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.

Motola says the fund takes its cue from the three baskets strategy employed by Bill Fries, manager of the Thornburg Value Fund. When Motola joined Santa Fe-based Thornburg Investment Management in 2000 to run the Thornburg Core Growth Fund, he tweaked the concept to fit a growth strategy.
    Right now, he's finding the consistent growth basket most difficult to fill. It accounts for about 25% of assets, compared to 33% in industry leaders and 35% in emerging growth. "Some of the stocks in the group hit their price targets, and I've had a hard time finding quality replacements in that basket. In periods of uncertainty investors are drawn to stocks that generate a lot of cash and have fairly predictable business models, so it's difficult to meet our valuation criteria," he says.
    Based on estimated 2006 earnings, the portfolio is a little pricier than some indexes, but cheaper than others. The fund has a price-earnings ratio of 22.9, compared to 26.5 for the Nasdaq 100 Index, 19.0 for the Russell 1000 Growth Index, and 15.1 for the S&P 500 Index.
    Stocks in the consistent grower group include Affiliated Managers Group, which acquires majority interests in mid-sized investment management firms with between $500 million and $15 billion in assets. AMG's current portfolio of affiliates includes Tweedy, Browne Company; Essex Investment Management, Friess Associates, Rorer Asset Management, Frontier Capital, The Managers Funds and the recently acquired Third Avenue Management. The company differs from most of its competitors in that it typically purchases about a 60% ownership interest, not 100%.
The advantage of AMG's approach is that the company provides a liquidity event for the founders and other shareholders, while creating an incentive structure to keep younger management talent in place.

Among growth industry leaders, Motola favors prospects for Las Vegas Sands, which operates casinos, hotels and convention facilities. Properties include the Venetian Casino Resort and the Sands Expo and Convention Center in Las Vegas, as well as the Sands Macao Casino in Macau, China.

The Macau gaming opportunity over the next five years is particularly attractive. Demographics in the region are compelling for years of growth driven by low penetration of mass-market gaming, growing incomes, easing of travel restrictions for mainland Chinese and infrastructure development. "Las Vegas Sands is going to operate six out of the ten planned properties there," he says. "That's like one company owning 60% of the Las Vegas strip."
    Google, another stock in the industry leader basket, has become a lightening rod that, according to Motola, has "polarized parts of our investor base." Although the stock sold off earlier this year after a disappointing earnings announcement, Motola feels it remains a worthy long-term investment. "Some people view Google as the second coming of the Internet bubble," he says. "I see financial statements that show over $600 million in operating cash flow in each of the last three quarters. The company doesn't have high capital requirements, so the ongoing amount of money that needs to be reinvested in the business is modest compared to other companies of its size and cash level. That's a pretty real business."
    Emerging growth companies in the portfolio include Satyam Computer Services, an Indian-based consulting and IT services company. Satyam offers a range of services including software development, application implementation and business process outsourcing to customers all over the world.