Concentrated in High Growth Opportunities
Marsico International Opportunities Fund
Author: Ticker Magazine
Last Update: Nov 01, 11:56 AM EDT
|Management quality plays a crucial role when companies are poised to accelerate growth. Robert Susman, co-portfolio manager of the Marsico International Opportunities Fund, and his global team of analysts search for and invest in businesses with highly recurring or subscription-based models as sources of healthy cash flows.
“We avoid product-driven stories and focus much more on recurring, service-driven stories. I tend to believe that recurring models have lower volatility of earnings and the market gives them a higher multiple over time.”
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’.