Marsico Fund Aims For Stocks With Catalysts And Moats

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Love those protective moats.

Columbia Focused Equities Fund aims for quality growth companies whose use of technology creates a protective moat around them.

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.

IBD: You like technology's impact more than you like tech companies, right?

Marsico: 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.

IBD: You've also said you look for companies with a catalyst. How does that work?

Marsico: 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. ( TJX ) 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.

IBD: How often do you look for turnaround situations sparked by a catalyst?

Marsico: Sometimes, as far as change is concerned, we look for a life-cycle-change company. We have two financial stocks like that:Citigroup ( C ) andAIG ( AIG ).

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 various markets.

IBD: Why is the fund doing better this year?

Witter: 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.

IBD: Tom, how do you and Coralie divide duties? Do you follow stocks in different sectors? Or do you backstop each other?

Marsico: 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 process.

IBD: You recently opened a stake inFacebook ( FB ), whose earnings per share growth jumped to 108% in the most recent quarter from 0% two quarters prior. What's its driver?

James Marsico: 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.

IBD: Which of its acquisitions do you like?

James Marsico: 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.

IBD: Facebook andGoogle 's ( GOOG ) efforts are aimed at boosting advertising revenue.

Witter: 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.

IBD: Have you increased your stake inGreen Mountain Coffee Roasters (GMCR) because of its new products?

Marsico: They're one of our smallest positions. Their new CEO came from Coke. He has a good understanding of how to manage a global beverage product.

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 Capital.

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 Starbucks'.

IBD: What about their upcoming new brewing machines for specialty coffees?

Witter: 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 efficiencies.

IBD: Speaking of Starbucks, what's the thesis there?

Marsico: 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.

IBD: You've trimmed yourBiogen Idec (BIIB) stake. Is that for risk management, or are you cooling on the stock?

Machock: There's no change in our view. As share price increases, we trim positions.

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 new drug.

IBD: Chipotle Mexican Grill (CMG) gapped up. It beat Q3 views. What's your thesis?

Witter: 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 labor efficiency.

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.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Mutual Funds

Referenced Stocks: AIG , C , FB , GOOG , TJX

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