Old and New Funds, but Still Winners

09/26/2007 12:00 am EST

Focus: FUNDS

Thurman Smith

Editor, Equity Fund Outlook

Thurman Smith, editor of Equity Fund Outlook, finds one newer fund and two established ones that have racked up good gains for their shareholders.

Some of the best opportunities in the no-load universe come from boutique firms that create a fund that models their private account management style. Such is the case at any-cap, non-diversified Jordan Opportunity (JORDX), a creation of Hellman, Jordan Management in Boston.

Over its first two-and-a-half years, manager Jerry Jordan, formerly with Putnam, returned 17.7%, vs. 10.8% for the average large-cap growth fund. The last six months were the strongest. Its investment philosophy seeks firms with strong earnings growth and buys when stock markets, the industry groupings, and the particular stock all have technical factors that argue for a higher price.

Jordan seeks to reduce exposure by raising cash or purchasing index puts. He also believes that thematic concentration in both industry sectors and companies is necessary to provide long-term outperformance. An asset base of only $27 million is a plus.

The biggest gain of any class fund in the Equity Funds Outlook [between March 10, 2000 and September 14, 2007] was all-cap CGM Focus (CGMFX) with an annualized return of 31.4%. Boston-based Ken Heebner runs a concentrated portfolio of frequently changing names based on a combination of bold top-down bets and bottom-up research. He also will short stocks when markets drop.

The portfolio’s concentration in a couple dozen names and overweighting of favorites magnifies movement both ways. Heebner flips these focused bets quickly. The only approach to using this fund is to hold for at least a full market cycle. Its tax impact would normally be too large for taxable accounts, but one would have to deduct [2%] from one’s annual return for income taxes on fund distributions over the previous 24 months. Assuming that over a sustained period an investor’s annualized return would be even half the 31% for the last seven-and-a-half years, then a subtraction of 2% can be justified.

So for very risk-tolerant investors, CGM Focus could be considered a “buy and hold.” The only hitch is if something happens to 66-year-old Heebner, for there is no apparent clone in the wings. So, its shareholders should always be plugged into a reliable source of fund news. Presently this fund is 25.7% over its 39-week trend line, which is about as extended as it gets. So, purchases should be staggered. And taxable accounts might want to wait until after its late-December distribution.

Though real estate funds have been having a rough time in the last six months, CGM Realty (CGMRX) has continued to gain, mostly because the fund holds operating firms as well as real estate investment trusts. A third of assets are invested abroad. Over its first six years, this 11-year old fund merely tracked its peer group, but from January 2003 through August 2007 its 39.5% annualized return well exceeded the 22.0% for its competition.

Ken Heebner is in charge here too, so top-down stock selection, concentration, spells of underperformance, and high turnover prevail. But investors who can hang in will likely be rewarded.

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