Marketocracy Takes Novel Approach, But Seeks Staying Power
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Tuesday, June 20, 2006

Marketocracy Takes Novel Approach, But Seeks Staying Power

Not very long before Ken Kam left Firsthand Capital Management, the company he co-founded with Kevin Landis in 1993, the Firsthand Technology Value Fund achieved top ratings nationally for the five-year period ended September 1999. Now that Marketocracy, the company Kam founded next, is approaching its own five-year milestone, he believes its inventive method of choosing stock-pickers from among the great unwashed is finally coming into its own.

That's because, Kam says, his pickers are in fact experts -- specializing beyond sector, right down to individual companies. In brief, Marketocracy allows visitors to its Web site to sign up as managers of virtual mutual fund portfolios. Each manager's investments and results are tracked, with the top 100 portfolios each month aggregated into the Marketocracy m100 Index. The firm's single fund offering, the Masters 100 Fund (a second is in the process of being registered), represents a combination of the m100 and Kam's own portfolio management.

According to Marketocracy's Web site, 11 quarters out from its inception, the m100 had beaten the S&P 500 in all but three quarters. According to Kam, the future is even rosier, since the key to identifying the top amateur portfolio masters is time. "The most important piece of data is one's track record," he told the MFWire, pointing out that other sites featuring virtual portfolios have tended to evaluate management over shorter periods. "The people we're picking now are based on five years of track record ... the more data you have, the more finely you can dissect people's performance and skill."

He contrasts the outlook for Marketocracy with the wild success of Firsthand at the height of the tech boom. "If all the people on your team only know how to choose tech stocks, the minute it goes out of favor, you've got nothing left to choose from," he said. "This is not a fund that's going to be in any sector all the time."

Instead, the Masters 100 Fund seeks to pinpoint and harness the particular knowledge of individuals in its enormous pool of potential stock-pickers. Out of the more than 80,000 who have had input over the past six years, he said, about five hundred have been offered research contracts. Generally, these select few are invested in more than one kind of stock. "The people who turned out to be the best after six months or even a year, those people turn out to be an enormous risk," Kam explained. If their showy results were followed without question, he added, the Masters 100 would be 100 percent invested in energy stocks. "The people who did well over the past five years -- they could not have done it being in one sector the whole time," he said.

However, also crucial to Kam's strategy is the idea that tens of thousands of virtual portfolio managers represent a huge store of valuable information on specific sectors and companies. Marketocracy's structure gives Kam and his associates access to those closest to the market, he believes. "Often times it's not the best portfolio managers who have the answers, it's the people in the industry ... we're in a very unique position to be able to put the whole picture together," he said.

With an expense ratio of 1.95 percent, the Masters 100 doesn't come cheap. But Kam points out what a lot of grunt work is involved. "[Consider] how much effort it takes a mutual fund to price itself every day -- I have to price 80,000 of them," he said. "Doing stock research pretty much boils down to figuring out what are the right questions to ask and who to put the questions to, and we do that better than anybody."

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