How Thornburg Investment Finds Opportunities

How Thornburg Investment Finds Opportunities

Since Brian McMahon and Vinson Walden of Thornburg Investment Management established the Global Opportunities Fund in 2006, the fund’s average annualized return was 10.67% (with sales charge).

Adding value is difficult with style-box approach

In an interview with Value Investor Insight, McMahon said they hesitated to start the Global Opportunities Fund because of their observation that U.S. investors were extremely focused on style-box allocation strategy. According to him, the strategy is evolving very slowly, and he noted that U.S. investors increasingly recognized that the style-box allocation structure does not serve them as well as expected.

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McMahon emphasized that the “ability of one fund to opportunistically cross geography and market cap boundaries can add value,” which he says is happened to Global Opportunities Fund.

On the other hand, Walden emphasized that it is difficult to add value using the style-box in a competitive industry. According to him, a more flexible and disciplined approach is necessary. In the case of Thornburg Investment Management, they are implementing a specific value-oriented philosophy and processing across a global opportunity set.

Thornburg Investment looks for three factors

Thornburg Investment Management is looking for three things in finding opportunities. Those are high-quality businesses, undervalued stocks and paths to success or catalysts. According to Walden, their investing approach is similar to Joel Greenblatt’s magic formula in many ways, with quality expressing itself through high returns on capital.

However, he pointed out that their approach is more focused on the status quo instead of the potential for those returns to be improved and then sustained over time.

During the interview, Walden identified some of the companies that offer good investment opportunities. These companies include BRF SA (ADR) (NYSE:BRFS), Trinity Industries Inc (NYSE:TRN), and Express Scripts Holding Company (NASDAQ:ESRX).

High-quality business

According to Walden, BRF SA (ADR) (NYSE:BRFS) caught their attention because it is a high-quality business. Since 2010, Thornburg Investment Management has owned a stake in the company.

BRF SA was formerly known as BRF-Brasil Foods S.A. It is one of the largest food producers worldwide. The company has a significant export poultry business and a leading domestic market share in different categories.

When they made an investment in BRF, Walden said they did not pay attention to the short-term noise affecting the company. At the time, investors were worried about its large acquisition and the margin pressure on its export business

According him, they maintained their focus on the company’s competitive position, which served them well. Walden explained that they believed BRF’s acquisition could result to synergies that would drive significant profit and that the margin pressure was cyclical, not structural.

McMahon added that BRF would likely benefit from Russia’s decision to ban imported foods such as chicken or meat from the United States, Europe and Ukraine. They did not count the situation in their investment thesis on the company, however.

“I would say that part of the reason to own higher-quality businesses is that unforeseen good fortune is more likely to shine on them,” said McMahon.

Good business with a simple path to success

Walden said cyclically-depressed industries are hard to find today. According to him, they are often attracted to good businesses in the middle of bad cycles, such as Trinity Industries Inc (NYSE:TRN).

In 2010, Thornburg Investment Management invested in Trinity Industries, a freight rail car manufacturer in the United States. At the time, they believed that the company was a good business experiencing a bad cycle; its production volume was close to zero.

Walden explained that Trinity’s simple path to success was its return to a more normal level of production, which would likely result in a significant improvement in P&L. He emphasized that the company’s problem was not related to losing business to competitors.

Undervalued company with secular top-line drivers

Last year, Thornburg Investment Management acquired a position in Express Scripts Holding Company (NASDAQ:ESRX) because it has secular top-line drivers from healthcare reform and demographics.

In addition, the firm noted that the company offers an attractive value proposition with scale-driven cost savings to clients. Thornburg Investment Management also believed that Express Scripts has the potential to boost returns to shareholders through capital allocation.

Walden explained that they found an opportunity in Express Scripts based on their estimate that the market was not valuing all factors appropriately.

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