4 Spectacular Fund-Manager Blowups of 2011

BOSTON ( TheStreet) -- Pimco bond baron Bill Gross reportedly said it was a mistake to sell Treasuries before a big rally this year. When a bond fund manager underperforms his or her benchmark index, "you go home at night and cry in your beer," Gross said.

But unlike most of us, the likes of Gross and other mutual fund and hedge fund managers still earn millions of dollars a year despite their sometimes colossal miscalculations.
John Paulson is one of several high-profile fund managers to get burned by choppy markets this year.

A lot of investors -- professional and not -- have been tested this year, as a confluence of events, from natural disasters to an unexpectedly weakening economy, has pummeled stocks. The benchmark S&P 500 Index's yo-yo performance -- down 8.6% over the past three months and 2.5% this year -- is giving money managers and ordinary Americans fits.

Even hedge fund manager John Paulson, who reportedly has made more than $10 billion in the past three years by betting against the subprime mortgage-backed securities market and wagering on gold's increase, is reportedly suffering giant losses.

The Wall Street Journal said in a story last week that Paulson's Advantage Plus hedge fund has lost 39% this year through Aug. 25, citing an unnamed source. Gold-related losses were the primary reasons for that, but there are also reported losses on Bank of America ( BAC) and Citigroup ( C) to contend with, followed by a big whack from Hewlett-Packard ( HPQ) after it said it's leaving the personal-computer business.

But no one will be holding charity bake sales for him -- or Bill Gross or any other professional investor -- any time soon.

Here are four high-profile, respected fund managers who have struggled this year:

Gross, who was named Morningstar's fixed-income manager in the decade ending 2009, has seen his $246 billion Pimco Total Return Fund ( PTTAX) eke out a mere 3% gain this year, almost half that of the Barclay U.S. Aggregate Bond Index, the fixed-income benchmark.

Pimco Total Return's performance this year puts it in the 88th percentile versus its peers, but the fund beats all but 5% of its peers over the past 15 years.

Gross made no bones about his strategy shift this year: He dumped U.S. debt holdings, principally Treasury and agency bonds, early in the year, saying he expected faster economic growth would contribute to inflation. The Federal Reserve also had been expecting a pickup in economic growth in the second half of the year.

That didn't happen. "The portfolio's 1.1% return from July 1 through Aug. 18 has been subpar, and has dragged its year-to-date return to the group's bottom quartile," reports fund-ranking firm Morningstar.

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The $13.4 billion Fairholme Fund ( FAIRX) is synonymous with manager Bruce Berkowitz and his against-the-tide bets on stocks and sectors that, in the past, paid off spectacularly. His fund has a 10-year average annual return of 8.4%.

Now he's living up to his firm's slogan of "ignore the crowd" with huge bets on the financial-services industry and, in particular, a 17% bet on bailed-out insurer American International Group ( AIG).

The result, in a word, is "ouch." AIG's shares have plunged 48% this year. He also has a 5.8% portfolio bet on Bank of America ( BAC), which is down 37% this year.


Boston-based Ken Heebner is another well-known manager who's off to a poor year. Known as Big Foot for his outsized bets on particular stocks, the mutual fund manager oversees Capital Growth Management's $2.5 billion CGM Focus Fund ( CGMFX).

Heebner's clients have been sent on a rollercoaster ride. The fund has sunk almost 20% this year. Even so, the CGM Focus Fund rocketed 80% in 2007 and 67% in 2003, contributing to a 10-year annualized return of 9%.

The fund's top holding now is online travel service Priceline.com ( PCLN), at 6.6% of assets. Its shares are up 26% this year, prompting Heebner to sell part of his stake earlier in the year.

Heebner has been trading at a furiously fast pace, which is typical for him, as his portfolio turnover rate during the first half of the year was the equivalent of a startling 554% on an annualized basis. That would mean the holdings turn over a total of six times in a year.

But he has a huge bet on the consumer-cyclicals sector, and the fund's latest big addition is Herbalife ( HLF), at 6%. The nutritional and household products firm's shares are up 64% this year.

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Bill Miller has been a manager on the Legg Mason Value Trust ( LMVTX) fund since 1982 and helped lead it to an enviable record. He beat the S&P 500 for 15 consecutive years, from 1991 to 2005. Miller, like Berkowitz, has been a Morningstar fund manager of the decade.

But now it looks as if the market has shifted against him. Over the past five years, the Value Trust has fallen an annual average of 8.3%, and this year it's down 8.3% as well. That's why it now has $3.4 billion in assets, compared with $21 billion at the peak.

Miller is currently holding lots of financial-services stocks, which is dragging down performance. Stakes in Wells Fargo ( WFC), Citigroup ( C) and JPMorgan Chase ( JPM) have contributed to that.

Computer maker Hewlett-Packard ( HPQ), a top 10 holding that is down 37% this year, is another albatross for the good ship Miller. A previous tech blowup for Miller, Sprint Nextel ( S), helped sully his reputation.
Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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