Beware fund manager with sure bet

Your Funds

Dollars & Sense

February 20, 2000|By Charles Jaffe

BOB MARKMAN is rocking the boat himself and trying to convince the rest of the world that there is a storm at sea.

The Minneapolis-based fund manager has stirred up a lot of emotions by taking on established thinking on fund investing.

In his new book, "Hazardous to Your Wealth: Extraordinary Popular Delusions and the Madness of Mutual Fund Experts," and in an article in the current Worth magazine (which you can see at www.worth.com), the manager of the Markman Multi-Funds rips conventional wisdom and the way most people invest. He says:

Diversification doesn't work, failing to "smooth the ride" of a fund portfolio to yield improved long-term returns.

You should buy only large, domestic growth companies, because small-cap stocks, foreign stocks and the value style of investing aren't worth your time and money.

Asset allocation should involve spreading your money through just three asset classes: large-cap, U.S. growth companies; short-term government bonds; and cash.

Markman's thinking rings true to many ordinary investors, who have watched the "diversified" portions of their portfolio dampen returns in recent years thanks to mediocre-or-worse performance from small-cap and foreign stocks.

Because theories like Markman's tend to evolve whenever one asset class stays hot for awhile, his attacks smack of, "I didn't beat them, I joined them." He adopted his current way of thinking after about 20 years of espousing and practicing many of the investment techniques he now repudiates.

When he says that his new way is better, he points to the fact that performance in his funds has improved dramatically in the year-plus that they have adhered to his new principles.

While acknowledging the perils of divining "proof" based on such short-term data, Markman says his conclusions are not just drawn on the market-of-the-moment. He has red-white-and-blue, patriotic (and perfectly logical) reasons for believing that the U.S. economy and markets are the best place to put your money.

What's more, he's not suggesting that his focused investment strategy will keep an investor ahead of the game in the short term. He acknowledges that there will be times when large stocks are out of favor (like last year, when the average international fund earned 38 percent, better than all but Markman's most aggressive fund and well above the average large-cap growth fund's 28 percent gain, according to Lipper Inc.).

He simply sees no reason to hedge your bets buying other asset classes when, over time, he expects that you will make more money if you adhere to his more simple formula.

Even Markman's detractors acknowledge that following his advice is not likely to send an investor to the poor house. What's more, these experts say that there are plenty of investors for whom an all-domestic, stocks-bonds-cash portfolio is emotionally and psychologically a good fit, even if they dispute Markman's contention that diversification doesn't work.

"This looks to me like a classic example of an investment professional extolling the virtues of what has worked for the last five years, capitulating to the market and saying he wishes now that he had done something that, in hindsight, obviously would have brought bigger returns," says G. Edward Noonan of Triad Investment Advisory in Hingham, Mass. "It's naive thinking but I can see how it would appeal to a lot of people."

The people to whom Markman's theory does not appeal are the ones Markman derides as "fund experts," ironically a term that for years has described Markman in columns like this one.

Markman describes his theory as a "sure bet," and the idea that such a certainty exists strikes most observers as laughable. They point to Japan a decade ago -- with a market that looked indomitable but proved insufferable -- or even to the big gains for international stocks last year, which surprised most observers.

"It's a big world and lots of things happen that people don't foresee," says Roger Gibson of Gibson Capital Management in Pittsburgh. "If you invest the way [Markman] suggests, you will feel pain when the market is against you. When you diversify, you will feel pain during any sustained period of wonderful performance for any one asset class. People attach more significance to recent history, but long-term there are still plenty of reasons to believe a diversified strategy will produce less pain."

Diversification is like buying an umbrella on a cloudy day. You spend the money and may be slowed a little as you lug the thing around with you, but it sure comes in handy when it rains.

Markman's storm of contention is persuasive enough that some people could give up their safety umbrella. Only time will tell if they (and Markman) will be winners, or just be all wet.

Charles A. Jaffe is mutual funds columnist at the Boston Globe. He can be reached by e-mail at jaffe globe.com or at the Boston Globe, Box 2378, Boston, Mass. 02107-2378.

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