Thornburg's Motola won't be tied down in the search for returns.
For the first time in its five-year history, a multicap growth fund
that usually leans toward small- and mid-cap stocks is finding more
enticing investment opportunities in larger companies.
To diversify among asset classes and avoid making market bets,
Thornburg Core Growth Fund spreads its portfolio among small-, mid- and
large-cap stocks. Usually, fund manager Alex Motola allocates between
25% and 40% of assets to each category, and historically he has usually
favored the first two.
But over the last six months, larger companies have been finding their way into the portfolio with greater frequency. The portfolio now has a 25%-25%-40% split between small-, mid- and large-cap stocks, with the rest in cash.
"The odds seem to be shifting in favor of large-cap growth stocks every
day," says the 37-year-old manager. "Domestically, large-cap growth has
been the least favorable place to be for most of the last five years on
a return basis. So it stands to reason that there ought to be more
value there than other places in the market that have done better."
Motola says the shift has given even mainstream companies like fund
holding Microsoft added appeal as growth stocks. "We're not tied to any
benchmark so owning Microsoft is very unusual for us," he says. "For
most of the last five years, the stock has done virtually nothing, yet
the company has doubled its revenue base over that time period and has
one of the best balance sheets in the world. So you are buying a great
business at a considerably cheaper price than you were five years ago,
and at just a modest premium to the S&P 500 Index." Future
catalysts that promise to drive revenues higher include a growing
enterprise server business, and operating system and productivity suite
monopolies.
But Motola isn't wedded to typical growth fund fare, and with a
substantial presence in off-the-beaten path emerging growth companies
as well as some foreign stocks, Thornburg Core Growth clearly doesn't
take its cues from widely used growth stock benchmarks. To get more
bounce from stock selection, Motola keeps the portfolio at a lean 35 to
40 names, less than half the average stock fund. At the same time, the
fund takes steps to spread its bets by maintaining a sizable presence
in each market capitalization category and investing in companies with
a mix of growth characteristics. Some are smaller companies that have
yet to experience earnings growth, but show promise of doing so. Others
are well-known market stalwarts that have been consistently growing
earnings for many years.
"I think part of our strength is that we have the flexibility to find
investment ideas that make money, rather than just looking for
companies with growth rates of 10% or 15%," says Motola, who prefers to
call this a "go everywhere" fund rather than the "go anywhere" label
usually applied to multicap offerings. "Historically, 85% to 90% of our
outperformance relative to the benchmark has come from stock selection.
So we want a portfolio that emphasizes stock selection and downplays
other assumptions we have to make. The more things you assume, the
greater the chance that you could be wrong."
The fund's ranking among the top performers in Morningstar's mid-cap
growth category over the last one-, three-, and five-year periods is a
clear indication that Motola has taken the right path more often than
not. But Morningstar analyst William Samuel Rocco worries that despite
its strong track record, Thornburg Core Growth carries some risks that
come with its distinctive style. "His focus on 35 to 40 names means the
fund is subject to considerable issue-specific risk, whereas his
tendency to favor the traditional growth sectors creates real sector
risk," notes Rocco of the fund manager. "And his taste for foreign
issues, including emerging markets names, also has its downside."
Motola says the foreign stock holdings, which typically account for anywhere between 5% and 20% of portfolio assets, represent distinct opportunities that would be hard to replicate in the U.S. Fuji Catering, for example, is a China-based company that runs cafeterias for corporations and universities. It is now in the process of greatly expanding its distribution center network, and operates at high operating margins and has very low labor costs. AustriaMicroSystems designs and manufactures analog and integrated (digital and analog) semiconductor chips. Motola purchased the small-cap stock when it was trading at 8.5 times earnings, and he says it is still very reasonable compared to its peers in the U.S. And America Movil, the dominant cellular service provider in Mexico, has a 75% market share in its home country.
Consistent Growers Too Pricey
Both foreign and domestic companies fall into one of three investment baskets that represent different corners of the growth stock universe. Growth industry leaders are fast-growing companies that appear to have proprietary advantages in industry segments that are experiencing rapid growth. Consistent growth companies generally sell at premium valuations and tend to show steady revenue and earnings growth. And emerging growth companies are typically growing companies that are in the process of establishing a leading position in a significant product, service or market that is expected to grow at an above average rate.