This is how the future looks to G. Kenneth Heebner, one of the nation's top mutual-fund managers: The rise in interest rates is not going to derail the economy; stable food and energy prices will keep inflation in check, and real estate will once again become a money-making investment.
If these forecasts sound contrary to what you've been hearing from Wall Street, it's not surprising. Heebner, the 53-year-old manager of the top-rated CGM Capital Development Fund in Boston, has always liked to blaze his own trail through the investment jungle.
"I want to have a viewpoint that is not widely believed" on Wall Street, Heebner said. His reason: If others don't share his investment ideas, he can buy the stocks he likes before they go up.
Although not as well-known as the fabled Peter Lynch, former manager of the Fidelity Magellan Fund, Heebner was one of Lynch's main rivals during the decade of the 1980s and early 1990s--with their returns running neck-and-neck.
Magellan has dropped down the list, but CGM Capital Development remains the second-best performing stock fund for the last 10 years and the third best for the past five years, as of June 30, according to Lipper Analytical Services Inc. CGM Capital, which invests in growth stocks, is now closed to new investors.
One of Heebner's best years was in 1991, when health and food stocks helped power his fund to a 99% gain. This year, though, has been a tough one. He has made big bets on industrial companies--including autos, building materials and paper products--in the belief their earnings and their stocks would benefit from a strengthening economy.
Those stocks did gain last year but were knocked back when the Federal Reserve raised interest rates. Some investors became convinced--wrongly so, Heebner thinks--that business would weaken and the country might go back into recession. So they sold the stocks that Heebner favors.
As a result, Heebner's fund, which has $457 million invested in 25 stocks, dropped 15% by June 30. In recent days, economically sensitive stocks have started to rebound and Heebner's fund is now down about 10%.
Trying to stay ahead of the crowd is not a risk-free strategy and Heebner admits he has made his share of mistakes.
"I sort of accept the fact that you are going to be wrong a certain portion of the time and you're going to lose money," he said. "But the important thing in stock investing is to position yourself in front of a big winner."
When Heebner talks about "big winners," he is talking about companies like Stone Container Corp., a maker of corrugated containers and liner board--used for the outer shell of boxes. Heebner has more than 5% of his fund's money in Stone, whose shares sell for $18, up from $6.50 a year ago. A stronger economy has produced a greater demand for boxes, allowing Stone to steadily increase its prices for liner board from $290 a ton last year to $425 a ton, starting Sept. 1.
Heebner also has invested heavily in steel, gypsum and chemical companies. His biggest holding is National Gypsum Co., which produces wallboard. Other investments include LTV Corp., a steel company, and Geon Co., a chemical firm. All three have shown sizable gains since last year.
Unlike many on Wall Street, Heebner is not fearful of rising interest rates. "The rise in short-term rates that we've seen, which may continue, is not going to interfere with very strong growth in our economy and the other economies around the world, . . ." he said. "I think we are going to have a strong economy in 1995 and 1996."
As for inflation, Heebner foresees no great pickup in the next 12 months because there is little pressure for higher wages and the cost of food and energy remains stable.
However, Heebner, expects increasing demand and rising prices for a variety of industrial commodities. Beyond his interest in steel and liner board, Heebner said he prefers not to be specific about the commodities where he expects rising prices--lest he tip his hand on which stocks he is buying.
Heebner, who has managed CGM Capital since 1976, considers himself an old-fashioned "earnings driven" investor. "I would have to tell you that stocks respond to earnings the same way now they did 20 years ago," he said. Strong earnings send stock prices up, weak earnings send them down, he said.
What has changed, he acknowledged, is the speed with which electronic systems alert all of Wall Street to financial events.
That, in turn, causes stock prices to respond to news much more quickly than before. Heebner was asked whether that had made his job as a money manager more difficult.
"You're sort of raising the question: With all that expertise and all those smart people out there, is it hard to make money? You know something? I'm heavily invested in the steel industry. I was able to get into the steel industry I think at a time when no one was paying much attention. And all these brains and all this money hasn't really changed that," Heebner said.
Heebner said he looks at the research provided by Wall Street brokerage firms but also studies raw data on many industries. He has a "tremendous conviction" that the global economy will grow rapidly in the next two years. Indeed, he said, one of the reasons he is focusing on industrial cyclical stocks is that he expects a sharp rise in the global demand for raw materials.