A Second Act for Bob Markman
Bob Markman has reinvented himself, and he's doing quite well, thank you. The question is whether to place more faith in his recent success -- or his previous failure. There's plenty of evidence on both sides of the ledger.
Markman, 55, is an intelligent, provocative and likeable money manager. In the late 1990s, the Minneapolis-based Markman started three funds of funds -- in other words, funds that invested in other funds.
He was a pretty good fund picker -- until the tech bubble popped. In early 2000, he wrote a book entitled Hazardous to Your Wealth: Extraordinary Popular Delusions and the Madness of Mutual Fund Experts. In it, Markman thumbed his nose at conventional experts who counseled such common-sense practices as diversification. He argued that large-cap growth stocks were the place to concentrate your wealth and that tech stocks were the most attractive such stocks.
His timing couldn't have been worse. One of his funds lost 25% in 2000, 24% in 2001 and 26% in 2002. Even in the context of the worst bear market in a generation, Markman's performance was wretched. In 2003, my editors and I inducted him into Kiplinger's Hall of Shame -- an article we do every few years on the very worst funds and their managers.
Time to regroup
Markman refused to quit. He folded all but one of his shrunken funds and renamed the remaining one Markman Core Growth (symbol MTRPX). He stopped picking funds -- and, of all things, started choosing stocks. "I had a quarter century of experience talking with the greatest stock pickers of our time," he says. "I was in a position to put that education to work picking stocks."
It sounded like a dubious enterprise at best, but here's the shocker: Since Markman began the new fund at the start of 2003, performance has been stunning. Over the past three years through November 20, the fund returned an annualized 15% and ranks in the top 3% among large-cap growth funds. It has been a consistent winner, too, placing in the top 10% among its competitors in 2003, 2004 and, so far, this year. In 2005, it beat about two-thirds of its peers.
How has he done it? Mainly by investing in stocks of large companies -- most of them fast-growing companies. In other words, he actually believes a lot of what he wrote in his book. "I think the book is still solid for the average investor," he says. "There were some things that were really wrong. The biggest mistake was not realizing that tech is cyclical. I thought it was a secular growth industry. I thought that even in a recession the last thing companies would cut back on was technology. It turned out to be the first thing they cut."
But he still maintains that "large-cap growth stocks are likely to capture the bulk of the returns over the next 20 years. The tailwind that will give them legs is globalization." As consumer classes grow in emerging nations, such as China and India, the chief beneficiaries in the U.S. will be large companies, not small ones.
Markman's recent hot streak, however, doesn't stem entirely from investing in classic large-cap growth stocks, which have continued to lag during the current bull market after performing miserably during the 2000-02 bear market. "If there's one flaw I have, it's that I always look at the glass as half full," Markman says. To keep that predilection under control, his fund's prospectus requires that he keep at least 20% of assets in some combination of bonds, cash and real estate investment trusts (REITs). Since the fund's inception, most of that money has been in REITs -- which have delivered outstanding returns. Thus, Markman looks good next to style-pure large-cap-growth managers in recent years partly because he's been fishing in more lucrative waters.
Markman also benefited by avoiding the behemoths. Most of the large-cap stocks he bought in 2003 and 2004 were on the small side of large-cap territory, typically sporting market values of $15 billion to $20 billion. Those smallish large caps did much better than the mega-caps. Only in the past few months has he moved vigorously toward the largest companies. Why now? "Obviously, that's where the market is heading," he says.
Markman looks for companies with strong balance sheets, increasing earnings, stable or expanding profit margins and dominant or growing market shares. He wants companies in growing industries, and he likes stocks with price-earnings ratios of less than two or three times their estimated growth rates. Yes, Markman has limits on what he'll pay for a stock, but they are so high that you can argue, for all intents and purposes, that there are few value bones in his body.
What the fund looks like now
Aside from a few oddities, the fund looks like a fairly typical large-cap-growth offering. His largest holdings are Google (GOOG), Apple (APPL), Vornado Realty Trust (VNO) and Berkshire Hathaway (BRK.B). Berkshire you'd expect to find in a value manager's fund; Vornado is a REIT.
But what really sets Markman's fund apart is his trading. The fund's turnover was 648% last year -- meaning that, on average, he held stocks less than two months. "The turnover number is misleading," he says. For one, he tries to capture short-term gains because he has a huge capital loss carry forward to use up -- thanks to the horrible bear-market years. Plus, as the fund appreciates, shareholders are abandoning it -- apparently once they get even.
Still, Markman's turnover is off-the-charts high. Few conventional stock-fund managers trade that much. With just $55 million in assets, Markman says he can take advantage of short-term swings in share prices without incurring significant trading costs. Maybe so, but most hyper-traders do poorly over the long haul.
Bob Markman is a fascinating guy. But would I own his fund? The turnover worries me, the bear market performance worries me and the unadulterated hubris of the attitudes expressed in his book worry me. So does the short length of his good spell. Four good years is encouraging but ultimately not enough to overcome my concerns.
Steven T. Goldberg is an investment adviser and freelance writer.