News Column

Reliably unexciting

May 19, 2014

By Winthrop Quigley, Albuquerque Journal, N.M.

May 19--SANTA FE -- Garrett Thornburg says if you plotted changes in the net asset value of one of the funds run by Thornburg Investment Management, the graph would look like "the EKG of someone who is dead, which is the whole point."

To understand Thornburg Investment Management -- and the more than $90 billion it handles -- it helps to understand that flat-line fund, the Limited Term Municipal Fund. The way the fund is managed, the philosophy of investing it represents and the way it became the seed from which other funds grew embody the firm's culture.

The fund was "never a very sexy idea," said Thornburg Investment Management CEO Brian J. McMahon. "A lot of the mutual-fund and asset-management business is a style business. You want some excitement. That was anti-excitement."

Still, since 1984 that fund reliably has churned out interest payments in good times and bad while minimizing risk and by avoiding the price swings that make a more exciting-looking net asset value graph. It's a performance that earned the fund a 2014 Lipper Award, one of five Thornburg funds to win Lipper Awards this year.

The Limited Term Municipal Fund buys municipal bonds from around the country, provided the price is right and the risk is appropriate. Municipal bond interest payments are exempt from federal income tax.

The fund is laddered, which means the maturities of the bonds are staggered. Every year, some bonds mature, and the principal is reinvested in bonds with longer maturities.

Sizzle-free investment

"You look really smart when rates go down," Thornburg said, because the value of the bonds increases when rates decline. "You look really stupid when rates go up. The fact is, over a long period of time, you look good because this system really works. You don't have to outguess the market. You don't have to pretend to be Bill Gross (a famous bond investor with PIMCO) and be smarter than the market all the time."

An investment management firm like Thornburg makes much of its money from fees it charges for its expertise in choosing investments. Most of its marketing involves convincing financial advisers and brokers to convince their clients to buy Thornburg funds.

McMahon recalls one broker they approached told them the Limited Term Municipal Fund likely would fail "because it doesn't have enough sizzle."

That is Thornburg Investment Management in a nutshell: sizzle free.

In good times, investors rush into the markets; in bad times, they abandon them in a panic.

"Our position has always been neither extreme," McMahon said. "Hang in there. Stay invested, but stay sensibly invested."

Thornburg talks a mile a minute. McMahon speaks quietly and deliberately. Neither man says much about himself unless asked.

Cream of the crop

Many of their portfolio managers and financial analysts hold degrees from the world's top business schools, and many of them are chartered financial analysts.

"We have a lot of people who could be superstars, but they aren't," Thornburg said. "That's not how it works. It's not a superstar system."

"We are very much an investment-centric versus a marketing-centric firm," said director of marketing Leigh Moiola. "We don't go out and create products that are the hottest trends in investing. Our resources go to the investment side of the house."

"We are known in the industry for not being marketing driven," said Chief Operating Officer Michael Doorley, who joined Thornburg last year after stints at Fidelity, Prudential and other firms. "That's a pretty unique feature. Most of the places I've worked were sales and marketing driven.

"Brian and Garrett and the people in this company have done a great job in building a company focused on what their expertise is."

Fidelity, for example, offers almost 200 mutual funds. Thornburg has 18, and several of those are variations on a theme.

Fund percolation

McMahon said new funds often don't start so much as they evolve.

"Most of our ideas just kind of percolate up," he said.

Thornburg offered only debt-based funds from its inception in 1982. However, analysts and portfolio managers were identifying great values in equities and, starting in 1990, would occasionally buy some.

Thornburg said he and his colleagues facetiously called their first equity holdings "the benign neglect fund, because we didn't do something until there was something to invest in, which is actually a really good strategy. If you don't have a better idea, don't do anything."

They were getting 27 percent annual returns on their equity investments but still didn't offer an equity mutual fund.

By 1995, Thornburg and McMahon reasoned that since they were buying equities anyway and were getting good results, it probably was time to start a fund. They placed a small help-wanted ad for an equity fund manager in The Wall Street Journal and received 500 applications, including one from William Fries, who was vice president of equities at USAA Investment Management Co.

Signing Mr. Fries

Thornburg couldn't believe a guy like Fries could be happy in a 15-person shop based at the foot of the Sangre de Cristos, but Fries stopped by to visit after a ski trip to Taos and got the job.

Fries launched the Thornburg Value Fund in 1995. Three years later, the International Value Fund began under his management. He was named Morningstar's International Fund Manager of the Year in 2003 for his work on that fund.

Ever since 1995, "all the equity funds have been sort of an organic growth" from the Value Fund, Thornburg said. "We found so many opportunities on the international side, we were getting over 25 percent international in our Value Fund when financial planners wanted to see a domestic fund. So I said, 'Let's just spin it off.' That turned out to be a pretty good move."

Soon the international fund led to an emerging markets fund. Equity portfolio managers discovered they were buying growth stocks for the value funds, so they spun off a growth fund.

"The biggest single step was the decision to do an equity fund with Bill," Thornburg said.

Equities now account for 75 percent of the firm's funds under management.

"That's three quarters of the company that wouldn't have existed if we hadn't made that one decision," he said.

Thornburg Investment Management has more than $90 billion under management today and employs 260 people.

Finding opportunity

When Garrett Thornburg founded his firm in 1982, he never expected the firm to grow that big.

He grew up in Lakefield, a farm town of 700 people in southwestern Minnesota. He was a young partner with Bear Stearns in New York when he noticed big banks that had low or no income tax liabilities were making tax-advantaged loans to small manufacturing firms using industrial revenue bonds.

The banks wanted better returns than they could get with those tax-advantaged loans, and they didn't need the tax-advantaged income, but they couldn't not lend or they would lose competitive position.

So Thornburg invented an instrument that "turned their illiquid, unrated mom-and-pop manufacturing loan into a (highly rated) seven-day money market instrument."

Bear Stearns wasn't interested in the product. Thornburg thought he had a pretty good idea, so he got Bear's permission to take the idea and start his own firm.

He started it in Santa Fe for two reasons. First, he and his former wife loved the place, especially its arts scene. Second, Thornburg said, "I didn't know how to raise children in New York."

He did his first deal with McMahon, who was a young corporate banker with Norwest Bank, which is now part of Wells Fargo.

McMahon figured if the product worked for Norwest, it would work for other banks, so he began making deals with other banks, generating fees for Norwest and business for Thornburg.

"I was impressed," Thornburg said. "He was smart enough to say, 'If this works for us, it works for other banks, and I can get paid to show these guys how to do it.' I didn't have any other bankers figure that one out. He was this young corporate finance guy at Norwest Bank. In 1984, I convinced him to join us."

Employee ownership

Thornburg is a minority owner of the firm these days and is chairman of its board. The rest of the company is owned by more than 30 employees, who are known as managing directors.

Many Thornburg funds regularly outperform their benchmarks, but the actively managed fund industry is always competing against index funds and exchange-traded funds because those funds charge lower fees and can get the same or better results as some actively managed funds.

"There are always replacement products being built for the market you're in," Doorley said. "Traditional asset management is probably not going to go away. The big question is, what role will ETFs or passive (investment strategies like index funds) versus active management play? We're looking at that."

What the next Thornburg fund will be is anyone's guess, though McMahon expects it will percolate up from something the firm already knows how to do well.

"Most of us here spend most of our time trying to deliver on what people have already hired us to do," he said.

"We don't want to be all things to all people," Doorley said. "We want to be thoughtful about what we do. We want people in the marketplace to understand why we do what we do."


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Source: Albuquerque Journal (NM)

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