Rolling through the rollercoaster ride

“Value managers try to be non-consensus,” explained Wong. “We try to zig when the market zags.” In 2021, near the bottom of the market, Wong pivoted to stocks that the Fund team believed had been overly punished in the market downdraft. As a result, the Fund rallied during the bull market of 2021, outperforming in eight out of the 11 major sectors.

“It was the first year that value outperformed growth, and we particularly benefited in the information technology sector,” said Wong. The Fund had added some lesser-known tech names like Jabil, an electronic manufacturing service company. “They’re not the Teslas or the Apples of the world, but they make the iPhones, and they make certain components for Tesla. Jabil became a higher margin, high free cash flow generating company as the industry consolidated.”

In 2022, after tweaking the portfolio again, the Fund outperformed the market in nine out of 11 sectors. “The headwind in 2022 was obviously inflation,” recalled Wong, “so we made sure that we owned companies that had strong pricing power to deal with that environment.”

One example was Dollar Tree, which, as Wong termed it, “debucked,” raising prices from $1.00 to $1.25. “As a consumer, I don’t know if they notice it or not, but as an analyst, 25 cents is a 25% price increase. So, that’s fabulous pricing power for them in an inflationary environment.”

Another value pick was Celanese, a specialty chemical company, which the Fund purchased in August of 2022. At that time, interest rates were just starting to rise, and the company did a large acquisition—putting a lot of debt onto its balance sheet.

“The combination of rising interest rates and high debt made many investors nervous,” said Wong. “As interest rates were rising, we were able to pick up this high-quality company at cheap valuation. When I see fear in investors, my eyes kind of open. I see opportunity.”

The company quickly paid back the debt—increasing investor confidence in Celanese—benefitting the Fund.

The secret sauce

Wong insists there’s no persistent theme that guides his portfolio management process. “But if there is one, we like ‘boring.’ We don’t own headline stocks—that’s not our strength. We tend to avoid them because it’s a crowded area. Instead, we try to own high-quality companies that are neglected and undervalued.”

In shaping the portfolio, macro factors are less of a concern than stock selection. “We don’t try to win by getting the macro picture right,” asserts Wong. “We frequently ask ourselves: ‘What inning of the market cycle are we in?’ And we tilt the portfolio accordingly. But we think of macro factors more from a risk management perspective. We're trying to neutralize factor risks and make sure we don’t have any unintended bets. We really try to take all our risks in the stock selection bucket and win by picking stocks.”

Wong likes undervalued companies with high or improving economic returns, which he believes differentiates the Fund from other value managers who might be more interested in the price of the stock rather than the quality of the company.

“We also tend to shy away from buying these high-growth, high-value highfliers because we’re worried about what may happen if growth decelerates,” he said. “In terms of market conditions, we are bottom-up stock pickers, and we don’t make market calls. We strive to outperform regardless of whether the market goes up or down by rigorously vetting the companies we own.”

One example is Lamb Weston, which supplies the potatoes for McDonald’s French fries. “We keep track of the potato crop because if they get the larger potatoes, that’s where they can charge a premium price to make longer French fries. That’s an example of the type of boring stocks that we like to own.” The Fund started investing in Lamb Weston in 2021 and it has continued to outperform through 2023.

Drilling deeper

The Fund looks for stocks with what Wong calls an “asymmetric reward/risk profile.” They start with the downside. “Can we quantify the downside and is it limited (to around 20% or less)? On the upside, we look for a multiple of the downside. Our asymmetric reward/risk ratio is about three times or more upside than downside.”

Wong may also consider history in determining when to buy or sell a stock. “We want to know where these stocks have traded to in a weak environment, or what’s a good support level when they experience issues? Would that be based on something like their asset valuation or their cash flows? We run through multiple scenarios to figure out the downside, but it needs to be quantifiable. And the key there is that we use our own proprietary research and modeling, and we’re not relying on consensus or sell side for that.”

The importance of working with an experienced research team is not lost on Wong. His fund co-manager, Nick Griffith, holds Doctor of Medicine and MBA degrees, as well the Chartered Financial Analyst (CFA) designation. “His background obviously is very strong in health care, and he’s adding alpha there, helping to pick stocks,” said Wong. “He’s also particularly strong in gathering and analyzing data for us.”

Thrivent Mid Cap Value Fund Top 10 Holdings as of 01/31/2024: Flowserve Corporation: 2.69% Allstate Corporation: 2.22%, Carlyle Group, Inc.: 2.21%, Celanese Corporation: 2.09%, Sensata Technologies Holding plc: 2.68%, D.R. Horton, Inc.: 2.29%, Berry Plastics Group, Inc.: 1.94%, Capital One Financial Corporation: 1.82%.