Beyond the Obvious

Tom Marsico is off to a hot start with his new mutual funds.

The former star manager of the Janus Twenty and Janus Growth & Income funds left Janus Funds last year to form his own money-management firm. In January he launched two funds: the Marsico Focus fund, which concentrates on roughly two dozen large stocks, and the more diversified Marsico Growth & Income fund, which currently owns 45 stocks.

Year-to-date, the Focus fund is up 28.9%, ranking it among the top 1% of large-growth-stock funds. The Growth & Income fund is up 22.3% year-to-date, placing it among the top 4% of peer funds.

Given those numbers--and Marsico’s impressive 10-year record at Janus--investors have already sent a lot of money his way. The two new funds hold about $450 million.

Marsico, 42, grew up in Denver, and started buying stocks as a teenager. He earned a bachelor’s degree in biology from the University of Colorado and an MBA from the University of Denver. After working as an analyst at brokerage Boettcher & Co. and as a pension-fund manager at Fred Alger Management, he joined Denver-based Janus Capital Management in 1987.

Marsico guided Janus Twenty to a spectacular average annualized gain of 22.4% from Jan. 31, 1988, until Aug. 11, 1997, when he quit Janus. He did nearly as well with Janus Growth & Income, which returned an average of 21.2% annually from May 31, 1991, through Aug. 11, 1997.

Marsico, based in Denver, was interviewed by Russ Wiles, a mutual fund columnist for The Times.

Times: What spurred you to branch out on your own?

Marsico: I was excited by the idea of starting my own firm. I really felt I could perform better for clients at the helm of my own ship. I wanted to form a strong team of professionals, with all sharing equity ownership in the firm. When there’s one common goal, that provides the best framework for good investment results.

Times: You focus on large-capitalization stocks, and that sector has been the clear market leader for the last five years. But some managers worry that big-name stocks are overvalued, and that their prices already reflect the companies’ near-term potential. Under the circumstances, has it been hard to put together new portfolios?

Marsico: No. We’ve been able to find attractive stocks, as can be seen in our performance. We’ve been able to find a lot of great investment ideas, like Ford Motor Co. [up 64% this year]. That goes to show you that the “efficient-market” theory doesn’t work so well with large companies.

Times: That’s an interesting view, since Wall Street tends to believe the efficient-market theorists who argue that big-name stocks are very efficiently, or accurately, priced, given that so many people are watching them.

Marsico: Not so. In fact, one real advantage of investing in large- capitalization companies is that they’re not well-followed by Wall Street. Active managers [i.e., non-index funds] own less than 10% of the typical large company, whereas they own closer to 35% or 40% of medium and small firms.

Generally, analysts don’t want to spend time figuring out what’s happening at large-capitalization companies because they assume everyone else is doing it. If you look at a large stock like General Electric, for instance, you will find that it has outperformed the market for 25 years, and over shorter time frames within that stretch. Yet it’s not widely owned by active portfolio managers.

Times: But certainly these stocks are more widely researched and have more analysts covering them.

Marsico: Actually, that’s not true either. It’s amazing how few analysts follow the major pharmaceutical companies, for example.

Besides, probably half of a research analyst’s time is spent doing merger-and-acquisition work, 25% is spent on marketing and only the final 25% on research. I mean, how do you miss a Ford Motor if you’re really doing your homework? As you might guess, we don’t use Wall Street research--we do our own.

Times: How do you do it?

Marsico: We visit companies, talk to management and try to delve deep into an organization by asking intelligent questions.

We talk to suppliers, customers, competitors and more. One way we found out that Boeing’s shipment schedules wouldn’t be met was by talking to a supplier who indicated that they weren’t seeing the order rates from Boeing that one would expect with a ramp-up in activity. [Marsico sold Boeing last year before the company officially announced its shipment problems.]

Another example is Warner-Lambert. The stock fell from about $48 to $38 or so [in December, when the firm’s diabetes drug, Rezulin, was pulled from shelves in Britain because of side effects].

We called a couple of endocrinologists and people who ran diabetic clinics. We knew how important this drug was for diabetes patients, and we didn’t feel it was justified to pull the drug because of a study that showed problems associated with liver enzymes in less than 1% of users.

Then we commissioned a study that surveyed health-maintenance organizations, general practitioners and internists about how much dosage would contribute to this problem. We didn’t think there was justification to pull the drug, so we bought the stock heavily, and we ended up being right. [The stock currently trades around $64.] We did our own research and added significant value.

Times: That’s a twist--a fund manager commissioning a study on one company’s product.

Marsico: We paid $10,000 for it.

Times: Is that the kind of thing you’re referring to in your marketing literature, where you say you’re trying to accomplish “out-of-the-box” thinking?

Marsico: Yes. The idea is to uncover information that isn’t always obvious, and then act on it.

Here’s an example: In 1994, Coca-Cola was at a point where the company had been unsuccessful in growing its international volumes. I talked to the company and was told that business had been hurt by unseasonably cold and wet weather in Germany and Japan.

So I called the ministries of trade and finance in Germany and Japan and obtained information on the trends for precipitation and temperatures over the past 20 years for Osaka, Tokyo, Munich and Frankfurt. This information did reveal that those last two years had been colder and wetter than normal.

So I bought a lot of Coca-Cola stock and watched it triple over the next three years as the weather became normal again and case volumes grew more rapidly. It was an instance when I wasn’t willing to accept what Wall Street was saying.

Times: How would you describe your basic investment themes?

Marsico: We’re looking for companies that are actively trying to grow their businesses by improving their returns on equity and assets.

We also like companies that are divesting business units that don’t fit their focus and on which the returns are subpar. If a company isn’t No. 1 or No. 2 in a product category, we’re not very interested in how they’re pursuing that business to make it larger.

Another reason I like large-capitalization companies is that they have got the marketing muscle to take their products international.

Times: Such as?

Marsico: One stock we really like is Coca-Cola Enterprises, the bottling company. Their volumes are growing at 1 1/2 times the rate Coca-Cola itself is expanding, which means they’re more successful in marketing their products than other bottlers of the same product. The reason for this is that they do more research on marketing in the geographic areas in which they operate.

For example, Americans drink about 342 servings of Coke a year. Yet the average amount of Coke that New Yorkers drink is around 142 servings, so obviously there’s a lot of room for improvement. Coca-Cola Enterprises just bought the New York franchise from a number of smaller owners. They’re conducting market studies for each major district in the city--Times Square, Midtown and so on. The research that Coca-Cola Enterprises does makes the company special and explains why they’re more successful than other franchisees.

They also have made major acquisitions in Europe, where they’re achieving substantial success. They’re the preferred vendor for Coca-Cola in pursuing further penetration of world markets. Coca-Cola is the quarterback, while Coca-Cola Enterprises is the offensive line that’s getting the job done.

Times: Which other of your holdings exemplify that global-investing theme?

Marsico: We think Citicorp possibly has the best global franchise of all. Now that they’re combining with Travelers, the firm enjoys tremendous cross-selling capabilities. There’s a lot of doubt on Wall Street that the [combined company] can increase [revenues] at a 15% rate. But knowing the two top people running the businesses--Sandy Weill and John Reed--I have full confidence they’ll attain the type of growth they’re seeking because they’ve done it before.

You have two great distribution networks, with Travelers in the insurance and brokerage businesses and Citicorp with a strong presence in banking in emerging-markets countries. As these nations improve their standards of living, financial products will be in much greater demand. Amid the Asian unrest, there has been a flight to quality, which has meant a flight to putting more money into Citicorp branches.

Times: What about investing directly in foreign stocks? Both Marsico funds can earmark about 25% of their assets for foreign issues. How much have you invested abroad so far?

Marsico: Right now, our foreign [stake] in the Focus fund is about 7.5% [all in European stocks], but we’re in the process of building up our positions.

Times: Can you disclose which stocks you’re buying?

Marsico: No. But . . . we’re really excited about the opportunities for our companies in Europe.

I’d remind you that many of the large-capitalization [U.S.] companies that we own are international in scope. So the international component is about 35% of our overall portfolio, based on sales.

Times: Obviously, with your emphasis on research, you need access to top executives of major companies. Is it easy to get that access?

Marsico: Yes, if you have something to offer to them--insight, expertise, diligence or knowledge of a particular industry, for example. And you must be a true long-term investor. If you just want to trade the stock, you can’t gain substantial access and you won’t develop a relationship. We try to find out what’s happening broadly at a company, not what next quarter’s earnings will be. We want to be long-term investors.

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Marsico Focus Fund and Marsico Growth & Income Fund

Strategy: The Focus fund seeks capital appreciation through concentrated investments in large growth companies. The Growth & Income fund invests in a more diversified portfolio of large growth companies, with a slightly greater emphasis on income.

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Year-to-date total returns: Focus fund: +28.9% Growth & Income fund: +22.3 Avg. general U.S. stock fund: +9.3 S&P; 500 stock index:

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Total assets and 5 biggest holdings as of May 15:

Focus fund: $349 million; 1. Citicorp 2. Dell Computer 3. Time Warner 4. Pfizer 5. General Electric

Growth & Income fund: $109 million; 1. Time Warner 2. Pfizer 3. Dell Computer 4. Citicorp 5. Coca-Cola Enterprises

Sales charge: None - Phone: (888) 860-8686

Min. investment: $2,500 ($1,000 for IRA)

Morningstar rating: Not rated (funds are too new)

Source: Lipper Analytical Services