He lost a bet with Vanguard founder John Bogle. He lost a significant chunk of his assets. He lost the top ranking for his funds over the last year as they have been clobbered. But Robert Markman is obdurate. He has not lost his determination to stick to a controversial fund strategy that challenges what many financial advisors and fund managers believe is the gospel of modern investing: diversification.
"A focused long-term portfolio is one invested entirely in technology stocks," wrote Markman in one of his columns for Worth magazine's Web site last year.
Not surprisingly, the founder of four funds has his critics. "That goes against every principle that I have ever learned. One never should concentrate assets in one thing or one strategy," says Jack Brill, a San Diego-based investment advisor with his own firm, Natural Investment Services.
Markman also believes that modern portfolio theory is "voodoo," that the efficient frontier is based on a false premise ("the assumption that one could determine what the future correlations between various equity classes would be") and that the so-called small-cap advantage has no basis in reality (he calls it "the small-cap hoax."). International investing is oversold. Value investing is another false premise because value managers will drop out of stocks once their p/e ratios become too expensive and they don't see the long-term prospects of technology, he writes in his recent book, Hazardous to Your Wealth: Extraordinary Popular Delusions and the Madness of Mutual Fund Experts. Published in early 2000, the timing of Markman's call for an all-tech portfolio was disastrous.
"The problem for the value camp," Markman complains, "is that a good number of value managers can't-or refuse to-make this leap of faith." One equity asset class, he argues, should "never" hedge another, he states. Only large-cap tech stocks matter, Markman argues, a sentiment that flies in the face of conventional wisdom.
"It is, at best, a naive conclusion. It is based on the wrong assumption: that one sector will always be grossly undervalued," counters Harold Evensky, a certified financial advisor in Coral Gables, Fla., who has debated Markman in many public forums.
"If any period proves that diversification works, then it would have to be the last year or so when heavily concentrated funds have had all sorts of problems," adds Russel Kinnel, an editor with Chicago-based Morningstar, which does not follow Markman funds.
Kinnel notes that-while the previously popular growth funds have tanked-it has been the value sector, much maligned in 1998 and 1999, that has prospered in the last year. "The argument for diversification is that no one can tell where the market is going to turn. Often, the market shines on those areas that have been most beaten up," Kinnel says.
Markman, president of Markman Capital Management in Minneapolis, has learned about getting beaten in the last 15 months as some of his tech-heavy funds have suffered hits of more than 65% before staging a modest recovery since early April. He manages four multicap funds-three stock funds and one income fund. He charges a 95 basis-point annual fee, on top of the usual underlying fees of the funds. Markman clients can "mix and match" the various portfolios to meet their asset allocation. The aggressive portfolio can invest up to 90% in stocks, while the conservative portfolio is usually in the 30% to 60% range.
This fund of funds approach is now new. Many fund of funds failed in the early 1970s, victims of a disastrous stock market, as well as a top-heavy fund-expense structure. Since fund of funds tend to charge a fee for advising investors how to deploy assets across several portfolios, investors, who also pay the normal fund expenses, are shelling out more in charges than if they select a fund or funds themselves.
Markman believes his approach is giving the average retail investor a chance to obtain the superior returns that normally go to well-heeled investors. His fund entries provide the average retail investor with "the same advantages of sophisticated private money management." But here's the difference: Much of Markman's equity allocation is limited to large-cap tech companies bought through Nasdaq indexes.
"One of the few sure bets for the next 20 years," Markman wrote in a column last year, "is that the largest and most successful companies will be those that create and take advantage of new technologies. Investors who resist this are missing the greatest wave of growth they will ever get to see." This was before corporate America started slashing capital spending budgets for information technology and previously unstoppable companies saw their sales falter.
Markman prefers to use indexes because they will ferret out the losers among tech companies, which, as they fail, will become a smaller part of the index or eventually drop out as the companies go under. This tech overweighting worked well for many growth-oriented funds, including the Markman funds, in 1998 and 1999. His moderate portfolio returned 20.7% a year during a five-year period between 1995 and 2000. The conservative portfolio registered an annual return of 16.2% and the aggressive portfolio was up 27.7% in the same time.
Markman was still flying high in April 2000, even as he paid off a bet with Bogle, whose Vanguard 500 Index Fund easily outpaced Markman's moderate portfolio (26.7% to 20.7% a year in the previous five-year period). Then came the freefall in the Nasdaq index, which greased the skids for big declines in some of Markman's funds.
"His one-, three- and five-year numbers are now very bad," says Sheldon Jacobs, editor of The No-Load Fund Investor, a newsletter in Hastings-on-Hudson, N.Y. Jacobs, like Brill and Evensky, was criticized 15 months ago by Markman. Markman's recent three-year equity numbers were between -3% and -6% through this year's first quarter. The five-year numbers were positive at between 2% and 3% a year.
Markman's growth-heavy strategy-no matter how he wanted to interpret the numbers in a strong period between 1995 and 2000-has blown up since he conceded his bet to Bogle. Nevertheless, he promises not to embrace the religion of most of the fund industry. "I'm comfortable," Markman writes in his book, "eschewing the traditional (and, by the way, flawed) diversification model because I believe the technology sector covers such vastly different companies that I have what in the future will be considered a widely diversified portfolio."
Markman's three multifund equity portfolios-which are aggressive, conservative and moderate-were down in the first quarter this year between 15.7% and 33.1%. The one-year numbers through March 31 of this year were brutal, -31.7% to -54.9%.
But Markman maintains he saw it all coming. Back when he was riding high, he wrote in his book: "The fact is we are sure to get a big tech correction. Sometimes even twice a year." And he cautioned: "The only time volatility is risky for the long-term investor is if you yourself make it so by panicking."
It is a book that won no friends for Markman among many advisors and fund executives. Evensky, for example, says he had not read the slender volume because, "I'm going to read substantive things that are worth my time."
In his book, Markman criticized Evensky, Brill and Jacobs, the experts in The New York Times fund-picking series, which ended last year, noting that Markman Funds had beaten the experts in a four-and-a-half-year period from 1995 and 1999 (the time between when his funds were started and his book was published). One expert was a Morningstar analyst. None of the experts was able to beat the S&P 500.
Markman's aggressive portfolio beat all Times' participants. His conclusion: The Times' "Dream Team Fumbles."
Even though he praised these experts as smart people trying to achieve the best returns for their clients, he argues they stumbled because they were switching funds too often and trying to meet the standards of modern portfolio theory.
Evensky concedes that he switched funds too often, but he contends that Markman would have been beaten by The Times' experts if the competition hadn't ended last summer. That's when the experts' more value-oriented picks would have trumped Markman.
Brill warns that Markman's unique, single-minded philosophy would "never satisfy the prudent-man investor rule." Lipper Inc.'s Don Cassidy, a fund-industry analyst, says Markman is "setting himself either to be a big hero or an also-ran." He fears that investors and advisors will be attracted to these funds when they're hot.
Morningstar's Kinnel argues Markman's declaration of victory over The Times' fund experts is misleading because "he is not listing the risk-adjusted returns. Investors in these funds have just been learning over the last year the great risks these funds have been taking." He adds that, while modern portfolio theory, is not "the Holy Grail," staying invested among various sectors is the best strategy because "no one knows which sector is going to be the best one. It makes the most sense to stay invested among various sectors."
Nevertheless, several of Markman's critics say they think some of his points have credibility. Bogle and others are skeptical of the benefits of international investing. The small-cap advantage-based on a study going back to the 1920s-has been criticized as using flawed data. Jacobs agrees with much of Markman's criticism of the so-called small-cap advantage and the popular categorization and so-called correlation of investments.
"A lot of those things are the result of sales marketing. The idea of much of this correlation of various equity is a fool's game," Jacobs says. He adds that although Markman's recent one-, three- and five-year numbers now are disastrous, "I wouldn't bet against him to get back on top."
Despite controversy and the Nasdaq bloodletting of the last year, Markman hasn't changed his strategy, except possibly to make his portfolios more aggressive as he loads up on more tech stocks. He continues to ridicule modern portfolio theory, as well as those who say he has received his comeuppance.
Having the courage of one's convictions may be an admirable trait. However, the bleeding can't end too soon for Markman. He doesn't have much leeway. His small fund complex had about $500 million in assets (including privately managed money) when his book was published about a year and a half ago. It had shrunk to some $400 million in April, according to Markman. The funds' part of Markman's complex has declined from about $250 million to $150 million. Markman isn't worried about asset declines, saying his complex is so small that he could continue with as little as $20 million.
Still, Markman says the asset loss has come through NAV declines and not because of investors yanking their money. He adds that, because of his high public profile, most investors were prepared for volatile times. And he continues to throw challenges to an investment community that preaches diversification through foreign stocks and other kinds of hedges.
"We've gone from the top-rated funds to the bottom-rated ones. Soon, we're going to be back in the top quartile," Markman says in an interview. And how will that happen? Markman is loading up on technology. In fact, over the past year, as the tech market has tanked, he says, the average weighting of his equity funds has gone from 65% tech to 75%. The rest is in cash and bonds.
"I'm expecting triple-digit returns on many of the tech stocks we are in," Markman says.
If Markman's top-quintile returns don't resume before the company's assets dwindle to a small amount, then he risks losing much more than a public soapbox; his business could be jeopardized. And some investors who got in 15 months ago will need a few years of triple-digit returns to make themselves whole.