Quick Take: Buoyed by rebounding equity markets around the globe, the $200-million Thornburg International Value Fund (TGVAX) has risen 25.8% for the year ended September 30, slightly better than the 24.4% gained by the average international equity portfolio. Over the longer term, the discrepancy in performance is more pronounced — for the five years ended September, the fund returned 11.3%, annualized, while the peer group eked out a 1.9% gain.
The fund’s senior portfolio manager, Bill Fries, uses fundamental bottom-up research to find value stocks around the world that have fallen out of favor. They construct a relatively concentrated portfolio with typically fewer than 50 names.
Fries and his team identify stocks as: “basic value” (financially sound companies whose stock is selling at low valuations relative to net assets or potential earning power); “consistent earners” (consistent growth companies which are trading at valuations below historic norms); or “emerging franchises” (rapidly growing companies in the process of establishing a dominant market position).
Fries, along with Wendy Trevisani, Egor Rybakov, Ed Maran, and Vinson Walden, all members of the portfolio management team, participated in the interview.
What Your Peers Are Reading
The Full Interview:
S&P: Why has the fund had good returns this year?
THORNBURG: We’ve been able to find stocks with good fundamentals and attractive valuations — in some cases, historically low.
Also, certain foreign markets are growing rapidly, while still trading at a discount. Moreover, stocks with high dividend yields, such as energy companies like BP p.l.c. (BP) and CNOOC Ltd. (CEO), have become more attractive to U.S. investors due to the new 15% tax rate on dividends.
S&P: What kind of stocks, based on cap size or industry, look especially attractive now?
THORNBURG: We’ve recently purchased names in financial services, industrial manufacturing, and technology. We’re also focusing on foreign companies with strong local demand and less export dependence, such as telecom providers and some retailers.
S&P: What are your largest holdings?
THORNBURG: As of Sept. 30: Deutsche Boerse AG, 2.83%; Fraport AG, 2.77%; Euronext, 2.73%; Bank of Ireland (IRE), 2.73%; Novartis (NVS), 2.55%; Samsung Electronics, 2.50%; Toyota Motor Corp., 2.47%; Tesco PLC, 2.39%; Richter Gedeon, 2.35%; and NEC Electronics, 2.35%.
The portfolio is concentrated in 51 names and spread out over all cap-sizes: 20.4% in small caps, 35.1% in mid caps, and 44.5% in large caps.
S&P: What are your largest country allocations?
THORNBURG: As of Sept. 30: U.K., 15.6%; Germany, 13.2%; Japan, 12.2%; Switzerland, 8.2%; and Taiwan, 5.4%.
S&P: Does the weak U.S. dollar present a major headache for global equity markets going forward?
THORNBURG: Overall, a weak U.S. dollar could be a mixed blessing for global markets. A weak dollar hinders overseas companies which do most of their business in the U.S.
Yet there are many opportunities in foreign companies with limited exposure to the dollar. Examples include companies providing local services or products, as well as international companies which hedge their currency exposure, have dollar-denominated debt, or are naturally hedged by having facilities in America, such as BMW and Toyota.
S&P: How are things looking in Western Europe?
THORNBURG: European interest rates have followed U.S. rates to near historic lows. The euro has strengthened significantly versus the dollar, which will lead to translation and transaction risk for exporters and companies that do business in the U.S.
But a U.S. economic recovery should spill over into Western Europe. Our fund has about 53% of assets in Western Europe at present.
S&P: What is your view of Japan? Has it finally come out of its decade-long recession?