VALUE ADDED


New Fund From a Master

Steven Goldberg

Tom Marsico's firm has launched a high-yielding fund that invests in companies of all sizes. Plus: Why Marsico is pound-the-table bullish on stocks.



During nearly two decades of managing other people's money, Tom Marsico has exhibited a Midas touch. That's reason enough to be excited about his firm's latest fund, Marsico Flexible Capital (symbol MFCFX). And it's not the only reason. The fund currently yields 5.7% before expenses.

Consider Marsico's record. Marsico Focus (MFOCX) and Marsico Growth (MGRIX), two similar funds he manages, have returned an annualized 10% and 9%, respectively, since their inception at the end of 1997 through January 18, according to Morningstar. That puts them in the top 5% among large-company growth funds. Before starting his own firm, Marsico put up sterling numbers for ten years at Janus Twenty fund.

There are other reasons to be optimistic about Marsico Flexible Capital. Launched December 29, the fund has only $17 million in assets. It invests in companies of all sizes, including midsize and small companies. The fund is a speck in the Marsico constellation, which, all told, manages $88 billion. That gives it the kind of flexibility that Marsico's other funds don't have.

Tom Marsico isn't the manager. But Cory Gilchrist, who is, works closely with Marsico and the other 15 analysts at the Denver-based firm. "I'm here about 12 hours a day, and I'm with Tom about six hours a day," Gilchrist says. "We talk to companies together, visit companies together and analyze companies together. It's a very collegial environment."

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It shows. The two other Marsico funds -- Jim Gendelman's Marsico International Opportunities (MIOFX) and Gilchrist's Marsico 21st Century (MXXIX) -- both boast superb records. The latter fund is worth talking about here. It's a mainly large-company growth fund that invests about 40% of assets in midsize and even a few small companies. Measured against all growth funds, it ranks in the top 2% over the past three years with an annualized return of 16% through January 18.

Marsico is not known for launching lots of funds. Flexible Capital came into being, Gilchrist says, because "we kept finding opportunities that didn't fit into any of our funds. We'd get off a conference call and one of us would say, 'I wish I could buy that for my personal account.'" They couldn't, fortunately, because Marsico forbids employees from owning individual stocks.

These companies weren't really value or growth companies and were often too small to make sense in the mainly large-company funds Marsico offers. Gilchrist expects the average market value of stocks in the new fund to run from about $4 billion to $15 billion. The companies tended to be complicated and have lots of individual investors as owners. Consequently, Gilchrist says, many of the stocks are mispriced. "The new fund has a very wide berth in terms of its mandate."

At the same time, Marsico and company decided the time was right to launch a fund that would afford investors a high yield, as well as inflation protection. As the baby boomers age, they're going to demand those things -- thus, demand should increase for securities with those attributes.

So, many of the stocks the fund owns have high yields. The 5.7% yield comes before deducting a 1.6% expense ratio -- no, this fund isn't cheap. In addition, 12% of the fund is in high-yielding junk bonds. The high yield and other factors should reduce volatility. That makes the fund ideal for retirees, but it's not a bad bet for other investors either. It will likely have a low correlation with other stocks funds, making it a good diversifier.

In addition to stocks with high yields, the fund frequently invests in stocks that offer inflation protection. How so? Take Transurban, one of Flexible Capital's holdings. The Australian company builds and operates "hot lane" toll roads throughout the world. The firm does everything from road construction to installing and operating toll meters that raise the rates for driving in special lanes when traffic is heavy. Transurban's contracts call for 4% to 4.5% inflation price increases. Business is booming, Gilchrist says, because of growing traffic congestion and the lack of government money to build new roadways. "They have a very large pipeline of new projects all over the developed world," including the U.S., he says.

Two other fund holdings are apartment real estate investment trusts (REITs). Equity Residential (EQR) yields 3.5%, and AvalonBay Communities (AVB) yields 2.3%. Apartments have lagged in the past decade as home ownership has increased. Consequently, not enough new apartments have been built. Rents are likely to rise in the future, Gilchrist contends.

Like all Marsico funds, this one is compact. It owns three bonds and 22 stocks. Six of the stock holdings are foreign. "Before I came to work for Tom, I ran an emerging-markets portfolio with 100 companies," Gilchrist says. "There was no way I could follow that many companies adequately, and I couldn't find that many good ideas."

Why Marsico is bullish on stocks

One of Marsico's distinguishing traits is that he and his colleagues spend a fair amount of time forecasting the economy and industry sectors -- and add value with their predictions. Many managers and others spend lots of time thinking about the big picture. But I've come across few others who seem to get it right often.

Here's the news: As the market stumbles through the start of the year, Marsico and company are pound-the-table bullish. Barring another 9/11-type terrorist attack, they see stocks, particularly growth stocks, doing well. "The underlying real economy is much more resilient than anyone thinks," Gilchrist says.

The developed economies are being run by rational people, for the most part. Gilchrist sees little to derail the boom in emerging markets, particularly China. "We see a very stable global economy with fewer booms and busts."

At the same time, good growth stocks are cheap. "We haven't seen valuations of special franchise growth companies this low relative to value equities or to bonds or to real estate since 1982," Gilchrist says. He defines special franchise companies as those with high growth rates and strong barriers against competitors in growing industries.

My bottom line: You might do well to buy some of the new fund and invest in Marsico 21st Century, as well. (Marsico Growth is already in the Kiplinger 25.) Unless Marsico loses his touch, both should prove rewarding.

Steven T. Goldberg is an investment adviser and freelance writer.




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