During the 1990s, Tom Marsico made investing look easy. As manager of Janus Twenty, Marsico recorded huge gains while limiting his portfolio to two dozen stocks. The fund often held well-known stars such as Lucent Technologies and Pfizer. Plenty of growth funds sought to copy the style, narrowing their portfolios and adding “focus” or “20” to their names.
Then the technology bubble burst, and the focus funds collapsed along with their famous holdings. But Marsico didn't do so badly. In 1997, he quit Janus and founded his own company where the new Marsico Growth fund continued producing winning results. In 2001 when Janus Twenty — under a new manager — finished in the bottom quarter of large growth funds, Marsico Growth finished in the top half. Marsico beat the S&P 500 in 2002, another bad year for growth managers.
What separated Marsico from his imitators was a willingness to bend. While many of the focus funds bought only stocks that fit squarely in the growth box, Marsico owned a mix. Along with technology shares, he held stocks like General Dynamics and General Motors, names that are often associated with value investors.
Though more and more managers confine themselves to narrow style, Marsico belongs to a small group that roams widely, often holding a mix of growth and value. The flexible funds can emphasize whatever stocks seem most appealing at any moment. Flexible managers are intriguing choices for current market conditions. In recent months, stocks have stagnated and investors of all kinds have complained about a shortage of bargains. Value stocks no longer look so cheap; growth stocks sell at stiff price/earnings ratios.
For funds that focus on one style box, the choices could be slim. But flexible managers have freedom to maneuver in flat markets. If technology growth stocks look expensive, the flexible funds can buy undervalued foreign retailers. Advisors who prefer setting their own asset allocations may shun flexible funds. Still, adding a top flexible choice can provide important stability. “Managers willing to deviate from the benchmarks can deliver decent results in downturns,” says Richard Bregman, chief executive of MJB Asset Management, a registered investment advisor in New York.
Among the most wide-ranging performers are Julius Baer International Equity and its sibling Julius Baer Global. The contrarian funds go wherever they see value, emphasizing Japanese growth stocks one year and undervalued Scandinavian banks the next. Recently, the managers have been buying Turkish stocks.
“Turkey is reforming its economy, and we are seeing dramatically lower interest rates,” says Brett Gallagher, a Julius Baer portfolio manager.
The Julius Baer managers rely on no single formula for picking stocks. Instead, they have different criteria for each industry and country. When picking pharmaceutical makers, the managers emphasize companies that aren't troubled by approaching patent expirations. Screening oil producers, they favor companies with the lowest development costs. To protect shareholders, the managers stay broadly diversified, typically owning a mix of 200 stocks that include growth and value names. The diversification helped Julius Baer International finish in the top half of foreign large-blend funds for nine years running, according to Morningstar.
Another steady performer is Hartford Capital Appreciation, which clobbered the S&P during the soaring year of 1999 — and finished in the black when the market collapsed in 2000. The fund looks for stocks that can rise 25 percent in a flat market. Often these are tarnished names, but some are obscure stocks with growing earnings. For instance, the fund bought Citigroup after the company suffered a series of problems, including complaints by Japanese regulators.
“This is an opportunity to buy a terrific franchise,” says Nevin Markwart, Hartford Capital's product manager. “Citigroup can increase its earnings 10 percent annually, and not many companies can sustain that kind of growth.”
Another recent purchase is Petro-Canada, a company that produces oil from tar sands in Alberta. Because the product is expensive to produce, profits from tar sands have been skimpy. But in an era of skyrocketing oil prices, the Canadian company should enjoy a fatter bottom line.
While some flexible funds place big bets on a few industries, Victory Diversified holds a broad mix of names. The fund owns stocks in every major industry. When he's keen on a sector, portfolio manager Larry Babin can hold double the S&P's weighting of the category. He can hold as little as half the weighting of an unappealing category.
“The idea is to control risk, but give the manager enough room to outperform,” says Babin, who has outpaced the S&P 500 by 2.5 percentage points annually in the past decade.
Lately, the fund has been overweighting technology. Babin says that demand for technology is strong, and that share prices got beaten down earlier in the year. Recent holdings have included IBM and Microsoft. A big winner last year was eBay. Babin bought it, figuring that the company's roaring growth rate would be faster than what analysts expected. He sold the stock after it climbed.
When a holding gets pricey, Babin gradually trims the position. Lately he has been cutting back on Apple Computer, a big winner. In the late 1990s, the fund scaled back expensive technology names. That caused Babin to lag the S&P in 1999, but during the next two years he outperformed by wide margins.
Investors seeking a flexible fund with a mild-mannered approach should consider Tocqueville Alexis. Portfolio manager Colin Ferenbach looks for companies with high returns on capital that have dropped out of favor. A recent example: chip giant Intel. The company has a rock-solid balance sheet, but its shares dipped recently on disappointing earnings. Tocqueville's portfolio also includes some regional banks, which have relatively low price/earnings ratios. But Ferenbach also buys stocks that fit in the growth box. “We will accept higher price/earnings ratios when a company has very high growth or something unique,” he says. A favorite growth holding is Getty Images, which owns valuable photo archives. After spending heavily to establish its business, the company is in a position to expand earnings, says Ferenbach.
By combining such growth stocks with some value names, Tocqueville aims to build a solid portfolio that can stay afloat, even when the market sinks.
|Fund||Ticker||Category||5-year % rank||1-year return||3-year return||5-year return||maximum front load|
|Hartford Capital Appreciation A||ITHAX||Large Blend||1%||22.2%||8.7%||9.3%||5.50%|
|Julius Baer International Equity A||BJBIX||Foreign Large Blend||2||22.6||13.7||9.0||0|
|Marsico Growth||MGRIX||Large Growth||8||13.2||7.9||0.5||0|
|Tocqueville Alexis||TOCAX||Large Blend||3||13.4||8.1||6.3||0|
|Victory Diversified Stock A||SRVEX||Large Blend||5||18.3||6.7||4.8||5.75|
|Source: Morningstar. Returns through 9/30/04.|