Q: What is the history and mission of the fund and how the fund differs from its peers?
The Marsico International Opportunities Fund was launched on June 30, 2000 with the mission of concentrated long-term growth investing. Currently, assets under management are $64 million.
We search worldwide for high-growth companies with big market potential by focusing on the quality of a company, its management team, and business model. Growth stories are allowed to play out over a two- to five-year timeframe, and we typically avoid low-growth, cyclical industries like financials, energy, and industrials.
Q: How does the fund differ from its peers?
Compared to other international growth funds, some of which have 100 to 200 stocks and are quite diversified, we run a concentrated portfolio of 35 to 45 stocks with high active share. Additionally, our investing approach is theme-based; the fund’s many themes vary from emerging markets, leisure travel, electronic payments, to the new internet retail distribution model.
Q: What core beliefs drive your investment philosophy?
Our philosophy focuses on the long term and we don’t get bogged down by a hiccup or quarterly miss. My personal goals are for a stock to double every four to five years and have an annual return of 15% to 18%.
In general, we prefer stories based on highly recurring or subscription-based services and avoid those driven by products – so there’s never a worry about whether a new product will hit or miss. Also, recurring models have lower volatility of earnings and the market gives them a higher multiple over time, which we’ve seen across many of our holdings.
When investing internationally, management quality is of great importance because of the wide discrepancies around the world in how people are trained and present their numbers. Before investing in a company, we like to meet with the people at its helm to determine whether we’re comfortable with them.
Q: What is your investment process?
From a universe of 10,000 global securities, we pick only a handful of names and the process used to find them begins with themes instead of screens. Looking forward over the next two to five years, we try to identify themes where significant growth will play out, then use intensive research to find great companies that fit into these themes.
Typically, this includes a lot of legwork, global travel, and meeting with many companies. However, figuring out which names will become winners generally involves less talking to companies and more talking to industry players and company competitors. Actually, our best ideas have come from stocks we own – we generate new ideas by moving up and down their value chains.
We also have a rigorous valuation approach with multiple models of cash flow and relative value to constantly monitor companies on our watch list because only some of them will have attractive valuations at a given point. Laying the valuation framework over our theme-based list provides 35 to 45 names.
Stocks tend to stay in the portfolio for a long time, but position sizes change based on how they’ve expressed themselves and their upside/downside. As investors, we are quite risk-reward based and thus are more concerned with limiting the downside. For us, a good time to start investing is when we’re comfortable that there is two times the upside versus the downside. In other words, when we see an upside/downside metric of 2:1.
Q: Can you describe your research process with an example?
An example of a company having a recurring model with high margins, low volatility of earnings, and an open-ended growth opportunity is InterXion Holding NV, an idea that was referred to us by one of our existing names.
Based in the Netherlands, InterXion offers cloud-neutral colocation data center services in Europe. Its primary business is providing the space, power, cooling, and environment needed by its customers to house their information technology infrastructures.
The company was suggested to us by Equinix, Inc., a U.S. data center company we had a big position in. Based on its recommendation, we talked to and met with InterXion and became comfortable with the management team.
The growth of colocation data centers is a theme we’ve already seen play out in the U.S. and which lags in Europe by about two-to-three years. Before cloud computing, big enterprises built their own data centers – and spent large portions of capital expenditure – to stay on top of technology trends, even though this likely wasn’t their core mission. Moving to the cloud is more capital efficient and cost effective for them over the long run; they can pool resources and shift a non-core function to a specialist.
After building a model, we discovered the company was growing 10% to 15% top line with a 50% EBITDA margin. Although there is always an execution risk by management, the risks here are more economic and we didn’t see much quarterly variability in its numbers. So far InterXion has put up a long string of quarters of sequential growth and is positioned to be a key infrastructure provider in Europe.
We got into InterXion at a perfect time. It wasn’t yet a large cap – it was an under-owned and underfollowed name then. The company was trading at a significant discount at around 12 times EBITDA. Though it now trades at 16 times, its U.S. peers are trading at 18 to 20 times.
There are differences in tax treatment and other things preventing it from being perfectly on par with the U.S., but we believe the valuation offered significant downside protection and InterXion is now one of the largest positions in the fund.
Q: Can you cite an example from another industry?
Hargreaves Lansdown PLC is a leading online reseller of mutual funds in the U.K. The company has a nice growth rate, is the top brand in the U.K., and has a strong growth story.
In the U.K., the trend of individuals moving their portfolios away from being offline and with a broker to being online and self-directed is well behind that of the U.S. Also, a regulatory change is making it harder for advisors in the U.K. to earn the fees they once earned, so many are shutting their doors, which is naturally pushing people to platforms like Hargreaves’.
Additionally, the government has changed tax rules regarding a type of individual retirement plan – the equivalent of our 401(k) – which effectively promote people to put money into them. So here again in retirement funds, we see the theme toward investments becoming self-directed and self-contributed.
Another theme we identified is the company’s low-cost, internet-enabled model; people are attracted to Hargreaves by its lower fees. Because it is now the largest player in the space, the company is seeing high incremental returns.
Q: What is your portfolio construction process?
We run a concentrated fund of 35 to 45 stocks using theme-based investing. There are no set rules regarding industry or country weights but if the portfolio becomes too heavy in any one, we try to manage that. The portfolio isn’t subject to minimum or maximum position sizes, either. Currently, our largest position is about 4.6%; previously it’s gone up to 5%.
Our process is iterative: A position starts somewhere between 50 and 100 basis points, then we watch it. As we grow in comfort and our model becomes more and more robust, a position size tends to increase. It can take from three months to a year to fully build a position, and this is tied to our view of its valuation, price target, and upside/downside.
Because this is a growth fund our weightings vary somewhat versus the benchmark, the MSCI EAFE Index, but we remain diverse by geography and sector. Currently, we are underweight energy and materials, and overweight technology, some consumer discretionary sectors, and have pretty sizeable weights in China and other emerging markets. However, emerging markets do tend to stay on the smaller side; they’ll never be 30% of the fund.
During construction, I’m not terribly concerned with individual stock volatility. However, I try hard to minimize the portfolio’s volatility, looking for companies that will work in all economic and inflationary environments. Because they are all growth stories that we believe will double in four to five years this leads to a naturally diverse fund.
Although we are a bottom-up investment firm, as the co-international portfolio manager my stock selection is influenced by a top-down macro overlay. Especially when considering entry and exit points, I think about emerging economies and central bank policies and what those could mean for GDP growth and interest rates.
Currency isn’t a big concern, though. Over the long run kind, it tends to net out to zero. However, it may affect our timing and position size – for example, should the Yen or the Euro be strengthening or weakening – but never to a great extent.
Q: Do you invest only outside the U.S.?
Typically, our exposure to U.S. companies is limited. Of the portfolio’s holdings at any given time, typically only two or three might be domestic and those must have an international growth angle in order for us to invest. For example, one of our current holdings is Vantiv Inc., a U.S.-based provider of payment processing technology. The company is acquiring a large European payments company, giving it a global growth story.
We do invest in both American Depository Receipts (ADRs) and in local markets, depending on where we think there’s more liquidity and where we can get the best execution. When all else is equal, we like ADRs slightly better, simply because they trade on U.S. exchanges and we own both.
Q: What drives your sell discipline?
We constantly add or trim names based on valuation, but outright sells are generally triggered by just a few things. It’s our belief that businesses are generally good at managing themselves over a three-year period, so that’s when we expect to see some type of innovation or change of strategy and real value accreting to the stock – and that’s a good time to sell a winner.
When we do, it’s usually because our thesis hasn’t played out; perhaps a company isn’t executing in the way we expected or its business model has changed. If we see either of these things within six months to a year, we would sell and move on to a better idea.
Q: How do you define and manage risk?
My goal is to minimize both portfolio volatility and loss, rather than overreact to headlines or get too concentrated in any one country or sector. The deep dive we do helps to ensure we haven’t missed something about a company that could lead to permanent loss of capital.
This is the very reason we won’t get involved with a company when we aren’t comfortable with its management team – their actions could impair our capital. Finally, I keep an eye on the portfolio’s Sharpe Ratio and try to maximize the return per unit of risk.
