Creating a Durable Portfolio
“Four basket” approach creates diversity and historical outperformance.
For Thornburg Summit Fund, building a durable stock portfolio rests on a straightforward but powerful principle: invest in strong businesses. Those businesses take many shapes – from the most familiar blue-chip firms to relatively unknown and disruptive upstarts. But their commonality lies in their competitive advantages and ability to maintain or build market share, often in growing sectors.
Whatever its profile, each potential stock investment is carefully analyzed by the fund’s managers not just for its business prospects but also for its ability to contribute to fund objectives and its risk/reward profile relative to other stocks and bonds.
Importantly, to avoid overweighting the fund toward any particular sector or style and to enable the fund to simultaneously participate in and manage the risk inherent in a variety of market environments, portfolio managers seek to balance the portfolio in terms of four different “baskets.”
1: Growth Industry Leaders
- These are dominant players that are maintaining or growing share within industries that are themselves growing.
- They typically have wide moats around their businesses and often enjoy significant leads over their nearest competitors.
- They allocate capital intelligently so that their competitive advantages may actually increase over time.
Example:
Alphabet: Dominant in search, it continues to benefit from the migration of ad dollars from traditional to digital media. Thanks to a wealth of data and cash, it is poised to continue benefiting from trends such as AI, autonomous driving and cloud computing.
2: Emerging Franchises
- These companies are taking market share quickly — many times by disrupting established players via differentiated products or services.
- They often operate in growing industries like technology or biosciences, compounding their growth profiles.
- Cash is typically deployed into organic growth, allowing these firms to continue building on their disruptive, competitive advantages.
Example:
BioMarin: This mid-size pharmaceutical firm features strong growth and recent drug approvals could trigger a sizeable increase in cash flow and substantial earnings-per-share growth. Indeed, despite aggressive growth plans, the company is on track to generate free cash flow and its valuation is attractive.
3: Consistent Earners
- These are the steady-Eddies. They’re stable and generate relatively non-cyclical revenue, earnings, cash flow, or dividends.
- Franchises with share prices set to grow roughly in line with GDP that, together with their dividends, should outpace inflation but with less volatility than the broader market.
- Driven by a mixture of organic and inorganic growth, cash generation is usually predictable and robust, often facilitating the return of cash to shareholders in the form of dividends and share buybacks.
Example:
Microsoft: This global software giant is a model of stability whose steady growth profile and multiple levers for future cash flow generation has the potential to reward long-term investors while introducing limited risk.
4: Basic Value companies
- High quality businesses “on sale.” They may have with discounted valuations due to market cyclicality or unexpected headwinds.
- Strong potential to appreciate over time, albeit with some volatility.
- Investors are “re-paid” for cyclical cash flow through dividends or share buybacks.
Example:
Broadcom: While not immune to the ebbs and flows of the semiconductor cycle, Broadcom is currently capitalizing on its strong position within the industry supply chain and has seen an acceleration of revenue driven by generative AI.
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