Heebner Tanks -“Never seen anything like this..talented managers look like newcomers”

http://www.bloomberg.com/apps/news?pid=20601213&sid=a74xUQYdcxEM&refer=home

CGM’s Heebner, Fidelity’s Lange Falter as Markets Claim Victims

By Sree Vidya Bhaktavatsalam

Jan. 5 (Bloomberg) -- Kenneth Heebner’sCGM Focus Fund, the industry’s top performer in 2007, dropped 48 percent last year as the worst market for stocks in seven decades humbled the best- known managers.

Harry Lange’sFidelity Magellan Fund dropped 49 percent, dragged down by stakes in financial companies. The average U.S. stock mutual fund fell a record 39 percent in 2008, according to Morningstar Inc. in Chicago. The Standard & Poor’s 500 Index declined 37 percent including reinvested dividends.

Investment losses, combined with withdrawals by customers, reduced U.S. stock mutual-fund assets to $3.6 trillion by Nov. 30 from $6.5 trillion at the start of the year, according to the Investment Company Institute, a Washington-based trade group. Of 4,934 diversified U.S. stock funds with more than $100 million, none eked out a gain in 2008, Morningstar data showed.

“I’ve never seen anything like this,” Jeff Tjornehoj, a fund analyst at Denver-based research firm Lipper, said in an interview. “Even talented managers looked like newcomers.”

U.S. mutual funds suffered in the greatest stock decline since 1937. The economic recession drove down shares of every industry from energy producers and automakers to technology companies and banks. Stock mutual funds surpassed their 22 percent fall in the most-recent bear market in 2002.

The loss of assets and the fee income related to managing that money was so severe that companies including Fidelity Investments, BlackRock Inc. and Janus Capital Group Inc. announced plans in the last three months of 2008 to cut more than 4,700 jobs.

‘Awful’ Year

“The year has been awful,” Wenli Tan, a fund analyst with Morningstar, said in an interview. “There really hasn’t been a good place to hide.”

Diversified U.S. stock funds invest in a range of domestic companies rather than in specific industries or overseas.

The Gabelli ABC Fund was the most successful of those funds with more than $100 million, falling only 2.6 percent. The $162 million fund’s largest holding as of Sept. 30 was chewing-gum maker Wm. Wrigley Jr. Co., which rose 40 percent in the first 10 months of the year before it was acquired by Mars Inc. The fund is managed by Mario Gabelli’s Gamco Investors Inc. in Rye, New York.

Heebner’s fund gained 80 percent in 2007 to beat all peers, largely by buying energy stocks. He was hurt in 2008 after oil prices fell almost three-fourths from a record in July. Known for his rapid movements in and out of stocks, Heebner reversed course in the third quarter by selling energy shares and snapping up bank stocks such as Citigroup Inc. and Bank of America Corp.

‘Big Swings’

The new bets didn’t pay off, as Citigroup fell 67 percent in the last three months of 2008 and Bank of America dropped 60 percent.

CGM Focus, owned by Boston-based Capital Growth Management LP, trailed 96 percent of similarly managed funds last year, Morningstar data show. Heebner wasn’t available for comment, said Martha McGuire, a spokeswoman.

“Heebner’s strategy has always been prone to big performance swings,” Morningstar’s Tan said. “This fund has a better chance of making up for lost ground than others.”

Lange, who has run Magellan since 2005, was also hurt by financial holdings, including American International Group Inc., the insurer taken over by the U.S. government in September. Magellan trailed 95 percent of its peers last year. In 2007, Magellan gained 19 percent.

“One calendar year is a short time to evaluate investment performance,” Alexi Maravel, a spokesman for Boston-based Fidelity, said in an e-mailed statement.

Housing Market

In a letter last month to investors, Lange said he had underestimated the extent of the housing slump and its impact on financial markets.

Magellan, which had been the industry’s biggest stock fund with $110 billion in assets in 2000, dwindled to $18.9 billion last month.

Growth Fund of America, which is now the largest stock fund, fell 39 percent in 2008. Combined with withdrawals, the losses dragged the fund’s assets to $116.5 billion in November after they reached $200 billion earlier in the year.

The team-managed Growth Fund was hobbled by a 16 percent stake in non-U.S. companies. Twenty-eight national markets, including China, India and Russia, lost more than half of their value. The fund is owned by Capital Group Cos. in Los Angeles.

Bill Miller’s Legg Mason Value Trust had its poorest year since opening in 1982, tumbling 55 percent. Another Miller fund, the $1.3 billion Legg Mason Opportunity Trust dropped 65 percent, making it the worst diversified fund tracked by Morningstar.

Streak

The $4.3 billion Legg Mason Value Trust holds the record for besting the S&P 500, toting up better returns than the benchmark for 15 consecutive years ending in 2005. Last year was the third straight Miller trailed the benchmark.

His fund was harmed by picks such as Bear Stearns Cos., the securities firm taken over by JPMorgan Chase & Co. in a deal brokered by the U.S. Federal Reserve. Miller also invested in AIG and Freddie Mac, the mortgage finance company seized by the government in September.

The $322 million Manning & Napier Pro Blend Maximum Term Series Fund last year led the S&P 500 for the 10th straight year to extend the longest current winning streak. The fund, managed by Manning & Napier Advisors Inc. in Rochester, New York, declined 35 percent for the year.

The categories of funds that performed best were bear-market funds, which bet against the stock market, and bond funds specializing in U.S. Treasuries.

The $158 million Grizzly Short Fund, managed by Minneapolis- based Leuthold Weeden Capital Management LP, soared 74 percent, compared with the 28 percent average gain for bear funds.

Pimco Gains

Long-maturity Treasury funds maturities rose 27 percent on average, led by the $273 million Pimco Extended Duration Fund at 49 percent. The fund is run by Pacific Investment Management Co. in Newport Beach, California, the world’s biggest bond manager.

The worst fund categories were those focusing on communications stocks, losers of 50 percent, and natural-resource stocks, which dropped 49 percent. Financial-service and bank funds fell 45 percent as those companies accumulated more than $1 trillion in asset writedowns and credit losses from the collapse of the subprime mortgage market.

Bond Funds

Bond funds declined 7.9 percent in 2008, as investors shunned all but the safest debt. High-yield funds that buy corporate bonds lost 26 percent.

The $129.6 billion Pimco Total Return Fund, the biggest bond fund, rose 4.8 percent in 2008, beating 90 percent of its peers, Morningstar data show. The fund loaded up on mortgage securities and investment-grade corporate debt earlier in the year. The fund didn’t own Treasuries, a move that manager Bill Gross said that he regretted in a Dec. 10 interview.

The $638 million Oppenheimer Champion Income Fund plunged 79 percent because of wrong-way bets tied to commercial mortgage- backed securities. Portfolio manager Angelo Manioudakis left New York-based OppenheimerFunds Inc. in December after total-return swap contracts backed by commercial mortgages unraveled.

 

Pabst made a relevant post about faltering managers.

To summarize, most fooled themselves and their clients.

A rising tide buoys all ships. And Managers thought they did it.

 

the hedge fund overexpanded in the last 20 years and just in 2005 there was talk about too much liquidity and in 2008 it was not enough liquidity as banks stop lending end to credit expansion and leveraging of assets.