Treasure Hunt

Finding value where you might not expect it

Nothing is simple anymore. Take value investing, for example. This strategy used to be cut-and-dried. Basically, portfolio managers bought good companies selling at low multiples--in other words, on the cheap. Today, however, not all value funds are created equally. Just look at the Thornburg Value Fund. It's got a mind all its own.

Bill Fries, portfolio manager of the Thornburg fund, cuts a broad cloth when he's shopping for companies in which to invest the fund's assets. "We look at low price-to-earnings, low price-to-cash, above-average dividend yield and that kind of thing," says Fries, who has been at the fund's helm since its inception in 1995. "But we also buy consistent growers--blue chip stocks. And we have a small portion of the portfolio in emerging companies."

Why does Fries invest in so many different types of companies? First, he wants to build a diversified portfolio of securities. And second, he says there are different contexts of value. "A consistent grower, for instance, may be a company that's spent billions of dollars over decades building its name--and that has value," he explains.

But that kind of value isn't easy to quantify, especially for by-the-book value thinkers.

PepsiCo is an example of a consistent grower that's in the fund's portfolio. Many value fund portfolio managers would never consider it a value buy. One reason: At the time this piece was written, it was selling at about 24 times earnings, and a lot of value camp people would find that too pricey. But not Fries. "Given the profit-ability of the enterprise and the core Frito-Lay snack food franchise along with the Pepsi beverage franchise, there's value in there," he says.

Then there are the emerging franchise companies you'll find in the fund, fast growers like Advent Software, Fox Entertainment and Novellus System. They're in the fund because, says Fries, "Growth is not a dirty word to me."

The portfolio contains about 47 stocks, and total holdings won't vary much beyond that; Fries wants "every stock to count." And count they have. The fund's average annual total return has been well over 27.52 percent, despite the fact that the value stocks have been down and are still rebuilding.

Look at the fund's asset allocation and you'll find nearly 21 percent in-vested in technology stocks, 6 percent in financial institutions, 7 percent in investment management firms, and the rest in everything from rail-roads to travel service companies.

No matter what type of company this manager selects, there's one rule of thumb he follows: Buy the stocks when they're out of favor. So even though Fries has stretched the meaning of value beyond what some might consider its natural state, he's firm on that front.

On the risk meter, even though the Thornburg Value Fund's diversity of value-type holdings might provide shareholders with some cushion as market tides turn and performance winners see-saw between growth and value stocks, it's not risk-free. But maybe the game isn't so much one of choosing between the two as it is of finding the priced-right winners.


Dian Vujovich is a nationally syndicated mutual fund columnist and author of 101 Mutual Fund FAQs (Chandler House Press). For free educational mutual fund information, visit her Web site, http://www.diansfundfreebies.com

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This article was originally published in the January 2000 print edition of Entrepreneur with the headline: Treasure Hunt.

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