Secular Trends in an International Portfolio
Thornburg International Growth Fund
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.
“We employ rigorous bottom-up fundamental analysis to invest in high-quality international companies with attractive growth prospects and reasonable valuations.”
Q: What is the history of the fund? How has it evolved since inception?
While running a domestic growth portfolio at Thornburg, we were finding more opportunities, particularly in the international space, in the 2005-2006 timeframe than we could reasonably put into that strategy. So, we took the necessary steps and launched this fund at the beginning of 2007 and employ the same approach to investing and stock picking that we used successfully in the domestic growth portfolio. We’ve stayed consistent in our approach, philosophy and process since inception.
Q: What is your investment philosophy?
We employ rigorous, bottom-up fundamental analysis to invest in high-quality growth companies with attractive growth prospects and reasonable valuations. We manage a fairly concentrated portfolio, which typically has 50 to 60 stocks. We have a multi-cap approach, in which the capitalization exposure is driven by our bottom-up fundamental research.
As a result of our process, we are able to identify interesting opportunities. We are benchmark agnostic; what matters is the stock selection. This is an international growth portfolio, which is uncorrelated to peers and benchmarks. Despite investing in a relatively small number of stocks, the portfolio is diversified.
We manage about $2.5 billion in the strategy, with about $1.8 billion in the mutual fund and about $700 million in separately managed accounts.
Q: What is your geographic footprint?
We invest in developed international markets, in emerging markets, and in businesses that are based in the U.S. but generate the majority of their revenues and profits outside the U.S. We avoid frontier markets because they generally do not offer enough liquidity.
Q: How do you implement your investment process?
Our process starts with narrowing down our large investable universe with screens. We visit companies, attend conferences, and talk to sell-side analysts; we follow the markets and the news on a daily basis. We constantly refine our research list and narrow it down to identify the opportunities that deserve attention. Then we start a fundamental research process on these companies.
Our screening approach is not a black box; there are certain characteristics that we look for. Before we become interested in a stock, we have to see five to ten characteristics. We have a relatively flexible process, which is rooted in identifying companies that we believe are high-quality businesses with attractive growth prospects and reasonable valuations. These three broad tenets drive our thinking.
Q: What factors do you screen for as part of your process?
Most importantly, we screen for growth. The other metrics include cash flow profile, valuation, improving fundamentals and margins, accelerating growth rates, etc. Then we do rigorous research on the individual stock level. We examine qualitatively and quantitatively the factors that matter, most importantly, the quality and the sustainable competitive advantages.
Once we identify a stock that we feel is worth fundamental research, we start by building a model. We use a template that helps with the consistency of our process. We build up the idea within that template, which helps us share the idea. Every time someone pitches a stock, it’s pitched and built up in a similar fashion.
We do qualitative and quantitative work to understand the business model, opportunities, threats, and revenue flow through profit and loss. Next, we build a forward model, which is based on the qualitative and quantitative work. The goal is to derive what we think future earnings power and future cash flow would look like. Before we invest in a business, we need to have expectations for the future that are better than the current consensus.
By doing this, we have a better understanding of companies and their valuation. We are growth investors and we are not scared of expensive companies, but the valuations need to be justified and reasonable on an absolute or relative basis. After we analyze all the information, we sit down as a team for the stock pitch to decide if the stock meets our criteria.
Q: Would you illustrate your research process with a couple of examples?
One of our largest holdings is Wirecard AG, a German digital payment solutions provider. We have owned the stock for a long time. It incorporates secular tailwinds that are an important part of the investment thesis. When we discovered Wirecard, it was a small-cap company, growing very fast on an organic basis and benefiting from the secular tailwinds of payments moving from cash to card. Wirecard does a lot of payment processing online and thus benefits from e-commerce tailwinds as well.
Because of our long-term focus, we assess what earnings, revenue and growth would look like in several years, what business value the company could create over time, and how big it could be in several years. We also evaluate if it is trading at a discount to the potential future value or to the underlying intrinsic value over time.
At the time, we saw Wirecard as a long-term business value compounder. Because it is a digital payments processing company, it has the quality profile that we like to see, good operating leverage, and expanding margins. The company is profitable, has positive cash flow, and is well positioned in its space.
Q: Why is Wirecard more successful than other financial services providers?
Wirecard’s platform is better than others in the industry. It can be difficult to observe from the outside, but the company is acquiring and linking together merchants, e-commerce companies, and customers. In Europe, there are different currencies and regulatory jurisdictions, so it is complicated to get everything seamlessly working together. For instance, a person selling online wants a merchant acquirer and processor that not only handles currency translation and cross-border regulatory issues, but also takes the complexity out of the process.
Wirecard has built a leading and technologically robust online processing platform. Scale matters because every incremental processed transaction leverages the platform that they have built.
Q: Could you give another example from a different industry?
We like the theme of e-commerce. Since we have the perspective of simultaneously managing a domestic portfolio, we often look at secular themes and trends that have occurred in the U.S. and apply them internationally when appropriate. We often look at the business cycles of international companies or at their positions on the technological curve.