Analysis of Thornburg Global Opportunities Fund
analysis, mutual fund

Today’s profile in Barron’s features the Thornburg Global Opportunities Fund (THOAX; Class A shares). This $2.5 billion fund has a 4.5% maximum sales charge, 1.32% actual operating expenses (after a temporary fee waiver), and 45% turnover. According to the article

The fund is notable not just for its category-leading 11.6% annual returns over the past five years, but also for its approach. It is extremely flexible—it can invest in any size company in any market—and extremely focused.

One of the accessible implementations of the fund’s benchmark is the iShares MSCI ACWI ETF (ACWI). Since the ETF’s inception in March 2008, the fund returned more than the ETF in about 98% of all rolling 36-month periods, 87% of 24-month periods and 77% of 12-month periods. The mean and median of the fund’s outperformance in a rolling 36-month period was 17.1% and 12.8%, respectively.

Comparing returns against a single static benchmark does not adjust for the fund’s risk. To accomplish the latter, let’s look into the performance of Thornburg Global Opportunities through the lens of Alpholio™’s patented methodology. One variant of this methodology constructs a custom reference portfolio of ETFs with a fixed membership but variable weights that most closely tracks returns of an analyzed fund. The difference between the returns of the fund and those of its reference portfolio is the RealAlpha™ (to learn more about this and other performance measures, please visit our FAQ). Here is the resulting chart of the cumulative RealAlpha™ since the fund’s inception:

Cumulative RealAlpha™ for Thornburg Global Opportunities Fund (THOAX)

Since inception, the fund produced about 3.6% of annualized discounted cumulative RealAlpha™. However, most of this value was added since mid-2013. Of note was an approximately 10% drop in the cumulative RealAlpha™ from August to September 2015. This was a result of a dramatic price decline of one of its main holdings, which underscores the concentrated nature of the fund. At 20.3%, the fund’s standard deviation was about 3% higher than that of its reference ETF portfolio. The fund’s RealBeta™ was around 1.07.

The following chart illustrates changes of ETF weights in the reference portfolio over the same analysis period:

Reference Weights for Thornburg Global Opportunities Fund (THOAX)

The fund had major equivalent positions in the iShares Morningstar Mid-Cap Growth ETF (JKH; average weight of 21.8%), iShares MSCI Switzerland Capped ETF (EWL; 12.7%), Vanguard Financials ETF (VFH; 12.5%), iShares MSCI Canada ETF (EWC; 12.2%), iShares MSCI Malaysia ETF (EWM; 10.3%), and iShares MSCI Japan ETF (EWJ; 8.6%). The Other component in the chart collectively represents additional six ETFs with smaller average weights.

Since inception, the Thornburg Global Opportunities Fund added a significant amount of value of a risk-adjusted basis but at the expense of an elevated volatility due to concentrated holdings. Currently, the fund’s top-ten positions account for 48% of its assets. At present, the fund is approximately evenly invested in the U.S. and foreign equities, which should be taken into account in the construction of the overall investment portfolio. The fund’s relatively small historical distributions indicate that despite active management it may still be a good fit for taxable accounts. The substantial front load detracts from the fund’s appeal.

To learn more about the Thornburg Global Opportunities and other mutual funds, please register on our website.

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Wide Range of Emerging Market Returns
mutual fund

An article in The Wall Street Journal indicates that emerging market mutual funds have a wide range of year-to-date (YTD) returns:

The average diversified mutual fund focused on emerging markets is up 1.2% in 2013 through October, according to researcher Morningstar Inc. But the range of returns is wide, from a gain of more than 24% to losses of more than 7%.

One of the strongest performers described in the article is the Thornburg Developing World Fund (THDAX, class A shares) with a YTD return of approx. 14%. With its inception in mid-December 2009, the fund has a relatively short history, yet Morningstar already rates it Five Stars / Bronze in the Diversified Emerging Markets category. Similarly, Lipper rates the fund a Five in the Total Return, Consistent Return and Tax Efficiency categories in the Emerging Markets asset class.

Let’s take a closer look at the fund’s performance from the Alpholio™ perspective. Here is the cumulative RealAlpha™ chart for the fund, starting three full months after the fund’s inception:

Cumulative RealAlpha™ for THDAX

Following three years of a largely unimpressive performance on a truly risk-adjusted basis, the fund has generated a substantial amount of RealAlpha™ earlier in 2013. However, as the chart shows, this outperformance peaked in May and has been on a decline since then. This may be a sign of reversion to the long-term historical pattern.

The following chart shows the percentage weights of exchange-traded products (ETPs) in the reference portfolio for the fund over the same analysis period:

Reference Weights for THDAX

The top-three equivalent ETP positions for the fund in emerging markets were in the iShares MSCI Hong Kong ETF (EWH; average weight of 17.1%), iShares MSCI Malaysia ETF (EWM; 15.9%), and iShares MSCI Singapore ETF (EWS; 11.7%).

It is worth noting that, as a proxy for foreign holdings, the fund also invests in domestic stocks with a substantial exposure to emerging markets. For example, according to the most recent holdings report, the fund held positions in Qualcomm (QCOM; 2.5%), Yum! Brands (YUM; 1.9%), First Cash Financial Services (FCFS; 1.9%), and Colgate Palmolive (CL; 1.9%).

According to the article

The $1.5 billion fund is positioned to capitalize on growing consumption in developing nations, says manager Lewis Kaufman. It has about half its portfolio in consumer-facing businesses…

This investment tilt is reflected in an equivalent position in the Vanguard Consumer Discretionary ETF (VCR; average weight of 11.1%).

As the following chart from the article depicts, returns of emerging market stock funds have been quite volatile this year:

Rocky Road to Small Gains in Emerging Market Stock Funds

The big decline in May-June was caused by an indication by the Federal Reserve that it may begin tapering its quantitative easing strategy by year’s end, which caused the domestic interest rates to rise and emerging market currencies to fall against the dollar. As a result, there was a huge outflow of capital from emerging markets — investors saw a better reward-to-risk opportunity at home.

When in September-October it became clear that the Fed will continue with its policy at least in the near term, emerging markets rebounded. However, since the Fed’s bond purchases will not last forever, the emerging markets will undoubtedly be again affected. This underscores the wide range of returns of foreign investments caused by changes in the domestic monetary policy.

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