When he talks about the current state of the stock market, William Fries sounds like a teacher discussing a child's bad behavior with a concerned parent. "I wouldn't call this a 'bad market,' but I would say it's disappointing," says the long-time manager of the $2.2 billion Thornburg Value Fund, who was named Morningstar's international equity fund manager of the year in 2003. "When a company's fundamentals are solid, it's reasonable to expect that its stock will do well. But that hasn't been the case."

The performance of fund holdings in the financial services sector, which account for roughly one-quarter of assets, illustrates his point. Bank of New York has about $7 trillion in assets under administration worldwide, with $2 billion of that outside the United States. Securities servicing, private client services and financial markets services make up about three-fourths of the company's earnings, with more traditional corporate and retail banking activities accounting for the rest. Despite a business focus that is not heavily influenced by the direction of interest rates, the bank's stock dropped from about $35 in January to around $28 in August, largely because of investor concerns about rising interest rates.

Fund holding Lowe's Companies also has suffered this year because investors think rising interest rates could negatively impact the construction industry, as well as the bottom line of the country's second-largest retail home improvement store. Fries believes those concerns are overblown. "The housing market will be surprisingly resilient, and the Fed is going to keep interest rates under control," he says. "A ten-year bond with a 4.5% yield is not enough to curtail housing spending, and short-term rates are still low." He believes the company's modest valuation and its successful expansion from rural areas to more profitable suburban locations add to the company's appeal.

Still other companies in the portfolio have languished simply because investors have been slow to recognize their value, says Fries. Target Corp., the second-largest general merchandise retailer in the country, has succeeded in differentiating itself from its biggest competitor, Wal-Mart, by being a more upscale discounter and carrying higher-quality brands such as Mossimo and Isaac Mizrahi. It also has shed problem subsidiary Dayton-Hudson. Yet the stock sells at a steep discount to Wal-Mart. Health care and pharmaceutical stocks, which recently accounted for a total of 14% of assets, also have disappointed this year because of investor concerns about pricing controls.

To Fries, such disappointments have a silver lining. Based on forward earnings estimates, he pegs valuations of equities in the portfolio at "average or below average." Based on estimated 2004 earnings, the weighted average price earnings ratio of the portfolio is about 17. Other measures, such as price-to-book value, price to sales, and price-to-cash flow also stand below the market average, while projected earnings growth is slightly higher.

And while some stocks have fallen victim to market malaise, others have helped the fund minimize its losses so far this year. Stock of Alltel Corp., the seventh-largest wireless service provider in the United States, is up over 14% so far this year. Greeting card maker American Greetings has seen its stock rise from $17 a share to $24 a share over the last year. Other recent successes include Exxon Mobil, insurance holding company Aon and Lincoln Financial.

Despite some recent setbacks, Thornburg Value's winners have far outpaced its losers since its inception in 1995, when Fries left his job as a vice president at USAA Investment Management Co. to become a portfolio manager out of Thornburg's Santa Fe, N.M., headquarters.

Fries also manages the $1.25 billion Thornburg International Value Fund, which was launched three years later after he became cramped by the geographic restrictions of the domestic offering. That fund has landed in its Morningstar category's top decile in every year since it was launched in 1998. In 2003, its exceptional performance helped Fries earn Morningstar's Fund Manager of the Year in the international category, and added his name to a short list of investment managers whose investment process has proven effective both in this country and abroad.

Thornburg Value also has maintained its pace under a variety of market conditions. "Performance has thus far been exceptional," notes Morningstar Langdon Healy in a recent analyst's report on the domestic fund. "Since its late-1995 inception, the fund has crushed the S&P 500 Index as well as its average large blend rival. Meanwhile, the fund has been no more volatile than the bogey."

On the downside, Healy notes that an expense ratio of 1.43% is "a high hurdle for a large-cap fund to overcome relative to cheaper index offerings." And a smattering of foreign and small stocks may make it questionable for investors seeking a pure large-cap domestic offering.

Indeed, Thornburg Value's portfolio construction is unique. The portfolio holds only about 45 stocks. And while many are blue-chip household names others, such as Internet ad agency DoubleClick and FTI Consulting, are a rare sight in a value fund.

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