The eclectic mix comes from Fries' broad definition of value. He divides the portfolio into three categories. The first, Basic Value, conforms to the traditional value mold with characteristics such as low price-to-book and price-earnings ratios. They tend to be sensitive to economic cycles, and Fries tries to buy them when they are out of favor. Stocks in this group include Bank of New York, Smurfit Stone Container and Deere & Co.
A recent addition to the Basic Value category is Exxon Mobil. "A little over a year ago, oil was selling at around $23 a barrel and most analysts thought that the company's earnings would be lower in 2004. Obviously that hasn't happened, and the stock's price still does not reflect future prospects for growth." Fries says Exxon Mobil also has the highest return on capital invested, the highest profit margins and the lowest finding and development costs among integrated oil companies.
The Consistent Earners category contains many dominant blue-chip names whose revenue streams are not subject to the same ups and downs as those in the cyclical group. "Earnings may not grow as much as the basic value group on a cyclical upturn, but a nominal growth rate of 10% to 12% over the long term is a reasonable expectation," says Fries. Names here include Pfizer, Citigroup, Colgate Palmolive and Federal National Mortgage Association.
The category also includes stocks not normally associated with earnings stalwarts, such as media holdings Comcast and DIRECTV Group. Comcast, the largest cable television system operator and the largest high-speed Internet provider in the United States, enjoys the benefit of recurrent revenue from cable system subscriptions, as well as growth from consumer migration toward high-speed Internet systems. DIRECTV, a Direct Broadcast Satellite (DBS) service provider that has more than 11 million subscribers, should benefit from a 30% ownership stake by Rupert Murdoch's News Corp. Fries says the revenue streams of the two companies have not been affected by increased competition, despite investor concerns.
Fries recently added Microsoft to the Consistent Earner group. "Microsoft is well-positioned for continued capital appreciation," he says. "It has strong leadership, it continues to gain market share and it has executed its business plans better than its competitors. And it has a great business model and a unique position of power with its Windows operating system."
The final group, Emerging Franchises, truly distinguishes this fund from most of its peers. It contains higher risk names such as E*Trade Financial, Fox Entertainment Group and Nextel, which have the potential to grow faster than the other two categories of stocks. "Some people think it's unusual to have these kinds of stocks in a value portfolio," says Fries. "But they can be considered value stocks because I buy them when they are out of favor. It's a unique opportunity when smaller companies in the portfolio can have larger-than-average gains over time."
The largest holding in this category, Nextel, is a leading provider of wireless services in the United States whose networks cover 197 of the top 200 markets domestically. It historically has had the lowest termination rate and the highest average monthly bills of the major wireless service providers.
Fries says that Thornburg Value maintains a ballpark 40/40/20 asset split between Basic Value, Consistent Earners and Emerging Franchises. But in the more recent choppy market environment, he has decreased the Emerging Franchise niche to 12% of fund assets and fattened up the Consistent Earner category.
Fries uses a similar strategy in the international fund, which has a concentrated portfolio of about 50 stocks. As of August, the fund maintained a 42/38/13 equity asset split between Basic Value, Consistent Earners and Emerging Franchises. The basic value category consists of stocks such as Samsung Electronics and Toyota Motor Corp. Tesco, a leading supermarket chain in the United Kingdom and the fund's largest holding, is a Consistent Earner.
Emerging markets such as Mexico, South Korea and India account for 24% of fund assets, a stake that makes its exposure to those markets among the highest in its Morningstar foreign-large-blend category peer group. That allocation, as well as its lower-than-average median market capitalization of $7.6 billion, also makes its portfolio more venturesome than most. Still, Fries has kept the fund beta over the last three years just slightly below that of the MSCI EAFE. Among established markets, the United Kingdom, Japan and Germany account for 19.72%, 16.65% and 11.05% of assets, respectively.