A highly select approach to

Transcription

1 with independent analysis from A highly select approach to Global Equities Thornburg Investment Management presents Thornburg Global Opportunities Fund managed by Brian McMahon and Vinson Walden October 2017 For professional investors only.

2 Many fi rms appear to do what we do. What sets us apart is not what we do, it s how we do it: how we think, how we invest, and how we re structured. Count on Thornburg for a distinctive process that can help you reach your fi nancial goals. To learn more, vist thornburg.com/our-fi rm or contact Chris Elsmark at Chris.Elsmark@thornburg.com. thornburg.com

3 Introduction Welcome to another edition of Source, a publication that shines the spotlight on particular funds and their managers. This time, Thornburg presents Thornburg Global Opportunities Fund, with an in-depth profile and Q&A with co- Portfolio Manager Brian McMahon and co-portfolio Manager Vinson Walden, plus supporting analysis from Citywire. Contents 5 Investment profile 8 Analysis 11 Q&A October

4 4 October 2017

5 Investment Profile with Brian McMahon Could a focused global equity fund launched in mid-2006 provide investors a smooth ride and strong returns over the next 11 years? It wouldn t be easy. The market peaked in late 2007, collapsed in the 2008 Global Financial Crisis, cratered anew in 2011 and came a cropper again in 2015 and A decade ago, most actively managed global equity funds had multiple times the 30 to 40 holdings of Thornburg Global Opportunities Fund. Many more stock positions would presumably mitigate the intense market volatility to come and spare investors the possible whiplash from a high-conviction fund over such a turbulent period. Despite the inevitable missteps, though, Global Opportunities Fund has discovered a few things along the way. The biggest lesson we ve learned is that we can execute with a focused portfolio and do it without a lot more volatility, said co-portfolio Manager Brian McMahon. We haven t had a lot less, either, but we ve been able to manage the risk and ramp up the reward. The fund s beta since its 28 July 2006 inception through the end of July 2017 against the MSCI All Country World Index (ACWI) amounts to 1.1, while its annualized return amounted to 11.2%, about double the index s 5.7% gain. The fund has generally protected on the downside, while capitalising on the upside. The spreads between the upmarket capture and down-market capture ratios amount to 24, 46, and 17 points for the three-, five-, and seven-year periods, respectively, through the end of July. Since its debut 11 years ago, the spread hit 22 points. Bottom-up, fundamental research with a tilt toward picking stocks trading at a significant discount to their assessed intrinsic value is the usual modus operandi for value funds. But the Global Opportunities Fund concept of value applies to all types of stocks, from beaten-up cyclicals to hardcharging secular growth stories. The key is trying to figure out whether they re trading at meaningfully less than what their future The biggest lesson we ve learned is that we can execute with a focused portfolio and do it without a lot more volatility. Brian McMahon earnings prospects would indicate. It s a tricky exercise as stock valuations have risen more than economic growth would imply since the end of the crisis, likely October

6 because major central banks have pumped unprecedented amounts of liquidity into the global financial system in a bid to revive economic growth and inflation. Share price multiples have expanded amid the flood of liquidity and expectations that earnings growth would enable stocks to grow into their multiples. The MSCI ACWI s trailing price-to-earnings (P/E) ratio has clawed its way back from a post-crisis 2011 low of 11.9x, and was recently trading at almost 20x, in line with its two-decade average. Global Opportunities Fund holds 30 to 40 names, a fraction of the index s nearly 2,500 constituents. So the investment team can deeply analyze its holdings for both attractive valuations and well-founded growth prospects. Perhaps that s why it exhibits a lower trailing P/E of just less than 18x, and has a higher three-to-five-year earnings per share (EPS) compound annual growth rate forecast of 14.1%, versus the index s 13.3%. Its historical three-year EPS growth contrasts even more sharply: 23% vs the index s 10%. And it s not just bottom-line growth: historical three-year sales growth amounted to 17.7%, about tripling the index s 5.8%. If Global Opportunities Fund has had a knack for tapping under-valued stocks poised for accelerated earnings, it s also had its misses. The fund has never owned Amazon, for example, and only just recently purchased Facebook. Those were errors of omission, McMahon admits, of vision on our part. He explains that neither company initially passed muster on traditional or even non-traditional multiples, particularly in the case of Facebook. He adds that while both still appear pricey given the ongoing surge in passive investment flows into these mega-cap tech stocks, a recent short pullback presented an attractive entry point to initiate a position in Facebook. As the Fed continues to reduce its still considerable monetary accommodation and the European Central Bank moves to slowly cut its liquidity injections in the next year or so, potential market pullbacks may provide additional openings to initiate new positions or build out positions in existing holdings. Going back to the mid-1950s, during periods when the Fed undertook a monetary tightening cycle, McMahon notes that stock multiples contracted slightly less than two multiple points. Over the last decade, rock-bottom interest rates and quantitative easing have changed the calculus in the general perception of the cost of capital and by extension equity risk premiums. Moving forward, how markets, including passive flows, react to the withdrawal of the unprecedented stimulus is difficult to predict. Less quantitative easing and tighter monetary policy mean the rising liquidity lifting all boats will recede. Will the flows into passive, most of which compel buying, regardless of price, into ever more expensive stocks as market-capitalisation weightings increase, continue or reverse if stock multiples contract? We ll see, McMahon says. In the meantime, sound price discovery on individual stocks will become more important than ever if markets again pull back. Stocks with stronger business models, balance sheets and attractive valuations the kind that Global Opportunities Fund targets should hold up better. These characteristics may not be immediately evident, though. Some of the companies are engaged in promising cost-reduction and business execution stories. Others may have productively leveraged their balance sheets in pursuit of future high-growth prospects. T-Mobile U.S., 6 October 2017

7 for example, has made huge investments to build out its network, a phase that weighed heavily on its return on equity (ROE). But now it s starting to reap the rewards, McMahon says, and its ROE has increased rapidly over the last year. It s much the same story with Indian conglomerate Reliance Industries, which has invested heavily in both its energy and telecom segments, with refining and petrochemical projects coming on line over the next year or so, and its wireless telecom market share expanding rapidly. It has completed its greenfield LTE communications network covering the entire country of 1.3 billion people. It s now carrying more data than any of the Chinese or European networks, McMahon points out. With the peak in capex and net debt behind it, free cash flow should inflect near term. Has it seen a return on the historical numbers? No. But the stock is up around 50% so far in 2017 on anticipation of improving financial metrics in the medium term. We re interested in the strategic winners, McMahon adds. Investment teams need to look both forward and backward, which is necessary for risk control. Brian McMahan (left) and Vinson Walden October

8 INTERROGATING PERFORMANCE 10 Year Track Record in Global Equity Brian McMahon and Vinson Walden Average Manager MSCI ACWI Frank Talbot Head of Investment Research, Citywire The management team of McMahon and Walden have comfortably outperformed both the average manager and the index over the past decade. While their concentrated style has resulted in a fourth quartile standard deviation of 19.60% annualised - it has enabled them to flourish during the post credit crisis bull market. TOTAL RETURNS (%) JUL 07 JUL 09 JUL 11 JUL 13 JUL 15 JUL 17 8 October 2017 SOURCE: Citywire Discovery/Lipper, as at Data is based on Brian McMahon and Vinson Walden s track record in the sector over 10 Years. Performance is based on total return in USD calculated gross of tax, bid to bid, ignoring the effect of initial charges and with income reinvested at the ex-dividend date. Average manager is based upon the managers tracked in Citywire s Equity - Global sector.

9 Risk-Adjusted Percentile v Market Share (end of July 2017) 10 Year Risk-Adjusted Percentile BEST POSITION The MSCI ACWI is notoriously hard to outperform, with around 20% of fund managers achieving positive alpha over all time frames up to 10 years. Among those managers with a 10 year track record, McMahon and Walden have the 14th highest risk-adjusted returns globally from a peer group of 401 managers (96th percentile); while over the equity market rally of the past year, they re in the 97th percentile for risk-adjusted returns. When both time periods are taken into account, they are fourth overall in the peer group; this is reflected in their position in the upper most right-hand corner of the bubble chart Year Risk-Adjusted Percentile SOURCE: Citywire Discovery, as at Risk-adjusted percentiles are calculated in USD gross of tax, bid to bid, ignoring the effect of initial charges and with income reinvested at the ex-dividend date. Peer group rankings are based on managers tracked by Citywire globally. Market share data based on total assets under management by managers tracked by Citywire. October

10 Risk-Adjusted Returns (Brian McMahon and Vinson Walden) 6 Months 1 Year 3 Years 5 Years 7 Years 10 Years MR Rank MR Rank MR Rank MR Rank MR Rank MR Rank / / / / / / 401 Total Returns 6 Months 1 Year 3 Years 5 Years 7 Years 10 Years TR Rank TR Rank TR Rank TR Rank TR Rank TR Rank / / / / / / October 2017

11 Q & A with co-portfolio Manager Vinson Walden Q Thornburg Global Opportunities Fund is a high-conviction global equities portfolio of 30 to 40 holdings, a fraction of the typical global equities fund. Can you discuss its diversification and risk management? A VW: The core of both the fund s risk management and philosophy is our bottom-up, fundamental analysis. With a typical global equity fund of 150 or so holdings, it s hard to be selective, study, and track them all closely. As for position sizes, do you really want to put money into your 150th best idea? Almost all of our performance over time has come from valuation-sensitive security selection, not from being in the best country or the best industry at the right time. We ve been able to add more value through heavier individual weightings within a highly select, compact fund of what we assess to be highquality, undervalued stocks that offer an attractive risk/reward balance compared to other options. A key element of the fund s diversification is its geographic flexibility. It s not easy to find a time in the fund s history that our geographic weightings have looked like the benchmark s. But, we maintain exposure to at least 10 different countries. These are not necessarily the biggest countries that you would expect in a global fund. So we are not currently in Japan, for example. Then we re diversified by industries and also have position size limits. Q You mention valuation sensitivity and suggest a preference for undervalued stocks. But a holdingsbased analysis implies the fund s investment style is more a large-capitalisation core fund. A VW: We have been global value-sensitive investors since the fund s July 2006 inception. The fund may currently look more core oriented, but that s a function of our value orientation. In the 2008 financial crisis, many cyclical stocks became deep values, especially some banks and manufacturing companies. As they recovered and their share prices rebounded, we benefited and then migrated toward more secular growth stocks with better upside potential and a little more insulation from the overall business cycle. As they appreciated and hit our price targets, we have shifted into others with the potential of greater upside and margin of safety. The crux is that we only buy companies we believe have significant upside to our deeply researched and fundamentally derived price target. In any event, we don t target stocks based on where they may be classified in a market research firm s investment grid. Part and parcel of our flexibility is an ability to invest along the market capitalisation and style spectrums. This helps us navigate market cycles, but is based on where we re finding the most attractively valued stocks, regardless of whether the market perceives them as value, growth, or core stocks. October

12 Q Apart from a discount to your assessment of intrinsic value, what else do you look for when analysing a company? A VW: A high-quality business and a clear path to long-run success. Taken together with an attractive valuation, you can understand why different types of companies deserve different multiples. A company may or may not be a bargain because it s trading at 10 times earnings. Some businesses are a good value at 20 times earnings because they are strong franchises with few competitors, healthy or growing end markets, and a robust, durable earnings potential. By standard valuation measures or a short-term mindset, such a company may look expensive, but its multiple may be justified or even reflect an underpricing. Essentially, valuation and business quality are attached at the hip. They can t be assessed independently of each other. Of course, numerous factors are considered within the analysis of valuation, business quality, and catalysts for success. By considering so many factors, we bolster our knowledge of the business and can mitigate risk. Ideally, when something goes wrong for us, it doesn t detract as much as the winners contribute to the fund s overall performance. Q One result of the Global Opportunities stock-by-stock approach is that sector weightings can vary quite sharply from those of the index. Its consumer discretionary allocation, for example, is around eight points higher than that of the index, while allocations to financials and especially health care are below index levels. Does that create more risk or volatility? A VW: It s a residual effect of our value-oriented approach and the relative opportunities available at any given time. In a well-diversified fund with high active share, you will often have stockspecific shortfalls and disappointments. Our batting average isn t perfect. But if our top 10 companies have done well, while the bottom performers haven t hurt that much, again, overall fund performance should benefit. So, yes, we re overweight consumer discretionary because that s where we re seeing more bottom-up opportunities at this time. We bought Wynn Resorts, for example, early last year, concluding that the market was undervaluing it. Steve Wynn, the chairman and CEO, has a terrific long-term record of creating value for shareholders by producing high returns on capital and strong cash generation. And it has a visible path to success. Its Macau properties increasingly benefit from growing capacity utilisation thanks to rising Chinese middle-class demand. As for health care, much of the opportunity set in the U.S. is saddled with unknown fundamental risk due to uncertainties surrounding health care policy, which could affect pharma, biotech, and health care services companies to varying, hard-todiscern degrees. While some of them may be reasonably valued on current fundamentals, they may also lack adequate downside protection if an adverse health care policy shift occurs. It s simply not clear there is 12 October 2017

13 enough potential upside to compensate for regulatory risks. Some face less such risk than others device makers or service companies, for example, but we find valuations pricey for many of them and prefer not to get involved at this time. On U.S. financials, valuations are also on the high side, baking in expectations for lower taxes, less regulation, and higher interest rates. European financials are also likely to benefit from higher rates as economic momentum grows, but their prices already reflect considerable optimism about the economic recovery in continental Europe. That said, all our current financials exposure comes from the U.S. and Europe. And we continue to look at financials in both regions, and elsewhere, that have an underappreciated ability to return capital to shareholders or improve their operations, notwithstanding the economic environment or surprise political developments. There s a good example of this latter point in the property sector. One of our U.K. holdings, a property developer called Barratt Developments, sold off along with the rest of the U.K. equity market in reaction to the surprise Brexit vote in June of last year. We took advantage of the selloff to increase our position size. Since then, the stock has more than recovered from its pre-brexit trading levels. Markets often push share prices around more than business fundamentals warrant. That s why our value orientation and fundamental analysis of the company s quality and catalysts for success are so important. They really drive the fund s long-term performance. For further information on Thornburg s range of funds, visit or Chris Elsmark, Managing Director in London, at chris.elsmark@thornburg.com. All information contained in the above article refers to the U.S. mutual fund. This information is considered relevant because the Global Opportunities UCITS (the Fund) is structured similarly to the U.S. mutual fund. Although the Fund is managed by the same investment team and utilises a similar investment process as the U.S. mutual fund, the performance and portfolio composition of the Fund may differ due to UCITS regulations. October

14 Thornburg Global Opportunities Fund Average Annual Total Returns As at 30 June 2017 (in US$ terms. Not annualized for periods less than one year.) U.S. Mutual Fund (net of fees, without sales charge) YTD 1-Yr 3-yr 5-yr 10-yr Since Incep Class A Shares (Incep: 28/07/06) 14.18% 27.97% 7.58% 16.50% 6.62% 10.40% Class I Shares (Incep: 28/07/06) 14.35% 28.40% 7.97% 16.97% 7.11% 10.91% MSCI AC World Index 11.48% 18.78% 4.82% 10.54% 3.71% 5.47% Performance data shown represents past performance and is no guarantee of future results. Investment return and principal value will fluctuate so shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than quoted. For performance current to the most recent month end, visit thornburg.com or call The maximum sales charge for the Fund s A shares is 4.50%. There is no up-front sales charge for class I shares. Since the Fund has a limited performance history, data for Thornburg Global Opportunities Fund, a U.S. mutual fund, is shown. Although the Fund is managed by the same investment team and utilizes a similar investment process as the U.S. mutual fund, the performance and portfolio composition of the Fund may differ due to UCITS regulations. Investments carry risks, including possible loss of principal. A copy of the full Prospectus and KIID may be obtained by contacting the local Paying Agent through the Fund s Transfer Agent, Brown Brothers Harriman Fund Administrator Services (Ireland) Ltd or at The Prospectus and KIID contain important information about the Fund and should be read carefully before investing. This communication and any investment or service to which this material may relate does not constitute an offer or solicitation to invest in the Fund and is exclusively intended for persons who are Professional Clients or Eligible Counterparties for the purposes of the FCA Rules and other persons should not act or rely on it. This communication is not intended for use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation. In the United Kingdom, this communication is issued by Thornburg Investment Management Ltd. ( TIM Ltd. ) and approved by Robert Quinn Advisory LLP which is authorised and regulated by the UK Financial Conduct Authority ( FCA ). TIM Ltd. is an appointed representative of Robert Quinn Advisory LLP. The Fund is a sub-fund of Thornburg Global Investment plc, an open-ended umbrella type investment company with segregated liability between sub-funds, authorised by the Central Bank of Ireland (CBI) on 25 November 2011 as an investment company pursuant to the UCITS Regulations. Authorisation of the Company by the CBI is not an endorsement or guarantee of the Company by the CBI nor is the CBI responsible for the contents of the Prospectus or KIID. This material constitutes a financial promotion for the purposes of the Financial Services and Markets Act 2000 (the Act ) and the handbook of rules and guidance issued from time to time by the FCA (the FCA Rules ). TIM Ltd. neither provides investment advice to, nor receives and transmits orders from, persons to whom this material is communicated nor does it carry on any other activities with or for such persons that constitute MiFID or equivalent third country business for the purposes of the FCA Rules. Unless otherwise noted, the source of all data is Thornburg Investment Management, Inc., as at 30 June October 2017 Legal disclaimer

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16 Thornburg Global Opportunities Fund This is no ordinary global equity fund. It is rooted in our long heritage of unbound, collaborative fundamental research, unfl inching active portfolio construction, and uncommon desire to be different in how we think and invest in promising companies with a durable competitive advantage. Our fl exible and diversifi ed fund offers: Potential growth of capital through unconstrained stock selection A high active share through a value-centric, focused portfolio of stocks A strong track record of outperformance The same proven team that has successfully led a similar strategy as a U.S. mutual fund since 2006 thornburg.com Chris.Elsmark@thornburg.com