Private equity fuels Threadneedle income star Thornber

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Staying true to his nature means running a diversified portfolio of around 80 to 90 positions, says AA-rated Stephen Thornber, fund manager at Threadneedle Investments.

‘It’s my nature to be defensive and cautious,’ he said, adding that efficient diversification is important to manage the ever-present risk of being wrong, and is consistent with Threadneedle’s investment philosophy.

Thornber is candid about the reality of investing, saying, ‘fund managers spend their lives looking back at the chances we missed, and we sometimes forget about the bad stuff we got into.’

‘I don’t get everything right, I get many things wrong. But out of 80 stocks if I can get 50 right and 30 wrong, then performance will be pretty good,’ he said. Thornber has managed the Threadneedle Global Equity Income Ret Net Acc GBP since launch in June 2007.

Valuations, Thornber said, currently favour Asia and Europe, while the US looks overvalued. ‘Over the last four or five years, there’s evidence that US income stocks are expensive relative to history. But in Europe Asia and Japan, they’re trading close to 10 year averages.’

‘I think Asia looks particularly attractive. The Asian region is trading at levels close to Europe, but without the issues plaguing European markets.’

On a sector basis, he is bearish on US utilities, in particular stocks where the only attractive quality is a high dividend yield. US telecoms are another sector he is avoiding, citing regulatory risk in a mature market with certain companies showing weak balance sheets.

However, in Asia, utilities and telecoms are areas where he finds better value. Citing the example of Malaysian telecoms he notes strong balance sheets, coupled with good growth and roughly 5% dividend yield.

Among his top holdings includes private equity firm Blackstone Group, at 2.2% of the portfolio (as at end-May 2013). ‘Firstly, banks are being forced to strengthen their balance sheets and dispose of assets. Quite often with such forced sales, there’s mispricing, and private equity firms are buying assets off the banks. And Blackstone is doing this on a huge scale. The other thing is banks are also exiting lines of business, because they don’t have the risk capacity to manage them. One example is SME financing, and firms like Blackstone are now entering this space.’

He notes that the portfolio is deliberately diversified to ensure no single sector or geography dominates the portfolio’s allocation, and while a single position can hold a maximum of 4%, in the history of the fund, the largest position Thornber has taken is 2.6%.

Year-to-date, as at end-May 2013, the fund has returned 12.50% against the benchmark MSCI AC World TR GBP return of 9.54% (in USD terms). He attributes this outperformance to stock selection, and despite being underweight geographically on markets that did well in the start of the year, stock selection more than compensated. ‘The approach is really to find strong companies, but then diversify as efficiently as we can,’ he noted.