‘Fund of Funds’ Manager Sticking to Large-Cap Bet
An alternative to creating and monitoring your own diversified mutual fund portfolio is to let someone else do it for you. In recent years, that concept has itself become a packaged product via “funds of funds.”
A fund of funds is a mutual fund that invests in shares of other funds. Minneapolis-based Markman Capital, with its Markman MultiFunds, has become a well-known name in the fund-of-funds arena.
The key performance issue with such funds, of course, is how they allocate money among market sectors as well as individual funds. In the case of the Markman funds, principal Bob Markman has focused heavily in recent years on large-cap growth-stock funds--a bet that has paid off, and one he says he’s sticking with.
We talked with Markman recently by phone.
Question: Bob, the stock portions of your three “funds of funds”--Markman Aggressive Allocation, Markman Moderate Allocation and Markman Conservative Allocation--have been dominated by large-cap growth-stock funds. And those funds in fact led the market in 1998 and 1999. But in the fourth quarter of last year, many small- and mid-cap stock funds began to take the lead. Does this change your strategy?
Answer: I’d have to disagree with you on that. I would say it wasn’t small- and mid-caps that outperformed--it was technology that outperformed. Back those stocks out, and small- and mid-cap funds didn’t outperform [the broad market].
Anyway, my thesis isn’t that large U.S. growth funds are always going to outperform. There are going to be years when small caps will do best, or international will do best. This year could be a good example: Given how badly international and small-cap have done over the last two to three years, I wouldn’t be at all surprised to have, let’s say, large caps do 15%, small caps do 21% and international do 22%.
My only point is, when the dust settles over any reasonable holding period, it’s unlikely that those other ways of investing are going to outperform large U.S. growth stocks.
The big thing with large-growth stocks is, I get the best combination of returns I want over time relative to what’s going on in the world and the market, with the best sense of security and sleep at night.
I don’t have to worry about this sector falling out of bed for an extended period of time. I simply can’t imagine an economic scenario where the business activities of Microsoft and GE and Cisco Systems are in the dumper and other companies are doing well. It’s just not the way the world is put together. I’m not into market timing. This is a long-term multiyear macro call.
Q: But if you think foreign stock funds, on average, could gain 22% this year and large-cap growth 15%, why not go after those 7 additional percentage points for your fund shareholders?
A: Because I am one of the few people in the industry who is willing to say I don’t know enough to make those calls. I think I know enough to make a longer-term macro call [on the market]. But nobody is smart enough to make those shorter-term year-to-year calls.
Q: OK, let’s talk about the risks associated with investing so heavily in large-growth-stock funds now. Given that these funds have seen such a huge run-up over the last three years, and that the stocks’ price-to-earnings ratios are so high, don’t they have tremendous room to fall?
A: We’ve heard this before.
We don’t know when it’s going to happen. It could be another five years before it happens. Which means that the amount of money people are going to leave on the table [by avoiding large-cap growth] may far exceed what’s going to happen when things regress to the mean.
What I think all these asset allocators and diversifiers refuse to take a look at is not just what happens when the market goes down, but what the rebound looks like.
The summer of 1998 is an example when everything fell. My large-cap growth, my tech--it all got slaughtered. But then when people came back to the table to buy [in October 1998], the stocks that took off were large-cap growth and tech.
Q: Some people still would say that staying concentrated in large-cap growth means there’s a great risk of missing out on opportunities elsewhere in the market.
A: Yeah, there is. But the effort to address that risk--to overcome that risk--is a foolish game.
We’re mature adults here. If you don’t want to have disappointments, if you can’t deal with being disappointed in a quarter or over six months, you shouldn’t be in the market. Go buy a [bank] CD, for crying out loud!
Q: The hot performance of many tiny Internet start-ups was a big reason why so many small-cap growth funds posted 100%-plus gains last year. You can’t get that in a large-cap growth fund.
A: My [orientation] . . . is not just large-cap--it’s also growth. And we very clearly saw, particularly in the area of technology, that there were great opportunities to be had in small and mid-caps: One of our larger positions for our clients is Firsthand Technology Innovators fund. It’s a tech fund, but it’s small-to-mid-cap. That was one of the reasons the Aggressive fund in the fourth quarter did 30%.
The [market] story is a tech story as much as it is a large-cap-growth story. We think that people should be at least a good 50% to 100% overweighted in tech [versus the tech sector’s weightings in major market indexes].
Things move so fast that oftentimes in the blink of an eye, companies can move from small -cap to mid-cap to large cap [in size]. So I just don’t want to be so rigid and so dogmatic that I’m not willing to have a portion of the portfolio there.
Q: What are you doing with new money flowing into your funds today?
A: We’re buying the Firsthand fund. That position has more than doubled since the first of the year.
I want to increase our exposure to smaller- and mid-cap tech. And in my efforts to [do so], I trust Kevin Landis [manager of the Firsthand fund] more than anybody else. My intention is to get that fund into double digits [in the Aggressive and Moderate funds, from about 5% to 6% of assets recently].
Q: But shareholders shouldn’t assume that this is the beginning of a substantial move by you away from large-cap growth to smaller- or mid-cap stocks?
A: If my portfolio is a stew, the fact that there’s some onions and carrots in there [doesn’t change the fact that] you’re still eating it for the beef. The large-cap growth is the beef. The onions and carrots just give it the flavoring.
(Markman Funds have a $25,000 minimum, or $1,500 for investments made through discount brokerages Charles Schwab, Fidelity or TD Waterhouse. For more information on the Web: https://www.markman.com.)
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Times staff writer Paul J. Lim can be reached at paul.lim@latimes.com.
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Markman’s ‘Funds of Funds’
Here are performance data for two of Markman Capital’s “funds of funds”--mutual funds whose holdings consist of shares of other funds. Also shown are the most recently reported asset allocations for each Markman fund--the names of the funds it owns, and their total share of the portfolio.
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Total return: Markman fund ’98 ’99 YTD* Moderate Allocation Portfolio +18.3% +35.5% +0.5%
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Recent allocation: Janus Twenty (20.9%); Marsico Focus (18.8%); Rydex Series OTC (14.1%); Pimco Short-Term Bond (10.2%); Davis New York Venture (8.0%); Strong Advantage Bond (7.6%); Firsthand Technology Innovators (4.7%); Internet Fund (2.2%); cash (13.3%).
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Total return: Markman fund ’98 ’99 YTD* Aggressive Allocation Portfolio +26.2% +49.9% +3.4%
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Recent allocation: Rydex Series OTC (19.4%); Janus Twenty (18.8%); White Oak Growth Stock (13.4%); Davis New York Venture (13.4%); Liberty-Stein Roe Growth Stock (11.9%); Firsthand Technology Innovators (5.8%); Marsico Focus (4.9%); Transamerica Premier Equity (4.6%); Pin Oak Aggressive Stock (4.6%); Internet Fund (3.8%); cash (-0.5%).
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Total return: Markman fund ’98 ’99 YTD* Average U.S. divers. stock fund +14.6% +27.2% +0.3% Average S&P; 500 stock index fund +28.1% +20.2% -3.0%
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* Year-to-date performance is through Friday.
Source: Markman Capital, Times research
