Jason Stipp: This is Jason Stipp from Morningstar reporting from the 2009 Morningstar Investment Conference. I have the pleasure today to talk to Tom Marsico of Marsico Growth and Marsico Focus Funds. Tom, thanks for joining me.
Tom Marsico: It's nice to be here. Thanks for having me.
Jason: Sure, so in your funds, you blend a top down, bottom up analysis, and we'll get to some of the bottom up stuff in a moment, but I think the top down - I'd like to pick your brain a little bit about where you think we are right now in the current cycle and specifically what metrics are you looking at to get a handle on where this economy's health is?
Tom: There are going to be a number of important developments as we see the recovery of the financial sector and the recovery of the economy. So obviously, the government has taken a very active role. We've seen the results of the stress tests from the banks and actually I think that that's given people a lot more confidence that the banks have adequate capital. Also, within the last month or so, the banks have raised over $60 billion, so they've supported their capital structure quite dramatically, even though they've experienced heavy losses. I think that what's really important as far as policy is concerned is that we need more transparency in the system.
And I think that what's going to be important is that our positions have to be known to the public, and I think it's going to be very important that other major players in the market's positions will have to be aware of that.
This will help regulators also, so that the large positions in CDOs that were developed, the large positions in credit default swaps that were in place, and how those instruments impacted prices of other securities, I think is going to be a very important aspect of regulation going forward.
So, I would expect that you'll see regulation as it relates to hedge funds. There are certain hedge funds that act as banks. There are certain hedge funds that act as agents. There are other hedge funds that are really more like broker dealers. And then there's traditionally hedge funds that are long, short, neutral.
But, I think that's going to be a major change in regulation and I think that will be important to get a stabilizing impact that people will really understand what is systemic in the system. I think that the other thing that's going to be important going forward too, is the restrictions as far as leverage that financial institutions can take.
As a result of that, I think that you're going to get less leverage, but people will put a higher valuation on those earnings, because the volatility of earnings will actually be reduced. So, we like the financial sector right now. We think that it's very undervalued as far as what we think normalized earnings can be.
And so this is a sector that represents about 18 percent of our portfolios.
Jason: In the financial sector, do you think that there is going to be some survivorship? So, for example, a Goldman Sachs that may get through this? Sees a much smaller playing field that could potentially come out of this because it was able to survive?
Tom: We're one of the largest shareholders in Goldman Sachs. We've had a position in it for a long period of time. We added to our position when the stock was trading at a fraction of book value. We think that they understand and see the markets as well as anyone, or probably better than most of the investment banking businesses. You've seen tremendous consolidation in investment banking. Lehman is no longer in the same position that it was before even though a lot of it went to Barkleys, and obviously Bear Sterns is not the player that they were before, and other companies have retreated.
So, we think that if you look at the lead tables now, Goldman Sachs, JP Morgan and Morgan Stanley are doing quite well in the lead tables. In the lead tables for this tremendous capital that has been raised here in the last several months.
So, what we like are the survivors, and those companies such as Wells Fargo and US Bank Corp and JP Morgan that did not lend heavily in '06, in '07, to the housing industry. And now they've taken advantage of consolidation. Wells Fargo bought Wachovia, JP Morgan bought Bear Sterns and also Washington Mutual. So, now their footprint is much larger.
Wells Fargo now goes coast to coast, and with that management team - Dick Kovacevich and John Stumpf - we think that they're tremendous managers - Richard Davis at US Bank Corp.
So, what we're seeing are the margins are actually wider now on the pieces and loans that they're putting on their books. They're also coming onto the books at a time when the assets are at very low levels instead of at very high, inflated levels where they were before.
So, this is the time in the cycle where you want to buy financials. And as I mentioned earlier with regulation, I think you'll get a higher multiple on less leverage.
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