Thrivent Large Cap Value Fund’s lead portfolio manager and how he shoots at his goals.
Coming up, talking shop with the manager behind Thrivent Large Cap Value Fund.
From Thrivent Asset Management, welcome to episode 34 of Advisor’s Market360™. A podcast for you, the driven financial advisor.
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Today, we shine the spotlight on Thrivent Large Cap Value Fund and the lead portfolio manager at the helm. Kurt Lauber, CFA, Senior Portfolio Manager shares insights into the investment strategy that he and his team employs. How has Lauber brought recent performance success to the Fund? Listen on and you’ll find out, but if we had to sum it up with one word, that would be “balance.”
At one point in our conversation with him, Lauber talked about his love of ice hockey. Like balancing on skates, Lauber brings balance to his Fund through a return-focused stock selection strategy. He also believes that holistic balance in life and a long-term view allows him to react well to the global market’s many surprise body checks.
Lately, the markets have seen plenty of volatility, which has indeed given investors one surprise hip check after another. From inflation to fears of recession, how does the Thrivent Large Cap Value Fund move the puck towards its goal?
To start out, we asked Lauber about what potential he sees in large-cap value stocks. Over the past decade, value stocks have underperformed in contrast to strong performance exhibited by growth stocks. But Lauber anticipates that the tables will soon turn in the favor of value stocks. Lauber explains:
“The Russell 1000 Growth® index has outperformed the Russell 1000 Value® index from the Great Financial Crisis of 2008 until the Covid recession by about 6% per year. So, everyone loves the growth managers. Growth has done really well. But what they forget is the cycle before from the Dot Com recession to the Great Financial Crisis – or, 2001 to 2008 – Russell 1000 Value outperformed growth by 5%. So, almost a similar amount.”
Lauber points out that value stocks have a history of jumping ahead of growth stocks after certain disruptions in the market, such as the Dot Com recession. Prior to that, technology stocks were overvalued, which led up to the sell-off in 2001. With too much capital chasing too few ideas, it took about a decade for the growth segment to recover, while value stocks fared better.
Currently, the markets and economy are in a similar tailspin, which Lauber believes will work in favor of the value space in the next few years.
“Since the Covid low two years ago, or the Covid recession low, the Russell 1000 Value index has beat the Russell 1000 Growth index by 12%, or 6% per year. Why was that? When I talk about spreads, that's the high value companies and the low value companies. Spreads widened out to a level that was not sustainable, just because people were fearful of going into recession. So, those spreads have come down. Value stocks have done well.
“Who's going to lead coming out of this? It really depends on economic growth. It's not the Great Financial Recession, right? Companies are in excellent health. Consumers are in very good shape. So, it doesn't look like the excesses of the Great Financial Crisis.”
One factor lending to favorable conditions for value stocks is inflation. A number of industries that represent a sizable portion of the value space, such as financials, materials, energy, and industrials, tend to do better with a little inflation, according to Lauber.
During the two-year period ending halfway through 2022, Thrivent Large Cap Value Fund – Class S, outperformed the value sector by about 12%. Lauber shared that his team’s key to success is a solid stock selection process.
“Every sector had good stock selection except for Health Care over that time period. And none of the returns were really [due to] a big sector bet; we didn't have a very high risk bet on. The portfolio beta was very close to our peer groups – meaning, we looked pretty close to the benchmark. However, we put up very good returns relative to it. So, what that's telling you is that you did it through stock selection, right? It looked a lot like the index, but the stocks you picked did very well.”
Lauber broke down his team’s return-focused process. Summed up, their philosophy is simply that companies with good returns deserve higher valuations. They especially look for companies that have the potential for good future returns when others may not expect it.
“What's really important here to understand: it's not current returns. It's returns expectation in the future, what's built into the stocks. If investors expect really good returns and the value is already in there, there's no opportunity. But if a company has very good future returns and people aren't expecting it, that's where it provides opportunity for us.”
He identifies companies by focusing on sales-to-capital rather than sales growth or margins.
“So, when you look at returns in the sales to capital, growth guys will just look at the sales side of it. They just look at the TAM, how big the market can be. We care about that. But we care about the capital that is actually being put in to generate that sale.”
Here’s your lingo lesson for the day. When Lauber says TAM, that’s shorthand for “total addressable market.”
The team of analysts working behind the scenes is comprised of individuals who are experts in their specific sectors and industries. When working with them to identify companies, Lauber says he looks for three criteria: operating performance, valuation, and catalyst.
Let’s break it down. On operating performance, Lauber said:
“They’re basically ranking their companies on group-specific operating fundamentals. So, they have industry frameworks. What they display is the most important factors to time versus stock performance. Then they do the qualitative assessment of changes in the industry or the company. What we want them to do is a detailed, fundamental analysis of that, but also to put it into a financial statement so we can look out two to three years in a normal period and understand where those returns are going.”
Then, on valuation:
“What we're looking for is, can they demonstrate what returns are priced into that stock? Can they look out and show us, returns of this company are very good, but the valuation is low.”
As for the catalyst:
“What are the key performance indicators that are going to unlock value? Is it a product? Is it new management? Is it a cycle? What's going to unlock that value? So, we have to have a catalyst, because we're always usually buying something that has some controversy or low, poor sentiment.”
The analysts work with the managers to find companies that make the cut in each of these three areas. But where these criteria overlap, like a three-ring venn diagram, stocks that land in the “sweet spot” in the middle is where they find the right kind of balance. Lauber finished by adding that this framework is applied across all sectors, clarifying that he manages the Fund to be sector-neutral.
We know how stocks are picked, but what is the team’s sell strategy? Lauber’s answer was relatively simple:
“Our sell discipline is basically that we sell when we're uncomfortable with 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. Then we have what we call the bad sell. It's when a thesis is violated. To do this, you have to have a thesis well laid-out and written out and able to follow it; key performance indicators outside of quarterly reports. The worst is when you find your thesis is violated right on the quarter or right along with everybody else because it's immediately in the stocks. And even then, that's the hard part. That's where you say, ‘oh, great, I just missed it. And it's in the stock, and what am I going to do now?’”
On the risks present in large-cap value stocks, Lauber shared that much of the risk present in this segment lies within the long-term outlook for global economic growth. One example would be greater regulations in key economies such as China.
“Value stocks do need global economic growth. They don't generate a lot of their own growth. They need that to help them through their strategies. They're good at cutting costs, improving margins and even pricing, but they do need some economic growth. That's just the nature of financials, industrials, energy and materials.”
What about inflation? Lauber meets the challenge by looking for names in the value space with pricing power and have inflation built into their outlook. An example Lauber shared with us was a potato company that supplies french fries and other potato-based foods to restaurants. The industry was hit hard at the height of the pandemic, but with this particular company, Lauber saw an opportunity.
“Of course, people weren't eating fries. They weren't going out. Now, we were coming out of the cycle, so it's a very good, high return company.
“The industry is – there's a few potato manufacturers, so they are usually able to pass on pricing, but they had one of the worst potato crops of all time. And they were having a hard time gaining through the shipping costs. However, when that was priced in, people were saying, ‘well, I don't think they're special anymore.’ That was a good time to own that stock because we knew from history that they could eventually get the pricing power through.”
We would have been remiss if we hadn’t asked Mr. Lauber about his personal life and how that plays into his role at Thrivent. We take pride in the amazing people behind the investments here at Thrivent. Portfolio managers are hard workers – having an hour with them to ask questions is a rare gift. So, we took this opportunity to ask him about the path that led him to Thrivent.
Lauber was happy to share that he studied finance at Notre Dame and graduated during the recession in the 90’s, which had a special impact on him as he immediately learned what a recession really means. Here’s how he started out in his career:
“I went into trading futures, but what I didn't like is it was very technical, trend-following – I didn't know why things were working. You know, what was the underlying reasons, the value for it?
“I went back to grad school. I went to Chicago Graduate School of Business, now known as Booth, and I put together a curriculum that I would be a fundamental analyst. I really studied hard on those tools that I used throughout my career. I did have a whole year of studying under Eugene Fama, a Nobel Prize winner. So, I kind of got my quant creds from studying under him. I got all my tools from MBA school, but I started my return-focused process at Brinson Partners.”
What helped him land at Thrivent was in part due to a desire to get out of the big city and move northward.
“After we had three kids and wanted to get out of Chicago, we moved back to my wife's hometown here up in Minnesota and I went to work for American Express. I had to pitch stocks to hedge funds, growth management, value managers. I was an analyst at the time, a tech analyst with a very value[-based] background. I got to return to those roots to work with Matt Finn. I came in a couple months after he took over the Value Fund.”
Lauber went on to share a piece of guidance that he and his family, including five kids, strive to live by in daily life.
“I’ll give you my family motto. Raising five kids, we've always said, ‘every day you got to do something for your mind, your body and your spirit.’
“So, in this job, the mind is definitely taken, right? It's challenging every day. And I try to come up with something every day, that I learn [something] new about a company or new to my process; improvement.
“Your body: you got to – I work out every day. You just have to keep your body strong. It helps to reduce the stress of your stressful job.
“And the spirit: we always say, you can't do too much for the spirit. Every day I start with a morning prayer and a reflection – and then I spend some time in prayer because you have to have that good base. It does help in investing too. Of course, it helps in life in general because you're going to get things thrown at you. And if you have a good, balanced life, focused on what's important spiritually, then you can deal with that same thing in investing.
“I've had many things that have just – you didn't know that Russia was going to invade Ukraine or that COVID-19 was going to come out of China. You have to react to these things and sometimes even your best laid plans get turned over.”
Adding to his balance in life, Lauber has his fair share of hobbies and passions outside of the office, hockey being the first mentioned. Remarkably, his first time hitting the rink was later in life after having children, brought about by wanting to learn alongside his kids. Despite not having played in high school or college, it’s clear that he brings a competitive spirit to the sport, something that’s certainly present in his role as a portfolio manager.
He also loves the outdoors and camping.
“I camp all four seasons. Matter of fact, I'll even go winter camping. I take everything to extremes. I’ll pull a sled out into the Boundary Waters and I'll set up a tent for five days. And I got a chance to combine those two last year.
“And, matter of fact, there's an article that's in the Minnesota Department of Natural Resource magazine. It's the November issue. ‘Lure of the Wild Ice.’ We took hockey skates and we pulled sleds in about eight miles and we set up a tent because the ice was perfect. It's never perfect. It always snows right away or the wind blows. So, I got to combine my two favorite things. We played some hockey, did some ice fishing and some winter camping for a couple of nights in the Boundary Waters.
“So that's my love of Minnesota. You got to go see this article.”
Lauber was excited to show us the magazine. He had it within arm’s reach sitting atop his desk. Of course, since this a podcast, we can’t show you, but he flipped through to find the article he was featured in and held it up to show us. Accompanying the headline was a special photo spanning the full spread: it’s Lauber himself, standing on a frozen lake, facing the sun, and ready with a hockey stick.
“I'm more proud of this article than probably anything. Lure of the… there we are. That's me. My fund got written up in the Wall Street Journal, and I'm like, ‘forget that! Did you know I'm in the conservation magazine?’”
Thanks for listening to this episode of Advisor’s Market360™. All episodes are available on Apple Podcasts, Spotify, and Google Podcasts. We’d like to hear from you! If you’ve got questions or comments about this episode, or if you have an idea for a topic, email us at email@example.com. You can also learn more about us at thriventfunds.com and find other items of interest to you, the driven financial advisor. Bye for now.
All information and representations herein are as of June 29, 2022, unless otherwise noted.
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.
Any indexes discussed are unmanaged and do not reflect the typical costs of investing. Investors cannot invest directly in an index.
Past performance is not necessarily indicative of future results.
There are risks involved when investing in the fund. Large companies may be unable to respond quickly to new competitive challenges and may not be able to attain a high growth rate. The Fund’s value is influenced by a number of factors, including the performance of the broader market, and risks specific to the Fund’s asset classes, investment styles, and issuers. Markets may also be impacted by domestic or global events, including public health threats, terrorism, natural disasters or similar events. The Adviser's assessment of investments and ESG considerations may prove incorrect, resulting in losses or poor performance. Foreign investments involve additional risks, such as currency fluctuations and political, economic and market instability, which may be magnified for investments in emerging markets. These and other risks are described in the prospectus.