Fund name: Marketocracy Masters 100 Fund (MOFQX)

Objective: The fund seeks capital appreciation by investing in a diversified portfolio of stocks and exchange-traded funds which are represented in the portfolios of the m100 (I’ll explain, below).

Adviser: Marketocracy Capital Management, LLC of San Mateo, California. MCM advises this fund and, through its Marketocracy Data Services affiliate, operates the Marketocracy.com website. MCM oversees about $40 million in assets, the vast majority of which are in this fund, with the remainder in separately-managed accounts.

Manager: Kendrick W. "Ken" Kam. Mr. Kam is chairman and founder of the adviser. From 1994 to 1999, he co-managed the Technology Value fund with Kevin Landis. The fund gained 56% a year during its first three years of operation and had the best five-year record (about 50% annually, 900% cumulative return) of any fund at the point of Mr. Kam’s departure.

Inception: November 5, 2001.

Management’s Stake in the Fund: Mr. Kam owns the adviser and has between $100,000 and $500,000 invested in the fund. Beyond that, he has repeatedly described this as "the core equity portfolio for our own families."

Minimum investment: $2,000 for regular accounts and IRAs.

Expense ratio: 1.95% on an asset base of about $36 million.

Comments: People in my line of work just hate the Wikipedia. Hate it, hate it, hate it. They have an unearthly certainty about the Wikipedia’s authors (a bunch of pimply-faced, tongue-pierced, pot-smokin’ high school vandals) and the quality of its work (about as reliable as the graffiti scratched on men’s room stall walls). As a result, they excoriate it in their lectures, howl about it at their lunch tables and ban it in their syllabi.

All of which strikes me as pretty typical of the reactions of experts in any field when they’re confronted with something new, strange and popular: toss off a few "adverse attitudinizings," declare victory and stomp away as loudly as possible.

All of which is faintly risible. Can you imagine the average teenager taking time to edit, maliciously or not, a portion of an essay on Gabriel García Márquez’s novel The General in his Labyrinth? If they did it once, do you really think they’d receive enough gratification to come back again? Who, exactly, do you suppose would create or edit an article on hwajeon? If you were the cook who created the hwajeon piece (it’s a sort of sweet confection made in Korea), would you sit idly by while it was vandalized? No, no, someone who cared, and no.

The Wikipedia is an embodiment of the faith expressed in the First Amendment to the U.S. Constitution. The framers of that document believed that good ideas would consistently prevail in the marketplace of ideas; that while demagogues might win the moment, reasonable people would carry the day because (1) they were right and (2) reasonable people in a crowd ultimately value what’s right. The empirical evidence bears out the claim that the community intelligence expressed in the Wikipedia confirms the founders’ faith:

All of this is possible because a lot of very bright people -– the 75,000 volunteers who contribute to the Wikipedia, many of whom turn out to be subject-area experts -– feel a vested interest in getting it right and keeping it right.

And, oh, by the way, Morningstar hates the Marketocracy fund. Hates it, hates it, hates it. So far as I can tell, they discovered that its portfolios were constructed by a series of dart-flinging, poop-tossing chimps. As soon as it was launched, they warned "relying on stock ideas generated from novice, Internet-based investors has proved perilous." In 2005, they named it one of the five worst funds in the Schwab OneSource line-up:

And so they banished it to the land of Morningstar Pans. (As a side note: 4 of the 5 "worst funds" went on to beat their benchmarks, peer groups or both over the following three years.)

But there it sits with a four-star rating from Morningstar and Lipper’s highest total return rating for the past three years and second-highest rating for the period since inception. As of the moment I’m writing this profile, the fund has returns in the top 10% of its Morningstar peer group (mid-cap core) for the past day, week, month, quarter, two quarters, year and three years. It’s one of the few long-only, diversified equity funds that has managed to make money so far in 2008. It did have one bad year (2004) in its first seven, but six reasonable-to-great ones.

So what does it do? Marketocracy Data Services runs the Marketocracy.com website, at which individuals sign up to run hypothetical investment portfolios. The portfolios operate with a number of real-world limits: The site’s software imposes trading costs, you can only invest in domestic equity securities, ADRs or ETFs, at least 65% of any portfolio must be domestic equity, portfolios must meet SEC diversification requirements, ETFs can’t exceed a quarter of the portfolio, and so on.

There are about 65,000 Marketocracy portfolios and 55,000 portfolio managers. Marketocracy’s assumption is that a lot of those managers are actually highly-knowledgeable professionals in various fields whose backgrounds and substantial network of industry contacts allows them to grasp investment opportunities well ahead of the ever-thinner corps of Wall Street analysts. This is, by the way, the same premise the underlay the Firsthand Technology Value fund when Kam and Landis started it. They were biomed and tech insiders, respectively, with dozens of contacts in those industries who could help feed leads and vet, endorse or reject ideas for them.

The 100 portfolios with the best long-term performance are designated the Masters 100 (m100). The managers of m100 portfolios receive three sorts of rewards:

• The adulation of the remaining 55,000 investors in the community;
• The possibility of a cash award from Marketocracy; and,
• The knowledge that their portfolio is being incorporated into a real-world mutual fund.

Mr. Kam aggregates the portfolios, weeds a bit, monitors performance and has the opportunity to make alternate investments (in indexed products) if too many of the m100 slip. It has proven to be a reasonably high volatility strategy with more than commensurately high rewards.

Company link: Masters 100 Fund

July 1, 2008
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