Robert Markman, president of Markman Capital in Minneapolis, used to be a true believer in hedging your bets by putting some money in growth stocks, some into emerging markets, some into small cap, some into international.
Now, he thinks it’s a dumb idea.
About 1 1/2 years ago he realized that “slicing and dicing a portfolio” didn’t work. Investors didn’t make nearly as much as they could have if they mainly invested in large-company growth stocks.
Markman isn’t dumping every dime into Standard & Poor’s 500 index funds now. But he’s no longer telling people to diversify by buying emerging market funds, international funds or real estate investment trusts.
“My strategy is what I call front-running the S&P,” said Markman, who manages $460 million in assets for high net-worth individuals and others. “I don’t want to invest in all companies in the S&P 500,” he said. Instead, he wants to own the best-performing companies in the S&P 500.
Markman now recommends four mutual funds: Marsico Focus Funds, Janus Twenty, White Oak Growth Stock fund and Rydex OTC.
All are heavily concentrated, mega-cap growth funds. So much for diversification.
White Oak Growth (888-462-5386, minimum investment: $2,000) is a no-load fund that invests in about 25 stocks in three industries: technology, financial service and health care. Last year’s return was 39.5 percent; the year-to-date return through June 10 was 10.9 percent.
Rydex OTC (800-820-0888; minimum investment: $25,000 in its fund family) is a no-load fund that tracks the Nasdaq 100. It holds about 80 stocks. About 80 percent of the holdings are technology stocks. The largest holdings include Microsoft, Intel, Cisco Systems, MCI Worldcom, Dell Computer and Sun Microsystems.
“You’re basically buying the technology body builders,” Markman said.
Last year’s return on Rydex OTC was 86.5 percent; the year-to-date return through June 10 was 142 percent.
Janus Twenty, now closed to new investors, is invested in 32 stocks. Large holdings include America Online, Microsoft and Dell Computer.
Last year’s return was 73.4 percent; the year-to-date return through June 10 was 11.3 percent
The Marsico Focus Fund (888-860-8686; minimum investment $2,500) is invested in 31 stocks. The largest holdings include airlines, automotive and diversified financial companies. Last year’s return was 51.3 percent; the year-to-date return through June 10 was 7.7 percent.
Picking up any pattern here? Markman said he’s betting that technology will continue to be a dominant growth area for the next five years or so. He’s also betting that large U.S. companies will continue to lead the market.
So, he asks, why bother investing in small-company stocks?
“I don’t want to find the next Microsoft. I’ve got Microsoft,” Markman said. “If you’re not concerned about week-to-week, quarter-to-quarter volatility, why diversify?”
Markman’s theory is unusual, but he isn’t a lone voice in the wilderness.
A few other financial advisers are questioning whether diversification is a smart strategy.
Some predict that large-cap stocks are likely to post the best gains for the next 10 years. So they’re recommending that investors hold onto the large-cap favorites and ignore smallcompany stocks.
Some words of warning: The new theory certainly sounds good, especially after you’ve seen your so-called diversified portfolio just sit there.
But if everybody is so smart now, why didn’t they share this idea with us five years ago before this large-cap bull market roared into town?
THE PERILS OF FOLLOWING A TREND
What happens if you jump on a trend and then don’t know when to jump out?
Just take a look at what would have happened if you put $10,000 in the Tem-pleton Developing Markets mutual fund in early 1993.
The first year, you would have struck it rich when the fund posted a return of more than 74 percent in 1993. Your $10,000 would have grown to more than $17,400, before expenses and taxes, in one year.
But what would have happened if you held on for six years?
You might think, given the rise of the Dow Jones industrial average and all, that you would have easily doubled your money. The Dow, after all, has more than tripled since early 1993.
But you’d be wrong. Your $10,000 was worth roughly $18,200 by the end of May 1999, according to Morningstar Inc. Your average annualized return was 9.81 percent.
The fund lost money in two of the five years. It posted a 22.5 percent gain in 1996. But it lost 19 percent in 1998. It did start posting double-digit gains once again in early 1999.
How much money would you have had if you put your $10,000 in an S&P 500 index fund? Try more than $34,400. The average annual return was 21 percent.
Bottom line: Don’t chase trends in the hopes of latching onto incredible gains.
