Thrivent Large Cap Growth is a reminder of how new managers
can herald a change in a
David Francis and Darren Bagwell, now co-managers, took the
helm of the $521 million portfolio on Oct. 1, 2011.
In the three years prior to their taking command, the fund
lagged its Morningstar peer group in eight of 12 quarters,
according to Morningstar Inc.
In the nearly three years since they took control, the fund
has outperformed in eight of 11 quarters.
The fund has also flipped from lagging the S&P 500 to
The fund's improved relative performance comes amid several
strategic changes. For example, Francis and Bagwell shifted to
career analysts. Prior, the fund used analysts angling for a
promotion to portfolio manager posts of their own.
Francis, who is 61 and also Thrivent's head of equity
investments, and Bagwell, who is 47 and Thrivent's director of
equity research, talked with IBD from their offices in Appleton,
Wis., about how they look for
in the stock market.
How much of the improvement in the fund's relative performance
since you began to run it is due to your strategic changes and
stock picking? And how much is due to luck, including a favorable
turn in the
Determining the mix between luck and stock picking is difficult,
if not impossible. It is hard to not be self-serving in answering
the question. But attribution reports credit the bulk of the
outperformance to security selection, and thus to the
analyst/portfolio manager skills rather than luck.
On your watch this fund has made key changes in how it looks for
market leading stocks. You've expanded your team of analysts,
right? And you've cut down on potential turnover and career
conflict by hiring people as career analysts, correct?
In the early 2000s, there were only five analysts and they
supported the entire equity investment division, not just this
growth product. They were relatively junior positions. They
averaged four or five years' experience. They were not domain
experts. And the career path was to join one of the portfolio
Today we have 20 senior fundamental research analysts. They
each average more than 15 years experience, most within the
(industries) they cover. They support a number of funds. And
their career path is to be an analyst.
There are an additional five analysts that provide quant
Analysts are dedicated solely to this one fund?
The biggest difference is the career focus.
When I hire an analyst, I say we're not hiring you to become
successful enough to be a PM. We want you to become a top expert
in your field. We will compensate you and treat you so you are at
no disadvantage to your peers who become PMs.
Analysts in some shops often feel like second-class citizens
because PMs get all of the glory and compensation. We make sure
they know they won't make sacrifices culturally in terms of
prestige and compensation.
You've also made the fund more concentrated, with about 40 names,
down from 100 or more; and you lowered your annual turnover rate
to about 65% from more than 200%. Did those also help fund
Yes, that is a good summary.
You also boosted active share to about 75%, up from 4%. Active
share is the difference between your weightings and the index's,
Yes, active share is a less sophisticated concept than tracking
error. It's more user-friendly. To beat your index, you need
active share. Are you taking bets, or are you running a closet
) has run up so much since its IPO. Why should any investor think
this has more room to run?
It definitely has more room to run. Its value to investors is as
an advertising platform. And they're maybe a year to 18 months
into the transition to mobile. We're willing to look three to
five years down the road at earnings growth. And we are willing
to own through the inevitable bumpy road that goes with a rich
valuation to be around for a significant payoff over a multiyear
Gilead Sciences (
) has had huge earnings-per-share growth acceleration over the
past four quarters. Can it sustain the underlying earnings
Their earnings growth is a function of their hepatitis C drug. It
is tantamount to a cure, not just a treatment. They also have a
strong franchise in HIV drugs. Wall Street's concern as of late
is, "What's next?"
Our analysts believe the (drug-cost controversy) is a Trojan
horse. Because of the life-saving nature of the hepatitis C drug,
they will succeed in keeping prices up more than the market
And we're enthusiastic about their drug pipeline.
Any additional thoughts, Darren?
Sovaldi is a better drug -- a cure -- that is far more economic
over the saved life of a patient vs. less effective,
cheaper-per-dose alternatives that require life-time
Your stake inApple (
) has held fairly stable in recent disclosures. You see pending
product launches boosting Apple's earnings growth rate?
The fund's stake was smaller prior to our takeover. We had a lot
A couple of years ago it ran into the high 700s. In hindsight,
we should have taken it lower.
In late 2012 it became a stock that everyone loved to hate. It
got to the 300-400 range. We thought that was overdone, so we
redid our position.
How do you feel today?
We believe in Mr. (Tim) Cook (Apple's CEO) and his ability to
come up with the next big thing. Earnings will follow, if those
(next big things) are successful. To me, this is about execution.
It is not about expense. Consensus estimates of $7 in earnings
per share are probably too low.
IsUnion Pacific (
) a story about a transportation company benefiting from energy
That's part of it. Given the strong East-West corridor they
control, they are better positioned to benefit from that.
The rest is that they are the best-run railroad in the U.S.
UNP does a phenomenal job of controlling their operating costs.
Their East-West route and access to Mexico position them well for
any improvement in the industrial economy.
What would you add, Dave?
It's a commodities story too (which makes it a global story).
Corn gets shipped all over the world. And the effective way to
take it is by trains. These guys do a better job than most at
IsEOG Resources (
) a fracking play or is there more to it?
At the end of the day, yes, it is the largest natural gas
producer in the lower 48 states. Its production gains in the past
two years are nothing short of phenomenal as a result of their
being early adopters of fracking.
You began your stake inDelta Air Lines (DAL) recently. Was it
because of their new pricing power due in part to industrywide
I've been in the business 35 years and I never wanted (to own)
airlines. But there is amazing discipline that this industry is
exhibiting in this cycle.
Andrew Meister (the fund's industrials analyst) convinced me
it's different this time. Those are the scariest words in this
Our stake began in March.
Delta is performance oriented. They are executing on their
strategy. The management team's compensation is driven by the
company's return on invested capital. That's much better than the
country-club approach that most airlines take.
IsHome Depot (HD) a play on economic growth or the housing
It's simply a play on being optimistic about the housing cycle.
Secondarily, they have a phenomenal management team.
The new CEO (Francis Blake), came in after (Robert) Nardelli
destroyed this company. Blake turned it around by getting people
on the sales floor and other steps.
What would you add, Dave?
You have two choices in this space: these guys andLowe's (LOW).
These guys get it right, and Lowe's doesn't.
The alternative (to Home Depot) may be cheaper, but we want to
be in the premium player. Today, how do you grow your top line
and hold margins? Great management teams. They're worth their
weight in gold. Anybody can manage through economic growth. But
in the environment like the past few years, good managements rise
to the top.
Schlumberger (SLB) is an energy play. But why this particular
Bagwell: John Groton, our energy analyst, sees this as the
premier land-based oil service company globally. Schlumberger is
strong in almost every international region. They're one of the
highest quality players. And they're engaged in pretty active
Once Groton decided that oil services -- especially land-based
-- was the most attractive subsector, then it was a matter of
finding the most attractive plays. Those are Schlumberger
andCameron International (CAM).
A lot of investors favor cloud-based storage stocks over on-site
storage. Why do you likeEMC (EMC)?
EMC is the world's largest provider of storage solutions, and the
The move to the cloud has slowed equipment purchases and cut
the amount of equipment needed. But we expect new products,
improved spending by enterprises and growing federal purchases to
help medium-term results.
And we believe that EMC's efforts to establish a federation
that includes EMC,VMware (VMW) -- which is 80% owned by EMC --
andPivotal Software will pay dividends as customers seek broader,
advanced solutions to network projects. This should allow greater
market share and higher margins.
Lastly, activist shareholder Elliot Management is advocating a
potentially value-creating spinoff of VMware. That's not likely,
but it could support the shares.
Any additional insight, Dave?
We don't have a one-size-fits-all approach. We're a growth fund.
We like this mix of approaches. It brings stability.
Speaking of VMware, what's your thesis?
They make software that lets you see your desktop from the road.
And it allows multiple operating systems off a single server vs.
a server dedicated to each operating system. So it has enabled
the server population to decline because VMware uses 100% of a
server instead of just a small part. It lets users do more with
That saves clients money on servers, on electricity for power,
on heat and light for floor space housing servers. And you need
fewer people to maintain servers.
Starbucks (SBUX) is a relative newcomer to the portfolio. Why did
you buy it?
We got it in the last three months. It replaced a position inFox
(NWS), which had announced a bid forTime Warner Cable (TWX). We
didn't like that. We had a specific thesis for Fox, and that went
out the window when they bid for Time Warner. Starbucks was the
next best idea. They have international expansion opportunities.
And a broader menu.
What's the driver behindSalesforce.com 's (CRM) recent EPS growth
New product introductions. They constantly come up with new
verticals to apply their community building software to. And they
don't have anything close to a good peer in the marketplace that
can do what they do.
Cerner (CERN) is another name in which you recently began a
stake. What's your thesis?
Francis: We began it in July, I think. They're a dominant
health care information system provider. They're helped by
ObamaCare and the digitization of medical and other health
Forcing medical institutions to join the 21st century in terms
of being connected, Cerner is a company that goes in and is No.
In the last few weeks they bought Siemens Health Services, and
the market reacted favorably.