An article from MarketWatch claims that

The problem for most investors is that they have a tough time recognizing when a manager like Miller or Kenneth Heebner of the CGM Funds — another famous manager with a feast-or-famine record — is heating up, and only recognize it after the feed has started.
Heebner’s CGM Focus (CGMFX), for example, has the best record in the business among large-cap blend funds over the last decade, according to Morningstar Inc., with an annualized average gain of 10.75%. Over the last half of that decade, however, the fund is dead last in the category, with an annualized loss of 5.45%.
In short, it started the last decade hot, then fell off sharply.

To gain some insights about the performance of this fund, let’s take a look at CGM Focus (CGMFX) from the Alpholio™ perspective. First, a buy-sell signal derived from the smoothed cumulative RealAlpha™ for the fund since early 2005:

Buy-Sell Signal for for CGMFX (Smooth)

The fund significantly outperformed its reference portfolio from mid-2007 to mid-2008, but subsequently began to heavily underperform. (The latter period was punctuated by a pseudo-rebound in 2010, which generated a temporary buy signal. This illustrates that no performance prediction mechanism, even that of Alpholio™, is perfect.) To augment the performance analysis, the following chart shows components and weights of the reference exchange-traded product (ETP) portfolio for the fund:

Reference Weights for CGMFX

The equivalent ETP positions with the highest weights in the mid-2007 to mid-2008 period were iShares North American Natural Resources ETF (IGE), iShares MSCI Brazil Capped ETF (EWZ), and Vanguard Materials ETF (VAW). The collective weight of these three positions averaged about 79% in that period, which clearly indicates that the fund was riding the boom in commodity prices. The peak of the cumulative RealAlpha™ coincided with the top of that boom in the summer of 2008. While the bet on commodities worked out, heavy trading saddled the fund’s investors with a large short-term capital gain distribution at the end of 2007.

The article further states that

Over the last year, however, Heebner has been back on top, gaining nearly 50% over the last 12 months.

This recovery was not reflected in the fund’s cumulative RealAlpha™, which was largely flat from mid-2012 till present. How is that possible? The fund had large equivalent positions in the Vanguard REIT ETF (VNQ) and the aforementioned VAW. In the last three months, the fund heavily tilted toward small-cap equities represented by iShares S&P Small-Cap Growth ETF (IJT). So much for being a “large-cap blend” fund and using the S&P 500® index as a relevant benchmark.

Timing of any mutual fund characterized by large directional bets and rapid trading (the most recent turnover ratio for CGMFX was 360%) is certainly very challenging, but not entirely impossible, as the Alpholio™ analysis demonstrates. In addition to the automatically-generated buy-sell signals, investors should pay close attention to the overall trend of the cumulative RealAlpha™ curve, as well as the specific investment themes (market capitalization, sectors, industries, countries/regions, etc.) pursued by the fund’s manager. These rapidly changing bets, in turn, make it necessary to continually modify the benchmark to elicit the true risk-adjusted performance of the fund.


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