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Secular Trends in an International Portfolio
Thornburg International Growth Fund
Interview with: Greg Dunn, Sean Sun

Author: Ticker Magazine
Last Update: Jul 26, 12:10 PM EDT
In a globalized economy, secular growth trends find their way to more than one market. Thornburg International Growth Fund was created with the aim to provide exposure to these growth trends outside of the U.S. Portfolio managers Greg Dunn and Sean Sun employ a consistent bottom-up process to seek quality companies that not only have attractive growth prospects but are also trading at reasonable valuations.

ďWe employ rigorous bottom-up fundamental analysis to invest in high-quality international companies with attractive growth prospects and reasonable valuations.Ē
With people buying more products and services online and less offline, e-commerce is a clear secular trend. It occurred earlier in the U.S., but some places in China actually caught up to the U.S. and exceeded it. However, in Europe the levels of e-commerce penetration are much lower than in the U.S. We see that as a secular tailwind that will occur within Europe.

Moreover, the structure of the European e-commerce market is more attractive. In the U.S. e-commerce is fragmented and the only big player is Amazon. In Europe, there are multiple public companies that focus on different niches with a great deal of success such as fast fashion e-commerce company ASOS in the UK, luxury focused Yoox Net-A-Porter in Italy, or more marketplace models like Zalando in Germany.

Some of these European businesses have managed to tap into consumer demand in a way that Amazon hasnít been able to capture. Amazon tends to focus on basic apparel and is a platform that emphasizes transactions rather than the entire experience of browsing for fashion. The European fashion e-commerce companies are meeting needs that exist and are building solid businesses over time.

Q: Why is fashion e-commerce more popular in Europe than in the U.S.?

A: I think that there is more demand for online fashion and fast fashion in Europe. For example, ASOS in the UK is a fast-fashion brand. Its online presence is a clear advantage over brick-and-mortar retailers, because ASOS is able leverage data, stay on trend, and bring products quickly to the market. Their consumers love it. In fact, weíve begun to see the people who built these businesses in Europe entering the U.S. market with their brands.

Q: How do you build your portfolio? What is the role of diversification in the process?

A: The key element is our basket structure of growth industry leaders, consistent growers, and emerging growth companies. We loosely target about a third of the portfolio in each of these three baskets. The characteristics of the stocks within each basket are quite different yet complementary.

That structure helps to maintain a growth portfolio thatís balanced across the entire spectrum of growth. It includes the more conservative or defensive stocks in the consistent grower basket, the more aggressive growth ones in the emerging growth basket, and the growth industry leaders at the core of the portfolio.

In that way, we achieve a balanced portfolio that doesnít tilt towards the more aggressive growth stocks or towards the more defensive ones. That balance gives us an opportunity to perform well in different market environments. It also gives us a slightly different perspective on the portfolio risk and helps manage that risk through the cycle.

The three-basket approach translates into the all-cap approach. The stocks in the emerging growth basket tend to be smaller- to mid-sized companies; the consistent growers tend to be mid-to-large-sized companies; the growth industry leaders tend to be the larger-sized companies, which have consistently compounded their competitive advantage and have strong positions within their sectors.

During the financial crisis, our emerging growth basket was shrinking, but our consistent growth basket was getting larger because of the developments in the market. That was a good indicator to add to the emerging growth stocks or to look for new opportunities in an environment, which didnít feel good for risk taking. Our process helped us maintain the balance and put us in a position to perform well coming out of that crisis.

Q: Do you have any limits on position sizes at the industry, country, or individual stock level?

A: We are benchmark agnostic and the fund looks different than the benchmark and our peers. Because we want the portfolio to be diversified, our largest positions are between 3% and 4%. The initial position sizes are typically between 1% and 3%, depending on the type of stock and liquidity. Small-cap, high-growth, and high-volatility stocks have smaller weights than well-established, large-cap growth industry leaders.

In terms of sector and industry exposure, we are comfortable looking different from the benchmark. We tend to have higher exposure to technology than the benchmark, because investing in technology is part of being a growth fund. Currently our technology exposure is approaching 30% because thatís where we are finding attractive opportunities. We make sure that the bottom-up process is driving the portfolio exposures and, second, we make sure that we keep the exposures in check to avoid concentrating our risk.

The geographic exposure is a similar story. If we find a lot of opportunities in one individual country, weíll have higher exposure to that geography. As long the underlying stocks make sense, we are not bothered by the higher exposure.

It is important to understand that this is a truly active portfolio. We donít look like the benchmark or like our peers. We have a stringent, bottom-up driven, fundamental research process, which we follow consistently. The goal is putting together a portfolio of diversified stocks and providing attractive exposure to growth outside of the U.S.

Q: What is the portfolio turnover and the fundís stated benchmark?

A: The portfolio turnover has historically been about 100%, partially because we are adding and trimming, but over the past year the turnover has been in the range of 60% to 70%. Our stated benchmark is the MSCI AC World ex-U.S. Growth Index.

Q: How do you define and manage risk?

A: Since this is a concentrated, high-conviction portfolio, the key element is the understanding, in-depth knowledge, and monitoring of our investments. We constantly talk to management teams, as well as check and stress test the investment thesis. Even before a stock goes in the portfolio, there is rigorous financial statement analysis every quarter with the release of new data. First and foremost, we make sure that we donít permanently impair capital. We spend a lot of time trying to understand what the risks are and where destruction can come from.

We use our basket approach as a form of diversification and risk management. Also, we leverage the broader team at Thornburg because everyone has different expertise, viewpoints and experiences. They help us stress test our investments and stocks as they come to the portfolio.

At the top level, we manage risk through the research process. At the portfolio level, we manage risk through our baskets and through diversification. We also utilize quantitative risk tools to generate risk reports and understand our exposure to various factors and other metrics.

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