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Mutual Fund Notebook
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October 12, 2000: 12:00 p.m. ET
Build your own 'virtual' fund; Winning biotechs; Some winners and losers
By Staff Writer Martine Costello
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NEW YORK (CNNfn) - Fund manager Ken Kam has been searching for the world's best biotech companies, and now he's searching for the world's best stock pickers.
Kam, manager of the Medical Specialists Fund and a founder of Firsthand Funds, has launched a new company called Marketocracy that allows any investor to open his own "virtual mutual fund."
Marketocracy will track the funds on its site for three years and then hire the people with the top performing funds as portfolio managers at Marketocracy Capital Management, Kam said.
"The people who are worth listening to are the ones who have demonstrated they have a good track record," Kam said.
Also in this column: Ken Kam talks about biotech stocks; A question about capital gains on mutual funds; and some winners and losers on a day when the stock market struggled.
Marketocracy launched on July 17, and about 14,500 people have designed their own funds, he said. As with "real" mutual funds, Marketocracy calculates a net asset value for each fund at the end of the day.
The company is working from the idea that only about 20 percent of professional money managers beat the S&P 500 every year, and there are millions of individual investors who may be able to deliver top returns.
The name, Marketocracy, stems from the word "meritocracy," where people are judged on their ability more than anything else.
People can start a fund with a fictional $1 million, and then monitor or change the fund using the tools on the Marketocracy site.
"Nobody knows what's going to be the best strategy," Kam said.
The company will track the funds quarter by quarter and at the end of three years offer jobs to the best stock pickers and build a new family of mutual funds. Kam said there will be at least one fund, and most likely more than one.
The best stock pickers will be able to take advantage of the volatility in recent trading sessions to buy stocks at good prices, he said.
Kam said a falling market is the best time to buy -- and that the best managers aren't afraid to follow their convictions when numbers are turning red. He disagreed the market is at a crossroad, shifting from bullish to bearish.
"Every year the market has cycles like this," Kam said. "Every year, the market has wild optimism and wild pessimism."
A great year for biotechs
Kam delivered top returns at Firsthand Funds with co-founder Kevin Landis. Many of the funds have soared, like Firsthand Technology Leaders, which earned 152.6 percent in 1999. The two parted amicably when he left Firsthand to go out on his own.
The Medical Specialists Fund, with $10 million in assets, is up 23.1 percent year to date as of Sept. 30, according to fund-tracker Morningstar. Morningstar calls it the "Evil Knievel of health-care funds."
Kam said the fund has been up as much as 40 percent and down as much as 1 percent.
Check your mutual funds on CNNfn.com.
"It's been a volatile year," Kam said. "But the trend is still up and there's a lot more to go. We're just at the beginning of the revolution. We're trying to identify the elephants of the industry and we're trying to buy the elephants."
Among his favorite stocks are Affymetrix (AFFX: Research, Estimates), which is making gene chips that will help diagnose whether a person is genetically predisposed to get a disease and how to best treat it.
"It will become the Intel of this industry," Kam said of the stock.
He also likes Celera Genomics (CRA: Research, Estimates), which announced it has mapped virtually all of the genes of the human body.
Question of the week: Capital gains on funds
Figuring out your tax liability with mutual funds can be a mind-numbing experience. But what happens with funds you own for years in your 401(k)? A reader wrote CNNfn.com recently with the following question.
Question: How are the capital gains handled in a 401(k)? I have owned a number of Fidelity funds for retirement since 1980. When I retire and begin to take distributions, will I have to show and track the amount I bought each share for, as well as for each of the trades I made from one fund to another? How are taxes figured for the gains I have received on these funds?
Dennis Coleman, a principal with Unifi Network, a division of PricewaterhouseCoopers, said the answer is simple. When you withdraw money from a qualified plan like a 401(k) you don't pay capital gains, you'll just pay state and federal income tax. State income tax rules vary, and federal income tax is up to 39.6 percent.
"The only time there will be an issue with capital gains is when you have investments in stock," Coleman said.
Click here to learn how to make sense of mutual fund returns.
That's why in some cases it might be better to own funds with big gains outside a 401(k), because long-term capital gains are 20 percent, so you'll pay less than income tax rates.
"In some circumstances you can do better holding the funds outside a qualified plan," Coleman said.
Some winners and losers
Two fund categories -- one winning this year, the other losing -- swapped places on the performance charts for the week ending Oct. 6, according to Morningstar.
Japan stock funds, under water all year, were the best performers for the week, with average returns of 0.81 percent.
At the top of the list was Warburg Pincus Advisor Japan Small Company Fund, up 2.66 percent; Matthews Japan Fund, up 2.49 percent; and Fidelity Japan Fund, up 2.23 percent.
But small growth funds, top performers this year, had a terrible week with average losses of 7.49 percent. The category was the second-worst performer behind tech funds.
Within small growth, the top performers were Allegheny/Veredus Aggressive Growth, down 1.95 percent for the week; Calvert New Vision Small Cap, down 2.28 percent; and Meridian, off 2.39 percent. 
-- Click here to e-mail your mutual fund questions to Martine Costello
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