14 Jan 2013 Thornburg Value Fund - Q4 2012 Commentary ( Portfolio )
Portfolio performance for the Thornburg Value Fund for the fourth quarter of 2012 was favorable. For the three-month period ended December 31, 2012, the fund returned 2.89% (for the A shares without sales charge) versus negative 0.38% for the benchmark S&P 500 Index.

Since our crystal ball at Thornburg Investment Management suffers periodic bouts of imprecision, and since we do not carry a strong bias about U.S. economic direction and Fed policy, our objective is to manage a well-structured portfolio that performs well in either up or down markets. We believe we have made measurable progress in that regard. Positioned neither aggressively nor defensively, the Thornburg Value Fund outperformed the benchmark S&P 500 Index in both “up” and “down” periods during the quarter.

An example of one of the portfolio “balancing” measures we have taken follows. A distinctive feature of Thornburg’s diversification approach is our classification of companies within a three-basket construct: basic values, consistent earners, and emerging franchises. Since the purpose of the basket construct is to serve as a risk mitigation tool and not simply as a nice way to assemble a portfolio, the team has placed more emphasis on the market and price behavior of securities in the classification process. Over the last few months we have also worked to bolster the consistent earner basket of the portfolio, in what remains an uncertain economic environment.

Positive Contributors to Performance for the Quarter

Among the stocks that contributed most to the portfolio’s performance this quarter were ADT, Tokyo Steel, Gilead Sciences, Delphi Automotive, and Hartford Financial Services.

ADT is a leader in the home security business with a secure, repeatable, predictable cash flow. We believed the company’s capital structure was too conservative, and part of our investment thesis was that any potential leveraging would be recognized by the markets as positive. Tokyo Steel Manufacturing benefitted from improved cost structures, a weaker yen, and the general market optimism surrounding the election of a new Japanese prime minister. Longtime healthcare holding Gilead Sciences has recently seen more and more excitement surrounding its Hepatitis C treatment, with a 100% success rate in recent trials. The markets appear to recognize the product as a valuable asset, and the share price responded.

Auto parts manufacturer Delphi Automotive has relocated manufacturing capacity to lower-cost emerging markets. Its revenues are tied to global growth, and recent optimism regarding those prospects helped performance. Hartford Financial Services is making a transition from the variable life business towards a pure property & casualty (P&C) insurer; these firms typically trade at higher multiples. If Hartford can exit the variable business at low cost, we believe it will be good for the stock.

Detractors from Performance for the Quarter

Among the stocks that detracted from performance for the quarter were Apple, Inpex, St. Jude Medical, Softbank, and Newcrest Mining.

The markets are taking a conservative, even pessimistic view of Apple’s prospects and have punished the stock. We do not, frankly, see a reason to be so pessimistic and our position is unchanged. Investors are not (we believe) giving oil and gas exploration firm Inpex Corporation sufficient credit for the earnings and cash flow that we expect to stem from its Ichthys development. We are reassured by various factors, including the fact that more than 90% of production has been pre-sold.

Medical technology developer St. Jude Medical’s non-cardiac rhythm management business reported disappointing results, and the company disclosed an FDA warning letter concerning manufacturing. Most of the drop in Softbank’s stock price since the Sprint acquisition was announced has been recovered, and we view the acquisition favorably. The decline in the stock during the quarter was mostly due to currency-related factors; in local terms, the stock was essentially flat for the period. Australian gold miner Newcrest mining experienced issues with cost inflation, as have many gold miners. But the company can increase production, and we believe that most of the news on costs is priced into the stock.

Notable Purchases and Sales During the Period

Ace Limited is a property and casualty insurer, well diversified by product line and geographically. The company has a strong balance sheet, and above-average return on investment. Its good presence in emerging markets presents the company with attractive growth prospects. We initiated the position in October. Another new holding, Liquidity Services, provides an online marketplace for businesses and governments to dispose of surplus assets. The company generates significant free cash flow and requires relatively little capital to operate. We initiated the position in October. We also initiated a position in Dutch grocer Koninklijke Ahold, one of the best-managed grocers globally. It is a leader in applying technology to marketing and management processes, and its online ordering system is leading edge. The company is stable with ample growth potential, and valuation is attractive. We initiated the position in October.

We sold healthcare management firm Alere relatively early in the quarter due to deteriorating fundamentals and weak second quarter results. The Gap was sold relatively late in the period after its price target had been reached, and we sold Intel due to deteriorating fundamentals and uncertainty regarding competition.

Conclusion

We continue to focus on buying promising companies at a discount to their intrinsic values. Adjustments made over the course of the past several quarters have resulted in a more balanced structure that can provide attractive returns in a variety of market conditions, while not representing a departure from the tested investment philosophy of the portfolio.