Thornburg Value Fund (TVAFX), co managed by Edward Maran and Connor Browne, was launched in 1995 and is nearing its 15-year anniversary. It was the first equity fund offered by privately held Thornburg Investment Management, which now has a collection of seven equity funds. Although Thornburg Value Fund has a broad value focus, which is obviously implied by its name, it is not a run-of-the-mill offering in this space.
The fund tends hold a relatively concentrated portfolio of companies (recently around 50 or so names were in the portfolio) allocated to three broad investment theme buckets: Basic Value, Consistent Earner, and Emerging Franchises. As bottom up investors, the percentage of assets in these three categories varies over time depending on what companies the co-managers find most compelling. Normally, however, the later two will be smaller portions than Basic Value.
Basic Value for Thornburg is similar to other value shops in that the managers highlight financially sound companies with well-established businesses whose stocks are trading at low valuations relative to the estimates of intrinsic value or potential earning power. Consistent Earners, meanwhile, are companies selling at valuations below historic norms that have shown steady earnings growth and/or dividend growth. Importantly, value in this category is considered on a relative basis, so that companies may, in fact, appear richly valued on some metrics. Lastly, Emerging Franchises are companies that management believes are in the process of establishing a leading position in a product, service or market. The managers expect that their selections here will grow at an above-average rate.
Maran and Browne, however, don’t operate in a bottom-up vacuum. The duo incorporates a larger worldview when considering investments, to help ensure that they select companies of which they are fond that are also poised to benefit from macro events—or at least not be materially affected by such happenings. This larger view also allows them to take advantage of opportunities that some fund managers would avoid. This included a successful foray into bonds during the recent recession. In fact, the fund’s prospectus provides a fair amount of leeway to the managers.
Although not quite as broad as a “go anywhere” fund, management’s options are pretty open. The fund has the leeway to own foreign equity securities, partnership interests and, as already noted, foreign and domestic debt obligations. That said, under normal market conditions, the co-managers will focus on domestic equities in the value space. By design, however, the portfolio has no market cap restriction and will usually include a mix of large, medium, and small companies, with a bias toward large and mid-caps.
As the three buckets highlight, the definition of value is somewhat lose, including traditional value stocks and stocks that, in management’s view, provide value in a broader or different context. Some of the metrics on which companies are reviewed include price to earnings, price to book value, relative earnings growth potential, price to cash flow, industry growth potential, debt to capital, industry leadership, dividend yield, dividend growth potential, dividend history, franchise value, and the security and consistency of revenue streams, among others.
Two areas of particular focus are the potential for favorable developments and undervalued assets. Here, the co-managers are seeking out companies that they believe have assets that the market doesn’t fully appreciate but that could eventually turn out to be major growth drivers. A recent example of this is Google (GOOG). Although some might view Google as inappropriate for a value fund, it resides in the Consistent Earners category, which means that its purchase was dictated by relative value—not absolute value. Underpinning the selection is management’s belief that the company’s valuation predominantly reflects its dominance in search. The other businesses in which Google operates, including a push into the operating systems of mobile devises, are not being properly valued, according to Maran and Browne. As such, if these businesses gain traction, they believe there could be material upside potential. Indeed, not your typical value play, but when viewed with a slightly different lens, it is easy to see the value angle.
A difficult 2008 has put a crimp in the fund’s recent trailing performance metrics, but its trailing five- and ten-year returns through August are in the top third of Value Line’s Growth objective group. Note that Value Line’s Growth objective group contains funds based on their objective of capital growth (appreciation), so, despite the word “value” in the fund’s name (and its investment focus), it fits squarely in this broad group. Risk, meanwhile, is similar to that of other funds in the group. Although expenses and a $5,000 minimum investment aren’t out of line, Thornburg Value Fund is a load offering, and, as such, isn’t appropriate for the “do-it-yourself” investor. That said, the fund is worth considering if it is recommended by your financial intermediary.