Earlier this year, Connor Browne, co-manager of the Thornburg Value Fund, offered a good demonstration of his investing style when he purchased the stock of Transocean Ltd.-shortly after the offshore drilling contractor's Deepwater Horizon rig burst into flames in the Gulf of Mexico, killing 11 workers and ushering in an environmental nightmare. Browne also beefed up holdings in ConocoPhillips and Marathon Oil, two energy companies without a direct connection to the incident but whose shares fell nonetheless amid concerns about a slowdown in drilling.
"There is no question that this was a horrible, horrible accident," says the 32-year-old Princeton graduate, who has co-managed the fund since 2006. "But that doesn't necessarily mean it's time to step away from the stock."
Browne's job as a manager is to look past the bad news, especially when he thinks it's a temporary setback, if he likes a company's long-term outlook.
While he concedes that drilling moratoriums and higher costs from tighter safety standards may hurt Transocean in the short term, he asserts that investors are failing to recognize the value of its assets and the implications of the world's continued dependence on oil. The reduction in supply from drilling moratoriums, he believes, could eventually bring higher oil prices. "The stock became attractive when the market overreacted to the long-term impact of the spill and Transocean's valuation became extremely cheap," he says.
Most of the time, the factors that drive a stock to trade below what Browne believes it is worth are less dramatic than a rig blowup. Take health-care companies, where the fund has also beefed up its presence in recent months. These stocks may lag the market because investors are concerned about legislation, patent expirations or government cost controls. An example is Gilead Sciences, one of the fund's top holdings, a biopharmaceutical company that focuses mainly on antiviral drugs, as well as medicines for liver, cardiovascular and respiratory diseases. In recent years, the company has taken a leading role in the treatment of HIV, and an estimated two-thirds to three-quarters of all patients use its drugs.
Yet the stock is out of favor as investors mull the ramifications of patent expirations scheduled for 2018. To add to the problem, cost-cutting for health care in the U.S. and Europe threaten to decrease the use of the company's drugs.
Browne thinks such concerns should not overshadow the consistent demand for proven, life-saving medicines. He adds that Gilead also has a good strategy for replacing drugs that are going off patent, and its new products scheduled for release in the near future are going to be priced at a premium to the older ones. At a price of nine times forward earnings, the company is also attractively valued, and it's growing revenue and earnings at a brisk clip.
At other times, a hiccup in a stock's price might actually be caused by something temporary. That was the case when Browne reintroduced shares of Russian energy company Gazprom and Dutch financial services giant ING into the portfolio in the spring of this year. In early February, he sold the two stocks as the Greek sovereign debt crisis unfolded and the shares started to slip. While neither company was directly exposed to Greek sovereign debt, he believed they would be hurt by the malaise in the European Union.
But when the stocks continued to fall after the sale, their compelling valuations, along with government actions to prop up Europe's economy, gave him the rationale he needed to delve back in just a few months after he sold them. "The market has already priced risk into these stocks," he says. "And over the next six to 12 months, austerity measures and European Central Bank efforts are going to have a positive impact on European economies." About 20% the fund's assets are in foreign stocks.
Although this is an equity fund, Browne will also dabble in bonds if he thinks they are selling for less than they're worth. In late 2008 and early 2009, at the height of the credit crisis, the fund took its first positions in several corporate bonds that were favored by Thornburg's equity research analysts and selling at what Browne considered significant discounts.
Once the crisis abated in late 2009 and early 2010, the managers sold them at a profit and slashed the fund's fixed-income position from nearly 10% of assets at the beginning of this year to less than 3% by the end of March. "The opportunity that arose during the credit crisis was unprecedented, and we do not expect to see it again," he observes.