"We're at the Bottom of the Cycle"
Daily Briefing: INVESTING Q&A
BusinessWeek Online
Monday June 24, 2002
Growth-stock manager Thomas F. Marsico's timing is just about impeccable. A former portfolio manager for the once white-hot Janus Twenty Fund, Marsico wrote the book on concentrated investing. The rationale for put-your-eggs-in-one-big-basket investing was that top-notch research would lead the way to a select number of companies. A diversified fund would only dilute the performance of winning stock picks.
The rewards could be high, but so were the risks. Marsico managed the balancing act well for almost a decade. From 1988 to 1997, the fund gained investors an average of 21.4% a year. Then, after establishing one of the best records for large-cap growth money-management, Marsico struck out on his own and launched Marsico Capital Management, across town in Denver from his ex-employer and new rival, Janus Funds.
Marsico's firm debuted near the peak of investors' general love affair with large U.S. companies, and, in particular, anything that had to do with technology. That infatuation would ultimately spell doom for Janus' tech-centric growth shop, which feasted heavily on the likes of Cisco, Intel, Microsoft, and WorldCom. The firm has been suffering, showing bottom-of-the-barrel performance since the bear market began in 2000, as well as outflows from disenchanted investors. Assets have been cut in half, to $160 billion.
GROWTH LEADER. By contrast, the 50-stock, $1.5 billion Marsico Growth Fund is up a cumulative 49% since inception. It's 3.53% increase this year through June 17 ranks it the No. 1 growth fund. Meanwhile, 816 large-cap growth funds in the category have lost an average of 14% so far this year.
The $684 million Marsico Focused Fund, with 27 stocks, has risen 58% since its inception, and is up 1.21% this year -- again edging out the competition. Morningstar analyst Gregg Wolper calls Marsico's record over the past 12 months especially impressive. The funds have outperformed more than 90% of their peers and trounced the S&P 500-stock index, down 14% in that same time.
Recently, Marsico spoke with BusinessWeek's Mara Der Hovanesian about the prospects for a recovery in the stock market, CEO compensation, and some of his favorite stocks. Edited excerpts from their conversation follow:
Q: The numbers are pointing to a modest recovery in the economy. Is this what you'd expect?
A: We just finished unprecedented growth in the economy and in productivity, brought about by very, very large earnings gains over the past five or six years. This was as much the result of innovations in technology as it was the stability in interest rates. [In the future], you will see that inventory levels in general will be lower, we'll have longer periods of growth, and we'll show fewer recessionary declines.
In general, our economic house is in much better shape than it has been for a long time.
Q: But then why is the market so up and down from day to day?
A: The market is going through a period where people are questioning the durability of the recovery. And I think that's the result of the lack of capital expenditures as yet. The overspending that was done in the technology and telecom areas has hurt the confidence of business leaders to go out and spend some more.
Some areas of the economy and the market are still benefiting from low interest rates -- such as the automobile and housing industries. But, eventually we'll see the improvement in economic conditions run through the rest of the market. We're at the bottom of the cycle.
I also think there's been a general skepticism given the Enron and Tyco situations and the valuations in the tech sector. Those are the major factors.
Q: How is it that you sidestepped some of the biggest blowups in the large-cap arena?
A: We missed Enron and Tyco and the dot-com businesses. I think we missed them because we didn't own a big position to begin with. The more work we did on Tyco, for instance, the less appealing we felt the business was.
There wasn't a lot of rationale for the moves it was making. CIT Financial was a very bad acquisition, because I don't consider it to be a dominant financial-services company or the best lender to the best companies.
Enron was a much easier test. Its trading businesses were so profitable that you would have thought that more capital would have come into the area and driven down returns.
So, we talked to their competitors and asked them why they weren't making these sorts of energy trades, and they told us they were scratching their heads, trying to compete, and they didn't understand how Enron was so profitable. And these aren't dumb guys. We figured something just had to be wrong there.
We met with the executives a couple of times, and I didn't feel comfortable with the answers I was getting. It didn't add up.
Q: What's your view on the scandals now plaguing Corporate America?
A: I think in general that business executives have been rewarded too handsomely for the prosperity that has taken place because of innovation in technology and from the decline in interest rates.... The growth was not accomplished at the hand of corporate management.
The bull market took all stocks up, and now we've got a competitive environment and we're finding out who the better managements are. We're not just assessing them by the stock's [performance].
Q: Does Wall Street deserve the lashing it's getting from investors?
A: Wall Street analysts' recommendations have never been a great source of ideas.... You have to get information yourself, evaluate the companies and what positions they have in the market for what they are, and come up with your own conclusions.
Q: How are money managers dealing with the issue of accounting shenanigans?
A: Portfolio managers are telling companies that the value of earnings is tainted because of certain accounting practices. And if a company is going to go offshore and not have a tax rate, then I'm going to compare it with a company that does have a tax rate, and see what its earnings are. I'm going to reduce the multiple that I'm willing to pay for those earnings.
Q: You own hardly any tech stocks. Why?
A: People who have not been in the markets for a long period of time did not understand that the technology industry is a cyclical industry. They took the growth as something that was secular -- that would go on for a long period of time -- and [thought] that in this new world, the business cycle was dead.
First, you got rid of the mainframe and the minicomputers with specialty word processors, and then in the next cycle there were desktop computers, and now we've gone through the BlackBerries and such. For now, the major disruptive technologies have run their course, in my belief.
Q: What are some of your current favorite stocks?
A: One of our biggest holdings is in Tenet Healthcare. We think that health care is benefiting from a tightening in the supply of available hospital beds. Also, there are three major areas -- neurology, orthopedics, and cardiovascular disease -- where the [profitability] of those businesses are higher. They've also used cash flow to pay down debt, and the stocks are trading at a low multiple of less than 18 times calendar 2003 earnings.
I'm also bullish on defense. We started buying these stocks more than a year ago -- before the September 11 attacks. What we were seeing was that maintenance represented 38% of the total defense budget, [so we believed equipment would be replaced rather than repaired].
We believed that the procurement budget would start to grow, and also that the type of product brought on-line would change.... We need a whole new type of Air Force and defense system, and Lockheed Martin epitomizes the new system..... We've also got General Dynamics in the portfolio. |
