Love those protective moats.
Columbia Focused Equities Fund aims for quality growth
companies whose use of technology creates a protective moat
That investment approach is paying off this year for the $1.2
billion fund. Columbia Focused Equities is having its best year
since 2009. The fund, which is the sister portfolio of no-load
Marsico Focus , was up 28.04% this year through Oct. 31.
That topped 77% of the fund's large-cap growth peers tracked
by Morningstar Inc.
That's also far better than the fund's five-year average
annual gain of 14.43%, which topped just 29% of its rivals.
Thomas Marsico, 58, and 42-year-old co-manager Coralie Witter
talked with IBD from their offices in Denver. They were joined by
analysts Dr. Matt Norkunas, John Machock, Kevin Boone and James
Marsico, Tom's son.
You like technology's impact more than you like tech companies,
The theme of the portfolio and the theme we look for in growth
markets is innovation and technology.
But we usually are not direct investors in technology because
they have short product cycles.
And pricing around those products goes down in line with
Moore's Law (which says that microchip performance generally
doubles about every two years) or sometimes much deeper.
So you have to sell more and more of the product just to stay
even. Instead, we like companies that use innovative technology
to create moats around their businesses.
You've also said you look for companies with a catalyst. How does
Generally, we are looking for strong companies. Their catalyst
might be superior execution of a business plan.
Take the retail concept area. We've ownedTJX Cos. (
) for a long time. They built a moat by providing quality goods
at lower prices. That's a moat because they have 30,000 points of
touch with various suppliers, to find the best branded products
at low prices. That's a difficult model to build. And they're
expanding into Europe.
How often do you look for turnaround situations sparked by a
Sometimes, as far as change is concerned, we look for a
life-cycle-change company. We have two financial stocks like
) andAIG (
Both came through the financial crisis with a lot of
restructuring that needed to be done. Both were trading at large
discounts to book value.
But the brands they established over decades were still
intact, and the book value of assets held on their balance sheets
was greater than what was reflected on their stock prices. With
better management teams, they have turned around. The catalysts
were positive changes in management, resetting their cost
structures, and re-establishment of the financial markets after
the turmoil of the crisis in 2008.
But the main focus of the portfolio is imbedded in unit growth
companies. Mostly as a result of the application of technology to
Why is the fund doing better this year?
With less volatility around policy risk, we're in an environment
where stock picking is now being rewarded again. That had not
been true for years. And that lends itself to active management,
such as we do.
Combined with low inflation, that favors the quality growth
names where we do the bulk of our research.
Tom, how do you and Coralie divide duties? Do you follow stocks
in different sectors? Or do you backstop each other?
Our work is collaborative. We communicate multiple times a day.
We don't follow different sectors. We come to agreement on names.
We have dialogue and debate to increase our overall confidence
and conviction in names we buy. That makes for a healthy
You recently opened a stake inFacebook (
), whose earnings per share growth jumped to 108% in the most
recent quarter from 0% two quarters prior. What's its driver?
We try to find companies that are aggressively going after
specific trends in the technology space. And consumption of
content, which is moving from desktop to mobile devices, is where
we seek to target certain opportunities.
One thing that's unique about Facebook is that mobile revenue
growth has accelerated meaningfully as people move from desktop
to mobile consumption.
When the company went public (May 18, 2012), they had zero
realized revenue from those mobile-device users. Now, in the most
recent quarter, mobile revenue accounted for 41% of their total
revenue base. So the company has solved a problem in 12 to 18
months and started capturing and unlocking value in their user
base accessing the platform from a mobile device.
Which of its acquisitions do you like?
Facebook made a $1 billion investment in Instagram about a year
ago. Recently some people saw that as a signal that user
engagement was slowing on Facebook. Now it looks as if Instagram
is taking disproportionate share away from other online websites
and platforms. And the current valuation of about $10 billion on
the Instagram platform shows significant return on investment,
giving us confidence in the company's ability to understand the
marketplace and recognize trends and where viewers are going.
Facebook andGoogle 's (
) efforts are aimed at boosting advertising revenue.
To tie those two ideas into themes that we're highlighting today,
those two companies are competing in a large global market that
is growing. They are taking share through the shift to online
advertising, where consumer behavior is shifting. Both companies
benefit from a network effect that their business models enjoy.
They've created products that increase in value the more that
people use it. That is the moat around their businesses. The
opportunity set around both companies is tremendous.
Google has less than 10% of the global advertising market and
is growing at a 20% compound annual rate. Facebook, which is
younger and smaller, is growing around a 50% pace this year. They
are share gainers using investments they made to stay ahead of
the competition and gain share in growing markets.
Have you increased your stake inGreen Mountain Coffee Roasters
(GMCR) because of its new products?
They're one of our smallest positions. Their new CEO came from
Coke. He has a good understanding of how to manage a global
Green Mountain has 90% of the K-Cup market. They just signed
Target and Costco. But the current debate around this company is
whether private label competitors that make coffee will gather
more share. And there's interest in the short community,
highlighted by David Einhorn's position at Greenlight
But we believe Green Mountain's new management is executing
well. They're finding new customers for their K-Cups, they have a
relationship withStarbucks (SBUX), and we don't think (Starbucks'
Chairman, President and CEO) Howard Schultz would have a
relationship if he didn't think they had the best product.
Starbucks tried to develop their own K-Cup, but then deferred to
Green Mountain, which will have a new product next year (soup in
partnership with Campbell's Soup). They've also done a good job
of getting into stores similar to but smaller than
What about their upcoming new brewing machines for specialty
What got us into the stock is the big picture. Single-serve is
taking share from ground coffee. And 2014 should see acceleration
in that trend when the company comes out with a new brewer and
demonstrates the benefits of their manufacturing
Speaking of Starbucks, what's the thesis there?
They have seven or eight drivers. They have a number of
initiatives. Their same-store sales growth is accelerating. They
are executing better within stores. Their service is getting
faster. They keep coming out with new beverage innovations like
pumpkin spice latte around the holidays. And they've improved
their food, which increases the attachment of food to beverage
items. They acquired a company called La Boulange, which takes
their food quality up.
On top of that, these guys are the poster boys of using
Facebook and other digital media to drive more business into
their stores. That's looped in with a Starbucks loyalty card. It
started as a physical card, now it's an app.
The third leg of their growth is in the consumer packaged
goods area. They're getting close to the point where anything
sold in the store belongs to Starbucks. And they can use their
thousands of stores as a launch platform for new products.
You've trimmed yourBiogen Idec (BIIB) stake. Is that for risk
management, or are you cooling on the stock?
There's no change in our view. As share price increases, we trim
They've come up with a new (treatment) molecule for multiple
sclerosis. Other (treatments) didn't cure the disease. They just
slowed its progression. And you had to take a large injection in
the leg daily.
Biogen's new (treatment) is an oral drug, so that improves
compliance. It also avoids some of the side effects of one of the
other approaches. Their new treatment has captured 12.5% of the
total MS market. And 60% to 70% of new patients are using this
Chipotle Mexican Grill (CMG) gapped up. It beat Q3 views. What's
It's one of the most unique restaurant concepts created in some
time. Even at peak hours, lines of customers move quickly. They
assemble your bowl or burrito quickly. They can do it because of
And they offer high-quality items at reasonable prices,
earning record margins. They can quintuple their store base in
the U.S., so they have a highly visible length of opportunity.
They're also opening stores in Europe. They're applying their
labor efficiency to their ShopHouse Southeast Asian concept.