SKARBECK: Even investment stars have losing periods

Most investors have heard the cautionary statement “past
performance is not indicative of future results.” This oft-repeated caveat reveals its truth time and again in the investment
industry.

Bloomberg recently noted that the CGM Focus Fund is in danger of relinquishing its grip on the best 10-year mutual fund performance
for this century’s first decade. The fund, managed by Ken Heebner, absolutely crushed the market for the first seven
years, returning 32 percent annually compared to the Standard & Poor’s 500 gain of less than 2 percent a year. However,
since June 2008, the fund has lost 54 percent versus the 8.7-percent drop in the market, leaving CGM trailing 96 percent of
its peer mutual funds in 2008, 2009 and, again, this year.

Heebner’s stunning fall is reminiscent of another former star mutual fund manager, Bill Miller. Miller guided the Legg
Mason Value Trust Fund to 15 years of besting the S&P 500 return through 2006, but his returns then nosedived, losing
66 percent before reviving this year.

How can a top-performing investment manager suddenly not only lose the golden touch, but suffer a major collapse? For investors,
there are a few signs that may provide clues that a high-flying fund could develop trouble down the road.

One is the financial media’s tendency to elevate these managers to star status. Miller was showered with accolades
by the press—particularly near the end of his stretch, when the financial paparazzi gossiped about whether Miller would
beat the market once again. The media—and of course the fund’s marketing department—hype those historical
returns, leading investors to pile onboard.

In 2005, at peak performance and swamped with new cash inflows, Miller was managing $18 billion in the Value Trust Fund.
In May 2008, Heebner was called “America’s hottest investor” by Fortune just one month before the
CGM fund’s assets peaked at $10.3 billion.

Which brings us to perhaps the most glaring sign that a manager’s performance may be about to slump—those huge
inflows of cash by investors wowed by the outstanding past performance figures. Fund-rating firm Morningstar has noted an
“investor’s tendency to put a manager on a pedestal at the worst conceivable time.”

You can see how this poses a problem for even the best investment manager. Many of their great investment ideas, conceived
years back, have delivered superior results—however they are often no longer the great purchases they once were. And
yet with their cash inflows, investors are demanding that the manager put huge sums to work in securities at unattractive
prices.

In the first eight months of 2008, Heebner’s fund attracted $3.3 billion in new assets from investors smitten by the
80-percent return logged by the fund in 2007. CGM’s total assets climbed over $10 billion. Subsequent losses and $1.8
billion in net withdrawals dropped the CGM Focus fund assets to $3 billion today. At Miller’s fund, losses and investor
withdrawals have shrunk assets by $13.5 billion since 2006, to $4.5 billion.

The stark reality is that many investors in star mutual funds actually lose significant amounts of money by investing at
the wrong time. Talented investors can be more nimble when working with smaller amounts of money. But for even the top-performing
investment managers, it is clear large sums of money will serve as an anchor to future returns.•

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Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money management firm. His column appears
every other week. Views expressed are his own. He can be reached at 818-7827 or ken@aldebarancapital.com.