Sifting for Gems as Growth Slows

Capitalizing on big-picture economic trends is the name of the game at Denver's Marsico Funds.

Cory Gilchrist

Capitalizing on big-picture economic trends is the name of the game at Denver's Marsico Funds, founded by star growth-stock manager Tom Marsico. Interestingly, the firm's outstanding domestic fund of late—Marsico 21st Century—isn't run by Marsico. The $2.7 billion fund is steered by Cory Gilchrist, 36, who took the reins in 2003. An annualized 22 percent gain over the past five years places 21st Century among the top 2 percent of funds that invest in large, growing companies (technically, Gilchrist can invest in firms of any size, although he has long tilted the portfolio toward industry-leading giants). He blends economic forecasting with company-by-company analysis to find businesses ready for takeoff.

What is your take on the market in 2008?

We think monetary and fiscal policy conditions are still tightening, and it's going to be relatively choppy until the end of 2008. We're in a slowing global economic growth environment that is going to cause some pretty dramatic changes in the fundamentals of some businesses. We've been reducing our commodity cyclical exposure in the industrial, materials, and energy spaces, where earnings growth rates have probably peaked. We've been repositioning in more-sustainable companies that will benefit from global economic growth. Specifically, what sectors and companies are best positioned?

We're finding real opportunities in the consumer discretionary sector, where strong companies have been thrown out with weak. This is also an area that should benefit from easing in commodity pricing. A good example is our move into MasterCard. This is a company with a clean balance sheet and a growing market share. As wealth levels rise and we move from cash and check into plastic and electronic forms of payment, the networks of choice are MasterCard and Visa (which will be very exciting when its ipo comes out in early 2008). Plus, if China grows 7 percent instead of 11 percent in 2008, it won't have a large impact on MasterCard's pricing or volumes. On the other hand, if you're exposed to copper or steel in China, the change in growth will have a material impact on pricing power. We also invest in companies that are aggressively growing their earnings and revenues, which the market tends to say are overvalued. An example is Amylin Pharmaceuticals, which has a revolutionary technology in hormone-based therapy for type 2 diabetes and potentially obesity. Hormone therapy can be applied to other ailments, but the market isn't willing to look out far enough to see the number of people who could be on these drugs.

Has the pendulum officially swung back in favor of large-company growth stocks?

Over the last nine months, that appears to be the case. I think what we're seeing is a return to our type of companies. These companies are trading incredibly cheap relative to their growth rates—cheaper than we've seen them since 1992. Casino stocks make up a large chunk of your portfolio. Why?

To give you an idea of its potential, Las Vegas did $6.7 billion of gaming volume in 2006. That same year, we estimate the U.S. gaming market at $56 billion, when you include places like Atlantic City and Chicago and, most importantly, Native American casinos. So when you think about gaming in Las Vegas as being enormous, it's actually a unique business model with a very small market share growing into a very large market opportunity. The real opportunity that we see is the propensity to gamble by middle-income and high-income Asian consumers. As the middle class emerges in Asia, a place like Macao becomes a very, very compelling investment. It's compelling for large operators there, like Wynn Resorts and Las Vegas Sands. What is a big-picture or industry theme playing out that people aren't talking about yet?

A new generation of seismic technologies is allowing us to see below deep-water salt formations for the first time. We've had positions in deep-water rig companies like Petrobras and Schlumberger with the idea that this technology could enable a new wave of deep-water oil discoveries. And we've got the first one: Petrobras recently announced its discovery of Tupi, an ultra-deep-water oil field off the coast of Brazil that could potentially hold 5 to 25 billion barrels of oil and gas. They also have rights to portions of a reservoir nearby that's potentially five times that size. We're talking about two locations that could potentially change the supply-demand dynamics for oil in 2008 through 2012. We think there will be more discoveries off the west coast of Africa, in the Gulf of Mexico, and off the coast of Brazil.