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This Fast-Moving Fund Scores Overseas

Marsico Flexible keeps cash handy to pounce on firms with rich prospects.

Most fund managers stick either to the value or growth style of investing. But Doug Rao, the manager of Marsico Flexible Capital Fund (MFCFX), likes to keep his options open. Rao invests in both fast-growing companies and slower-growing, bargain-priced companies of any size.

Although size and style may not matter to Rao, he is consistent in his approach to picking stocks. He favors firms with durable business models, sustainable competitive advantages and high free-cash-flow growth that trade at favorable prices. (Free cash flow is the cash profit left after deducting capital outlays needed to maintain the business.)

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Rao keeps a lot of cash on hand -- the fund recently had nearly 20% of its assets in the green stuff -- to pounce on investment opportunities. When the U.S. economy was bottoming in the second quarter of 2009, China was seeing strong growth as its stimulus program started to boost consumer confidence. Rao quickly moved 25% of the fund’s assets into China and Brazil, a complementary play because Brazil is a major producer of commodities and China a large consumer of them. As the Chinese economy recovers, its appetite for materials to feed infrastructure projects grows, which in turn benefits Brazil.

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In fact, overseas investing is a large part of Rao’s strategy, and his foreign holdings -- 29% of assets at last report -- are a major reason Marsico Flexible has performed so well over the past year. For the 12 months that ended October 15, the fund returned 25.8%. That beat both Standard & Poor’s 500-stock index and the average large-company growth fund (the category Morningstar assigns Marsico) by 16 percentage points. The fund’s three-year annualized return of 5.9% beats the S&P 500 by an average of 13 percentage points per year and the average large-company growth fund by 12 points a year.

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Rao expects consumers in developing nations to drive global economic growth over the next decade. That’s because residents of emerging markets are benefiting from growing incomes and aren’t as burdened by debt as are consumers in developed nations, including the U.S.

Rao hopes to capitalize on the trend by investing in U.S. technology companies, such as Oracle (ORCL), and consumer firms, such as Mead Johnson Nutrition Co. (MJN), that derive the bulk of their sales from developing markets. He also favors industrial companies that are supplying the materials that emerging nations use to build their burgeoning infrastructures. Among his holdings: Eaton (ETN), which makes a variety of products used in the power-equipment, aerospace and automotive sectors, and PPG Industries (PPG), a maker of protective and decorative coatingss.

Large banks that came through the financial crisis in good shape also look promising, says Rao. Companies such as U.S. Bancorp (USB) and Wells Fargo (WFC) have relatively low interest costs and more-stable deposit bases than their competitors, which allowed them to grow during the downturn. Many big banks also were able to increase their market share during the crisis by acquiring rivals. That, in turn, will allow these banks to generate better earnings gains once the economy recovers and customers’ appetite for credit picks up. An improving economy, Rao adds, will also lead to lower losses from bad loans.

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