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No fear: Thornburg's value star on taking the contrarian route

No fear: Thornburg's value star on taking the contrarian route

As Valeant defends itself against claims it’s the pharmaceutical Enron, holding on to its stock might sound a bit precarious. The same goes for another pharmaceutical group that has courted controversy, Canadian firm Concordia Healthcare.

However, global value investor Brian McMahon, chief executive of Thornburg Investment, is not one to shy away from taking a contrarian stand: he is still holding on to both stocks in his Global Opportunities fund. The manager, rated Citywire+, runs the fund alongside Citywire A-rated Vinson Walden.

Valeant’s shares slid significantly in mid-October as a report from short-selling firm Citron Research accused the group of falsely claiming revenue on products shipped to its own subsidiary.

Concordia Healthcare stock soon followed suit, dropping in sympathy due to its comparable business strategy. The company has also come under attack from US presidential hopeful Hillary Clinton over drug pricing.

Before the recent market scare, McMahon and his team had reduced their exposure to Valeant after it announced it would move away from key business strategies that propelled its success, such as selling neurological drugs, which had depended on price increases in its third-quarter earnings. But he has not sold out of the stock completely.

And, being careful not to throw out the baby with the bath water, McMahon is holding on to Concordia, saying he is ‘not afraid to take meaningful positions in stocks that we do our homework on’.

‘Concordia and Valeant are under fire for drug pricing,’ he says. ‘We’ve had significant dips in their share prices, so that’s dented our short-term performance, if you want to look back on one month. But, over a longer period of time, our annual performance is more than 6%.’

Within the Ireland-domiciled Ucits fund, which mirrors its $2.3 billion US mutual fund, Concordia is the top holding, making up 6.9% of the portfolio. Valeant is fourth-largest, at 5.3%, according to its factsheet from the end of September, a figure that has subsequently gone down after the manager sold off part of his exposure over the course of October.

While Concordia has significant debt levels after a number of acquisitions and is facing price compression, its latest acquisition – UK-based Amdipharm Mercury, which it bought for $3.5bn – further diversifies its product base and gives it access to new markets.

‘We think they can survive. They have a diversified portfolio,’ says McMahon. ‘They’re valued at a significant discount to other pharma companies, so that’s our hope. Obviously, there’s leverage there. We have to keep our ear to the ground. There’s a bit of a high-wire act.’

McMahon says there’s value in the fact Concordia isn’t based in the US, but does a lot of business there: being domiciled in a better, friendlier tax regime with lower tax rates where it’s easier to move money around has its benefits. ‘We went into it because we got interested in these companies that were rifle shooting on small and medium-sized individual drug acquisitions that were headquartered outside the US,’ says McMahon.

Over three years, McMahon’s performance is strong...

Source: Lipper

Hanging tough

The contrarian view is one that’s worked for the manager’s team time and time again. Since its inception in March 2012, the fund has consistently outperformed its benchmark, bar a few months in 2012, which was mainly down to a holding in Bank of America, McMahon says.

As of the end of September, the fund’s total return was 55.2% over the past three years, in comparison to the 25.8% rise of its benchmark, the MSCI AC World USD.

‘Sometimes, performance can be very, very lumpy, for better or for worse,’ says McMahon, who is the lead manager on the fund and responsible for all investment management at Thornburg. ‘We had a good-sized position in Bank of America in 2012, which really deflated [it fell to $5 at one point]. That hurt, but we added to it and held our ground and it did fine. We ended up selling it higher than it is priced today ($16.50).’

McMahon adds: ‘We have pretty straightforward strategies and execute them capably, and we don’t get caught up in fads or various synthetic things.’

The US mutual fund was launched in 2006 and hit $1 billion a year ago without any changes being made to its overall framework in that time. ‘It’s very focused, and in some sectors we don’t have any holdings. I don’t think we’ve ever owned a utilities stock in this fund. A lot of people would say: “Why would you do that? You can’t do that.” I say: “Yes, you can.”’

Walking the walk

When asked which company he is most optimistic about, McMahon laughs. ‘Oh, my God, that’s like asking which kid you like best.’ He has learned not to fall for favorites, he adds.

However, he admits he’s optimistic on French cable operator Numericable. He believes the major shareholder, billionaire Patrick Drahi, is a positive driving force for the firm. ‘We think they can significantly increase margins. Drahi has a record of doing that and he has suggested he could.’

Drahi’s telecoms company Altice is hoping to buy a US wireless provider, having acquired Cablevision Systems in a $17.7 billion deal in September. McMahon thinks Drahi will use Numericable to show his skills to attract funds for US acquisitions. ‘It will be hard for him to add to his Cablevision acquisitions in the US if he can’t show what he’s done in France,’ McMahon says.

Personnel is also driving his Citigroup stock pick. The banking giant, one of the few international banks based in the US, has long been plagued by lawsuits and regulatory scrutiny. McMahon likes that Michael Corbat, the bank’s chief executive, and Michael O’Neill, its chairman, have made progress in simplifying Citi since they joined in 2012.

‘We like what Corbat is doing there and what he has done [so far]. We like O’Neill and that there’s a separate chief and chair. They didn’t have that when Sanford Weill was there and they got in trouble,’ he adds.

‘O’Neill has a pretty solid record of simplifying, focusing and delivering better than others. They inherited what they inherited and they’ve been fixing it up. The fines are going down, they segregated the non-core into Citi Holdings and they worked it down.’

If McMahon and his team notice these top-level players doing things that are not aligned with their hints, that’s when they will pull out. If the management is caught doing ‘dumb stuff and re-complicating the balance sheet’, the manager says, he will need to rethink things.

‘Frankly, we like it when management has some degree of control on these outcomes. However, management does not control everything.’

... and over five he has more than doubled his benchmark

Source: Lipper

From schoolboy spy to Santa Fe

McMahon spent time working in banks and took various corporate finance positions before joining Thornburg in 1984 as its chief investment officer, initially focusing on fixed income.

He says he enjoys the laidback style of Santa Fe, the modest capital of New Mexico, and being able to skip the crowded trains and business dinners that come with doing business in big cities.

Looking back at the manager’s education, there’s something of a standout subject: Russian studies. McMahon explains that, before he even ‘knew what economics was’, he was picked – or, in his own words, ‘invited’ – to take Russian at high school in Ohio.

‘Some guy came along and said: “We’re going to have Russian classes here by a professor from Ohio State and you should take Russian.”

‘What was going on behind the scenes? I don’t know. I ask myself that question. It was around the time of the Vietnam war and there was probably concern from someone at a high level at the Pentagon or something saying: “Why aren’t we grooming any Russian speakers in the US?”’

Even though he went on to study the language at college, McMahon says he has barely used it since – except when bargaining with an artist on the street in St Petersburg.

Targeting Asia

McMahon and his team travel from their Santa Fe office to visit about 200 companies a year, some of which might translate into its 30 to 40 holdings.

Historically, its US weighting has varied considerably over time, ranging from as low as 35% to as high as 55%.

‘That’s going to change,’ says McMahon. He sees Asian markets taking up more portfolio space in future.

‘If you look at the long term and see how the world’s changing, we’re going to go along with it. For now, for example, we don’t have a lot of exposure in China; we’ve had a little more at some points in the past. It’s a big economy and I expect over time we’ll increase our exposure.’

Since the Chinese market had its meltdown in late August, McMahon sees value in a number of stocks that are trading at or below book value. For example, Chinese telecommunication companies are trading at multiple discounts in comparison to similar companies around the world.

His one reservation is what the government might do next. For example, e-commerce company Alibaba is an independent company, but the government controls the internet and so can have some influence over the company’s actions. McMahon got in on the IPO, but soon pulled out of the stock. His team is still watching it closely to see whether they should re-enter.

‘It’s hard to argue that there’s better value in China today than there has been at any point in the past few years, except maybe 30 days ago. Generally, values are beaten down – the economy is not growing as it used to grow – but it’s still growing,’ he says.

McMahon has also increased his number of research trips to India and Latin America. The fund does not have much exposure in these territories, either, but their inquiries are growing.

The selection process is much more bottom up than regional, McMahon stresses, but he admits that ‘the more beat-up various emerging markets get, the more interesting they are’.

This article was originally published in the November issue of Citywire Americas. To sign up to receive our free magazine, follow this link.

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