Fund in Focus: Thornburg Core Growth/A

Alex Motola, manager of the $125-million Thornburg Core Growth Fund/A (THCGX), researches and selects stocks for this all-cap growth portfolio. A thorough investment process has already led to strong performance, and he believes it will eventually reward investors with good long-term returns.

For the one-year period ended June 30, 2005, the fund advanced 21.2%, versus a gain of 5.4% for the average all-cap growth fund. For the three years ended in June, it registered an average annualized return of 22.1%, versus 8.4% for its peers, and 8.4% for the S&P 500. Within its category, Standard & Poor’s upgraded Thornburg Core Growth to 5 Stars from 4 Stars in April 2005. The fund also ranks 5 Stars within the broader domestic equity fund category.

Thornburg Core Growth, just shy of having five full years of operating history, got off to a rough start. It was launched just after the dot-com implosion, and fell 19.2% in 2001, and 26.4% in 2002. However, Motola doesn’t attribute the initial losses to the technology sector. He points out that the declining market as a whole, which the fund outperformed on a relative basis, largely drove performance in the first two years. During that period, the fund’s worst performers were Time Warner (TWX), Amdocs (DOX), a subsequent winner for the fund and a current holding, and Advent Software (ADVS).

Motola and the members of the core growth investment team at Thornburg say the fund’s bias is growth-at-a-reasonable price, yet characterize the portfolio as flexible, eclectic, and research-intensive. Indeed, a single, rigid approach isn’t necessarily used when selecting new stocks to add to the 35 securities currently held in this slim portfolio. Motola feels the concentrated nature of the fund allows him and his team to better understand, research, and manage each holding.

Motola does, however, keep specific criteria in mind when selecting new stocks, and reviewing the fund’s current holdings. Time is dedicated to researching each security because of the nature of growth stocks themselves; investors generally have higher expectations from them, despite their greater potential for a decline in value. Motola believes it’s vital to assess what could go wrong with a stock, even though investors are generally more centered on what’s good about an investment.

During the idea generation phase when investments are sought, 70% of stocks in the portfolio come from screening, while the remaining 30% are obtained through research and company visits. Typically, Motola and the team screen companies on operating margins, homing in on those with expanding margins. Return on invested capital, return on equity, sales, and earnings growth are other metrics they concentrate on. (Screens based purely on valuation are less common, since the managers feel they can miss opportunities.) Next, SEC filings are scrubbed, and forward looking investment models are built for stocks that have been uncovered. Finally, knowledge from industry insiders, such as supply chain managers and retailers, is sought since they can offer offer analysis, risk assessment, and thoughts on future expectations.

Risks for the fund are posed largely by unanticipated events, but Motola and his team do their best to try and anticipate them by structuring the portfolio to “absorb” any shocks. This is done by using a multi-cap strategy — investing in large- mid- and small-cap companies — and by dividing the portfolio into three distinct growth segments.

Growth Industry Leaders are fast growing companies that appear to have proprietary advantages in industry segments that are experiencing rapid growth. Stocks of these companies generally sell at premium values. Google (GOOG), the fund’s second-largest holding at 4.04% of assets, is an example of a Growth Industry Leader.