Funds for the Long Haul
These managers have stood the test of time for their investors
CDC NVEST TARGETED EQUITY FUND
MANAGER'S BEST YEAR: 1982; up 78.7%
MANAGER'S WORST YEAR: 2002; down 28.8%
Ken Heebner recalls lunching with some coworkers at a former firm on New Year's Eve in 1974, right at the bottom of a nasty bear market. "Everybody was totally depressed, but within the first six months of 1975, a lot of our stocks tripled," he recalls. Heebner thinks the market might again be at such a turning point--once the fog of a possible war with Iraq clears. "If you're in the right stocks, there is a significant profit to be made," he says.
Given how the funds Heebner manages have done in recent years, he needs to post some pretty hefty returns. Only his CGM Realty has outpaced the market, on average, during the past five years. That's hardly the sort of performance one would expect from someone with his long-term record. Since he began running the CDC Nvest Targeted Equity Fund in 1977, it's up an average 13.8 percent annually, compared with 12.1 percent for the S&P 500. And back at his home firm, CGM's flagship Capital Development fund (now closed to investors) has done even better, gaining 15.3 percent during that same period.
Heebner's aversion to technology stocks was his undoing during the late 1990s bull market. And when the indiscriminate selling began in early 2000, it mauled even his mundane holdings. "We had a bubble, which I did not participate in, and now we have a bear market which is difficult to work in," he says. Even his huge stake in home-building stocks--a quarter of his portfolio--during a housing boom hasn't helped as much as expected. "They have dramatically outperformed the earnings estimates, and they still haven't done well," he says. "But you have to buy these stocks before people decide the outlook is decent." He points out that his current favorites, including Lennar, Ryland, Centex, NVR, and Hovnanian Enterprises, are growing at more than 20 percent a year, yet trade at five to six times next year's earnings. As investors realize that the recovery is real, he says, those compelling valuations are going to attract plenty of cash. But Heebner sees more than improving valuations, noting industry consolidation that allows the bigger companies to gain market share. Another plus: a wave of first-time immigrant buyers.
A big gamble? You bet. But it's one Heebner is more than eager to make. As CGM's corporate logo, a fencer in the ready position, would put it: En garde! -J.M.P. -Tim Smart, James Pethokoukis and Paul J. Lim
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