Thornburg Value Fund market commentary for the first quarter ended March 31, 2015.
Thornburg Value Fund: Celebrating Nearly 20 Years
We’re pleased to write that for the quarter ended March 31, 2015, the Thornburg Value Fund outperformed the benchmark S&P 500 Index, returning 3.47% (for the A shares without the sales charge), versus the index’s 0.95%. In October, the Value Fund will celebrate its 20th anniversary (hard for us to believe!), and we’ll use the time up to that point to highlight some encouraging performance metrics.*
Some of you may remember that we experienced about a year and a half of relatively weak performance between December 31, 2010, and June 30, 2012, during the aftermath of the financial crisis. One of the things that characterized that rough patch was increased volatility: for the life of the fund up to that point, raw beta (calculated weekly) had been 0.94, meaning that the fund was slightly less volatile than the market. During that same extended period (October 1995 through December 31, 2010), the fund returned 10.1% on an annual basis, versus 7.1% for the S&P 500 Index. For that long stretch, the fund outperformed the market, with lower volatility. During the year and a half of underperformance, volatility jumped; beta was at 1.22; annualized total return was a negative 8.9% (as shown in the table on the following page) versus the S&P 500 Index’s positive 7.7%.
But we took action to correct course. We bolstered the consistent earning characteristics of the portfolio and took other actions to reduce volatility. Since then, beta has returned, at 0.95, to its historic average. Returns are even more competitive. For the up-market period since June 30, 2012, your fund has returned 23.1% on an average annual basis, while the index has returned 18.9%. So your fund has significantly outperformed the broader market, with less volatility, during one of the strongest rally periods in recent memory. And we believe our efforts at risk management have paid off—that we have positioned the portfolio to have the potential to outperform during whatever market upcycles remain on the near horizon—while exposing shareholders to less downside risk.
Thornburg Value Fund: Semi-Literary Asset-Management Parallels
William Thorndike Jr’s 2012 book, The Outsiders,1 profiles eight market-beating CEOs and the characteristics that set them apart from their peers. Many of those characteristics can be used to describe key tenants of Thornburg’s investment philosophy and approach. Among us investment types, the book is, in Derek Zoolander’s words, “so hot right now.” It’s a good read, and we recommend it.
Thornburg Value Fund: Foxes versus Hedgehogs
Thorndike draws a distinction between managers who are like foxes, with well-rounded knowledge bases, and managers who are like hedgehogs, experts in a narrow field. All of his “outsider CEOs” are foxes. Thornburg’s global-generalist approach aims to train us each as foxes, in stark contrast to how many of our competitors operate (as sector specialists working in silos). In our work as analysts, associate portfolio managers, and portfolio managers, we conduct bottom-up, fundamental research on a wide variety of types of companies doing business all over the world. Thorndike asserts that his fox CEOs “had familiarity with other companies and industries and disciplines, and this ranginess translated into new perspectives, which in turn helped them to develop new approaches that eventually translated into exceptional results.”
We believe a global generalist approach, where each of us is trained like a fox and not a hedgehog, gives us a sustainable competitive advantage. Thorndike writes on Warren Buffett:
Buffett…by virtue of his prior experience evaluating investments in a wide variety of securities and industries, was a classic fox, and had the advantage of choosing from a much wider menu of allocation options… Simply put, the more investment options a CEO has, the more likely he or she is to make high-return decisions, and this broader palate has translated into a significant competitive advantage for Berkshire.
—William Thorndike Jr., 2012, The Outsiders
The latitude and discretion our portfolio managers use in the management of our strategies allow us to best take advantage of the global generalist approach. Not only does this flexibility create an environment that allows better comparison between investment opportunities, it also widens the available universe of investable securities.
Thornburg Value Fund: Far from The Noise of Wall Street
Describing his outsider CEOs, Thorndike writes, “Interestingly, their iconoclasm was reinforced in many cases by geography. For the most part, their operations were located in cities…removed from the financial epicenter of the Boston/New York corridor. This distance helped insulate them from the din of Wall Street conventional wisdom.”
Thornburg’s location in Santa Fe, New Mexico, is conducive to bold, high-conviction investing, especially when our ideas are contrarian. Our private structure allows our focus to remain on our investors’ outcomes, rather than the quarterly game of giving and hitting earnings guidance as an organization. If we do well by our investors over the long term, our own financial rewards will follow.
“Independent thinking is essential to long-term success and interactions with outside advisers (Wall Street, the press, etc.) can be distracting and time-consuming,” writes Thorndike.
Thornburg Value Fund: Revisiting Inflation and the Strong Dollar
In our third-quarter 2014 commentary, we discussed the relationships between inflationary growth environments, non-inflationary growth environments, and p/e multiple expansion of the market. Why revisit the topic? Because valuations in the United States really are about inflation expectations—and a strong dollar. Let’s take a look at the dollar component of this relationship; strong-dollar periods correlate closely with higher multiples.
The greater than 3% rise in the trade-weighted dollar in 2013 played a role in keeping inflation pressures at bay and contributed, we believe, to multiple expansion in 2014. With the monetary expansion in Japan, the end of the Fed’s stimulus in the United States, European Central Bank monetary expansion, and weakness in emerging markets-sensitive currencies, we might expect continued dollar strength in the coming months and years, which could lead to further U.S.-market multiple expansion.
See full PDF below.