Furniture makers will tell you that three legs are necessary to make a stool stable. It's a metaphor that Thornburg International Growth Fund has taken to heart: Each of the fund's roughly 50 holdings falls into one of three categories - emerging growth companies, growth industry leaders or consistent growth companies.
"It's sort of a nice way to get an extra layer of diversification and to build an all-weather portfolio," says the fund's manager, Tim Cunningham. The emerging growth companies are the ones that often boost performance, although stocks in that basket tend to be more volatile. The other two categories provide more stability.
The mix enables the fund to provide above-average returns and below-average risk compared with the universe of funds in its Morningstar category. But the three-basket structure of the $1.7 billion fund makes it extremely difficult to pigeonhole.
Morningstar places the fund in the foreign small/midsize growth category, but describes its style as large growth. Benchmarks are confusing, too. Thornburg compares the fund's performance with the MSCI All Country World Index ex-U.S. Growth benchmark. But Morningstar picks MSCI EAFE for performance comparisons, except when calculating alpha, where it chooses to use MSCI EAFE Growth. The fund has outpaced all these benchmarks.
For the year ended Nov. 6, Thornburg International Growth beat the net return of the MSCI EAFE index by 5.21 percentage points. Over three years, the outperformance was an annualized 9.77 percentage points and over five years, 11.01. All calculations include the fund's expense ratio, but exclude the 4.5% front-end load. Lipper gives the fund top ranks for both total return and consistent return.
Cunningham, who began running the fund in February 2012 with his co-manager Greg Dunn after several years as associate manager, is quick to point out that emerging growth companies are "not to be confused with emerging markets." In fact, the fund is fairly agnostic when it comes to geographical or sector balance. Company research is primary, and the selection of individual stocks determines what countries the fund will land in. As of Sept. 30, the latest date for which the breakdown is available, the U.K. was the top country in the fund, at 22.6% of the portfolio, and software and tech services the leading industry, at 18.1%.
Although it doesn't avoid the developing world, Cunningham says that the portfolio gravitates toward "tamer" emerging markets that have good disclosure. When they do venture farther out on the country risk curve, Cunningham and Dunn look for extra layers of protection, such as business stability. In India, for example, the fund holds Jubilant FoodWorks, the exclusive franchisee of Domino's Pizza. It's a solid business model, and Cunningham jokes that you can always "count the stores."
Some 3.6% of the fund's holdings are in Russia, a country where many global industry giants have faced difficulties. Here, the extra protection is in the form of required disclosures. "We own Magnit, which actually trades in London, so it has to follow all the London Stock Exchange rules," Cunningham says. Magnit - another emerging growth company, by Cunningham and Dunn's reckoning - is a multiformat retailer that runs everything from convenience stores to big-box operations.
Growth industry leaders tend to be among the largest capitalization stocks that the fund owns and dominate their fields. Cunningham cites Baidu, the Chinese search engine company, as an example.
But most companies in this basket are not as well known in the United States. They include Hargreaves Lansdown, a financial services firm that is the leading discount broker in Britain. Cunningham and Dunn say they followed it for three years before determining that the price was right to buy.
Two major factors made the firm attractive, they say: First, since Hargreaves Lansdown had already built its discount brokerage platform, new accounts could be added virtually without cost. Also, the U.K. is now transitioning from defined benefit pension plans to defined contribution formats. That should mean a growing number of Brits will be opening up their version of 401(k) accounts in the coming years.
Another holding in the growth industry leaders category is Localiza Rent a Car, a major car rental business in Brazil. Since Brazilian stocks have lagged for several years, country weakness gave Thornburg a chance to pick up the shares at an attractive price. "Localiza is the biggest buyer of cars [in Brazil], so they get a huge break on the price," Cunningham says.
The firm rents out the vehicles for a year and then sells them at roughly the price it paid. "It's a great little [business] model," he adds.
Consistent growth companies often have a recurring revenue stream, which helps the stocks hold up well in weaker economic environments. Cable television and Internet service providers are a good example of this type of company. The fund owns a Dutch firm in that business called Ziggo.
One of the largest holdings in this category - in fact, in the entire portfolio - may come as a surprise. Credit card giant MasterCard, which comprises 2.6% of the fund, appears an unlikely holding for a global fund.
Yet Cunningham points out that although MasterCard is based in the U.S., a majority of its revenues are from outside the country. It's an unusual approach to international investing and another reason that this fund is so hard to typecast. Companies based in the U.S. represented 10.3% of the fund as of late September.
MasterCard fits the recurring revenue model for the consistent growth company category. But it could also fit among growth industry leaders. Many companies around the globe could straddle both baskets. So how do the managers choose the right category? "We try to be as intellectually honest as we can," Cunningham says.
Also in the consistent growth category is German payments processor Wirecard. The company seamlessly completes payment transactions for many retailers worldwide, taking a small fee for each. Cunningham and Dunn see great growth potential as global card transactions rise; only about 15% are currently made by credit or debit card. (The rest are still handled with cash or checks.)
The Thornburg managers begin seeking out companies for their three baskets by screening data. Although screens are different for each category and some are modified depending on market conditions, the managers like to see revenue growth, good cash flow and high margins.
But the screens only get them so far. The managers read sell-side research and travel frequently to conferences where they can meet executives of companies they might want to buy stock in. Because they limit the number of positions in the portfolio, they cull the weakest investment idea in the fund when they settle on a new prospect.
"We do a lot of legwork," Cunningham says about the fund's stock selection process. "I wish there was a nice, easy formula for it."
Joseph Lisanti, a Financial Planning contributing writer in New York, is a former editor-in-chief of Standard & Poor's weekly investment advisory newsletter, The Outlook.
Thornburg International Growth Fund
Credentials: CFA; B.A. in finance, U. of Nevada; MBA, University of Colorado
Experience: Co-portfolio manager, Thornburg Intl. Growth Fund (February 2012-present); associate portfolio manager, Thornburg Intl. Growth (2009-2012); equity research associate at Thornburg (2007-2009).
Inception of fund: February 2007
Style: Large growth
AUM: $1.7 billion
3- and 5-year performance as of Nov. 6: 16.51%, 22.67%
Expense ratio: 1.51%
Front load: 4.5%
Minimum investment: $5,000
Alpha: 9.70 vs. MSCI EAFE Growth
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