Thornburg Investment Management: Our Unique Investment Approach
February 15, 2016
by Robert Huebscher
Thornburg Investment Management is based in Santa Fe, NM, and manages $55 billion in assets as of December 31, 2015. Its funds span the range of asset classes, offering both U.S. and non-U.S. exposure. Its first equity fund, the Thornburg Value Fund (TVIFX), has returned 9.73% on an average annualized basis since its inception in 1995, versus 8.11% for the S&P 500 (as of 1/31/16).
On February 8, I spoke with Bill Fries, who is in the process of transitioning to senior advisor this year, Connor Browne, the co-manager of the Value Fund and who was mentored by Bill when he managed that fund and Jason Brady, president, CEO and the head of global fixed income.
As a firm, Thornburg has a consistent long-term record of success in having all of its funds beat their respective benchmarks. The Thornburg Value Fund (TVIFX) outperformed the S&P 500 by 162 basis points since its inception in 1995. Has the process you’ve used to manage that fund remained constant over that period? How has that process been transferred to your other equity funds?
Bill: Yes, absolutely. The process has remained consistent since we launched in 1995. To give you a little bit of history, I came here in 1995 when Thornburg was primarily a fixed-income shop. I came to start the equity product. As with most fixed-income shops, Thornburg was pretty conservative. But the management had run an internal equity portfolio since 1990 with what I would consider great success. It was a focused portfolio. It was global in nature. There was a little bit of flexibility, but it was primarily a deep value portfolio.
We decided to have a more comprehensive approach to value investing with the launch of the Value Fund. We established three categories of value. First is Basic Value, including investments familiar to most value managers. Many of those companies are cyclical in nature and can have periods when they provide investors with a great opportunity.
The second category is high-quality companies that we identify as Consistent Earners. The predominant part of the portfolio is in those two categories. We would never swing to all basic value or all consistent earners. We typically own 40% in each of those, but not in a pedantic way. There’s lots of room for flexibility. We want to go where there is value.
The third category we consider is Emerging Franchises. That’s not necessarily emerging markets, but emerging-franchise stocks. Others might look at them and say, “Well, they have growth characteristics,” but they get out of favor too, as we see in today’s market. We have a limited portion of the portfolio in those names.
We end up with three different categories of value. That has worked pretty well for the firm in terms of developing consistent performance over time by being able to go where we can identify opportunity.
Connor: The flexible perspective that we use with the Value Fund has continued in all of our subsequent equity-fund launches and is part of our fixed-income investment process as well. Because of their flexibility, sometimes our funds are very hard to fit in to a traditional asset-allocation grid. We believe that flexibility allows us to find underlying investments that can outperform over the long term.
What do you consider to be unique about your investment style? How do you maintain consistency over the course of changing market conditions? Along with that, what steps have you taken to develop and maintain collegiality among managers and analysts? What has been the most difficult challenge in establishing the enduring style that you just described?
Jason: Let me answer that at the firm level, and then my colleagues can focus on what it has meant specifically to the Value Fund with some examples.
As Connor mentioned, our investment style has a flexible perspective. But that is not just at the portfolio level; that is actually at the analyst and portfolio-manager level. All portfolio managers are also analysts, and everyone is looking all over the world for good ideas. When you combine that with a very collaborative, collegial environment, it makes for a very powerful combination.
When we are looking all over the globe across asset classes, we are actually here in Santa Fe comparing notes, describing what we’re seeing, with each individual analyst and portfolio manager adding value, so that all the portfolios here can benefit.
That certainly has not resulted in our portfolios looking the same. As a matter of fact, each portfolio that we have has very different goals. But, for example, the fact that we started as a fixed-income shop and Bill came along and launched our now very successful equity portfolios has been an example of how we can come together into asset classes that are often considered to be very different with very different disciplines.
That’s a very different approach than a number of folks who might start with a benchmark. Rather than looking for pluses and minuses against a benchmark, we start with portfolio goals and then work to drive value for our clients with active management.
Connor: Another important part of our investment culture at Thornburg is collaboration. We’re far from the herd in Santa Fe, New Mexico. In order for us to benefit from all of the knowledge and experience sitting around our trading desk, we need to respect each other. Bill would hopefully agree that that is one of his core beliefs in life in general, but also in investment management – believing in and trusting those around you, treating each other respectfully, which allows us to work together, to collaborate.
For example, we just worked very closely in the Thornburg Value Fund on a new basic-value stock idea. It’s a municipal bond insurer, Assured Guaranty (AGO). It was a huge benefit for us to be able to get access to the experts on our municipal-debt portfolio management team. We were thinking about exposure to Puerto Rico and to some states and municipalities that may be under pressure. We worked very closely on that idea, which I don’t think is something that happens as often at other shops.
Bill: I would add that recruiting and building our team over time is important. We have a process to the way we recruit people, which we are all involved in, where everybody that’s on any of the teams has a shot at talking to new recruits. Generally speaking, potential hires talk to a lot of the people on the team. We are looking for personalities that fit our collegial environment and people who treat their peers with respect and dignity.