A Tale of Two Fund Managers, Part 2
In Part 1 of this “series,” I looked at Bill Miller’s Legg Mason Value Trust to see if Miller really was a “value” guy and whether or not he had added any “value” as a stock picker. Using a Fama-French Three-Factor Analysis (3FM), the answers were “no” and “no” for the time periods examined (through May 2008).
This time, I’m going to look at Ken Heebner’s CGM Focus Fund (CGMFX) to see if he’s really a "”growth” guy and whether or not he has added any “value” as a stock picker. Exhibit 1 shows a chart of the daily price of the fund (adjusted for dividends) since inception on October 1, 1997 through the end of October 2010. The chart shows that CGMFX had a great run until mid-2008 – handily outpacing the S&P 500. According to Bloomberg Businessweek, Heebner’s fund had average annual returns of 32% from 2000 through 2007, while the S&P 500 returned 1.7% annually. Then things got very ugly very fast. From it’s peak on June 23, 2008 to the subsequent low on March 9, 2009, the fund lost 67% of its value.
Despite his relatively abysmal performance since 2008 (see Exhibit 2), Heebner’s long-term record tops all other mutual funds, according to Morningstar, and his CGMFX fund has outperformed the S&P 500 by nearly 15% per year over the last decade. While this is a notable achievement, we’ll see below that the S&P 500 might not be the most appropriate benchmark for CGMFX.
So, let’s get to it. Using daily data and the same methodology described in Part 1, I regressed the daily risk-adjusted returns of CGMFX against the factors in the 3FM (data from Kenneth French’s web site): the excess return of the total market (CRSP 1-10) over the T-bill return (Mkt-RF), the return of small company stocks minus that of big company stocks (small minus big, or SmB), and the return of the cheapest third of stocks sorted by price/book minus the most expensive third (high minus low, or HmL). Exhibit 3 shows the results of the regressions over various time periods.
Interpreting the results, we find:
1. Over the life of the fund, the 3FM explains roughly half of the variation in the fund’s daily returns – not a great fit. More recently, however, the three factors explain roughly 90% of the fund’s returns – a pretty decent fit.
2. Looking at the Alpha, we see that Heebner has outperformed the regression-based benchmark over the longer term by about 7% per year (columns 1 and 2), but more recently he has underperformed by nearly 6% annually (columns 4 and 5). He’s also on track to underperform in 2010. Note, however, that the t-statistics and p-values tell us that his alpha is not statistically significant.
3. The fund’s long-term beta (Mkt-RF) is just under 1.0 (columns 1 and 2) – so basically the fund moves with the market. More recently, however, the fund has become more volatile and beta has risen to about 1.3.
4. The SmB coefficients tell us that the fund is basically a large cap fund (SmB <= 0.0).
5. The HmL coefficients tell us that the fund is a value fund – the statistically significant coefficients are either well above 0.3 (columns 1 and 2) or slightly below (column 6). Just as with Miller’s LMVTX, Morningstar classifies CGMFX as a “Blend” fund – a hybrid of growth and value. If you consider only the more recent HmL factors loadings you might reach the same conclusion.
So, once again the 3FM analysis tells a slightly different story than the “conventional” wisdom. Ken Heebner’s CGM Focus Fund is a large cap value fund that is recently more volatile than the market and generates no statistically significant alpha.