Money manager Kenneth Heebner, convinced that a growing U.S. economy will eventually prompt the Federal Reserve to boost interest rates, has bet 21 percent of his CGM Focus Fund (CGMFX) on a decline in U.S. Treasuries.
The $1.44 billion fund, which Heebner uses to make concentrated wagers on stocks, had sold short $300 million of U.S. Treasury bonds at the end of last year, according to a filing yesterday with the U.S. Securities and Exchange Commission. That is up from $190 million at the end of the third quarter and $80 million halfway through last year.
Heebner, who turned CGM Focus into the top-performing diversified U.S. stock mutual fund for the decade ended 2007 before losing his touch in the financial crisis, is doubling down on a bet that left him trailing peers and the stock market over the past year. Wall Street professionals such as Nassim Taleb and James Rogers have recommended betting against Treasuries, though timing that wager has proved difficult as investors flocked to U.S. government debt in search of a safe haven from economic turmoil in Europe.
“If you have staying power, this is a perfectly acceptable time to be getting short treasuries,” said Stephen Stanley, the chief economist for Pierpont Securities LLC, a Stamford, Connecticut-based brokerage that focuses on government bonds. “Over a shorter period, you are kind of fighting the Fed.”
CGM Focus has generated an annual average loss of 9.9 percent during the five years ended Feb. 25, worse than 99 percent of other mutual funds that follow a similar strategy, according to data compiled by Bloomberg. The fund rebounded over the past three months when Treasuries fell, beating 99 percent of peers. It slumped again this month as an inconclusive election in Italy damped optimism about the global economy.
“We established a significant short position in U.S. Treasury bonds in anticipation of what we believe will be a stronger U.S. economy going forward,” Heebner said in a Jan. 2 letter included in the filing.
Unlike most mutual funds, CGM Focus Fund has the ability to short sell securities. The fund, which mostly invests in stocks, employs a “flexible” investment style and can invest in fixed-income securities, according to a prospectus filed with the SEC.
In 2006, CGM Focus sold short 3.85 million shares of Amazon.com Inc., only to call off the trade after losing at least $43 million on short sales during the first half of 2007. By the end of 2007, the fund had sold short 30 million shares of mortgage lender Countrywide Financial Corp.
Yesterday's filing showed that CGM Focus had sold short $200 million of 2.75 percent Treasuries and $100 million of 3.125 percent bonds that mature in August and February 2042 respectively.
The bet dwarfs the other holdings of the fund. Heebner's second largest investment -- comprising 10.7 percent of the fund's assets -- is in Citigroup Inc. (C) All told, the fund has 29 percent of its assets invested in banks, including Citi, Bank of America Corp. (BAC), and Morgan Stanley (MS). CGM Focus has an additional 24 percent devoted to homebuilders D.R. Horton Inc., Lennar Corp. (LEN) and PulteGroup Inc. (PHM)
During 2012, Heebner positioned CGM Focus to benefit from greater economic growth “than actually occurred,” the money manager said in yesterday's filing, leading the fund to “modestly” underperform the Standard & Poor's 500 Index. CGM Focus had a 14 percent total return last year, including dividends, compared with a 16 percent return for the S&P 500, according to the fund's annual report.
In an interview last week, Heebner said a rebound in housing will translate into a strong financial position for consumers, boosting the U.S. economy and prompting the Federal Reserve to end stimulus programs known as quantitative easing.
“The Fed will eventually change its policy by moving away from QE3 and then raising rates,” Heebner said, without specifying a time frame.
Martha McGuire, a spokeswoman for Capital Growth Management LP in Boston, said Heebner wasn't available to comment.
Scott Minerd, the chief investment officer for money- management firm Guggenheim Partners, compares the Fed's quantitative easing with a similar program that lasted from 1942 until about 1951, when the central bank vowed to take action should interest rates climb above 2.25 percent.
Minerd, whose firm has offices in Chicago and New York and oversees about $170 billion in assets, noted that the current stimulus program has been under way for almost four years. He said the Fed may be forced to keep rates low longer than anticipated, for fear of roiling markets and causing another credit crunch.
“We could have another five to six years of this,” said Minerd, who works in Guggenheim's office in Santa Monica, California, near Los Angeles. “You could be short for a lot of years before you got any pleasure out of it.”