The Marsico Flexible Capital Fund was, in part, born of necessity
The Marsico Flexible Capital Fund was, in part, born of necessity.
In late 2006, Marsico Capital Management LLC put in place a stricter investing code for employees of the fund family: no individual stocks, bonds or ETFs. That basically left mutual funds.
Several of the Marsico partners, among them A. Douglas Rao, decided to launch a fund for employees to invest in —”to eat our own cooking,” as Mr. Rao put it. “We wanted to start a fund less correlated to the indexes,” he said. “Most funds are constrained by styles. We wanted to create a more opportunistic fund.”
What started out as home cooking for Marsico employees has become a resounding success for the firm since it was launched in December 2006. Mr. Rao became the portfolio manager six months later.
The Marsico Flexible Capital Fund Ticker:(MFCFX) had assets of $628 million at the end of March, driven by major outperformance against the S&P 500, the fund's primary benchmark. Though the fund is lagging the index by just over 1 percentage point this year, it was up 34% for the 12-month period ended March 31, versus 17% for the S&P 500.
And since inception, the fund has had an average annual return of 12.6%, compared with 1.2% for the S&P 500. It has a five-star rating from Morningstar Inc. and is ranked the No. 1 global flexible portfolio fund by Lipper on a one- and three-year basis.
The reason for the fund's success is, yes, flexibility. Mr. Rao, who spent five years with Trust Co. of the West before coming to Marsico in 2005, is given free rein to invest in whatever securities he wants and in whichever markets he sees fit. Initially oriented toward income-producing investments, Mr. Rao shifted gears in late 2007 as his concerns about leverage and the credit markets increased. He kept a high level of cash for most of 2008 and into 2009, and moved into emerging-markets stocks early in 2009.
“It's a go-anywhere fund,” Mr. Rao said. “We invest in small-caps and large-caps across global markets and across the capital structure.”
Indeed, the 37-year-old manager has invested in everything from emerging-markets stocks to high-yield debt to convertible bonds and preferred bank debt. After profiting in emerging-markets stocks for much of the last two years, he has recently shifted capital back into U.S. equities — which now account for just over half the portfolio. His largest sector allocation is in financial stocks, accounting for 24% of assets.
Mr. Rao has a pronounced contrarian streak in his investing style. His 24% weighting in financials, for example, might raise some eyebrows.
“The sector requires patient capital,” he said. “I don't think we're in the ninth inning of the housing crisis yet, but there's value in the sector.”
U.S. Bancorp Ticker:(USB) is one of his favorite financial stocks.
In general, he keeps a relatively high cash balance (6.88% as of March 31) in order to invest quickly.
“Most people view high cash balances as an opportunity cost. We think they provide opportunities to invest in markets with significant dislocation,” Mr. Rao said.
Examples include his purchase of convertibles in TransOcean Ltd. and shares in Anadarko Petroleum Corp. Ticker:(APC) after the Gulf of Mexico oil spill last year.
“It's a lot easier to make money when everybody else is running,” he said.
Mr. Rao uses some creativity in his investments. When analyst Meredith Whitney helped send the municipal bond market into a tailspin, he was sure it was a buying opportunity.
However, he, too, concluded that the market was not liquid enough. He decided to look for insurance companies with large muni bond investments and found the Travelers Cos. Inc.
The company's shares have rallied along with the muni bond market in the last two months, rising from a low of $53 a share in January to a recent $62.
Marsico is known as a deep-research shop, with a team of about 20 analysts who are “constantly surfacing ideas” for the seven Marsico funds, Mr. Rao said.
The other distinguishing characteristic of the Marsico Flexible Capital Fund is the relatively large positions he takes. By design, the portfolio is concentrated in 20 to 50 stocks.
“It's like Warren Buffett says: "Your top 10 ideas should be a lot better than your next 40,'” Mr. Rao said. “We want each position in the portfolio to be more significant.”
E-mail Andrew Osterland at aosterland@investmentnews.com.
