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Fund in Focus: Thornburg Core Growth/A

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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.

Consistent Growth Companies are stocks that generally sell at premium valuations and tend to show steady revenue and earnings growth, e.g. DIRECTV Group (DTV), and Affiliated Managers Group (AMG), to name two.

Emerging Growth Companies are typically growing companies that are in the process of establishing a leading position in a significant product, service or market, and are expected to grow, or continue to grow, at an above average rate. These companies may not be profitable at the time of purchase. Examples includeTempur-Pedic International (TPX), and Shanda Interactive Entertainment (SNDA).

As of the end of June, Growth Industry Leaders took up 31% of the portfolio, Consistent Growth Companies 29%, and Growth Industry Leaders 31%. In terms of the multi-cap structure built into the portfolio, any where from 25%-40% can be allocated to stocks of either large- mid- or small-cap companies. As of the end of June, large-caps took up 41% of the portfolio, mid-caps 30%, and small-caps 29%.

Motola sells a stock for a number of reasons, such as when a price target has been reached, if there is a significant change in company fundamentals, or to upgrade the portfolio with a better idea. If a stock gets too expensive, he may not sell the entire position, but instead reduce exposure and benefit from the profits. In addition, Motola sells to take advantage of a tax losses. Two of the most recent sells, Golden Meditech (GMDTF.PK) and PainCare Holdings (PRZ), were shed to generate tax losses. LifeCell Corp. (LIFC) and stocks of other attractive companies that the fund currently holds were added to the portfolio.

The fund’s top ten holdings include some household names, and account for over 35% of its assets. They are Chicago Mercantile Exchange Holdings (CME), 4.15%; Google (GOOG), 4.04%; DIRECTV Group (DTV), 3.95%; Tempur-Pedic (TPX), 3.56%; WellPoint (WLP), 3.50%; Life Time Fitness (LTM), 3.45%; Dell (DELL), 3.22%; Korean-based CJ Home Shopping, 3.16%; Apple Computer (AAPL), 3.16%; and Microsoft (MSFT), 3.13%. The portfolio also holds stocks that are not well known, including international ones listed on local exchanges. They account for 12% of assets.

Motola and his team are not benchmark preoccupied. While they aim to beat their benchmark, the Russell 1000 Growth Index, they are not worried about hugging its weightings from a sector standpoint. Instead, Motola affirms that understanding individual stocks well helps control risk. Compared to its peers, Thornburg Core Growth fund has a higher Sharpe ratio, 1.23 versus 0.44, indicating that it has achieved better risk-adjusted returns. Volatility is only slightly higher than it’s peers, while portfolio turnover is lower.

Contact Bob Keane with questions or comments at: [email protected].


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