Generating Free Cash Flows In Emerging Markets
TWST: Please begin with a brief introduction to Thornburg Investment Management and tell us a bit about your role there.
Mr. Kaufman: I joined Thornburg in April 2005 having previously worked at Morgan Stanley and Citigroup. What really drew me to Thornburg was the global generalist approach. I think that there is a natural tendency in this business for us to be too narrow in our investment approach. That is, we may focus on a particular industry and maybe not do as good a job of looking at the industry in the context of what else is out there. So from the ground up, from our most Junior Analysts to our most Senior Portfolio Managers, we want all of our investment professionals to be able to put investment opportunities in context. For example, most investors that would go to Brazil would see the 15 mining companies and the five energy companies and really have a natural resources sort of focus. We have a skill set where we not only go down there and see the mining companies and the energy companies, but we also see the banks and the retailers and the central bankers and the Internet companies and whatever else might exist in Brazil. Through that process we're able to really scour the world across sectors, across industries for the best opportunities out there. If the end goal is to know the greatest number of facts about a company or an industry, maybe that's not a game we'll win. If the end goal is to make the best investments and to be able to put investments in context, that's something we're very much focused on doing.
Another important aspect of Thornburg is the three-basket approach. We structure most of our equity portfolios according to three baskets: basic values, consistent earners and emerging franchises. While we typically have a good balance across those three baskets in our portfolios, it's not necessarily a number we manage to. Rather, it's a construct for thinking about value in different ways. What I mean by that is sometimes there is very good value in a stock that is, let's say, low multiple of earnings. Other times there's better value in companies that have much higher multiples of near-term earnings but where there is a more durable business model or where the duration of cash flows is longer or where growth prospects are better. So we want to be able to think about value in different ways. We want to be able to strike a balance between promise and discount. I think a lot of firms do one of those things at the exclusion of the other, and we try to structure portfolios in a manner that does both.
The last thing I would emphasize about Thornburg is that we are not a marketing-driven firm. We are an investment-driven firm. What I mean by that is that every product that's been started here at Thornburg has not been started because we think we can sell it. Rather, it's been started because we believe we can deliver on an excellent investment program to our clients and because the portfolio managers believe in the product. So we're an investment-driven shop, not a marketing-driven shop. I think the evolution of our product development reflects a focus on products that we believe in and what we think we can do well.
In 1995 we launched our first equity product, the Thornburg Value Fund, and by 1998 that portfolio was approximately one-third invested in international stocks. We took a look at that and said, "We're pretty good at this; it probably makes sense for us to have a portfolio that's specifically focused on international investments." And so in 1998 we launched the Thornburg International Value Fund, which is now our biggest product. In 2002, we had an International Fund that was taking us to some interesting parts of the world where income opportunities were perhaps outsized relative to what you might find in the developed world. We felt that we could deliver a very attractive income-oriented strategy to our clients focused on growing dividends per share on a global basis, and so we launched the Income Builder Fund in 2002. Then most recently, we were running the Income Builder Fund at approximately 20% emerging markets, so we made the decision to launch the Developing World Fund in December 2009. That is broadly an overview of Thornburg.
TWST: What is your investment philosophy specifically as it relates to the Developing World Fund?