Swedroe: Star Manager Loses Luster

February 29, 2016

Last week, Financial Advisor magazine published a story announcing that one of the mutual fund industry's oldest funds, run by one of its most enduring fund managers, Kenneth Heebner, went out of business when Natixis Global Asset Management liquidated its CGM Advisor Targeted Equity Fund.

According to the article, at its end, the fund had $363 million in assets, dramatically less than the $1.02 billion it had at its peak in February 2010. It finished 2015 with a 3.3% loss, lagging 79% of its peers over the last 12 months. And over the past five years, it lagged 99% of other large-cap core funds. The article further noted that Heebner still runs the CGM Focus Fund (CGMFX), which now oversees $829 million, down from $10.3 billion in 2008.

This story carries an important message for investors who believe that past performance of active managers (and, for that matter, active share, because the CGM Focus Fund has always been a highly concentrated fund) is predictive of future performance. Going back to my trusted "videotape," I found that Kenneth Heebner's CGMFX was the No. 1 performer among diversified U.S. stock mutual funds in the decade ending in 2007.

A Toppled Hero

You could say that his performance put him among the "royalty of fund managers." In fact, in June 2006, Fortune senior writer Jon Birger cited Heebner's "amazing history of making big winning bets on stocks and sectors," adding that, "there's no question Heebner is one of the all-time greats."

His performance was so good that a competitor, Will Danoff, manager of the Fidelity Contrafund, stated in a September 2008 interview with Kiplinger's Personal Finance: "I want to be more like Ken Heebner—he's my hero." As you will see, Contrafund investors are certainly glad Danoff didn't get his wish.

Despite the overwhelming academic evidence that past performance has virtually no value as a predictor of future performance, and perhaps ignoring the SEC's warning not to rely on past performance, investors piled into CGMFX. But have investors been rewarded for their belief that Heebner's performance was the result of skill rather than the result of a random outcome?

CGMFX's performance since 2007 has earned it a one-star rating from Morningstar. The table below presents the results:

CGMFX Return (%) S&P 500 Index Return (%) Morningstar Percentile Ranking**
2008 -48.2 -37.0 96
2009 10.4 26.5 99
2010 16.9 15.1 35
2011 -26.3 2.1 100
2012 14.2 16.0 65
2013 37.6 32.4 9
2014 1.4 13.7 97
2015 -4.1 1.4 85
2016* -20.6 -7.0 99
Last 5 Years* -1.4 10.3 100
Last 10 Years* 1.3 6.3 99

*Through Feb. 23, 2016. **1 is the best rank; 100 is the worst rank.

While one dollar invested in the S&P 500 Index at the end of 2007 was worth $1.64 at the end of Feb. 23, 2016, the same dollar invested in CGMFX was worth just $0.60. Predictably, investors have fled the fund. Thus, even if Heebner's performance turns around, most investors won't be there to benefit.

So, how should you interpret this outcome? Here are two possible explanations to consider:

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