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Advisor select

Vinson Walden is portfolio manager for Thornburg Investment Management. He joined the firm as associate portfolio manager in 2002 as a member of the ­investment team. He wa +

Thornburg Global Opportunities Fund
THOAX (A Shares)
THOCX (C Shares)
THOIX (I Shares)
THOGX (R6 Shares)
Fund Family
Thornburg Funds
Fund Advisor
Thornburg Investment Management Inc

2300 North Ridgetop Road
Santa Fe, NM 87506

T: 877-215-1330

Quality, Price and Path to Success
Thornburg Global Opportunities Fund
Oct 4, 2017

Q: What is the history of the fund?

Along with our Chief Investment Officer, Brian McMahon, I am the co-founder and co-manager of the Thornburg Global Opportunities Fund, which was launched on July 28, 2006. 

Our investment philosophy and tactics have remained the same since inception. Using the principles of classic value investing, we choose global stocks, diversify the portfolio across both geography and industry, and tend to hold investments for relatively longer periods.

When I joined Thornburg Investment Management in2002, the firm had roughly $4 billion in assets under management (AUM). That figure has since grown to about $50 billion.

Q: What core beliefs drive your investment philosophy? 

We are looking for three things, essentially, in a good investment. They are a high-quality business, a low price, and a path to success; a path to success is a hypothesis about the future.

Essentially, we believe good investments share three characteristics: they are high-quality, low-priced businesses that have what we call the “hypothesis of the future” – in other words, they can demonstrate a path to success. It’s been a successful formula for our clients.

In forming our hypothesis, we try to understand how an investment could play out, looking for approaching milestones and whether changes are unfolding – whether in the industry, for the company, or to the regulatory landscape – that could affect a positive result. Putting this all together gives us an idea of how business conditions may change. 

For us, timeframe is essential; we think of our investments on a three-year time horizon at the minimum. Overall, it’s important not to have positive expectations for the fund every month or quarter. With at least a three-year timeframe, we have some confidence, but the longer we commit the better the outcome.

Q: What is your definition of quality?

For us, quality boils down to competitive strength. We look for companies with a finite number of competitors in stable industries so they aren’t vulnerable to new challengers sneaking up on them, or to technological obsolescence. To us, high quality isn’t a company that just did well last year, but one which will remain strong for five or 10 years longer.

An example of “quality as competitive strength” is Aena SME SA, which operates airports in Spain. The company is currently one of the fund’s largest holdings. From a competitive standpoint, Aena is in an extremely comfortable position and we are willing to bet its business model will last a long time. What’s special about the company is it’s state-owned – it’s a monopoly that operates airports and heliports for the entire country of Spain.

Elsewhere in Europe, airport operators typically manage one location or a regional collection of airports, and they compete against each other. For instance, in London there are three or four airports in competition. This gives Aena an extra advantage. It doesn’t need to worry about an airport in Barcelona competing with one on the outskirts of the city, because it owns both of them. 

In addition, through its subsidiary, Aena International, the company also participates in managing 16 airports abroad. But the vast majority of the profit comes from its home country, and Aena doesn’t pursue expensive international expansion.

Q: According to your research, why does Aena qualify as a high-quality business?

Aena’s business is extremely profitable. Not only is its competition quite limited, the company benefits from steady demand because it participates in all the air traffic going into and out of Spain. For visitors from cold-weather countries, Spain is an attractive tourist destination because it is sunny, warm, and peaceful; recently it’s become even more popular.

Further, the Spanish economy is recovering after a long recession and adjustment period. The country leads Europe in a number of macroeconomic trends and this is reflected in its air traffic, which has been growing in high single-digits for a long time – this year, it’s growing at a rate of around 8%.

Another beneficial trend at play is the growth of low-cost airlines. As air travel gets cheaper, it stimulates the travel market, which is growing much more rapidly than the overall economy. We see this all over Europe: though GDP growth is 1% or 2%, the increase in air traffic is significantly higher. 

Q: Can you describe your research process?

Our approach to research is fairly holistic. To get a full understanding of companies and the ecosystems they operate in, we consider all the usual publicly-available information and sources, including financial statements, company websites, and transcripts of management interviews. Travel is routine, too, and we often engage with companies and meet management teams, as well as their competitors and suppliers. 

To winnow the field of thousands of investable companies, we filter them through our three core beliefs – they must be high-quality businesses, trade at a low price, and have a path to success. This gives us a manageable but still appealing buffet of companies to choose from. With only 30 to 40 holdings in the portfolio, we don’t have to follow every company or generate a lot of new ideas every year – just a handful is all we need.

Q: Would you discuss more examples?

A longstanding investment that we believe is still a promising, high-quality business today is Galaxy Entertainment Group Limited, a casino and hotel operator located in Macau, which is a special region of China. The business has strong and steady demand, limited competition in an undersupplied market, and significant growth drivers. 

Although it’s not a monopoly, Galaxy is in a decidedly comfortable competitive situation. Macau, which is often referred to as “the Vegas of China,” is the only legal gambling destination in that entire country – and it’s our belief it will remain so. Because there are only six licensed casino operators in Macau, competition is limited and the market is undersupplied.

  • Inception: July 28, 2006
  • AUM: $2.3 billion

In China, the rising middle class has a lot more disposable income. Tourism and travel are growth drivers in China, with Macau being a big beneficiary. Like Vegas, people go to Macau not just for the gaming but also for shows, entertainment, and shopping. After a statistical analysis of the popularity of Las Vegas relative to the United States’ economy, we concluded that Macau’s economy is still in the earliest stages of development and see strong growth prospects for Galaxy over the next 10 years.

Another example is our recent purchase of the Indian petrochemical conglomerate, Reliance Industries Limited. Although its main business is in that space, the company has invested billions of dollars to build a state-of-the-art telecom network because the market is undersupplied in India. Existing telecom firms don’t have modern assets or investment programs, giving Reliance Industries a chance to come in and lead by providing a newer and better network. 

We purchased Reliance Industries around yearend, and it’s off to a good start – it’s one reason we’ve had good results recently. In the longer term, our belief is the company’s telecom investment will bear fruit.

Q: What is your portfolio construction process?

Our stock picking focuses on finding good businesses from a competitive standpoint with low valuations and a solid hypothesis of the future. To significantly improve our outcomes, we try to find all three elements simultaneously. Our benchmark is the MSCI All Country World Index, though realistically, we try to do well versus any salient benchmark. 

The portfolio has a diversified mix of 30 to 40 holdings. Position size is limited to 10%, with our top holdings tending to be between 3% and 5%. A 20% limit applies to geography and industry, which ensures that significant portions of the fund don’t end up in one place, like Japanese banks or Internet stocks. These limits guard against overconfidence from the managers and problems that could creep into a particular sector.

Looking at the fund’s top holdings demonstrates our diversity by both industry and region. Currently, the three largest positions are Aena, Altice NV, and Baidu, Inc. – respectively, an airport operator in Spain, a Netherlands-based multinational telecom group, and a Chinese web-services company. 

Other top holdings include CF Industries Holdings, Inc., a manufacturer and distributor of agricultural fertilizers; T-Mobile US, Inc., the wireless network operator; and Alphabet, Inc., the technology giant formerly known as Google. 

Clearly, diversification is a key priority of portfolio construction, as is staying within industry limits and keeping our geographic exposure in check. Finally, we shy away from industries where competition seems too complicated or a lot of change is taking place. 

Some areas we tend to avoid are the super-competitive retail space and the restaurant industry, which faces changing dynamics and competitors always coming and going.

Q: How do you adhere to your sell discipline?

All sales stem from an effort to improve the portfolio, but they can be triggered by a number of things. In every case, though, having a focused portfolio like ours compels us to be quite discriminating and constantly compare companies from a risk-reward perspective. 

Changes within a company or to its valuation can lead us to sell. For instance, with this year’s strong run in the markets, we sold some things outright simply because their prices had become high relative to our internal appraisals. A sale could also be triggered when something isn’t developing as we expected; we may decide to move on and continue running the portfolio from a future Internal Rate of Return (IRR) perspective. 

The portfolio’s turnover was approximately 30% last year, due in part to the Brexit anxiety which caused us to make a lot of changes – adjustments that have since proven beneficial. In 2016, we had to make room in the portfolio for seven new holdings. However, our target holding period is generally three to five years, so our pace is relatively slow and deliberate; there’s no frantic activity or daily trading. 

We generally stay with the stocks we own for many, many years, adjusting position sizes accordingly in times of relative strength or weakness; as shares appreciate, we tend to reduce position size. Google is a good example. We’ve owned it for about eight years but not at a constant position size, as we’ve been able to sell it on strength and buy more on weakness. This works out if a share price fluctuates over time, except in cases like the bank stocks recently, which haven’t pulled back to provide the opportunity to buy on weakness.

Q: How do you define and manage risk?

For us, risk boils down to the probability and severity of impairment to capital, with permanent loss being the ultimate risk. We recognize that mistakes happen, as do disappointments and surprises in the market, and can easily absorb a modest setback. Large losses, however, are a different matter because they can impair the compounding of the portfolio.

The key to compounding is to avoid big losses. To avoid them at the portfolio level, we must avoid them at the level of the individual stock, so we are extra careful with names that may have the potential for particularly unattractive downside risk. This involves hypothesizing about plausible downside scenarios – thinking about what could go wrong and how bad it could get. 

In the market we encounter plenty of unattractive companies for which there’s no lower limit should something go wrong—for instance a declining business that also has a tough balance sheet.  Suffice to say that’s something to avoid!  In contrast, there’s not nearly as much risk with companies that are competitively entrenched and have balance sheet strength.