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2025 Market Outlook [PODCAST]
2025 Market Outlook [PODCAST]
How will changes on the political front influence the financial markets?
How will changes on the political front influence the financial markets?
12/17/2024
FUND COMMENTARY
Honing the competitive edge of Thrivent Large Cap Value Fund
Key points
Focusing on value
Value investing is more than the sale of an asset. It includes looking at the capital that is actually being put in to generate that sale and the profitability of every incremental sale.
Finding the unique features
This Fund focuses on stocks that may provide the opportunity for improved returns but with low expectations for that possibility.
To stay sharp during the long, frigid Minneapolis winters, Kurt Lauber, Thrivent Large Cap Value Fund (TLVIX) senior portfolio manager, hits the ice for a local men’s hockey league, pushing the puck and indulging his unsatiable penchant for competition. He picked up hockey in 2004—the same year he joined Thrivent as assistant portfolio manager of the Fund.
In one particularly raucous game, Lauber found himself matched up in a face-off refereed by a former National Hockey League pro from the old Minnesota North Stars. “We were just killing each other out there even though we all had to go to work the next day,” recalls Lauber. Amused by Lauber’s over-the-top competitive zeal, the former NHL enforcer looked at him just before he dropped the puck and joked, “Does anyone see any scouts in the stands?”
That competitive fire has been with Lauber his entire life. He took up boxing as a student at the University of Notre Dame and worked his way up to campus champion. Later, he focused that disciplined training on earning his black belt in Shorin-Ryu karate. During one recent winter, he skated six miles pulling a sled with all his provisions into the Boundary Waters wilderness along the Canadian border—where temperatures may drop to 30 or 40 degrees below zero—and pitched a tent for five crisp days of camping and ice fishing.
So, it’s no surprise that Lauber, the father of five children—all hockey players—takes that same intensity into his job as manager of Thrivent Large Cap Value Fund (TLVIX). The Fund received a 4-Star Overall Morningstar Rating™ out of 1,099 funds in the Large Value category and for the three-year period. In the five-year performance period the Fund received a 4-Star rating out of 1,035 funds and for the 10-year performance period (out of 809 funds) as of June 30, 2024. (Morningstar ratings are calculated based on risk-adjusted return.)
Maintaining momentum
Lauber, who has managed Thrivent Large Cap Value Fund since 2013, is happy with the performance of large-cap stocks as a whole and with how well Thrivent Large Cap Value Fund has performed against its peer group. He also is proud the fund maintains a good information ratio, which is a measurement of strong stock selection relative to the benchmark for a given level of risk.
“We look a lot like our competitors when measured for risk or volatility but have outpaced the competition in returns through strong stock selection,” Lauber said.
“Value stocks got a bad reputation over the past 10 years primarily because growth has done so well,” Lauber said. “From the financial crisis to the recent boom of artificial intelligence (AI), large-cap growth companies dominated the equities markets.”
Lauber believes the conditions may change to be favorable for value stocks. “It really depends on the economy. Right now, we have high inflation and interest rates. Industries within the value universe, such as financials, materials, energy and industrials, tend to do better with a little inflation but also depend on good economic growth.”
For the betterment of investing in value, Lauber is tracking both the U.S. Federal Reserve (Fed) and its market-anticipated movement to start to reduce interest rates in 2024, as well as the global economy. He’s also watching energy, utilities and technology—value companies supporting the artificial intelligence (AI) trend.
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Stock selection process
Thrivent Large Cap Value Fund outperformed the Russell 1000 Value index by more than 2.6% in five years ending June 30, 2024. The key to that success, explained Lauber, was the Fund’s stock selection process, which focuses on determining which stocks are likely to outperform market expectations of company returns in the years ahead.
“The most important lesson I’ve learned as a fund manager,” said Lauber, “is to do deep, fundamental work on names from the bottom up and to understand that good-return companies deserve higher valuations—and to find those returns that are not reflected in the stock price. That's the best way to add alpha.
“If investors expect really good returns and the valuations already reflect that, there's no opportunity,” he added. “We believe the best opportunity comes from finding companies that can deliver very good future returns that people aren't expecting.”
To identify those types of companies, Lauber focuses on components of return on invested capital: the ratio of sales-to-capital (capital turnover) and the ratio of operating profit to sales (margin). “The growth investors are just looking at the sales side of it. They just look at how big the market could be. We care about that, but we also care about the capital that is actually being put in to generate that sale and the profitability of every incremental sale.”
To identify detailed future returns, he asks Fund analysts to rank companies on operating performance, valuation and catalysts. The team focuses on the industry or company dynamics that could alter the sales landscape and impact future returns. “We’re looking for the key performance indicators that are going to unlock value. Since the stocks we’re analyzing usually come with lower expectations, we have to identify a catalyst that could change those expectations. Is it a product? Is it management? Is it the cycle? What’s going to unlock that value?”
They apply this strategy to stocks within every sector rather than focusing on chasing favorable sectors, Lauber explained. “We can go plus or minus any sector, but we're looking for these dislocations within each sector that lower our risk and provide greater opportunity.”
Once they’ve crunched the numbers and identified potential investments, they talk to management and do a deeper dive on the companies before making the final decision on whether to add those stocks to the portfolio.
When to sell
Determining which stocks to sell can be a much more straight-forward process. “Basically, we sell when we're uncomfortable with the valuation, we sell when we're uncomfortable with operating performance, and we sell the entire position when we're uncomfortable with both. That's the good sell.
“The bad sell,” he adds, “is when you find your investment thesis is violated right at the quarter’s end, at the same time as everybody else, because it immediately impacts the price of the stock. You have to have a clear thesis and a discipline of selling when the thesis is broken, and the best-case scenario is to make that assessment and make your move before anyone else does.”
Where are we in the market cycle?
Pinpointing where the market is in the current cycle has proven particularly challenging due to the wide range of global and domestic economic issues that factor into the equation. Add into that the current sticky inflation factor that the Fed is fighting.
“What makes it worse from the Fed’s perspective,” explained Lauber, “is that the economy is in very good shape.” He pointed out that corporate and consumer balance sheets, wage growth and the labor market have had strong, albeit slightly volatile numbers. Because all are good indicators of a healthy economy, “it makes it even harder for the Fed to fight inflation,” said Lauber.
The potential for a recession is still a factor to consider. If the healthy economy becomes too good resulting in the Fed to increase rates instead of reducing, it could slow the economy and cause a recession.
Lauber must take all those factors into consideration in selecting stocks for the Fund. “What we're looking for are those stocks that are affected by that confusion or being priced like we're going into recession, stocks that provide the opportunity for improved returns but with low expectations for that possibility.
“When valuation spreads compress and more companies have similar valuations, then it becomes very important to look at the operating factors and really lean on the analysts to use their framework to decrease the number of names. It's not always intuitive. You really have to look at the history of how each individual stock and each sector has been impacted by macro factors. What we like to do in the value stock space is to try to determine what is different in this cycle. Then we have to determine which industry or which company is going to be better off when the economy begins to recover.”
The key is to identify those companies before the rest of the market catches on. And that passion for beating the competition to the punch is a trait that’s baked into Lauber’s DNA.
See more on Thrivent Large Cap Value Fund.
Past performance is not necessarily indicative of future results.
All information and representations herein are as of 07/30/2024, unless otherwise noted.
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Thrivent Asset Management, LLC associates. Actual investment decisions made by Thrivent Asset Management, LLC will not necessarily reflect the views expressed. This information should not be considered investment advice or a recommendation of any particular security, strategy or product. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon, and risk tolerance.
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Ratings may differ among share classes of a mutual fund as a result of different expense structures, however, the ratings do not consider sales loads.
The Morningstar Rating™ for funds, or "star rating", is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product’s monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods.
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