By Robert Barker
Ken Kam is a guy with lots of ideas. He's also a guy who makes no bones about getting a lot of them from other people. That's really the entire point of his unusual mutual-fund outfit, Marketocracy Funds, which on Nov. 5 is set to open its fourth fund, the Marketocracy Masters 100. It will draw investment ideas from the best-performing investors who are tracking hypothetical portfolios at Marketocracy's Web site, www.marketocracy.com.
Many investors got to know Kam as co-manager, with Kevin Landis, of Firsthand Technology Value Fund (TVFQX), which had a brilliant run before crashing in today's tech bust. In its first five-plus years before Kam quit the fund, it soared 762%, vs. 491% for the average tech fund, according to Morningstar. It lost 10% in 2000 and so far in 2001 is down 49%.
You might think Kam had good timing, quitting in late 1999. But his own new fund, Marketocracy Medical Specialists (MSFQX), is off to a rocky start. To catch up on that, plus find out about how Kam has organized Marketocracy's latest fund, I sat down with him in late October amid InterShow's Portfolio Management Symposium at Walt Disney World. Here are edited excerpts of that conversation:
Q: What's the point of your new fund?
A:It's the first fund that leverages the new tools I've been building at Marketocracy, to be able to extend the Firsthand strategy into more sectors than just technology and health care.
Q: When you say "Firsthand strategy," what do you mean?
A:This is the strategy that Kevin Landis and I used to start Firsthand Technology Value Fund. It's basically the idea that if you want to find the people who understand any industry best, you have to be able to tap the expertise of people who are in the industry. And when Kevin and I started Firsthand, we leveraged our own personal contacts in our respective industries to build that fund family up and establish a track record.
Q: Go on.
A:And we were fortunate that technology and health care were just on the beginning of a very long move. But as I got to the five-year mark at Firsthand, it became more important to me that we figure out how to extend the success into other sectors, so that we would be able to steer our shareholders around any pitfalls that might happen in technology or health care.
Q: So what's the Marketocracy 100, and how are you going to use that to pick stocks?
A:The thing that makes first-hand investing work is having a terrific network of people who have experience in the industry, and who also know how to translate that information into actionable investment decisions. What's easy to find is people with first-hand experience in an industry. What's hard to find are people who have a credible track-record of investing.
Q: How do you do that?
A:Investors come to our site, and they run a virtual portfolio that I use to keep track of all their [investment] decisions.
Q: So they create a hypothetical portfolio and trade it, and you track it the same way a mutual fund would be tracked?
Q: So what's the Marketocracy 100?
A:It's the people who've managed the 100 best-performing [virtual] funds. I also interview them, and based on that and their track record, I have enough confidence in them to use their experience to leverage the first-hand kind of decision-making.
Q: A cynic would say you're simply plundering a bunch of other people's ideas.
A:There are two reasons why that isn't the case. One is we really are looking to hire the best people to be portfolio managers. And [using the Marketocracy 100] is what we can do now because we don't have quite enough data to be able to hire them and give them control over a fund.
Q: The second reason?
A:In the meantime, we do have a way to remunerate these people who we pick through our affiliate that runs the Web site.
A:Initially, they're going to be paid something as members of the 100.
Q: So if I'm one of the 100 and you like some of my ideas, how much money do I stand to make?
A:At the beginning, it's driven by how successful the company is overall. In the longer-term, we plan to have a more formal relationship as the dollars get bigger -- it will almost be like a temporary-employment-type relationship.
In the beginning, when the dollars are small, it's better to keep it more of a rewards program for being in the Marketocracy.
Q: These portfolios must hold hundreds of stocks. By the end of the year, how many stocks do you expect to have in the fund?
A:We'll probably be in the 400 to 500 range.
Q: Your own fund, Marketocracy Medical Specialists, is off quite a lot, as are some of the other Marketocracy funds. ChangeWave Fund (CWFQX ) has lost 30% of its value.
Q: Your Technology Plus Fund (TPFQX ) has been off less, about 10%, vs. a 44% loss for the average tech fund, according to Morningstar.
A:Amazing for a tech fund.
Q: This hasn't been a place where folks are getting rich. Why should investors give you money now?
A:What we're all looking for as investors is a source of information that's unbiased, unconflicted, and timely. And I can't think of a better source of information than people from the industry, who are performing now, as demonstrated by their track records, and put through the normal first-hand investment process that worked so well for me at Firsthand.
Q: But your medical fund presumably does follow the Firsthand idea. You have your own network, a good Rolodex in the health-care field. Yet your fund is off a lot. Why should an investor have confidence in you with this new fund?
A:Well, actually, I think [Marketocracy Medical Specialist Fund's performance is] in line with the health-care sector. It has done a lot better than any of the technology stocks that I used to play with at Firsthand.
Q: It's off about 18%, vs. Morningstar's average health-related fund, which is down less than 16%.
A:So it's a little bit more off. This is a perfect example of why I thought we needed to expand the range of expertise that we could bring to investments -- so that we could cover more areas than just technology and health care.
Q: The last time we talked, in February, I asked what your favorite stock was, and you told me [medical device maker] Novoste (NOVT ). The stock then was in the low $30s. Within a couple of weeks it took a big hit and was cut by more than half. And then in the last month or so it lost some more and now is around $10. What happened?
A:The company is doing terrific. They just reported their first profitable quarter. Second-quarter revenues represented a 50% growth rate over the first quarter. That continued into the third quarter. They're expected to make almost $1 a share next year.
Q: Is it still a big position for the fund?
A:It's smaller, but not because I've sold any. It's just down. In fact, the stock is still one of my favorite companies.
Q: What else should a prospective investor know about the fund?
A:I really want to emphasize that as investors, we're all looking for a source of information. Information drives returns in all styles of investing. This is a source of information that I know has worked for me in the past at Firsthand. It has been taken to the next level at Marketocracy.
We're doing for investors what everyone would want to do for themselves, which is to be able to tap into some of the ideas of the best people who are performing right now and be able to invest alongside of them.
Barker covers personal finance in his Barker Portfolio column for BusinessWeek. His barker.online column appears every Friday, only on BW Online
Edited by Patricia O'Connell