Fund name: Thornburg Developing World Fund, “A” shares (THDAX)

Objective: the Fund seeks long-term capital appreciation, primarily by investing in emerging market stocks.  For their purposes, emerging market stocks can be either the stock of companies domiciled in an emerging market country (e.g., a Bolivian toothpaste maker) or of companies whose earnings are largely driven by emerging markets (e.g., a US toothpaste maker which earns a substantial chunk of its revenue from its emerging markets operations).  It can also invest, without limit, in emerging market bonds and convertible bonds (but the manager doesn’t particularly plan on it). It’s not restricted in the size of company that it can hold and is likely to hold 40-60 stocks.

Adviser: Thornburg Investment Management. Established in 1982, TIM manages nine fixed income and seven equity funds, and separate accounts for high net worth and institutional investors. The Santa Fe firm had $52 billion in assets under management as of 12/30/09.

Manager: Lewis Kaufman, a managing director at TIM and co-portfolio manager of Thornburg's International ADR — American Depositary Receipt — portfolio. Lewis joined TIM as an associate portfolio manager in 2005. In 2006, he was promoted to co-portfolio manager for the ADR portfolio and named managing director. Prior to joining Thornburg, Lewis held various investment related positions at Morgan Stanley and Citigroup.  In addition to an MBA for Duke’s Fuqua School of Business, Mr. Kaufman earned a BA in English, cum laude, from Colgate.  (Yes, yet more proof of the flexibility of a liberal arts education.)

Management’s Stake in the Fund: none yet recorded.  In general, Thornburg managers hold substantial positions in the funds they manage.  Of the 12 managers listed in the most recent SAI, only the manager responsible for bond funds (mostly single-state funds) was not invested.  Only one manager had under $50,000 invested and most were well above $100,000. 

Opening date: December 16, 2009.

Minimum investment: the load-bearing version requires $5,000 for regular accounts, $2,000 for IRAs, and $100 for accounts opened with an automatic investment plan. Load-waived "A" shares are available for financial advisers, though not for individual investors, at Schwab, Fidelity and various broker/dealers. Finally, no load "I" shares appear to be available at Fido with a minimum purchase of $2,500. The catch is that Fido charges a $75 transaction fee on each purchase.

Expense ratio: 1.83% for “A” class shares, on assets of $6.1 million.  There’s also a 1% redemption fee on shares held fewer than 30 days.

Comments: one of the things most likely to cause little kids in a Sunday school class fall over in a (dramatic) dead faint is the emergence of all those “begats.”  Surely you remember that part where Phares begat Esrom; and Esrom begat Aram; and Aram begat Aminadab; and Aminadab begat Naasson; and Naasson begat Salmon; and Salmon begat Booz of Rachab? And don’t even get me started on the part where Salathiel begat Zorobabel; and Zorobabel begat Abiud! 

Understanding Thornburg Developing World requires a bit of begat-ology.  But just a bit.  In this case, we start with Thornburg Value (TVAFX) which launched in 1995.  TVAFX is a very solid core fund.  Consistently four stars from Morningstar.  A Lipper Leader for Total Returns and Consistent Returns.  Beats its peers in about four years out of five. Top-rank returns over the trailing three, five, ten and fifteen-year periods. After the first three or so years, TIM’s management team noticed that about a third of Value’s portfolio was international and that the international holdings were doing just swell.

And so, in 1998, Thornburg Value begat Thornburg International Value (TGVAX).  Thornburg tends to a collegial style of management and so many of the folks responsible for guiding Value also helped guide International Value.  To a consistent five star rating from Morningstar.  And a “Fund Manager of the Year” award from Morningstar in 2003.  And Morningstar’s coveted “Analyst Pick” designation among international core funds.  And designation as a “Lipper Leader” for Total Returns and Consistent Returns.   Beat its peers in 11 years out of 11.  Top-rank returns over the trailing three, five and ten year periods. And after a while, TIM’s management team noticed that up to a quarter of International Value’s portfolio were emerging markets stocks (broadly defined) and that they were doing  just swell.

• A focus on strong risk-adjusted returns; that is, building the downside risk carefully into the calculation of likely long-term returns.
  
  
• A preference for self-funding companies; that is, firms which don’t need to rely on access to (expensive, fickle) outside capital – whether from banks, debt markets or venture capitalists – to fund their growth.

Mr. Kaufman, who contributes to and is supported by the International Value team, believes that this fund will offer two distinct advantages to investors above and beyond what they gain from the value of TIM’s stock selection discipline.  First, the presence of developing markets companies domiciled in the developed world offers the potential for a substantial gain in risk-adjusted returns.  While many US and European firms have some exposure to emerging markets, a fraction of them are actually driven by their emerging markets operations.  Mr. Kaufman points to Colgate Palmolive, which derives half of its worldwide earnings from the emerging markets.  Those markets account for almost all of the firm’s earnings growth; it manufacturers locally in those markets with local management teams trained to global standards; it adapts its product line, product formulas and packaging to the needs of those markets; and it has been rewarded to huge market shares (70-90% for some product lines in some markets).  The legal and financial security offered by its developed world roots allows Colgate to provide relatively low-risk, high-quality exposure to emerging markets.  Mr. Kaufman imagines that 15-20% of the portfolio might be firms headquartered in the developed world.

Second, the fund offers currency diversification.  Most international investors have exposure predominantly to only two other currencies (the euro and the yen), both of which are tied to mature, developed markets much like the US.  Emerging markets currencies are apt to hold up reasonably well given the region’s vibrant population and economic growth, and generally low levels of public debt.  As a result, that exposure might provide a source of gain above and beyond whatever the markets themselves provide.

The caveats here are relatively limited.  Mr. Kaufman has not previously managed a mutual fund and it’s increasingly clear that success in other vehicles – hedge funds, separate accounts and the like – does not automatically translate into success in fund management.  That said, Thornburg has a solid record with new fund launches.  In addition, the 1.83% expense ratio creates a substantial headwind for the manager to overcome, though Thornburg’s generally low-turnover style reduces the fund’s market costs. 

 Bottom Line: there are about 120 emerging markets funds available, include a couple dozen no-load, retail funds.  Very few of those funds have distinguished themselves on grounds of risk control.  The fact that one of Morningstar’s two “Analyst Picks” – T. Rowe Price Emerging Markets (PRMSX) -- lost over 60% in 2008, highlights the problem.  Thornburg’s fine pedigree and avowed risk-consciousness make it a serious contender for investors able to access its load-waived shares.

Fund website: Thornburg Developing World