The money manager version of 'Moneyball'

Oct. 18, 2011 - PRLog -- The money manager version of 'Moneyball'

By Amy Feldman

NEW YORK, Oct 17 (REUTERS) -In "Moneyball," the Oakland A's general manager Billy Beane puts together a baseball team on a budget by relying on computer-generated analysis to draft his players.

For the past decade, Ken Kam, founder of the Marketocracy family of mutual funds and online investing site marketocracy.com, has been pursuing a similarly quantitative, and unconventional, approach to finding money managers. The data on the best of his investors show he may be on to something.

Instead of relying on smarts, education or work history - as most funds do - Kam's Marketocracy upended the model by testing candidates with hypothetical portfolios that they managed online. Anyone could try their hand at the model portfolios, just for fun, and some 40,000 regular investors have.

What makes it interesting is that Kam has then created separately managed accounts (minimum $100,000) of the real-time investments of the best of those investors. So far, just 16 have qualified, although not all are actively managing real portfolios right now. The company runs a mutual fund, the Marketocracy: Masters 100 Fund (MOFQX.O), as well as separately managed accounts (SMAs) with a $100,000 minimum investment, like the SWAN (for Sleep Well at Night) and ART (for Absolute Return Team).(See link.reuters.com/zec54s)

"Investing talent is exceptionally rare, and it's been very difficult for anybody to find," says Kam, who had become disillusioned with traditional money management after working at once-high-flying Firsthand Funds in the 1990s stock market boom.

Marketocracy's assets under management total just $25 million, but the performance numbers, which Kam has begun vetting in order to market the company, are intriguing. He released data to Reuters on the top three investors - Jack Weyland, Randy McDuff, and Justin Uyehara - who among them have some $6 million in assets. Year-to-date (through Aug. 31), investors in Weyland's composite earned 19.6 percent after fees, while those in Uyehara's got 28.6 percent, and those in McDuff's received 9.8 percent, according to Marketocracy, in each case far surpassing the S&P 500 index's 1.8 percent drop.

The model portfolios show a far longer history: From his start in July 2002 through Oct. 10, Weyland, a retired military man with a penchant for biotech stocks, for example, posted an average annualized return of 34.3 percent, vs. the index's 6 percent. That's the kind of performance that makes you sit up bolt straight with a disbelieving look on your face. "When I show people the numbers, they have the same reaction: That's crazy, but that's what you're looking for," Kam says.

To find his investors, Kam culls through the tens of thousands of people in the Marketocracy database. To rate an interview with him, an investor needs to have run a model portfolio that's outperformed the market by at least 1,000 basis points a year for five years. "It's a high bar, but it means I don't waste my time on people who cannot perform," says Kam, noting that he would not have qualified for such an interview when he started the company.

Uyehara, a 41-year-old engineer with the California Department of Transportation, certainly isn't the type of person you'd see running money for a major mutual fund company. He's a frequent trader, with turnover well over 3,000 percent. He loves the process and has been doing it with his own money on the side for years. Lately, he's been using inverse ETFs to short the market. "I don't really have a strategy," Uyehara says. "I just do whatever I can to make money. If I see a trend where I think I can take advantage of the situation, I will exploit it."

Uyehara figures that he works about six hours a day managing his own portfolio and the model Marketocracy one (starting at 5 a.m. before he goes to his day job at Caltrans). Since he started running the model portfolio in January 2003, it's returned 32.2 percent annualized, far surpassing the S&P 500 index's 5.9 percent annualized return during that period.

Can an unknown investor like Weyland or Uyehara, who isn't doing this as a full-time job, continue to post those types of stellar returns long-term? And what happens if they fail, as has happened to many a better-known investor?

Here's where the invisible hand of Marketocracy comes in: Kam will switch investors - replacing the existing one with someone else vetted and on the bench - if the person he's using seems to have lost his touch. The key, as with the Oakland As strategy, isn't in any one person, but in using the data to create the best team. "We're just scratching the surface of the type of analysis that should be applied to everybody on the team," Kam says.

That process has encountered some bumps in the road. Kam's first investment vehicle, Marketocracy Masters 100 Fund has lagged the market: It's up just 7 percent for the past three years, trailing the S&P 500's 12.4 percent rise, even before accounting for fees of 1.8 percent, according to Morningstar. Kam says he's been rejiggering the fund's strategy, but is constrained by its prospectus and is loathe to close it down because its original investors include a number of Hawaiian pineapple pickers he'd known since childhood, and he wants to do the right thing by them. He's also moved the company's strategy away from the fund, with its broad universe of 100 stockpickers, and to the more-concentrated SMAs.

SMA clients can either invest directly with one investor - such as Uyehara, Weyland or McDuff - or in one of its composite portfolios, SWAN (for Sleep Well at Night) and ART (for Absolute Return Team). Both of the broader portfolios have outperformed the S&P 500 index since the firm began tracking their results, but both have struggled in recent months. SWAN, for example, is up an annualized 18.8 percent since May 2003, vs. 4.4 percent for the S&P 500, but has fallen 13.7 percent so far this year, vs. the index's 8.7 percent decline.

Jarrett Lilien, former president of E*Trade Financial Corp (ETFC.O). and now managing partner of private-equity firm Bendigo Partners, argues that Marketocracy, like E*Trade before it, empowers retail investors and demystifies the investing process. "It takes a number of things the Internet does best, and applies them to active management," he says.

Betting on a new strategy isn't for everyone, but Kam figures that assets will follow results. Says Kam: "I feel better about the money we have now than I did at Firsthand when we had billions." (Editing by Lauren Young and Beth Gladstone)

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There is no other enterprise like Marketocracy Inc. Only Marketocracy combines the research and tracking of Marketocracy Data Services analysts with the real investments guided by these models at Marketocracy Capital Management LLC, an S.E.C. registered investment advisor.