Manager who goofed thinks new numbers give him 2nd chance

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November 21, 2006|By Charles Jaffe | Charles Jaffe,Marketwatch

Fund manager Robert Markman says investors can improve their performance by "making more mistakes."

He should know. He has made - and acknowledged - plenty of mistakes.

When Markman issued a press release last week encouraging investors to find the emotional courage to move past mistakes, he raised a much bigger question: "Should investors forget past managerial blunders and let performance cure all ills?"

Markman's own case points out how good results can create twisted and confusing decisions for an investment public that tends to be fickle.

In 1995, Markman started the Markman Multi-Funds, which invested in other funds. It's a costly structure that has never been particularly successful, because shareholders pay expenses of the manager, plus all of the underlying funds. Saddled with high costs, a manager is going to have a tough time beating an appropriate market index.

In Markman's case, he famously bet Jack Bogle - the man who popularized index investing while at the helm of the Vanguard Group - that his new funds would outperform the index. He lost.

In January 2000, Markman published a book entitled Hazardous to your Wealth: Extraordinary Popular Delusions and the Madness of Mutual Fund Experts. In it, he trashed traditional thinking about diversification, praising big-name stocks and suggesting that technology was the way to go.

Three months later, the market peaked. Tech stocks imploded, and Markman's funds went with them.

By the end of 2002, Markman's best fund had a seven-year average annualized gain of 3.6 percent; his worst fund had an annualized loss of 3.8 percent. Yuck.

Recognizing and moving past his mistakes, Markman scrapped the fund-of-funds format to buy individual stocks; one fund was liquidated and three others folded into the renamed Markman Core Growth.

At the time, in my annual "Lump of Coal Awards," I suggested that Markman was burying his track record and that anyone expecting " ... a swift updraft in performance is deluded."

That's when Markman's performance turned around.

Core Growth fund is now a four-star fund, and it gets five stars when examined over the five-year period that represents the time since Markman changed strategies. The fund's 9.2 percent annualized gain over the last five years earns high marks from Lipper's fund-analysis system too.

Says Markman: "As someone who still picks funds for clients, I know that one year or two years isn't a turnaround, and I am not sure I could put an actual number on an appropriate time frame to say `This manager has got it.' ... But at some point you have to recognize that the past is the past and is not relevant to what is happening now."

The computers at the research firms seem to agree, letting Markman off the hook.

But here's where things get interesting. Markman's fund is rated as equal to or better than the Legg Mason Value Trust, the fund run by Bill Miller, whose 15-year streak of beating the Standard & Poor's 500 index appears ready to end this year.

Few people would put Markman into Miller's legendary class, but an investor who has never owned the funds or heard of either manager would have a tough time telling them apart. Both are large-cap funds, with similar expense ratios and Markman's fund has superior performance in every time period except for 10-year results (which include Markman's fund-of-fund days).

Experts aren't buying Markman's recent history because they have institutional memory of his more-distant past. Yet they acknowledge that the investing public gives second chances to almost anyone who can deliver outsized returns over any time period.

It's hard to quantify the danger based on, "What have you done for me lately?" Markman agrees, but notes: "I keep score every day, and all my shareholders should care about is if I hit the marks I am supposed to hit."

Charles Jaffe, a senior columnist for MarketWatch, also can be reached at Box 70, Cohasset, MA 02025-0070.

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