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High-Flying Mutual Funds That Crashed


NEW YORK ( TheStreet ) -- Investors have been racing to dump two notable mutual funds: Artio International Equity (BJBIX) and CGM Focus (CGMFX).

Assets at Artio have fallen from $10.9 billion in 2007 to $753 million now. During the same time, the CGM portfolio fell from $5.4 billion to $1.5 billion. Terrible performance records caused the exodus. During the past five years, CGM lost 7.5% annually, ranking dead last of the 444 large blend funds tracked by Morningstar. Artio lost 5.4% and trailed 96% of its foreign large blend peers.

The sorry performance is especially noteworthy because the funds once ranked as high flyers. At the end of 2007, both funds boasted performance records that were among the greatest ever compiled. In the preceding decade, CGM returned 26.1% annually, compared to 5.9% for the S&P 500. Artio returned 17.2% annually, compared to 8.7% for the MSCI EAFE international index.

What went wrong? Both funds follow unorthodox strategies that worked until the financial crisis disrupted markets. Diehard contrarians, the managers failed to perform in the downturn when the cheapest stocks only got cheaper. In recent years, the cold streak continued.

While the two funds follow different approaches, both make bold bets. CGM portfolio manager Ken Heebner trades rapidly, holding a big stake in copper producers one year, and banks the next. In 2008, Heebner decided that banks were unloved and put 40% of assets in financials. That led to huge losses as the financial crisis unfolded. Then in 2010, he shifted to industrials, which struggled as investors worried that the crisis in Europe could slow global economies.

Artio managers Richard Pell and Rudoph-Riad Younes also make daring moves. Before the financial crisis they scored huge gains by betting that Poland and the Czech Republic would profit from growth in the eurozone. Then, like Heebner, the Artio managers held banks during 2008. In 2011, the managers bet on China, a move that produced losses when investors became convinced the country was headed for a hard landing. After a dismal showing in 2012, Artio announced the two managers would be leaving the fund.

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