"It's Opportunity Time"


William Fries, portfolio manager and managing director of Thornburg Value Fund, was one of nine winners of the recent Standard & Poor's/BusinessWeek Best Mutual Fund Managers of the Year award. The fund scored a 5.9% average annual return over the past five years, which includes the tech boom and bust. Fries attributes his success in weathering that storm to the fund's strict discipline of selling when a stock reaches the target price it has set.

He acknowledges that in the boom years the discipline led to selling some stocks that were going gangbusters at the time, "so we were a little embarrassed, but not as much as we would have been without that discipline later," he says. A linchpin of the fund's approach is to ferret out stocks that are selling at a discount to their intrinsic value, even if the company has some worrisome aspects.

These were some of the points Fries made in an investing chat presented Mar. 18 by BusinessWeek Online on America Online, in response to questions from the audience and from Jack Dierdorff and Karyn McCormack of BW Online. Following are edited excerpts from this chat. A full transcript is available from BusinessWeek Online on AOL at keyword: BW Talk.

Q: Bill, we need all the insight we can get on the stock market these days. What's your diagnosis -- and outlook?

A: I'm relatively positive, recognizing that we've had a terrific run, but from here I would expect the return-of-confidence phase in the market is over, and we're going to be relying a lot more on earnings progress.

Q: Are you finding stocks to buy after the drop in recent days?

A: Well, it's certainly a better time to be buying stocks than a week ago. Prices are down, and it's essentially opportunity time.

Q: How do you pick stocks for Thornburg Value Fund (TVAFX)?

A: We attempt to buy companies that have a promising future that are available at a discount to intrinsic value. The process that we use starts with screens -- our own in-house fundamental research but in conjunction with Wall Street analysts and companies' management. The biggest thing we do is probably visiting companies, and that's an important part of our process.

Q: How many stocks does the fund tend to own at any one time? And what are some of your biggest holdings now?

A: We essentially have owned between 40 and 50 stocks over the last couple of years, and I would expect that we'll continue to have a focused portfolio and will probably end up adding one or two additional stocks as we grow. Every stock counts, and we don't take any of the holdings we have in the portfolio casually.

With this focus comes performance that can be -- when you only have 10% of one of the normal benchmarks [the S&P 500] -- more volatile than the market in both directions. However, our performance has been largely on the upside over the last number of years. Largest holdings would include Fannie Mae (FNM), Samsung, Bank of New York (BK), Citigroup (C), Marsh & McLennan (MMC), Alltel (AT), and Pfizer (PFE).

Q: Do you like any cyclical or industrial companies?

A: We have about 45% of the portfolio in our basic value category, and that includes these kinds of companies. This would also include companies that are credit-sensitive that are cyclical because they're tied to interest rates. The best cyclical I could give would be Deere & Co. (DE). It's tied to the agricultural industry, even though it's global. Up until the last year, the ag economy has suffered a good bit, but this last year it has gotten some help, especially in the U.S.

One of our holdings is Union Pacific (UNP), the railroad company. The housing boom helps them, as does the upswing in the ag industry. Coal shipments are important to them, as well as merchandise. All of the imported goods we tend to continue to import, especially from the Far East, typically land on the West Coast and have to be transported across the country. These land on containers that are transported by Union Pacific.

We also own Unocal (UCL) and Amerada Hess (AHC), two good energy companies. Since oil prices have been higher than most people anticipated -- most assumed at this point we'd be in the $22 range, this year they may be around $33 a barrel -- most of the analysts are making assumptions around $27. We own these companies because in both cases they'll be able to increase their units of production of both natural gas and oil. They are not richly priced and are at a substantial discount to the market. They also provide a very good yield. This is a nice combination.

Q: What's the top holding in your fund that you have currently purchased?

A: Well, our top holding is Fannie Mae. It's a fairly controversial stock, but it's also typical of how we operate. We tend to be contrarian in nature. Fannie Mae has had a lot of adverse publicity, but it has also created an opportunity. We bought this stock when it was most unpopular, which is why it has become a huge holding. On our Web site, thornburg.com, we provide a description of the large stocks in our portfolio. If you look at these names, you could find something wrong with every one of the stocks. That's how the market creates value.

Q: Your fund scored points in the S&P/BW award for its full disclosure to investors (see BW, 03/22/04, "A Bargain Hunter with a Wide Scope"). Has this always been the case, and have you increased disclosure recently?

A: We've always believed in full disclosure being the most effective way to communicate with our investors. Contrary to what one might expect from the issues that have come with congressional legislation, we have to be concerned about selective disclosure. In other words, we're more inhibited about disclosing information in the public domain today to ensure that it's all simultaneous and available to everyone at the same time. So, in some ways, that legislation has encouraged us, because we've always felt as soon as practical we make it a priority to put out all information. We've also taken an aggressive stance against market timers.

Q: How about the real estate market and REITs [real estate investment trusts] as investments now?

A: This is, I think, a very interesting area for people who are interested in dividend yield. We do own Boston Properties (BXP), and it has been a very consistent performer for us. The stock has had such a good run. It may not be as strong in the next year as it has been in the last few months. If we do have inflation that comes back, even with rising interest rates, you probably have an initial opportunity to add to some REIT positions. Real estate ends up being, over time, a pretty good offset to inflation.

Q: Thornburg Value scored a 5.9% average annual return over five years. Since that includes the tech boom and bust, how did you steer the fund during the storm?

A: Well, we have some disciplines in place. One is to establish target prices when we initiate a position, and we're pretty disciplined about eliminating these stocks when they hit this target price. I have to tell you that because of that discipline, we had a number of stocks we sold in the '99 and 2000 period where we looked pretty silly for a while, offloading stocks that were trading quite a bit above our target price. So we were a little embarrassed, but not as much as we would have been without that discipline later.

We also pay attention to our investment thesis. We actually, in writing our idea about what we think is going to happen to each company and why the company has promise, if that does not appear to be happening as anticipated we're pretty disciplined. Can't say we've done that on every stock that doesn't work, but with the majority of them it has been the case.


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