While many funds and money managers are under watch, Ken Heebner and the investments in his CGM FOCUS FUND (CGMFX) are perhaps more closely watched than any other in today’s current market.  Some may love Warren Buffett and his no non-sense approach, but Ken Heebner actually has a better track record since inception and he is known for blowing out of sectors when he feels he should or can.  In fact, you could almost think of the FOCUS FUND as being run more and more like a hedge fund with very loose guidelines on which stocks he can or can’t pick from.  The fund also noted about 14% of the total assest that were sold short, so he does make bets against sectors as well.  As of June 30, Heebner was still extremely focused on the commodity and global growth stories.

We went through to look for his positions in the Focus Fund that are worth more than $500 Million.  Keep in mind that several other positions were just shy of the mark, so the overall values and holdings are better compared down further on at the full list.  Here were his top holdings in the CGM FOCUS FUND:  CONSOL Energy Inc. (NYSE: CNX), Peabody Energy Corp. (NYSE: BTU), Freeport-McMoRan (NYSE: FCX), Petroleo Brasileiro S.A. (NYSE: PBR), Hess Corporation (NYSE: HES), Schlumberger Limited (NYSE: SLB), Weatherford International (NYSE: WFT), and United States Steel Corp. (NYSE: X).

Over the last 10-years the CGM FOCUS FUND has risen 936.1%, with a5-year return of 355.2%, a 1-year return of 70.7%, and a Q2 performanceof 27%.  That hasn’t continued for the first half of Q3.  "CGMFX" is anopen-end mutual fund that trades at the net asset value posted eachday.  On June 30, 2008 the fund’s share price went out at $61.46.  Itwas listed as of the August 14 close at $47.12.  That is a drop of23.3%. Conversely, the Vanguard 500 Index Fund that tracks the S&P500 Index actually rose 1.3%. The prior quarter when the Focus fund didso well there was roughly an 11% drop in the S&P 500.

We would caution that just because the markets in commodities andglobal growth have given back many gains in recent weeks, that is notan assurance that Ken Heebner is still active in all of these names.The losses are sharp in some of the names and Heebner is known forhitting the ejection seat without prejudice if he feels something hastopped or if something has changed.   It would lead one to believe thatHeebner has stuck with the commodity stocks and global growth stocks orthat his short sales aren’t working.  But with his past performance wewon’t rush to any major judgment as we are half way through thequarter.  It is very possible that in mid-November his September 30,2008 holdings may be entirely different if Heebner feels a major changeis afoot.  Below is the full list of EQUITY holdings (about 94% of thefund) as of June 30, 2008:
                                                                       SHARES           VALUE

ALUMINUM — 0.2%
  Century Aluminum Company (CENX)                 380,000         $25,266,200
AUTO AND RELATED — 2.7%
  Ford Motor Company (F)                               58,883,000        $283,227,230
BASIC MATERIALS — 10.1%
  CONSOL Energy Inc. (CNX)                           4,600,000         $516,902,000
  Peabody Energy Corp. (BTU)                          6,000,000        $528,300,000
COPPER — 8.1%
  Freeport-McMoRan  (FCX)                              4,453,700        $521,929,103
  Southern Copper Corporation (PCU)                2,963,700        $316,019,331
FERTILIZER — 2.0%
  Potash Corporation of Sask. (POT)                    890,000        $203,427,300
HEAVY CAPITAL GOODS — 4.6%
  Cummins Inc. (CMI)                                       7,350,000        $481,572,000
METALS AND MINING — 0.2%
  Teck Cominco Ltd. (TCK)                                 550,000         $26,372,500
MISCELLANEOUS — 4.0%
  Tenaris S.A. ADR (TS)                                   5,550,000        $413,475,000
OFFSHORE DRILLING — 5.3%
  Atwood Oceanics, Inc. (ATW)                           230,000         $28,598,200
  Nabors Industries Ltd. (NBR)                         10,550,000        $519,376,500
OIL – INDEPENDENT PRODUCTION — 10.5%
  Berry Petroleum Company (BRY)                      430,000         $25,318,400
  Canadian Natural Resources (CNQ)                   550,000         $55,137,500
  Devon Energy Corporation (DVN)                     4,050,000        $486,648,000
  Petroleo Brasileiro S.A. (PBR)                        7,414,700        $525,183,201
OIL REFINING — 9.7%
  Hess Corporation (HES)                                 4,020,000        $507,283,800
  Suncor Energy Inc. (SU)                                8,550,000        $496,926,000
OIL SERVICE — 18.6%
  Halliburton Company (HAL)                            9,270,000        $491,958,900
  National Oilwell Varco (NOV)                          4,130,000        $366,413,600
  Schlumberger Limited (SLB)                           4,950,000        $531,778,500
  Weatherford International (WFT)                    11,000,000        $545,490,000
ON-LINE SERVICES — 0.4%
  Priceline.com Incorporated (PCLN)                   330,000         $38,101,800
RETAIL — 0.7%
  The Gymboree Corporation (GYMB)                  560,000         $22,439,200
  Tupperware Brands Corp. (TUP)                        670,000         $22,927,400
  Urban Outfitters, Inc. (URBN)                            790,000         $24,640,100
STEEL — 16.9%
  ArcelorMittal (MT)                                          4,920,000        $487,424,400
  Commercial Metals Co. (CMC)                         440,000         $16,588,000
  Mechel OAO ADR (MTL)                                4,690,000        $232,342,600
  Nucor Corporation (NUE)                                6,442,500        $481,061,475
  United States Steel Corp. (X)                          2,875,000        $531,242,500

TOTAL COMMON STOCKS (stated cost $8,490,315,234)         $9,753,370,740

In the quarterly filing with the SEC, CGM’s team noted "We believe theworst of the current financial ordeal is behind us though it is stilltoo early to expect a broad recovery in the economy. Fortunately, webelieve there are bright spots in the economy, areas of strength toprovide select investment opportunities in an otherwise difficultmarket."

Many of Heebner’s picks are victim of the stocks following commodityprices, yet most of his picks are those which he feels are going togrow whether the commodity prices go back up 25% or go down 25%.  Sofar Heebner and his team are seeing a rough start and the team may havestuck with the winners for too long.  He may have changed positionsalready and he might not have.  Either way, he’s still a huge draw andinvestors are going to play close attention to his moves when they can.

Jon C. Ogg
August 15, 2008

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