Bombs Away! Heebner Shifts to Small-Cap REITs

The "Mad Bomber" has taken aim again.

This time, some of his targets are quite small. And that means shareholders may want to brace for another wild round of ups and downs the fund manager has made famous.

Ken Heebner, who earned his nickname for a frenetic trading style that often hits Wall Street by storm, seems to be shifting strategy in his $400 million (CGMRX Quote)CGM Realty fund. Capital Growth Management's latest disclosure of holdings reveals a move out of large-capitalization real estate investment trusts, or REITs, and into potentially less-liquid ones that could prove difficult to exit in a falling market.

According to the latest quarterly reports, Heebner sold off a large position in Equity Office Properties Trust (EOP Quote), the nation's biggest publicly held owner and manager of office properties. From the end of March to the end of June, he eliminated EOP from CGM Realty, where it had been one of his biggest bets, making up nearly 6% of the portfolio.

At the same time, he added small-cap names that are much less familiar. Among them: Grove Property Trust (GVE:Amex), one of the very smallest names in the Morgan Stanley REIT Index with just $106 million in market value; Mission West Properties (MSW Quote), which has a market cap of $126 million; and the $185 million Lexford Residential Trust (LFT Quote), ranked 114 among 129 REITs in the market-cap-weighted MS REIT Index.

While the recent performance of some of these stocks has been mixed, with quite a few trading near the high end of their 52-week ranges, others have fallen steeply. The low volume and small market size of many is a recipe for extreme volatility.

Of course, Heebner is no stranger to that. He likes to trade fast and often, and is not afraid to stake his portfolios on a handful of holdings. (CGM Realty has just 20 stocks.) CGM funds are well known for careening from top to bottom and back to the top of their categories. Since 1995, CGMRX has placed either in the top or bottom fifth of its specialty real-estate category, according to Morningstar.

The fund lost more than 20% and finished behind 89% of its peers in 1998. A stunning second quarter of this year, however, when REITs staged a brief rally, pushed him near the top of the relative charts again. As of the end of August, CGM Realty was up 5.5%, among the top 5% of real-estate funds. But a tough September pared those gains, and it is now flat for 1999.

Despite last year's loss, Heebner's long-term record in the sector is still quite strong. Over the past five years, CGM Realty was up an average of 12% annually, best in the category.

CGM Realty Returns
YTD return	Rank in category	3-year ave. return	Rank in category	5-year ave. return	Rank in category
0.6%	3/48	7.1%	3/26	12.1%	1/15
Through Sept. 28. Source: Lipper.

It's impossible to know how significant or long term this shift to small-caps may be. CGM (which did not respond to calls for an interview) often waits until nearly two months after the end of a quarter to disclose its holdings, and for a high-speed trader like Heebner, the reports can sometimes just be a snapshot of the portfolio on a particular day, outdated long before shareholders receive them.

But not all real-estate funds are finding the same interest in smaller-caps. Although Cohen & Steers has long specialized in smaller-cap, high-dividend REITs, its flagship (CSRSX Quote)Cohen & Steers Realty fund concentrated on so-called "realty majors," or the largest REITs in the sector in the last six months.

"We focus on the bigger, strong-balance-sheet companies," says senior vice president John McCombe. "Until we see some sustained recovery, these are the kind of companies that are more liquid."

REITs, on the whole, are difficult to trade, especially during tough times. And times certainly have been tough, despite the midyear sector rally. The S&P REIT Equity Index is down 14% so far in 1999, while the S&P 500 has gained 4%. Although less attractive to investors these days, REITs continue to be seen as a defensive play in a balanced portfolio because they offer yield and the potential for growth as well.

But shareholders who think that spells stability best remember that tiny targets can be easy misses, even for the "Mad Bomber."