Best Stock Fund of the Decade: CGM Focus
Meet the decade’s best-performing U.S. diversified stock mutual fund: Ken Heebner’s $3.7 billion CGM Focus Fund, which rose more than 18% annually and outpaced its closest rival by more than three percentage points.
Too bad investors weren’t around to enjoy much of those gains. The typical CGM Focus shareholder lost 11% annually in the 10 years ending Nov. 30, according to investment research firm Morningstar Inc.
These investor returns, also known as dollar-weighted returns, incorporate the effect of cash flowing in and out of the fund as shareholders buy and sell. Investor returns can be lower than mutual-fund total returns because shareholders often buy a fund after it has had a strong run and sell as it hits bottom.
At the close of a dismal decade for stocks, the CGM Focus results show how even strategies that work well don’t always pay off for investors. The fund, a highly concentrated portfolio typically holding fewer than 25 large-company stocks, offers “a really potent investment style, but it’s really hard for investors to use well,” says Christopher Davis, senior fund analyst at Morningstar.
The gap between CGM Focus’s 10-year investor returns and total returns is among the worst of any fund tracked by Morningstar. The fund’s hot-and-cold performance likely widened that gap. The fund surged 80% in 2007. Investors poured $2.6 billion into CGM Focus the following year, only to see the fund sink 48%. Investors then yanked more than $750 million from the fund in the first eleven months of 2009, though it is up about 11% for the year through Tuesday.
“A huge amount of money came in right when the performance of the fund was at a peak,” says Mr. Heebner, the fund’s manager since its 1997 launch. “I don’t know what to say about that. We don’t have any control over what investors do.”
Among bond funds, the decade’s top performer is GMO Emerging Country Debt, which rose 15% annually in the 10 years ended Tuesday. Though that fund also had its share of volatility, investors fared well, trailing only about one percentage point behind the fund’s total returns in the 10 years ended in November. The GMO fund caters mainly to big institutions, while the CGM fund is more accessible to small investors.
How will CGM and GMO fare in the future? Tom Cooper, co-manager of the GMO fund, thinks emerging-market bonds can deliver 8% to 10% annual returns in the next decade. As for Mr. Heebner, though the stock market had a huge rebound this year, he says, “for individual companies, there’s a lot of potential not yet realized.”