Quality, Price and Path to Success
Thornburg Global Opportunities Fund
Author: Ticker Magazine
Last Update: Oct 04, 11:17 AM EDT
|Businesses with a stable customer base and strong management are particularly attractive to investors when they are trading at a reasonable price. Vinson Walden, co-portfolio manager of the Thornburg Global Opportunities Fund, and his team follow a strict discipline in looking for these attractive stocks of superior businesses around the world.
“We are looking for three things, essentially, in a good investment. They are a high-quality business, a low price, and a path to success; a path to success is a hypothesis about the future.”
Q: What is the history of the fund?
Along with our Chief Investment Officer, Brian McMahon, I am the co-founder and co-manager of the Thornburg Global Opportunities Fund, which was launched on July 28, 2006.
Our investment philosophy and tactics have remained the same since inception. Using the principles of classic value investing, we choose global stocks, diversify the portfolio across both geography and industry, and tend to hold investments for relatively longer periods.
When I joined Thornburg Investment Management in2002, the firm had roughly $4 billion in assets under management (AUM). That figure has since grown to about $50 billion.
Q: What core beliefs drive your investment philosophy?
Essentially, we believe good investments share three characteristics: they are high-quality, low-priced businesses that have what we call the “hypothesis of the future” – in other words, they can demonstrate a path to success. It’s been a successful formula for our clients.
In forming our hypothesis, we try to understand how an investment could play out, looking for approaching milestones and whether changes are unfolding – whether in the industry, for the company, or to the regulatory landscape – that could affect a positive result. Putting this all together gives us an idea of how business conditions may change.
For us, timeframe is essential; we think of our investments on a three-year time horizon at the minimum. Overall, it’s important not to have positive expectations for the fund every month or quarter. With at least a three-year timeframe, we have some confidence, but the longer we commit the better the outcome.
Q: What is your definition of quality?
For us, quality boils down to competitive strength. We look for companies with a finite number of competitors in stable industries so they aren’t vulnerable to new challengers sneaking up on them, or to technological obsolescence. To us, high quality isn’t a company that just did well last year, but one which will remain strong for five or 10 years longer.
An example of “quality as competitive strength” is Aena SME SA, which operates airports in Spain. The company is currently one of the fund’s largest holdings. From a competitive standpoint, Aena is in an extremely comfortable position and we are willing to bet its business model will last a long time. What’s special about the company is it’s state-owned – it’s a monopoly that operates airports and heliports for the entire country of Spain.
Elsewhere in Europe, airport operators typically manage one location or a regional collection of airports, and they compete against each other. For instance, in London there are three or four airports in competition. This gives Aena an extra advantage. It doesn’t need to worry about an airport in Barcelona competing with one on the outskirts of the city, because it owns both of them.
In addition, through its subsidiary, Aena International, the company also participates in managing 16 airports abroad. But the vast majority of the profit comes from its home country, and Aena doesn’t pursue expensive international expansion.
Q: According to your research, why does Aena qualify as a high-quality business?
Aena’s business is extremely profitable. Not only is its competition quite limited, the company benefits from steady demand because it participates in all the air traffic going into and out of Spain. For visitors from cold-weather countries, Spain is an attractive tourist destination because it is sunny, warm, and peaceful; recently it’s become even more popular.
Further, the Spanish economy is recovering after a long recession and adjustment period. The country leads Europe in a number of macroeconomic trends and this is reflected in its air traffic, which has been growing in high single-digits for a long time – this year, it’s growing at a rate of around 8%.
Another beneficial trend at play is the growth of low-cost airlines. As air travel gets cheaper, it stimulates the travel market, which is growing much more rapidly than the overall economy. We see this all over Europe: though GDP growth is 1% or 2%, the increase in air traffic is significantly higher.
Q: Can you describe your research process?
Our approach to research is fairly holistic. To get a full understanding of companies and the ecosystems they operate in, we consider all the usual publicly-available information and sources, including financial statements, company websites, and transcripts of management interviews. Travel is routine, too, and we often engage with companies and meet management teams, as well as their competitors and suppliers.
To winnow the field of thousands of investable companies, we filter them through our three core beliefs – they must be high-quality businesses, trade at a low price, and have a path to success. This gives us a manageable but still appealing buffet of companies to choose from. With only 30 to 40 holdings in the portfolio, we don’t have to follow every company or generate a lot of new ideas every year – just a handful is all we need.
Q: Would you discuss more examples?
A longstanding investment that we believe is still a promising, high-quality business today is Galaxy Entertainment Group Limited, a casino and hotel operator located in Macau, which is a special region of China. The business has strong and steady demand, limited competition in an undersupplied market, and significant growth drivers.
Although it’s not a monopoly, Galaxy is in a decidedly comfortable competitive situation. Macau, which is often referred to as “the Vegas of China,” is the only legal gambling destination in that entire country – and it’s our belief it will remain so. Because there are only six licensed casino operators in Macau, competition is limited and the market is undersupplied.
In China, the rising middle class has a lot more disposable income. Tourism and travel are growth drivers in China, with Macau being a big beneficiary. Like Vegas, people go to Macau not just for the gaming but also for shows, entertainment, and shopping. After a statistical analysis of the popularity of Las Vegas relative to the United States’ economy, we concluded that Macau’s economy is still in the earliest stages of development and see strong growth prospects for Galaxy over the next 10 years.
Another example is our recent purchase of the Indian petrochemical conglomerate, Reliance Industries Limited. Although its main business is in that space, the company has invested billions of dollars to build a state-of-the-art telecom network because the market is undersupplied in India. Existing telecom firms don’t have modern assets or investment programs, giving Reliance Industries a chance to come in and lead by providing a newer and better network.