Though he's a value manager at heart, Bill Fries also peppers his Thornburg Value Fund (TVAFX) with some growth ingredients, or what he calls "emerging franchises." This portfolio holds 40 to 50 stocks, and since he hunts among those selling at a discount, each pick has a flaw if you look deep enough, he says. Fries, who lives in New Mexico and also manages a top-performing international fund, is a newcomer to the S&P/BusinessWeek Excellence in Fund Management Awards for 2004.
BusinessWeek's Lauren Young recently spoke with Fries about his fund and investing strategy. Edited excerpts of their conversation follow:
Q: Do you manage the fund with an eye toward risk?
A: We have a very solid core philosophy that's really focused on buying promising companies that are selling at a discount to intrinsic value. Inside that context, we try to maintain a diversified portfolio. That's where we are always conscious of risk. I've felt that if we manage the risk, the returns will pretty much take care of themselves if we're selecting our stocks from a good universe.
Q: How do you pick stocks?
A: We have three different classifications for our stocks. The first is basic value. These are typically cyclical companies -- financial services fall in here, too. We look at things like price-to-book and, when it makes sense, price-to-sales. We also look at p-e's and dividend yields. These might be industrial companies. They may not be at a peak of earning power. These tend not to have high levels of return on equity or return on capital.
For example, there's Deere & Co. (DE). We've owned it not all that long -- since last summer. New management came in a few years ago, and there were a few key things we wanted to make sure happened. Sure enough, they did demonstrate they were doing what they said they were doing. Now I know a thing or two about Deere. I grew up in rural New Jersey in my youth. Their tractors had a distinctive sound when you were on a farm.
The second kind of companies we like are consistent earners. You might think of them as blue chips. Their businesses aren't cyclical. They aren't influenced by interest rates. They're much more independent of economy. They have high levels of profitability. Their return on equity is high. These companies are Steady Eddies. They're franchise names like Pfizer (PFE) or Citigroup (C). And there are also some that are tied to subscription-type of businesses like cable or telecom.
The third kind of company we like to own are emerging franchises. These may be younger but not necessarily smaller. They've got growth characteristics. Growth is not a dirty word to us. In economics, more is better than less. These are stocks like E*Trade (ET) -- it's financial, but we would include it here. Others include InterActiveCorp (IACI) and Electronic Arts (ERTS).
We put them all together and try to buy in all three areas. When stocks are out of favor, you can look at every holding we have and identify some problem with the company that had caused people to be concerned about it.
Q: Do you have a strict way of investing among the three groups?
A: We don't allocate to the three areas. It would be fair to say a normal position might be 40/40/20. Emerging franchises are limited to 25% of portfolio. It's currently about 15%. On any individual holding, we take a position of more than 2%. Overall, the strategy helps us find value. We try to avoid artificial barriers. We don't have anything synthetic that says "you can't go there."
Q: What kind of experience do you bring to this fund?
A: I was at USAA [Investment Management ] for about 20 years. I initially was an analyst, and I got to run one of the two funds they had in 1979. We later introduced an international fund, value funds, and growth products. I got to manage across the pretty broad spectrum. One thing I realized: No one style necessarily works all the time. At Thornburg, I wanted to create a product that's good for all seasons -- hence, I came up with a portfolio that combines all three.
Q: Could you talk about one of your best picks?
A: Looking back over the value fund's existence, certainly EMC (EMC) was a good stock for us. We might identify E*Trade as a good stock for us. Health Management Associates (HMA), Genzyme (GENZ). These are all stocks we've held for a long time. EMC I bought on day one of the portfolio. We held that through '99. We left a lot on the table probably.
We liked EMC partly because of the valuation but also because of the promise of the business -- there was growing demand for storage on computer systems. You had burgeoning demand with a company that had a leading market position. The valuation was pretty compelling given how quickly the company was becoming established. Usually things are out of favor for some reason. They missed a quarter, probably in the summer of '96. That gave us a real good opportunity. Genzyme is the same kind of story.
HMA was dramatically out of favor, but it proved to be [one of] the most profitable and disciplined companies in that business. Hopefully, there will be a few out of our current holdings that turn out to be similar.
Q: Anything else you'd like to add?
A: Fannie Mae (FNM). It has been a pretty good stock for us. We didn't get involved until things got nasty. It's one our larger positions, and we bought when they sold off. We also owned Freddie Mac (FRE), but we consolidated recently into Fannie.
If you think about our housing market in the U.S., it's the best in the world. Part of the reason is that there's a ready market for mortgage product to be moved off a financial-service company's balance sheet into the domain as a securitized product. It's a very productive way to have a strong market to serve. We don't think that's going away. There may be some better oversight, but I don't think the basic need of being able to finance housing in an efficient way with some government involvement is going away.
The real estate industry, the financial-services industry, and homeowners are generally not a lot of advocates of having this industry disrupted or constrained from growth. Fannie Mae's growth is consistent with the number of mortgages outstanding. The American Dream still lives. People want to own a home.
Q: What do you think about the controversy surrounding Comcast with the Disney merger?
A: We own Comcast (CMCSA). It's normal for us to have some controversy. They did a clever thing acquiring old TCI from AT&T (T) at a good price. They'll be very disciplined at what they pay for Disney (DIS). We'll see what happens. If it doesn't make sense economically, they won't do it. I like the idea of having a vehicle that has both the ability to provide a service to individuals and have some bargaining power to providing the content for that vehicle.
Q: What do you do when you aren't working?
A: I live my work, but I have lots of distractions. I had a misspent youth, spent [a lot of] time skiing, fishing, and hunting. I'm still interested in all those things, and I enjoy collegiate and professional sports. I don't have children who play sports anymore. I also have new grandkids. I hope to be able to contribute to their development. Here in New Mexico, I ski and fly-fish. My wife and I like to hike. I'm 65, and I have no interest in retiring.