Harbor International Growth and Marsico International Opportunities are managed by the same team lead by Jim Gendelman. They are both managed using substantially the same style and investments, but Harbor International Growth has much lower fees. I do not use either of these for my International Large Cap Growth option. As an alternative to these two funds I would strongly suggest researching Forward International Equity (FFINX). It is managed by Pictet Investments and has substantially outperformced Harbor over the last eight years (see attached chart). Forward funds is represented by the red line and it has earned an annual compounded 9.3% return versus Harbor's 0.5% return for the same eight year period.
Forward has a small asset base compared to Harbor and Marsico which gives it the added advantage of being very nimble.
Below is a fund research report by Lipman Gregory on Marsico and Harbor. Enjoy!
The Financial Pragmatist
Libby Mihalka
FUND UPDATE:
Marsico International Opportunities (MIOFX) and Harbor International Growth (HAIGX)
Category: International GrowthManager: Jim Gendelman
Date of Interview: 2/8/07
With: Jim Gendelman
Gendelman buys companies that he believes have earnings-growth potential not recognized by the market at large. To find these companies he sometimes utilizes themes. One such theme is based on his view that there is a global “thirst for yield,” which will benefit “asset-based” business models.
Gendelman believes there is a thirst for yield because real interest rates are generally at historical lows across the globe, lowering income from risk-free investments such as Treasuries. This demand for yield, he says, is driven by aging baby boomers and large institutions—the former increasingly seeking income to meet their retirement needs and the latter needing a rate of return that allows them to meet their pension liabilities. To meet their objectives, both groups are seeking yields that are higher than what they can get from risk-free alternatives. Gendelman thinks demand for high-yielding products will be sustained over the long term unless real rates rise significantly from present levels.
The possibility that an increase in real rates will endanger his theme is low, in Gendelman’s view. He points to the “unprecedented priming of the monetary pump” globally and says, “the world has been awash with liquidity for over four years.” During this time, emerging-market countries have shown strong growth. Still, he notes, “you haven’t seen evidence of real inflation.” He adds that while there’s been some asset and commodity-based inflation, in the major economies inflation concerns are not at a point where rates are going to go up a lot. Gendelman says even if rates, and consequently yields, were to rise 100 basis points (which would be significant from current rate levels), they will still be lower than the yield expectations of individual retirees and pension funds in general. A much larger rise in real rates, while possible, is a low-probability risk in his view.
A new purchase that plays into Gendelman’s thirst-for-yield theme is Macquarie, an Australian bank. It has been “one of the early adopters and leaders in buying an asset, packaging it with a yield, and selling it to shareholders.” Basically, Gendelman explains, the bank scours the world to acquire long-term income-generating assets, such as toll roads, and then captures their underlying cash flows into a fund-like vehicle that provides its shareholders with a yield superior to that of a risk-free security. As a result, many institutional investors and individual investors find Macquarie’s financial products attractive. While other large banks outside Australia have started imitating this “unique business model,” in Gendelman’s view, Macquarie has an edge over them. In addition to having the first-mover advantage, it holds and operates the assets it acquires rather than selling them as some of its peers do. As a result, Macquarie can afford to pay its shareholders a “bit more” yield than its competitors because a recurring cash flow is worth more in present-value terms over a longer duration than over a shorter one.
Macquarie currently trades at around 14x to 15x next year’s earnings, a premium to other Australian banks, which trade in the low teens. Gendelman argues this premium is deserved because none of Macquarie’s Australian peers has its highly profitable asset-based business. Gendelman believes that if he is right about his thirst-for-yield theme, Macquarie could easily grow earnings in the mid teens over the next several years. He says its stock could be valued even higher if its asset-based business grows more robustly than he expects, though he is not counting on this. Macquarie looks attractive to Gendelman even if its stock just compounds returns in line with its earnings over the next several years.
A strong contributor to the fund’s performance last year was Shangri La, a Hong Kong-based hotel company that owns, operates, and manages hotels in a number of countries outside Hong Kong. Gendelman says its business model is similar to that of Four Seasons, a successful hotel operator that Marsico owns in its domestic portfolios and knows well. “We felt they were creating a Four Seasons-type model in China, meaning that they were not only going to own some of their own hotels but also going to franchise out their model and have a predictable, higher-margin earnings stream from just managing hotels for other people,” says Gendelman. While the underlying attraction to Shangri La remains intact, what’s changed is valuation. Since the fund’s initial purchase over three years ago, Shangri La has more than doubled and had started to trade at 11x to 12x EV/EBITDA (enterprise value/earnings before interest, taxes, depreciation, and amortization), which was in line with its peers but high relative to its history. Given that valuations appeared “rich” but the underlying growth story remains attractive, Gendelman trimmed Shangri La from 1.5% of fund assets as of September 30, 2006 to about 1% as of January 31, 2007.
From a regional and country perspective, Marsico International Opportunities has a low- to mid-teens allocation to emerging markets, which is in line with its index, Vanguard Total International Stock Index Fund. It is significantly underweighted to Japan and overweighted to Switzerland relative to this index; both positions are a byproduct of stock selection and reinforce the point that the fund takes large active bets relative to its index and, as a result, its performance can be out of sync with the index over shorter periods.
Litman/Gregory Opinion
Year to date through February, Marsico Inter-national Opportunities Fund is down 1.7%, compared to a 1% gain for Vanguard Total Interna-tional Stock Index Fund and a 1.1% return for MSCI AC World ex USA Growth Index (its style index). In 2006, the fund gained 24%, lagging the Vanguard index by 2.7 percentage points but outperforming MSCI AC World ex USA Growth Index by 0.5 percentage points.
Gendelman started managing Marsico International Opportunities Fund in July 2000. Since that time, the fund has beaten Vanguard Total International Stock Index Fund by over three percentage points, annualized. But we give less weight to the first two years of Gendelman’s track record because some aspects of his process were still evolving and we think Gendelman’s approach after June 2002 is more reflective of what we can expect in the future. Since July 2002, the fund has slightly lagged the Vanguard index, but has outperformed MSCI AC World ex USA Growth Index by almost two percentage points, annualized. This performance has come with volatility similar to the Vanguard index. The fund’s returns rank in the top decile over five years and in the top quartile over three years versus its international growth peers. Overall, the fund has performed strongly over the period we consider most relevant for performance analysis.
In our last update we noted the departure of an analyst from Gendelman’s team. This was a concern given that Gendelman had a relatively small team of just three dedicated analysts. Having discussed this issue with Gendelman we are less concerned for two reasons. First, he has access to Marsico’s larger pool of domestic analysts, who evaluate their industries from a global perspective, making them a valuable resource in some situations. Second, Marsico’s research culture is very intense, which some may find difficult to adjust to. (The last departure seems to be related to this issue.) This leads to the question of how Marsico ensures that the people they hire are a good cultural fit. The firm has interviewed a lot of candidates and it is clear to us that they are being very selective. In addition, Gendelman’s minimum qualifications for a new hire are unchanged from what he described to us over two years ago, so, it is good to see that the firm is neither dropping its hiring standards nor becoming impatient. We will continue to monitor team dynamics going forward.
Another concern has been the sharp rise in Gendelman’s international assets under management. International assets have gone from about $1.5 billion in early 2004 to almost $12 billion now. Much of the rise has come from existing sub-advisory relationships. As a result, Gendelman says the demands on his time in terms of marketing and client service remain low, allowing him to remain focused on investing, which is what we’d like to see in the future as well. Moreover, the fund’s opportunity-set remains sufficiently broad and Gendelman continues to run a relatively concentrated portfolio of about 50 stocks. So, while we continue to monitor asset growth and how that growth impacts Gendelman’s strategy, at this point it is not a material concern.
We remain impressed with Gendelman. He has a flexible approach to growth investing, which provides access to a broad universe of opportunities. His approach is somewhat theme-driven, though bottom-up stock picking is the much larger influence on stock selection. Gendelman and his team do thorough work to understand businesses and do not cut corners in their research. Gendelman’s overall portfolio management skills impress us as well. We think he does a good job of collecting different data points to come up with good insights at the macro and company level, which make their way into the portfolio in a thoughtful manner. Both Marsico International Opportunities and Harbor International Growth are similarly run and remain Recommended. Readers should note that Harbor International Growth, which is managed similarly to Marsico International Opportunities, has lower expenses and significant loss carryforwards and is unlikely to make capital-gains distributions for the next few years.
—Rajat Jain, CFA
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