With a broad portfolio of more than 1,200 stocks from dozens of countries around the world, managing Thrivent Global Stock Fund (IILGX) encompasses a diverse team of managers and analysts, utilizing a complex cross-section of fundamental and quantitative strategies.
"One area that differentiates Thrivent Global Stock Fund from most other global funds," explained Noah Monsen, CFA, senior portfolio manager, "is that we use a multi-manager approach, combining all of their different areas of expertise and investment strategies into a single global stock fund."
In all, the Fund encompasses seven domestic strategies (such as large cap, mid cap and small cap) plus two international strategies, all managed by different portfolio managers. "Each manager is responsible for their own investment process and portfolio construction of securities that they contribute to the portfolio," said David Spangler, CFA, senior portfolio manager and head of mixed asset and market strategies. "Our job at the top level is to determine how to best mix together those ingredients to form the best strategy."
They assign a weighting to each asset class in the portfolio, based on their analysis, and continue to monitor and tweak that weighting.
"For example," said Spangler, "at an asset class level, if we decided to overweight domestic and underweight international, we could do that either by adjusting the allocations among our managers or by using derivatives to alter our overall portfolio characteristic. If we want a greater domestic weighting and decrease international, for instance, we can buy the S&P 500 index futures and short the MSCI EAFE index futures. That’s known as 'dollar neutral' – altering the balance of our domestic versus international allocation in the Fund without touching the portfolio mix of the managers."
Quantitative meets fundamental
The fundamental managers of the Fund may assess the same type of data as the quantitative managers in selecting stocks for their strategy, but they approach it from a different perspective. "A fundamental manager will be interested in various types of financial information, such as balance sheet, income statement, or cash flows on a stock-by-stock basis," explains Spangler. "They're also interested in areas such as company managements, competitors, supply chains, and market structure."
By contrast, quantitative managers evaluate many of the same characteristics but in the form of very large data sets.
"We aggregate multiple data sets to analyze data from a quantitative point of view and to design and build portfolios of securities to reflect the characteristics we're interested in representing within the portfolio," said Monsen.
"The fundamental and quantitative processes could come up with different results," added Spangler, "but it really comes down to how we mix all the ingredients together to form a portfolio with the best risk return characteristic for long-term investors in an all-equity global portfolio."
The quantitative portfolio managers meet as a team every time their portfolio is rebalanced. "We start with an optimization software that gives us a portfolio as a starting point," explained Monsen. "Then we analyze and adjust to make sure the outcome matches the return potential and risk profile that we’re looking for.
"Quantitative investing can sound complicated," he added, "but the philosophy behind it is really simple. We’re using historical data to find characteristics of a portfolio that would potentially outperform the market, and then we look for stocks that we can use to build a portfolio that has those characteristics. We want to construct a portfolio with the characteristics that drive returns and diversify away the idiosyncratic movements of any single stock."
The global stock market faces some investment risks that may not come into play in a U.S. stock portfolio, such as foreign currency fluctuations and foreign exchange markets. In addition, foreign stocks, particularly in the emerging markets, may be more volatile than most U.S. stocks.
"One of the main ways that we manage some of those risks is through diversification," noted Monsen. "We don’t want to be overconcentrated in any single asset, and we have risks that offset each other. Even though individually there are some larger risks, the risk of the overall portfolio may be lower because of that diversification."
With a portfolio that encompasses large-, mid-, and small-cap domestic stocks, as well as stocks from both the developed and emerging markets – all managed as separate strategies – the Fund is broadly diversified. "At the top level," explained Spangler, "we look at our overall risk within the Fund, such as standard deviation returns relative to our peers, fundamental-based risk models, and macro level risk models.
"For example," he added, "we can stress test a portfolio by aggregating all the individual assets of our multiple managers into a composite, then compare it to our benchmark. In this process, we can determine whether we should include hedges and overlays to account for the portfolio’s sensitivity to material changes in monetary policy, rising/falling inflation, or even shocks to commodity prices."
When to sell
While buy and sell decisions of individual stocks are made by the managers of each strategy included in the Fund, the overall make-up of the portfolio is determined by an investment strategy committee that includes the head of the mixed assets group, the chief investment officer, and the chief investment strategist.
"At the asset class level, portfolio managers and analysts present their views to the committee on their particular area of expertise," said Spangler. "Along with that, we do a lot of quantitative research and macroeconomic research on both the U.S. and international markets to assess where we are in the economic cycle and what level of aggressiveness we should take when we see a market."
Within the quantitative strategies in the portfolio, added Monsen, the investment team calculates a score for every stock in its potential universe, which is updated daily. They adjust the strategies regularly to assure that the characteristics stay in line with their objectives.
"The process of adjusting a strategy naturally results in some new stocks coming into the portfolio, some stocks being held, and some stocks being sold," explained Monsen. "So, the sell strategy is part of the overall strategy construction process, and it’s driven more by the characteristics that we’re looking for in the overall strategy than by the characteristics of any single security."
Within each individual stock portfolio, the fund managers make their own decisions on which stocks to buy, hold or sell based on their own fundamental strategies and market outlook.
Active management can be particularly helpful in the global arena where the markets tend to be less efficient than they are in the U.S., according to Monsen. "There is more opportunity in the foreign markets to use quantitative factors to forecast returns to find stocks that may outperform the market overall. Active management also gives us an extra layer of risk management over the full portfolio that you wouldn’t get with a passive portfolio."
But Monsen and Spangler agree that even with a well-designed, carefully executed strategy, investing successfully in the global market presents a wide range of challenges. "I think as soon as you believe you have all the answers, the market is going to prove you wrong," said Spangler. "That’s why we have to continue to look at the markets in a very comprehensive and objective way and to take what the market gives us."
"One lesson we’ve learned in the international markets," added Monsen, "is that you’ve never seen everything. We’re always looking for something new that we haven’t seen before, something we need to learn in managing the portfolio in order to do a better job of either risk management or capturing alpha."
To view recent performance and information on Thrivent Global Stock Fund (IILGX), visit thriventfunds.com.