New Managers Revive Thrivent Large Cap Growth Fund

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Thrivent Large Cap Growth is a reminder of how new managers can herald a change in a mutual fund's fortune.

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 outperforming.

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 investment opportunities in the stock market.

IBD: 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 stock market ?

Bagwell: 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.

IBD: 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?

Francis: 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 manager teams.

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 support.

IBD: Analysts are dedicated solely to this one fund?

Bagwell: 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.

IBD: 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 performance?

Francis: Yes, that is a good summary.

IBD: You also boosted active share to about 75%, up from 4%. Active share is the difference between your weightings and the index's, right?

Francis: 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 index fund?

IBD: Facebook ( FB ) has run up so much since its IPO. Why should any investor think this has more room to run?

Bagwell: 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 period.

IBD: Gilead Sciences ( GILD ) has had huge earnings-per-share growth acceleration over the past four quarters. Can it sustain the underlying earnings growth?

Bagwell: 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 expects.

And we're enthusiastic about their drug pipeline.

IBD: Any additional thoughts, Darren?

Bagwell: 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 treatments.

IBD: Your stake inApple ( AAPL ) has held fairly stable in recent disclosures. You see pending product launches boosting Apple's earnings growth rate?

Francis: The fund's stake was smaller prior to our takeover. We had a lot of commitment.

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.

IBD: How do you feel today?

Bagwell: 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.

IBD: IsUnion Pacific ( UNP ) a story about a transportation company benefiting from energy fracking production?

Bagwell: 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.

IBD: What would you add, Dave?

Francis: 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 taking it.

IBD: IsEOG Resources ( EOG ) a fracking play or is there more to it?

Bagwell: 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.

IBD: You began your stake inDelta Air Lines (DAL) recently. Was it because of their new pricing power due in part to industrywide capacity discipline?

Francis: 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 business.

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.

IBD: IsHome Depot (HD) a play on economic growth or the housing cycle?

Bagwell: 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.

IBD: What would you add, Dave?

Francis: 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.

IBD: Schlumberger (SLB) is an energy play. But why this particular energy name?

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 share repurchases.

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).

IBD: A lot of investors favor cloud-based storage stocks over on-site storage. Why do you likeEMC (EMC)?

Bagwell: EMC is the world's largest provider of storage solutions, and the innovation leader.

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.

IBD: Any additional insight, Dave?

Francis: We don't have a one-size-fits-all approach. We're a growth fund. We like this mix of approaches. It brings stability.

IBD: Speaking of VMware, what's your thesis?

Bagwell: 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 fewer servers.

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.

IBD: Starbucks (SBUX) is a relative newcomer to the portfolio. Why did you buy it?

Bagwell: 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.

IBD: What's the driver 's (CRM) recent EPS growth acceleration?

Bagwell: 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.

IBD: 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 records.

Forcing medical institutions to join the 21st century in terms of being connected, Cerner is a company that goes in and is No. 1.

In the last few weeks they bought Siemens Health Services, and the market reacted favorably.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Mutual Funds
Referenced Symbols: FB , GILD , AAPL , UNP , EOG

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