One on One: "We like companies that are growing. We just want to buy them when they are out of favor"

William Fries is not a risk taker.

The portfolio manager and managing director of the Thornburg Value and Thornburg Global Value funds couldn’t conceive of having any other career, nor would he want one.

“I think I’d probably be doing the same thing, just not for money. I’m lucky to get paid for what I like doing,” says Mr. Fries.

Mr. Fries joined Thornburg Investment Management, based in Santa Fe, N.M., in 1995 after spending 21 years as vice president of USAA Investment Management in San Antonio.

Mr. Fries says he looks for excellent companies with solid business principles. He cites Staples as an example of an out-of-favor stock whose business is developing.

“We think they are very well positioned and continue to generate a decent top line in their stores.

“It should be profitable by the fourth quarter. In the meantime, it’s a drag,” he says.

His long-term value approach is also evident in his personal life. Mr. Fries saw a good opportunity when he bought a dilapidated 1961 Triumph in 1974 for $100. He restored the now candy-apple-red classic for $5,000, and today the car is worth anywhere between $10,000 and $15,000.

“You see how conservative I am? I stick with stuff,” he says.

Q How would you describe the Thornburg Value Fund portfolio?

A We’ve created a prospectus that defines value in a comprehensive way. It provides us with a core portfolio.

The three ways we look at value are the traditional basic value (low p/e stocks, common stocks with higher-than-average yields), price to cash flow, and companies that have attractive characteristics like persistency of their revenue stream that are very cyclical.

The differentiation between value and growth is somewhat misplaced. The real differentiation is between value and momentum in terms of style. We have no problem with companies that are growing.

We like companies that are growing. We just want to buy them when they are out of favor for this particular portfolio.

Q Are there any companies in your portfolio that don’t particularly fit the value mold?

A Semiconductor companies.

When we bought the semiconductor capital equipment stocks in 1998, they were selling at very low multiples of book value. They were basic values at that point, and they turned out to be growth companies. The companies never changed their spots, but the way we thought about them changed.

The consistent growers are companies that are in businesses that aren’t very cyclical and allow them to generate high returns on equity, such as high-quality drug companies like American Home Products.

Pepsi is a perfect example of this type of company. We are willing to pay more for those companies than we’d pay for a basic value stock.

Q Why?

A They have fundamentally more-attractive business attributes. They tend not to have earnings that swing very widely.

About the worst thing that happens is the growth may slow down – instead of growing at 15% they might grow at 10% in a weak quarter.

They typically have a brand franchise that enables them to sell at a premium. Everybody knows the brand. People still ask for a Coke or a Pepsi. That’s worth something.

We know we have to pay more to buy those stocks, but we try to buy them when they are out of favor.

Q What kinds of technology stocks are in your portfolio?

A Emerging franchises – that is our name for companies that are fairly new and growing very rapidly.

Because of their characteristics they are typically expensive to buy, in the traditional sense. For instance, American Online is by most people’s measure an expensive stock.

When we look at the leadership characteristics of the company, it gives them a unique position in their industry.

I think you’ll find a lot of value funds that own America Online. It represents a very solid value if you consider the current marketplace.

Q Value funds have done better this year. Will that continue?

A Value has done better this year. For the past six months it’s been especially difficult for companies that have portfolios that are oriented around technology and the Internet.

Not only have we gotten a positive return year-to-date, I think we are well positioned to participate in whatever the market throws at us over the remainder of the year.

If we do get a rally in the technology stocks, we have holdings that will participate. We own positions in stocks like Nokia.

Q What kind of strategy do you use to try to combat market volatility?

A The common thread is to go through our portfolio and try to buy stocks when they are out of favor. It’s a very difficult thing to execute.

The market volatility presents some opportunities, and that is what we look for.

We have certainly been able to buy some stocks that were at reasonable levels. That will be reflected in our performance going forward.

Q What determines portfolio performance?

A Ultimately it’s stock selection that drives portfolio performance. We have a focused portfolio with 50 stocks, and every one counts. We try to guard against the downside by buying stocks that are out of favor.

By buying companies that are attractively positioned, fundamentally we get to participate in the upside.

It doesn’t happen on a daily basis, but over time our portfolio ends up demonstrating attractive attributes.

Q What particular sectors have been showing positive results?

A We have pretty good size holding in the energy area: El Paso Energy, BP Amoco, Unical and Excellent.

They are our principal holdings and make up about 10% of the portfolio.

We own these companies because they have more things going for them than just oil prices going up, such as increasing units of production.

When you combine that with higher oil prices, it makes a pretty powerful statement.

I think these companies will be reporting extraordinary earnings over the next couple of quarters.

SNAP SHOT

William Fries, 61, portfolio manager and managing director, Thornburg Investment Management in Santa Fe, N.M.

Thornburg Value Fund (assets, $1.55 billion; total expense ratio, 1.35%): year-to-date return, 7.68%; 1-year, 22.95%; 3-year, 90.62; 5-year, 247.66%

Thornburg Global Value Fund (assets, $103 million; total expense ratio, 1.54%): ytd, -2.81%; 1-year, 27.69%