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.
