Insights from the fund’s manager, Lauri Brunner.
From the fund manager’s mouth to your ears – getting the inside scoop on Thrivent Large Cap Growth Fund.
From Thrivent Asset Management, welcome to episode 24 of Advisor’s Market360™. A podcast for you, the driven financial advisor.
One of the great things about this podcast is that it gives us a chance to shine the spotlight on our investment experts at Thrivent. Today we welcome to the show Lauri Brunner, Senior Portfolio Manager for Thrivent Large Cap Growth Fund.
Host: Would you like to introduce yourself?
Brunner: Hi, I’m Lauri Brunner, I manage the Large Cap Growth Fund for Thrivent Asset Management. It is my 15th year working for Thrivent.
Host: Thanks for joining us today, and talking about what you do and the large-cap space. Let’s dive right in. Maybe we should start with how you define large-cap growth.
Brunner: Large-cap growth is a broad category. There are companies in large-cap at the low end that are $30 to $40 billion in market value. And then there are companies in what we'd call mega-cap, which are valued at $1 trillion and above. That's the space of large-cap where we've done well through multiple positions that we own: Amazon, Google – which is called Alphabet – and Microsoft.
Host: So, what’s the potential of these particular mega-cap stocks and what’s driving growth?
Brunner: The common theme for those names is a shift to the cloud, globally. That is a multi-decade shift in I.T. spending. We are in the second decade of that shift. Not only is this outsourcing an enterprise’s need to own hardware or infrastructure and outsourcing that to the cloud providers, but it is the software running the business [that’s] being modernized and updated, and that is also supported by the cloud. The companies providing the backbone of this cloud service – Amazon, Google and Microsoft – have years of double-digit revenue growth ahead of them. And that's in part why we're optimistic about large-cap growth companies.
Host: The focus on cloud services makes sense – it’s certainly becoming more lucrative because of how we work today. Now let’s talk about Thrivent Large Cap Growth Fund. What did you get right last year?
Brunner: What did we get right last year in 2021? We did downsize our weight in Amazon.com after a really strong year of stock performance and fundamental performance in 2020. So, we pulled back on our position size in Amazon. In the first quarter of 2021, a component of their U.S. retail sales, which is called first party sales – that's the piece of the business where they actually own the inventory – that business grew revenue 44%. That's a really strong result. By the fourth quarter, which was just recently reported, growth in that segment, U.S. first party sales, was flat. 0%. No growth. So, during the year last year, we scaled back our overweight in Amazon, which did drag on our overall performance. But for the year, it was the right move for the fund.
Host: Were there any other positions that worked out well for the fund?
Brunner: Another thing that worked really well for us last year is we own shares of Nvidia, a large semiconductor company. Many people are familiar with that, so I will move on to another name that was a winner for us last year; a winner for us was Live Nation. This is a name that we purchased in the Covid downdraft of 2020. We bought the stock in February of 2020. It was our second-best winner in 2021. We can call it an “open up” name or [a name that performs well] as the economy opens up. This is on the small end of what we own. The market value of this company is only $25 billion, and they had revenues of $3.8 billion in the trailing twelve months.
Host: I’m interested in hearing more about the decision-making process that led you to add Live Nation to the portfolio. What did that look like?
Brunner: Live Nation is a vertically-integrated live entertainment company. What we liked when we looked at this business in 2020: first off, we went back through the names that the analysts had pitched to us in 2019, and we reviewed those names. This is a name that's not dependent on airlines, cruise lines or hotels, which are subsectors that I'm not a big fan of. The focus of this company is on spending on experiences rather than things, and it's spending that's done at the local level. You don't need to get on an airplane to enjoy a concert. Nobody knew it at the time, but in 2019 their revenues were $11.5 billion, but they fell 84% in 2020 during Covid. It was the name where revenues decreased the most of any name we held in the fund. 2021 was the first year of a multi-year revenue recapture for Live Nation, and we think there's better profitability ahead for this company. They took some time during Covid to digitize some of their processes and slimmed down some of their operating costs. So, this led up to a great reopening name that we think could be a multi-year winner for the Large Cap Growth Fund. So, it's a function of working with the analysts, going back through what they've put in front of us, investing early, and being patient.
Host: Right. So, slimming down, modernizing operations – we do hear a lot about how important it is for companies of this size to adapt to the “new normal,” and certainly the years ahead are a factor in that. Now, what other themes make up your large-cap growth strategy?
Brunner: We like themes, but we are not driven by themes in the Thrivent Large Cap Growth Fund. We have multiple positions in cloud names: Amazon.com, Google – which is Alphabet – and Microsoft, but we got there through a bottoms-up approach to cloud, not a top-down theme-driven [approach]. So, what we do is search for growth. And we want to invest in large marketplaces, which we call TAMs, which are “target addressable marketplaces.” So, this is really [a matter of], how big is the sandbox where the company is building their business?
Host: Why do you prefer these large marketplaces?
Brunner: Two reasons we like to invest in large marketplaces: first, it helps us frame how long the revenue growth runway is for the company. For Amazon, we determined early on that the revenue growth runway was going to be a multi-decade event. For cloud, we also think is a multi-decade revenue growth event. For Apple, we're at the half-decade point and hoping it could be a full decade of growth for that company and revenues above the market. We also like to invest in large marketplaces because we want to try to understand what happens to a company when they hit a pothole. And companies always hit a pothole in their operations. So, the idea is, how do they pivot their operations to sustain revenue growth?
Host: Speaking of pivoting, can you touch on your sell strategy?
Brunner: Our sell strategy is far from perfected. It's still a work in progress. The generic answer is that investors sell when a thesis is broken. But if I look at the Large Cap Growth Fund over the last 18 months, most of our sells have come under the header of restructuring a sector. And specifically, I'm talking about the Health Care sector. Jaimin Soni, who is the APM on the Large Cap Growth Fund, I asked him to take over management of the Health Care sector in 2021. As he went through that sector and learned the sector, he went broad and deep with his approach to learning the Health Care sector. We did sell a number of names in the space, so that is what drove most of our sell decisions in 2021. The second reason that we sell would be due to risk metrics, names that can be risk diversifiers in the fund. As other names are added to the fund, the risk metrics will change. So, if we are in a position where we have names that are risk diversifiers and we want to add more risk to the fund, we may sell some names.
Host: Right. Now, going back to your point about having a thesis and how it breaks. It sounds like perhaps it’s not as relevant for you.
Brunner: I think a lot of people say, “well, when the thesis is broken, we sell stocks.” I think that looks really good on paper. My strategy is a little different. And when I look at the data, we have these buckets that we put stocks into and the reasons why we sell them. And we have done a lot of restructuring, which I think is still like, I think I'm at the point now where I'm certainly doing less restructuring in the Large Cap Growth Fund, but that's an evolution of being in the job for three and a half years. You can't hit the sell button on everything on day one. It does take many months to get to a point where you're comfortable.
Host: Okay, so sectors, buckets of stocks… that’s the level that you focus on, but of course there is still a thesis. That does seem to be a consistent theme with some of the other managers that we’ve spoken to. The thesis informs the decision to buy and when the thesis is no longer valid, that’s a reason to sell.
Brunner: It means the stock is down. And then a lot of times they'll just say the thesis is broken. Which does happen, but it looks good on paper. But you know, as I was thinking about your question, the coy answer is that I don't have a marquee name where somebody presented me with work, with research that said, “we need to walk away from this stock.”
Host: That’s a good transition to my next question for you. Could you provide some insight as to how the management team works together?
Brunner: So, the Large Cap Growth Fund, we have a divide and conquer approach to managing the fund. We have very specific assignments, stock-by-stock. We own 40 stocks in the Large Cap Growth Fund. Last year, I moved Jaimin Soni, my APM on the fund, to the Health Care sector. So, he spent all of his time last year on the Health Care sector, covering and researching new companies broad and deep with his industry approach and his sector and company approach. That was his part of divide and conquer last year, so we hope to benefit from the fruits of that shift beginning now. Jaimin Soni is also working with me and learning the Industrials sector, so his responsibilities are broadening on the fund, which will help me. And then he's also backing me up on Tesla, which is covered by Andrew Meister, who's part of our research group, he's an analyst in our research department. So, there will be three of us tracking that company. Tesla is a really important company to the Large Cap Growth Fund, and so we have multiple people on that. I spend most of my time on the mega-cap companies, those that are $1 trillion in value and more, or approaching $1 trillion in value, where we have a number of large active bets.
Host: Speaking of bets, what should we know about risks as it pertains to large-cap growth stocks?
Brunner: The risk to large-cap growth stocks is that investors will find growth everywhere, whether it's revenue growth or earnings growth. When investors can find growth everywhere, that is a risk to the large-cap growth category. We do well when growth, and especially revenue growth, for large companies is scarce. We like scarcity of revenue growth. Our companies rank well in that type of a backdrop. So, when investors can find growth everywhere, it's going to be a tougher market for large-cap growth category, we believe.
Host: But if investors are finding growth everywhere, where’s the opportunity?
Brunner: Well, so if investors can find growth everywhere, you could argue that we're in a value market. We're in a market geared for value investors.
Host: In which case, that’s not in your portfolio, right?
Brunner: No, we have some names that are value names, certainly across the spectrum of valuation. Some names look more expensive, some names look less expensive or cheap if we put on our valuation lens.
Host: Sure. Now, let’s get into active management. Thrivent’s active management philosophy is something we like to talk about, we’re proud of our people. Comparing this to passive strategies like index funds, where the conventional thinking is that they will outperform actively managed funds in the long term. We know that that’s not always the case. Active management strategies have their advantages. So, what’s the benefit for the large-cap growth space?
Brunner: You know, our opportunity is to go deep on names and research companies and own fewer securities certainly than a passive strategy. So, we take large active bets. We know our companies top to bottom, bottom to top. Amazon.com would be a great example of that for the large-cap growth fund.
Host: And looking at a smaller universe of stocks means you can be more selective, right? Compared to the entirety of the S&P 500?
Brunner: Well, that's what we select from. We select across the eleven sectors of the economy. Certainly, we consider all of those. For example, we don't own any Energy stocks right now. Energy has been a great category as far as stock performance year-to-date in 2022. But we don't focus on investing in that space. We will look anywhere at any sector or companies that operate in large marketplaces and have strong relative growth trends. We will consider any sector of the economy to invest in. But the reality is, we're not invested in a number of sectors. We're just not finding the opportunities we need. That's pretty typical for a large-cap growth fund. We have a very large weighting in technology, which is very consistent with large-cap growth funds.
Host: Right. So, I’d like to wrap up by asking about your career. I’m curious as to how you started out, like your education. What was your major in college?
Brunner: Just marketing. I have an MBA and it's all general down the field.
Host: So, I’m guessing that working in investments wasn’t what you had in mind early on. What were the twists in the path that led you to eventually becoming a fund manager?
Brunner: I did not always aspire to be a portfolio manager, but the Large Cap Growth Fund had owned Amazon.com since 2007 after I arrived at Thrivent. It was purchased; I tracked the company for years. I was super happy tracking companies as an analyst. And so, it was an opportunistic position for me to interview for. But with my experience and time spent at Thrivent: the number of people I worked for here, having worked for Matt Finn for a number of years and Kurt Lauber, learning about how their investment process worked, and then partnership with Darren Bagwell in Large Cap Growth, and then owning Amazon.com uniquely situated me to move into this seat.
Host: Sounds like you made a great call with Amazon right at the start! What other experiences helped you move to the fund manager role?
Brunner: You know, my background in investing is – when I arrived at Thrivent in 2007, Matt Finn was managing the Large Cap Value Fund. And day one, he said, “Now you can see what we own. What should we do?” And I said, “Sell everything you've got within retail because there are too many stores in the U.S. Everything's full, sales are slowing, inventory is too high, and we don't need companies to build anymore stores.”
Host: Wow, what was his reaction?
Brunner: He said, “I think that makes a lot of sense. Can you go build me a framework that will help us invest based on that principle?” So, I spent many months developing an investment framework based on my concept that we don't need any more stores in the U.S. What led up to that was thousands and thousands of visits to stores over my career on the sell side, and then on the buy side, I spent a lot of time visiting stores. And that led up to that moment where I had this idea, or the concept that retailers did not need to build more stores. And the concept would be that we would invest in retailers that stopped store growth and focused on operations; so, better stores, not more stores, was the concept. So that has that framework has stayed with me since 2007, so it's lasted more than a decade. And that is that concept has guided me for more than a decade of investing at Thrivent.
Host: That’s tremendous! You’ve clearly got great intuition, and such valuable expertise. It’s been great having you on the podcast today, Lauri. Thanks again for talking with us about your career and about managing Thrivent Large Cap Growth Fund.
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All information and representations herein are as of February 15, 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.
Past performance is not necessarily indicative of future results.
As of December 31, 2021, the top ten holdings of Thrivent Large Cap Growth Fund were Microsoft at 9.53%, Alphabet at 8.22%, Apple at 7.99%, Amazon at 6.64%, NVIDIA at 4.80%, Meta Platforms at 4.66%, Tesla at 3.80%, Mastercard at 3.43%, Adobe at 2.97% and Salesforce at 2.52%. A complete listing of the holdings for the fund is available at thriventfunds.com.
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. These and other risks are described in the prospectus.
Investing involves risks, including the possible loss of principal. The prospectus and summary prospectus contain more complete information on the investment objectives, risks, charges and expenses of the fund, and other information, which investors should read and consider carefully before investing. Prospectuses and summary prospectuses are available at thriventfunds.com or by calling 800-521-5308.
Thrivent Asset Management, a division of Thrivent, offers financial professionals a variety of investment products to help meet their clients’ needs. Thrivent Distributors, LLC, is a member of FINRA and SIPC and a subsidiary of Thrivent, the marketing name for Thrivent Financial for Lutherans.