Funds run by Berkowitz of Fairholme Capital Management LLC, Heebner of Capital Growth Management LP and Miller of Legg Mason Inc. (LM) are the three worst performers among large diversified U.S. mutual funds in 2011, according to data from Chicago-based Morningstar Inc. The funds lost 11 percent to 12 percent through June 9, compared with a gain of 3.4 percent for the Standard & Poor’s 500 Index.
“People assume because certain managers have had good streaks that they are always going to be a step ahead of the market,” Russel Kinnel, director of mutual fund research at Morningstar, said in a telephone interview. “It never works out that way.”
The three managers are known for concentrating money in a small number of industries, said Kinnel, a strategy that can produce market-beating gains when the investments work out and large losses when they fail. Berkowitz, Morningstar’s fund manager of the decade, and Miller, known for beating the S&P 500 for 15 straight years through 2005, are wagering on a rebound in financial stocks. Heebner, manager of the best-performing diversified U.S. stock fund over a 10-year period until this year, was betting on automakers.
The two industries are the worst performers this year in the S&P 500 out of 24 groups. Bank stocks, as measured by the KBW Bank Index (BKX), fell 10 percent on concerns that the housing slump, litigation over mortgage bonds and foreclosures and new fee-crimping rules will depress bank earnings.
Betting on Banks
Berkowitz’s $14.8 billion Fairholme Fund had 74 percent of its equity holdings in financial stocks as of Feb 28, Morningstar data show. The fund fell 12 percent through June 9, ranking it last among 870 diversified U.S. stock funds with at least $500 million in assets.
Berkowitz didn’t respond to a request for comment. In a June 9 interview, Berkowitz said he was “more certain” than ever that his investments in financials made sense.
“The trends are getting better,” he said in the interview with Bloomberg Television’s Erik Schatzker. “The balance sheets are getting better and the cash flow is there to take care of the problems.”
Berkowitz said Brian Moynihan, chief executive officer of Bank of America, was doing “a good job” and that the bank “was making all the right moves.” Bank of America, based in Charlotte, North Carolina, fell 19 percent this year, including dividends.
American International Group Inc. (AIG), the New York-based insurer that’s Berkowitz’s largest holding, lost 40 percent this year, according to data compiled by Bloomberg. Goldman Sachs Group Inc. (GS) fell 19 percent.
Heebner, manager of the $2.5 billion CGM Focus Fund (CGMFX), didn’t fare better, losing 12 percent through June 9, second-worst among large funds, according to Morningstar. His fund had 36 percent in auto stocks at the end of 2010, according to a regulatory filing.
Heebner, 70, is known for making concentrated bets in industries from homebuilding to commodities and for his willingness to shift gears quickly. CGM Focus Fund, which gained 80 percent in 2007, returned 12 percent a year for the past 10 years, better than 99 percent of rivals.
“We anticipate a better domestic economic environment in the year ahead,” Heebner wrote in a Jan. 3 letter in the fund’s annual report.
Signs of Slowdown
Those expectations were damped when the U.S. economy slowed to a 1.8 percent annual rate of growth in the first quarter, from 3.1 percent gain in the final three months of 2010.
More recent reports suggests the world’s largest economy is slowing further. Manufacturing grew at its slowest pace in more than a year in May, consumer spending rose less than forecast in April, and the unemployment rate unexpectedly climbed to 9.1 percent in May.
Heebner declined to comment, Martha Maguire, a spokeswoman, wrote in an e-mail.
Ford Motor Co. (F), based in Dearborn, Michigan, and Heebner’s largest holding at yearend, fell 11 percent in the first quarter. His third-largest position, Freeport-McMoRan Copper & Gold Inc. (FCX), fell 7.1 percent. Freeport, the world’s largest publicly traded copper producer, is based in Phoenix.
Heebner sold all his shares in both companies in the first quarter, according to a regulatory filing. He dumped other automotive stocks including Aurora, Ontario-based Magna International Inc. (MG) and BorgWarner Inc. (BWA), which is based in Auburn Hills, Michigan.
Heebner ran the best-performing diversified U.S. stock fund over a 10-year period for 11 straight quarters before he was unseated in the first quarter of 2011 by Thomas Soviero, manager of the $4.2 billion Fidelity Advisor Leveraged Company Stock Fund. (FLSAX)
Investors make a mistake when they judge stock pickers only on short-term performance, said Kinnel.
“Managers don’t go from geniuses to idiots overnight,” he said. “Some of the investments they have made may well pay off.”
Berkowitz, 53, was named Morningstar’s domestic stock manager of the decade in January 2010. His fund, which opened in December 1999, has beaten the S&P 500 Index every year but one, 2003, according to data compiled by Bloomberg.
“Berkowitz hasn’t had a bad period of investment returns since the beginning,” Steven Roge, a portfolio manager with Bohemia, New York-based R.W. Roge & Co., said in a telephone interview. “It will be interesting to see how he overcomes this short-term adversity.”
Roge’s firm, which manages $225 million, holds shares in Berkowitz’s fund.
Ronald Sugameli, manager of the $126 million New Century Alternative Strategies Portfolio (NCHPX), a mutual fund that invests in other mutual funds, cut his stake in Berkowitz’s fund over the past few months.
“Berkowitz may be right, but I thought it was prudent to reduce our concentration in the distressed financial sector,” Sugameli said in a telephone interview from Wellesley, Massachusetts.
Investors pulled $2.3 billion from Fairholme Fund (FAIRX) in April and May, according to Denver-based Lipper. The fund attracted deposits of $11 billion in the four years ended Dec. 31.
Miller’s $1.5 billion Legg Mason Capital Management Opportunity Fund lost 11 percent through June 9, third-worst among large funds, Morningstar data show. The fund had 36 percent in financial shares at March 31.
In an April letter to shareholders, Miller wrote that the first quarter was a good one, “for almost everyone except us.” He said technology, health care and financial stocks were attractive. Miller, 61, declined to comment for this story, Maria Rosati, a spokeswoman for Legg Mason, wrote in an e-mail.
The fund’s largest holding as of March 31, Bermuda-based insurer Assured Guaranty Ltd. (AGO), lost 19 percent this year. Other financials in the portfolio that have suffered include Richmond, Virginia-based Genworth Financial Inc (GNW), down 23 percent, and New York-based Citigroup Inc. (C), down 20 percent.
Miller is best known for beating the S&P 500 for a record 15 straight years through 2005 with his larger Legg Mason Capital Management Value Trust. The fund trailed the U.S. benchmark for the next three years as Miller underestimated the severity of the financial crisis and his bets on banks and real- estate companies backfired.
The $3.6 billion Value Trust fell 0.5 percent through June 9, trailing 94 percent of rivals, Bloomberg data show.
To contact the reporter on this story: Charles Stein in Boston at firstname.lastname@example.org
To contact the editor responsible for this story: Christian Baumgaertel at email@example.com