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Quality, Price and Path to Success
Thornburg Global Opportunities Fund
Interview with: Vinson Walden

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.”
We purchased Reliance Industries around yearend, and it’s off to a good start – it’s one reason we’ve had good results recently. In the longer term, our belief is the company’s telecom investment will bear fruit.

Q: What is your portfolio construction process?

A: Our stock picking focuses on finding good businesses from a competitive standpoint with low valuations and a solid hypothesis of the future. To significantly improve our outcomes, we try to find all three elements simultaneously. Our benchmark is the MSCI All Country World Index, though realistically, we try to do well versus any salient benchmark.

The portfolio has a diversified mix of 30 to 40 holdings. Position size is limited to 10%, with our top holdings tending to be between 3% and 5%. A 20% limit applies to geography and industry, which ensures that significant portions of the fund don’t end up in one place, like Japanese banks or Internet stocks. These limits guard against overconfidence from the managers and problems that could creep into a particular sector.

Looking at the fund’s top holdings demonstrates our diversity by both industry and region. Currently, the three largest positions are Aena, Altice NV, and Baidu, Inc. – respectively, an airport operator in Spain, a Netherlands-based multinational telecom group, and a Chinese web-services company.

Other top holdings include CF Industries Holdings, Inc., a manufacturer and distributor of agricultural fertilizers; T-Mobile US, Inc., the wireless network operator; and Alphabet, Inc., the technology giant formerly known as Google.

Clearly, diversification is a key priority of portfolio construction, as is staying within industry limits and keeping our geographic exposure in check. Finally, we shy away from industries where competition seems too complicated or a lot of change is taking place.

Some areas we tend to avoid are the super-competitive retail space and the restaurant industry, which faces changing dynamics and competitors always coming and going.

Q: How do you adhere to your sell discipline?

A: All sales stem from an effort to improve the portfolio, but they can be triggered by a number of things. In every case, though, having a focused portfolio like ours compels us to be quite discriminating and constantly compare companies from a risk-reward perspective.

Changes within a company or to its valuation can lead us to sell. For instance, with this year’s strong run in the markets, we sold some things outright simply because their prices had become high relative to our internal appraisals. A sale could also be triggered when something isn’t developing as we expected; we may decide to move on and continue running the portfolio from a future Internal Rate of Return (IRR) perspective.

The portfolio’s turnover was approximately 30% last year, due in part to the Brexit anxiety which caused us to make a lot of changes – adjustments that have since proven beneficial. In 2016, we had to make room in the portfolio for seven new holdings. However, our target holding period is generally three to five years, so our pace is relatively slow and deliberate; there’s no frantic activity or daily trading.

We generally stay with the stocks we own for many, many years, adjusting position sizes accordingly in times of relative strength or weakness; as shares appreciate, we tend to reduce position size. Google is a good example. We’ve owned it for about eight years but not at a constant position size, as we’ve been able to sell it on strength and buy more on weakness. This works out if a share price fluctuates over time, except in cases like the bank stocks recently, which haven’t pulled back to provide the opportunity to buy on weakness.

Q: How do you define and manage risk?

A: For us, risk boils down to the probability and severity of impairment to capital, with permanent loss being the ultimate risk. We recognize that mistakes happen, as do disappointments and surprises in the market, and can easily absorb a modest setback. Large losses, however, are a different matter because they can impair the compounding of the portfolio.

The key to compounding is to avoid big losses. To avoid them at the portfolio level, we must avoid them at the level of the individual stock, so we are extra careful with names that may have the potential for particularly unattractive downside risk. This involves hypothesizing about plausible downside scenarios – thinking about what could go wrong and how bad it could get.

In the market we encounter plenty of unattractive companies for which there’s no lower limit should something go wrong—for instance a declining business that also has a tough balance sheet. Suffice to say that’s something to avoid! In contrast, there’s not nearly as much risk with companies that are competitively entrenched and have balance sheet strength.

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