Mr. Wang: Thornburg International Value Fund (TGVAX) has $17 billion in assets. Our investment philosophy is to buy promising companies with sound business fundamentals at a discount to their intrinsic value. The portfolio is diversified into three baskets: basic value, consistent earners and emerging franchises. The typical mix of three baskets is 40-40-20. Under basic value, we own companies which are financially sound with well-established businesses whose stock is selling at low valuations relative to the companies' net assets or potential earning power. They could be very cyclical stocks, sometimes trading at a very low multiple in terms of p/e or p/b.
TWST: What would be a representative basic value stock for you?
Mr. Wang: Financials, particularly the banks in Europe when they were trading below book values or even below tangible book values during the early period of 2009, such as National Bank of Greece, Deutsche Bank and AXA; mining companies such as BHP Billiton, which when too much pessimism is priced in, could also be trading at a very low valuation metric, thus a candidate for us to consider for the basic value basket. A more recent addition for this basic value category is Lafarge, which is the largest cement company in the world, based in France. It was trading below 10x p/e, and that looked very attractive in my eyes because if I buy a similar cement company in emerging countries, such as in Asia, I would have to pay over 20x. Approximately over 60% of Lafarge cement volume actually comes from developing countries, particularly in Asia and the Middle East, where you can have upside momentum in both volume and pricing as those nations are building up massive infrastructures. On the other hand, in developed countries cement volume continues to be depressed but price has been surprisingly resilient, mostly attributable to the unique nature of the cement industry - highly consolidated markets where cement prices are protected by the barriers to entry posed by considerable fixed asset investment, the physical constraints presented by vertical control of aggregates reserves and economic limitations on cement transportation. So these are the basic value propositions for Lafarge to be added into our portfolio.
The second basket, consistent earners, includes companies which are basically selling at valuations below historical norms, and sometimes the stock is selling at a premium or discounted valuation. Generally, they have very steady earnings growth and dividend growth or both, and have good cash generation characteristics. Typical example is Teva, an Israeli company which also is the world's largest manufacturer of generic drugs. The company has a good balance sheet, share buyback program, and has been able to grow both its revenue and earnings consistently. Another example would be SAP, which is a leading software company in the world based in Germany. SAP's application franchise is widely recognized as one of the strongest globally and is often cited by corporations as evidence of sound business processes and strong financial controls. Over time U.S. public companies will be required by the SEC to convert their accounting standards from U.S. GAAP to IFRS, and that will boost demand for SAP software and services.
The third basket we call emerging franchise, and that includes the companies which, in our opinion, are in the process of establishing a leading position in a product, service or market, and will grow at an above-average rate. A typical example is Baidu, which is the dominant Internet search engine in China. Everyone knows and uses Google in the U.S. or in the English-speaking world, but in China, Baidu is the Google equivalent. As you may know, Chinese characters are very different from Western languages, and that helps create a niche and a very big market for Baidu, which has figured out a very powerful and effective technology to serve Chinese searches on the Internet. China has 300 million-plus Internet users out of 1.3 billion people. The penetration rate remains low in that regard. Online search marketing is considered one of the best ways for small to mid-sized businesses to connect with millions of consumers while using a limited marketing budget. Currently, Baidu has nearly 70% of market share in China and has been growing at 30% to 40% per year. Google China has approximately 20% market share and had experienced several execution setbacks in the past few years.
Basically we have three diversified baskets which we discussed above. We don't really believe that only one pure style will work well to weather all seasons. So we have this comprehensive value approach diversified by three baskets to allow the portfolio to participate in different market situations. For example, in 2009 our basic value basket participated in the market rally starting in the second quarter, attributable to financials and industrial cyclical stock holdings. Likewise, our emerging franchise basket also participated in the rally, as most of the stocks in that basket are either straight emerging-country companies or developed-country companies which have significant exposure to EM growth.
This year contributions from basic value and emerging franchises are bigger in contrast to last year, when relative performance contribution was coming from our consistent earners basket.
Tickers included in this excerpt: 1099_HK, 1398_HK, 388_HK, 3968_HK, 6301_JP, 6954_JP, 7203_JP, 7974_JP, 883_HK, BIDU, MUFG
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