Money manager Kenneth Heebner, convinced that a growing U.S. economy eventually will prompt the Federal Reserve to raise interest rates, has bet 21% of his CGM Focus Fund (CGMFX) on a decline in U.S. Treasury bonds.
The $1.44 billion Capital Growth Management LP fund, which he uses to make wagers on stocks, sold short $300 million of Treasuries at the end of last year, according to a filing last Tuesday with the Securities and Exchange Commission.
Mr. Heebner, who turned CGM Focus into the top-performing diversified U.S. stock mutual fund for the 10 years through 2007 before losing his touch during the financial crisis, is doubling down on a bet that had him trailing peers and the stock market over the past year.
Wall Street professionals such as James Rogers and Nassim Taleb recommended betting against Treasuries, though the timing has proved difficult as investors have flocked to U.S. government debt as a haven from turmoil in Europe.
“If you have staying power, this is a perfectly acceptable time to be getting short Treasuries,” said Stephen Stanley, chief economist for Pierpont Securities LLC, a brokerage firm specializing in government bonds. “Over a shorter period, you are kind of fighting the Fed.”
"STRONGER U.S. ECONOMY'
CGM Focus generated an annual average loss of 9.9% during the five-year period ended Feb. 25, worse than 99% of other mutual funds following a similar strategy, according to data compiled by Bloomberg.
The fund rebounded over the past three months as Treasuries fell, beating 99% of peers. It slumped again in February as an inconclusive election in Italy dampened 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,” Mr. Heebner said in a Jan. 2 letter included in the filing.
Unlike most mutual funds, CGM Focus can short-sell securities. The fund, which mostly buys stocks, employs a “flexible” 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. (AMZN), 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 that year, it had sold short 30 million shares of mortgage lender Countrywide Financial Corp.
According to the filing, CGM Focus has sold short $200 million of 2.75% Treasuries and $100 million of 3.125% bonds that mature in August and February 2042, respectively.
The position dwarfs its other holdings. Mr. Heebner's second-largest investment — 10.7% of the fund's assets — is in Citigroup Inc. (C).
CGM Focus has 29% of its assets invested in banks, including Citi, Bank of America Corp. (BAC) and Morgan Stanley (MS). The fund has 24% devoted to homebuilders D.R. Horton Inc. (DHI), Lennar Corp. (LEN) and PulteGroup Inc. (PHM)
Last year, Mr. Heebner positioned CGM Focus to benefit from greater economic growth “than actually occurred,” the money manager said in the filing, which led it to “modestly” underperform the S&P 500. CGM Focus had a 14% total return last year, compared with 16% for the S&P 500, according to the fund's annual report.
HOUSING REBOUND
In a recent interview, Mr. Heebner said that a housing rebound would translate into a strong financial position for consumers, boosting the U.S. economy and prompting the Fed to end quantitative easing.
“The Fed will eventually change its policy by moving away from QE3 and then raising rates,” he said.
Martha McGuire, a spokeswoman for Capital Growth Management, said that Mr. Heebner wasn't available for comment.
Scott Minerd, chief investment officer for money management firm Guggenheim Partners LLC, which oversees about $170 billion in assets, said the Fed may be forced to keep rates low longer than expected for fear of roiling markets and creating another credit crunch.
“We could have another five to six years of this,” he said.
