocks— doubled in a little over a year. In November 2006 he built large positions in fertilizer companies Mosaic and Potash Corp. of Saskatchewan. This time the stocks quadrupled. In October 2005 he shorted mortgage lender Countrywide. Heebner was early on that one, but he stuck with the short for two years, and his conviction was rewarded in 2007 when Countrywide collapsed from $40 to $8. By then, Heebner had short positions in three more drain-circling mortgage lenders: BankUnited, IndyMac, and FirstFed Financial.

Not every one of his moves worked out so well, of course. But Kemp, Heebner's longtime mentor and colleague dating back to their days at Loomis Sayles in the 1970s, says that one of Heebner's many strengths is knowing when to cut his losses. "A lot of fund managers fall in love with an idea and ride it all the way down," Kemp says. "Ken's quick to admit when he's wrong." Heebner actually began 2007 with a quarter of Focus's money invested in five Wall Street banks: Bear Stearns (BSC, Fortune 500), Citigroup (C, Fortune 500), Goldman Sachs (GS, Fortune 500), Lehman Brothers (LEH, Fortune 500), and Merrill Lynch (MER, Fortune 500). The holdings could have proved disastrous, but by June— before the credit crisis really snowballed— he was out. "How do you explain genius?" muses Douglas Pratt, a former Invesco fund manager who was an analyst at Loomis. "Ken just sees things others don't."

A League Of His Own

Spend some time with Heebner, and it becomes clear why. His brain is wired differently. His ideas come faster, his focus is more intense, and his ability to sift through massive quantities of information and zero in on what matters is downright spooky. Pity the Salieris of the investing world who have to compete with this guy.

There's no simple formula that captures his investing principles, and explaining his approach is something even Heebner struggles with— which may be why CGM manages only $13 billion (including private accounts), a relatively modest amount given Heebner's track record. Basically, he's the last of the gunslingers— a go-anywhere manager who can be investing in left-for-dead U.S. value stocks one day and red-hot Brazilian growth stocks the next. But he's not just playing hunches. He knows from years of experience, for example, that when steel scrap prices soar— as they have of late— steel stocks usually follow. And Heebner is a workaholic who's up at 5:30 a.m. reading stock reports and checking business news and who never leaves the office at night without a stack of articles and research that make up his bedtime reading.

CGM is pretty much a one-man show. Heebner's entire investment team consists of two traders— Elise Schaefer and Sue Small— and Columb, the U2 fan. Being an analyst for Heebner is a bit like being a beauty consultant for Halle Berry, so Columb knows better than to try to suggest stocks. She operates more like a sleuth. Heebner will ask her to dig up the latest information on, say, scrap steel prices in China or deep-sea oil rig leases, and within an hour or two her findings are on his desk.

These days Heebner is keeping close tabs on the latest economic data out of China, because China is the key to his enormous bet on commodities. As of March, 64% of Focus's assets were invested in commodities-related stocks. His biggest stakes are in steel (ArcelorMittal, Nucor, and United States Steel) and in oil (Apache, Devon Energy, Petrobras, and Schlumberger). Petrobras, the Brazilian oil company that has announced two giant offshore oil discoveries, is his favorite. "Petrobras could become the biggest stock in the world," he says.

Heebner thinks steel prices could double and oil could blow past $200 a barrel. (He also thinks inflation will hit double digits within the next five years: "I don't know why anyone would buy a bond.") Yet he is constantly on the lookout for any sign that the economic slowdown in the U.S. may be infecting emerging economies abroad. That would deep-six his whole investment thesis, which hinges on China and other emerging nations using more energy and building more infrastructure. "I'm not waiting for Morgan Stanley to tell me there's something wrong in China," Heebner says. "By then it's too late."

One oil expert Heebner has consulted is Matthew Simmons, a Houston-based investment banker who's become the oracle of "peak oil" since his book Twilight in the Desert was published in 2005. Twilight argues that Saudi Arabia is running out of oil faster than we think, and Heebner's own research leads him to the same conclusion.

Simmons says he first met with Heebner around the time Twilight was going to press. Heebner spread out on CGM's conference room table a map of Ghawar, the world's largest oilfield. "I thought, 'Jesus, most of the people in the money-management business don't have any idea what any of the Saudi Arabian oil fields are called, much less where they are or what their production history is. But Kenny Heebner has a blown-up, detailed map of Ghawar that's better than anything I've ever seen,'" recalls Simmons. "Then he says, 'Let me tell you what I'm hearing.' Turns out he'd been digging up retirees from the oil business and finding people who were willing to talk. About an hour and a half later, I walked out and said, 'That guy is amazing.'" (CGM has become one of Simmons & Co.'s biggest clients.)

Mixing Business With Pleasure

Heebner enjoys his job enormously, which is the key to his longevity. "It's not a business for him, it's a pleasure," says his brother Jeffrey, 70, who ran a home-security business before retiring. Jeff says his brother is truly married to his work, which is why he was happily surprised when Ken got married at age 60. (Ken's wife, Renie, a microcap fund manager at another Boston firm, declined to be interviewed.) In fact, the line between pleasure and obsession sometimes gets a little blurry. Heebner doesn't take vacations, he insists he'll never retire, he knows less about pop culture than my 8-year-old twins (which, come to think of it, may be a good thing), and other than sailing and politics, he has few interests outside the investing world.

Even his morning commute— a half-mile walk from his home on Beacon Hill to Boston's financial district— is spent in deep thought about his stocks and the markets. Arthur Bauernfeind, chairman of Westfield Capital and a friend of Heebner's from their days together at Loomis, recalls once bumping into a snow-covered Heebner on the Loomis elevator on the way to work. When Bauernfeind started making small talk about the wintry weather, an oblivious Heebner looked up and asked, "Is it snowing?"

Heebner's intensity and one-track mind used to come with a volcanic temper, but Janine Hermsdorf, Heebner's head trader until her retirement in December, says he's mellowed with age. That said, the one time you still want to steer clear of him is the Friday before any three-day weekend. "It's like clockwork," says Hermsdorf, who otherwise sings Heebner's praises as a boss and friend. "He'll get agitated because he's not going to be trading for three days."

For better or for worse, the hyperactive trading has always been one of Heebner's calling cards. The turnover rate in CGM Focus, which typically holds 20 to 30 stocks at a time, was a whopping 384% last year, which in theory means he traded enough to buy and sell the entire portfolio nearly four times. Indeed, CGM's trading costs are sufficiently high that Hermsdorf was called on the carpet by one institutional client who, despite CGM's superior returns, was livid about its inflated VWAP, or volume-weighted average price, which is a measure of trading efficiency. "I thought the guy was going to eat me, he was so mad," she says.

Jeff Heebner says that his brother has always been a little obsessed with making a buck— even though spending it has never been his thing. Jeff recalls Ken showing up at Thanksgiving one year in a car so beat up that it was leaking gasoline. And Jeff has repeatedly begged his brother to replace the 45-foot sloop Nunaga— purchased used in 1987— with a new sailboat. "I keep telling him to get something bigger," Jeff says. "I worry he's going to drown in that thing someday."

It's the same story with his office. Located on the 45th floor of a tony Boston high-rise, it boasts a million-dollar view of Boston Harbor. On a clear day you can even see Cape Cod. But the interior looks as though he's barely unpacked. Award plaques sit unhung on the floor. There's a photograph near his desk of Acadia National Park in Maine that's been so bleached out by the sun it's unrecognizable. And while Heebner does have a stylish Kieninger clock on his wall, it doesn't work. "I haven't gotten around to getting it fixed," he says.

Heebner grew up in Philadelphia, the son of George Heebner, a building contractor, and Ruth Heebner, a homemaker. His paternal grandfather was a farmer in Pennsylvania Dutch country, where the town of Heebnerville bears the family name. Heebner inherited his work ethic as well as his love of sailing from his dad. George, Ken, Jeff, and youngest brother Donald would go on weekend excursions on their 42-foot boat, but Ken was the only Heebner boy who truly loved being out on the open water. A reluctant sailor himself, Jeff recalls a particularly harrowing voyage across Chesapeake Bay when they got caught in a storm. "I'm looking for the life preserver," he says. "And I look back at Ken, and he's kneeling on the seat with the steering wheel in his hand, smiling ear to ear. My knees are shaking, and he's having the time of his life."

Heebner was also the family bookworm, and his grades were good enough to take him to Amherst College and then on to Harvard Business School. He is one of a handful of business celebrities from the HBS class of 1965— former IBM CEO Louis Gerstner, consultant Ram Charan, and New England Patriots owner Bob Kraft are some others— but Heebner apparently made little impression on his classmates. "Ken was a very quiet guy," recalls fellow HBS '65 alum John Herrell, former chief administrator of the Mayo Clinic. "He didn't stand out." Adds another Harvard classmate, executive search consultant Tony Price: "There's nothing I recall about Ken that suggested the kind of success he's had as an investor. He was relatively quiet in a group of individuals who were pretty dynamic."

"They didn't know him well enough," counters John Henry (a retired Philadelphia businessman, not the Boston Red Sox owner of the same name), who knew Heebner at both Amherst and Harvard. "Ken did march to his own drumbeat, but he was absolutely brilliant. I never, ever doubted that he was going to be a great investor." Henry, himself a long-time shareholder in Heebner's funds, says what first impressed him about Heebner was a little gambit he had going in finance class. Classmates would bring him silver dollars, which Heebner would exchange for dollar bills. Says Henry: "Ken was hoarding silver dollars on the idea that silver was going to keep appreciating, which would eventually force the Treasury to stop issuing new silver coins." And that's exactly what happened. "It was funny as hell— he'd be sitting there with piles of silver dollars on his desk— but Ken had it nailed," Henry says. "He saw something the rest of us didn't. That's Ken— that's always been Ken."

Asked about the silver dollars, Heebner smiles and reveals that it was more than a lark for him. At one point he'd accumulated 13,000 silver dollars and had even taken out a bank loan to help finance his little venture. "The Treasury had these uncirculated silver dollars in bags in vaults. You could walk in with a thousand dollars, and they'd give you a bag of 1,000 silver dollars." It's still the best deal he's ever seen, he says: "You couldn't lose, but you could make a lot." Heebner figures he eventually netted around $15,000, but he was less successful when he tried to parlay his experience into a term paper about why silver prices were going up: "I didn't get a very good grade."

After getting his MBA, Heebner wanted to go to work on Wall Street as an investment banker. Nobody would hire him. "I think my energy level back then was so high that I just made people uneasy," he says. Heebner eventually took a position at the economic forecasting firm A&H Kroeger, where he spent four years and honed his ability to identify trends from reams of data.

Controversial Opinions

Eager to get into the investing world, Heebner thought he'd gotten his big break when Scudder Stevens & Clark hired him as a conglomerate analyst in 1969 and then promoted him to assistant portfolio manager for the Scudder Development fund four years later. Ned Swanberg, who was the fund's lead manager back then, says what he remembers most about Heebner is an idea he never acted on. Heebner returned from a trip to the New Jersey shore with what seemed like a bizarre suggestion: He wanted Scudder to invest in Atlantic City real estate. Atlantic City had fallen on hard times by the early 1970s, but there was talk of bringing in casinos. "I should have listened to him," Swanberg says. "We'd have made a fortune." (Gambling was approved in 1976, setting off a boom.)

Heebner was eventually fired from Scudder, but it had nothing to do with investing. During a three-martini lunch with some colleagues, Heebner made some comments critical of Scudder's CEO, and one of his lunchmates blabbed. "I wasn't a martini drinker," Heebner says. "That was the problem." Scudder's loss proved to be Loomis Sayles's gain. Kemp had just been made chief investment officer at Boston-based Loomis, and one of his first assignments was fixing Loomis's two struggling mutual funds. "Someone told me there was a fellow with some talent at Scudder, but he was loud and talked back," Kemp recalls. "I said, 'I don't care if he talks back, just as long as he has the right answers.'"

Heebner usually did. He took over the Loomis Sayles Capital Development fund (now CGM Capital Development) in 1976 and eventually turned it into Boston's second-hottest mutual fund, after Lynch's Magellan. The investment community in Boston is fairly collegial, and Heebner and Lynch soon became friends. "Peter would talk about Heebner constantly," says Brian Posner, a former Fidelity fund manager who early in his career was one of Lynch's analysts. "Here was a guy with a much more modest organization who kept just punching out the numbers."

In Heebner's early days at Loomis, he was forced to make all his stock picks from a list of 300 names approved by the firm's research department. Heebner was so frustrated by this restriction that he'd occasionally give Lynch stock ideas he wasn't permitted to use himself. Lynch confirms this, adding that in those days he, Heebner, and several other top Boston money managers used to talk stocks at a monthly dinner. Lynch says he even tried to recruit Heebner to Fidelity, an opportunity Heebner says he passed up because he would have been managing separate accounts instead of a mutual fund. "Ken is an incredible fundamental analyst," says Lynch. "He's very thematic, and he stays with things for a very long time, but once he's convinced that something is deteriorating, that's it."

Lynch says he never really thought of himself as competing with Heebner, but evidently that feeling was not mutual. "The day Peter retired, I thought Ken was going to cry," Hermsdorf says. "Ken thought he was catching up to Peter." In 1990, Heebner and Kemp broke from Loomis to form CGM. Or more precisely, they persuaded Loomis's parent company, New England Life, to spin them off. (Natixis, the French bank that acquired New England Life's money management operations, still owns a 50% stake in CGM.) Heebner wanted to leave Loomis largely because other money managers there were piggybacking on his ideas. "I had a good investment record, so obviously if they saw me buying something, they would want to look at it too," he says.

He continued to put up excellent returns until the mid-1990s, when tech stocks started to dominate the market. For Heebner, that was a problem, because he usually shied away from technology. The barriers to entry were too low, and forecasting winners and losers too hard. Focus eked out single-digit gains in both '98 and '99, whereas many rival funds were soaring 40% or 50%. Though Heebner never doubted his decision to steer clear of technology, others (ahem, ahem) weren't so sure. In October 1999, Fortune made Heebner the poster child for fallen fund stars in a story headlined "Where Have All the Geniuses Gone?"

With shareholders pulling money out of his funds, Heebner eventually gave in and bought a handful of tech stocks. But he was always a nervous holder, tending to buy and sell at the wrong times. "I knew it was a train wreck," he says. "The problem I had is that when you go from 50 times earnings to 100 times to 150 times, how do you know when the idiots are going to stop bidding these things up? That's the thing about bubbles— how do you know when they're going to end?"

Of course, skeptics are asking the same question today about commodities. Heebner doesn't see the parallel. He believes that the consensus view on Wall Street is still that the U.S. will drag the rest of the world into a global recession. He thinks that by betting big on oil and steel, he's actually being contrarian. We'll see if he's right. But by the time you read this, it may not even matter. Perhaps one of the Chinese steel prices Heebner tracks will have ticked in the wrong direction. Perhaps one of his Petrobras sources will have told him that the offshore discoveries are so big that they might oversaturate the market. Perhaps by the time you read this Heebner will have done the same about-face on commodities that he did on homebuilders 3 1/2 years ago.

Heebner's friend Bob Molloy, a retired broker from Merrill Lynch, likes to tell the story of the time Heebner took him and some Merrill colleagues sailing after work. "We'd just got out of Boston Harbor and we're about to put up the sails when Ken announces, 'We've got to turn back.' I said, 'What do you mean, we have to turn back? It's a beautiful day.' Ken said, 'Look out there. There's a big bank of fog rolling in.' Well, all I saw was the horizon, but by the time we got back to the slip, you couldn't even see from the cockpit up to the front of the boat— that's how thick the fog was." Like we said, Heebner just sees things before anyone else.

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Normxxx    
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