18 Feb 2011 Thornburg Value Fund - Q4 2010 Commentary ( Portfolio )
In order to illustrate why we believe our portfolio has unusual promise and discount, we will discuss three stocks that exemplify what we look for in investments, but which delivered below-average returns in 2010.

Our worst stock in 2010 was Transocean (RIG). Transocean operated the Deepwater Horizon rig that was drilling BP’s Macando well in the Gulf of Mexico. We owned Transocean shares prior to the tragic accident. Transocean is the industry leader in deepwater drilling, is globally diversified, has a strong balance sheet, and an unusually large number of rigs under long-term contracts that provide relative certainty regarding future cash flows.

As events unfolded after the well exploded and the drilling rig sank, we worked to determine the economic impact of the event on Transocean, including potential legal liabilities. We met with many of the companies involved including Halliburton, who did the cement job on the well, Cameron, who manufactured the blowout preventer, Anadarko, BP’s non-operating partner on the well, and other industry players, including rig operators and oil industry lawyers. We concluded that Transocean’s legal liability would be manageable. Since then, Transocean has released the actual contract between it and BP. The contract includes language indemnifying Transocean even in the case of gross negligence. While Transocean has recovered dramatically from its lows, we believe it remains significantly undervalued. As the legal liability question became clearer and Transocean stock failed to fully recover, we increased our position in the company and it is now one of the largest positions in the portfolio.

Gilead (GILD) was our second worst performer for the year. The stock declined 16.2% during 2010 despite growing revenues by 15% and earnings per share (EPS) by over 20%. Gilead is the leader in treatments for HIV – their treatment is taken by around three quarters of all patients on treatment worldwide. Even in the United States, a highly penetrated market, estimates are that of the 1.2 million patients infected, only 600,000 are taking medication. Patent cliff issues could affect earnings materially in the 2018 to 2020 time frame, but with a valuation of less than 10x forward earnings, we believe the company is dramatically undervalued anyway. Gilead bought back over 10% of its outstanding shares in 2010. As the share price declined in 2010, we added to our position and Gilead is now the largest position in the Thornburg Value Fund.

Google (GOOG) is the leading company in internet advertising and search. Google has no net debt, a substantial cash position, numerous proprietary technologies, high profit margins and a global footprint. We also perceive substantial value in areas where Google is a potential leader but which are not currently generating significant revenue. The company is competing for leadership in operating systems for mobile devices of all types. To put that opportunity in perspective, consider that the main strength of the Microsoft (MSFT) and Apple business models relates to operating system leadership in computers and smartphones. Google is also a potential leader in cloud computing due to an infrastructure in servers that is among the best in industry. We ascribe little monetary value to other initiatives, such as mapping, speech recognition, and self-driving automobiles, but recognize that free options are a good thing to have.

During 2010, Google made great strides in achieving acceptance of its Android operating system for mobile phones, achieved record earnings, grew EPS by around 20%, and generally surpassed our fundamental objectives for the company. Despite these accomplishments, Google shares lagged both the broad equity market and the technology sector in 2010. We added to Google in 2010 and it is one of the largest positions in the portfolio.

We are contrarian investors. We do our best to buy low and sell high. In environments where high goes higher and cheap stocks get cheaper – we can struggle. The good news is that these periods do not last forever, and valuation will matter again at some point in the future. We remain optimistic that our approach of buying promising companies selling at a discount to their underlying value has the potential to deliver results in the future similar to what we have achieved since the inception of the Fund.