Q:  What is the investment philosophy of Thrivent Mid Cap Stock Fund?

A: We’ve put together growth and value strategies to create this core mid-cap product. John Hintz and I have overall responsibility for the portfolio as a team, but we have divided it along the growth and value lines. When we get to individual industry levels, it makes a lot more sense to focus on specific areas, so I focus on growth areas and John focuses on value areas. On top of that comes the layer of risk control to make sure that we stay within the core universe and that we don’t take too much risk relative to the expected return.

Q:  Why should investors consider the mid-cap universe? Why do you think that mid-cap core investing is a better way to balance a portfolio?

A: I believe that there are two big benefits to mid-cap investing. The small and mid-cap stocks have higher growth profiles than large caps because they're smaller companies that can grow faster. At the same time, mid-cap stocks provide the risk protection that is more characteristic of the large-cap universe, while small-caps usually don’t have established management teams, customer base, or distribution channels. So with a mid-cap fund, you’re getting the best of both worlds – higher growth than large caps with less risk than small-cap stocks.

Regarding the core strategy, there are many benefits of combining growth and value. That approach enables us to take advantage where we see opportunities. When there are more opportunities on the value side, we can tilt the portfolio that way. If there are more opportunities on the growth side, we can tilt it that way.

Also, with the expertise that we both bring to the table, we can provide insight to the other one in a particular aspect. For example, energy historically has been a value industry before it became more of a growth industry, so we can apply some of the growth aspects to that value industry.

Q:  Do you hold any macro views or you strictly follow a bottom-up approach?

A: The fund has a very bottom-up focus, so most of our overweight and underweight positions come from individual stock selection and analysis. However, there are particular times when we see many opportunities from a bottom-up perspective, like in energy in 2004 and 2005. Then we start to analyze that trend, which leads us to some top-down view.

In industries like energy and semiconductors you need to have a macro view and we pay attention to that. However, the goal is not to make huge industry bets or swings; it’s the individual stock selection that provides value to the shareholders and that's where the alpha comes from.

Q:  Generally, the peaks and the valleys along market-cap lines are not as extreme as in the past. Has that been your experience?

A: Yes, there isn’t a huge valuation discrepancy between the different market caps. When we got out of 2000 there was big valuation discrepancy, maybe in 2003 as well, but that’s been narrowed. We don’t see a huge valuation argument to take advantage of a certain opportunity from a top-down view, which leads us even more to the bottom-up stock selection process.

But the great thing about the mid-cap arena is that you have large-cap companies that have stumbled and have become mid-cap companies. You also have smallcap companies with a strong growth profile that have grown to the mid-cap range. So our approach of having two managers, one with value and one with growth perspective, works pretty well. We have a lot of fallen angels form the large-cap world that are value play and a lot of small-cap companies that are still growth stories, so we bring a fresh approach in evaluating most companies.

Q:  Could you describe your investment process?

A: The process that we go through consists of idea generation, fundamental research, portfolio construction, risk management, and review.

We get out ideas in a lot of different ways. The universe consists of about 3,500 stocks and we both screen it on a weekly basis. Each of us uses specific screens, including growth screens, such as estimate revisions, earnings momentum, incremental margin improvement, and insider analysis. We also run screens on valuation metrics like P/E, price/book, EV/EBITDA, returns on capital versus the cost of capital, free cash flow as a percentage of EV, and insider analysis.

We have 12 analysts that cover various sectors and we get a lot of ideas from our internal research staff as well. Once we get our ideas, we do fundamental research on the names that passed the screens. Our research team meets the companies, goes through competitive analysis and through fundamental research. In analyzing the companies, return on capital is a big focus. We like to see improving return on capital, whether through increased sales, margins, or preferably both.

Essentially, we’re looking for companies with improving positive fundamentals relative to what the market expects. Our analysts are divided by industries, not by products or market caps, so we have an energy analyst, a materials analyst, etc. We do a lot of research on each individual company before we decide to put it in our portfolio.

In terms of valuation, we use various metrics because we don't believe that one valuation metric fits all; the various sectors of the market and industries require different valuation techniques. For example, for banks the common metric being used is price/book whereas for an industrial company the P/E would be the most common metric. For a lodging company that would be EV/ EBITDA. So we don't have one strict valuation approach but we’re looking for the appropriate valuation metric for the particular industry.

After we go through the research process, we lay the risk management aspects on top, and then we review this process on a weekly and on a daily basis.

Q:  What are the most important elements of portfolio construction?