My analysis shows that Ken Heebner is making more than just a bet on Financials, he is betting on a cyclical market recovery.
Financials an early-cycle sector
As the chart below shows, my reverse engineering of the CGM Focus Fund’s estimated exposures confirms the WSJ article about the extent of Ken Heebner’s overweight position in Financials:
Interest sensitive stocks such as Financials are early cycle movers. This exposure seems to be part of his overall theme of betting on a market recovery. The chart below shows the CGM Focus position in market beta, which shows the fund moving from a defensive position to an aggressive position:
I also estimated the fund’s exposure to the Morgan Stanley Cyclical Index and it shows a big bet on a cyclical recovery:
CGM Focus Fund has neutral to slight overweight positions in Technology, Energy and Materials. The fund's underweight positions are mainly in the defensive sectors such as Health Care...
…and Consumer Staples.
Ken Heebner, who went on record as having turned bullish in October, is showing now that he has turned really bullish.
5 comments:
There's only one problem. Heebner changes his positions every hour. Go check out the cover story Fortune did on him a few months back. At that time, he was heavily weighted in Agriculture plays like POT, MOS, etc. He probably exited most of those positions by the time the magazine hit the news-stands. Investors who followed his recommendations at that time are severely under-water today. Your better bet would be to directly invest in his funds - allowing you to ride his coattails.
Shantanu B,
There are two issues here. First, this post is not investment advice but an analysis of a manager's bets. If you really like Heebner, go buy his fund.
In addition, I have indicated that Ken Heebner does have a tendency for fast turnover. However, when he fixates on a macro view he doesn't give up on it easily. The change you mentioned occurred when he gave up on his commodity bets (see previous post here: http://humblestudentofthemarkets.blogspot.com/2008/09/heebner-pukes-his-positions.html
Nice reverse engineering as always. Other good ways to play cyclical recovery without all the tail risk of market direction is through market neutral trades such as copper/gold, and XLF/XLE.
Henry
Henry,
Given the recent market turmoil, the volatility of sector bets such as XLE/XLF at or equal to the levels of the volatility of the market, or SPY.
Cam
Thanks for revisiting Mr. Heebner, just as you said you would.
As for Mr Heebner's belief in a cyclical market recovery, apparently he thinks stocks will recover as falling prices coupled will falling incomes will force a reduction in consumption with resulting equilibrium through an increase in aggregate demand (government infrastructure spending).
This will be implemented when and if the government interventions into the money centers and credit availability to those worthy reoccurs.
America will have to become a nation much better at saving to help mitigate our trade imbalance.
The late bear/early bull scenario that he envisions may be rooted not in a cyclical market recovery but an economic fluctuation model.
I keep checking the Baltic Dry Index, China and dry goods and iron ore as a signal that conditions have improved and trade reappearing.
Perhaps Mr. Heebner also believes in political business cycle strength, wherein a charismatic new administration with its expansionary policy could also be the impetus to turn market emotion and psychology.
I was just at the Markov Processes International site, and give you credit for being able to deduce such things pertaining to a fund's probable sector holdings.
These dynamic modeling styles of analysis by data mining return streams, performing regression analysis, apparently can tell not only what sectors a fund's allocation is, but also if a hedge fund has strayed from its stated goals and objectives and is currently in much trouble! {Madoff}
I have started looking deeper into the Focus Fund's Sharpe ratio, and his beta and do not see any disparity that raises alarm as compared with other fund managers of this type risk in present recessionary period.
His Alpha has always been very good.
However, the low Treynor ratio of 2.14 seems poor as a ranking criteria.
Decades ago I started a masters degree in Research Measurement and Evaluation in Connecticut but only got halfway through it, so you have my respect and admiration.
Keep up your succinct analysis.
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