Thornburg Investment Income Builder Fund’s (TIBAX) primary objective is “to provide a level of current income which exceeds the average yield on U.S. stocks generally, and which will generally grow, subject to periodic fluctuations, over the years on a per share basis.” While that is something of a legalese mouthful, in simple English it means that management actively seeks to grow the per share distribution of the fund over time. That’s a unique focus and a high standard to which to hold oneself. Indeed, while it is common to hear corporations brag about the number of years they have increased their dividend distribution, Investment Income Builder Fund is the only mutual fund that I am aware of that has a dividend increase track record worthy of such self promotion.
This dividend mandate and the fund’s track record of meeting it aren’t things to take lightly. Over time, inflation will eat away at the value of a static payment, reducing the value of such policies unless an investor has the fortitude to reinvest a portion of each distribution. Such reinvestment would allow the total distribution to grow over time as an investor’s number of shares increased, even though the per share dividend remained unchanged. Moreover, fluctuating distributions are difficult for investors to schedule their lives around. If an investor couldn’t be certain what distribution to expect, he or she would be constantly concerned about spending patterns—investors tend to frown on uncertainty, especially when it comes to their incomes.
So Thornburg Investment Income Builder Fund is a rare “achiever” in the fund universe, as the distributions from investment income have increased each year of its existence. (Note that the total distribution has fluctuated because of capital gains distributions and the quarter to quarter payments have varied due to the timing of income received by the fund from the assets it owns.) If dividends are of interest to you, this fund is one that you must at least examine. It is important to note, however, that the management team isn’t looking for high yield as much as growing distributions. The hope is that growing distributions will be accompanied by rising stock prices—which would, in the end, result in a relatively stable dividend yield for a company. Holdings that have appreciated could then be sold and replaced with companies that management believes currently have better prospects and a similar dividend profile.
The fund is, essentially, a go-anywhere offering, with the freedom to invest in just about any type of security and anywhere management would like around the globe. Although management must invest at least 80% of its assets in income producing securities, with at least 50% of assets devoted to equities, there are no hard and fast allocation targets that have to be followed. With this freedom, management is reasonably active in shifting assets around to take advantage of what it believes are the best opportunities.
Such freedom makes this fund difficult to place in an asset allocation scheme. However, it could easily be viewed as a “one and done” solution for more aggressive investors willing to give one management team full control over their portfolios. For more conservative accounts, it could be paired with an asset allocation fund that has more rigid asset class targets, allowing Investment Income Builder Fund to shift one’s overall allocations around in an opportunistic manner. For those who prefer to pick individual funds for an asset allocation model, it could span multiple asset classes—shaving a little bit from each asset category’s allocation—with the goal of letting the managers active asset shifts lead to “changes at the margin” of one’s overall portfolio allocations to best take advantage of timely opportunities. So while the fund may not play nicely with an asset allocation model because of its flexible mandate, handled properly, it can make a nice addition to virtually any portfolio.
The management team consists of Brian McMahon, Cliff Remily, and Jason Brady. McMahon and Remily work on the equity side of the portfolio and Brady handles the bond portion. However, as with any Thornburg offering, this doesn’t truly capture the nature of the firm’s team approach. So, while these three managers are directly responsible for the fund, Thornburg’s entire investment research team works in close conjunction with each other sharing and vetting ideas.
An excellent example of this is on the equity side where McMahon and Remily travel the world seeking out investment ideas. When they come across a company worthy of additional research, they will, individually, begin to build up research for a long-form equity report that will be created for the best candidates. This process includes putting a company’s financials into a proprietary model to get a handle on the quantitative side of the equation while digging into the qualitative factors by examining such things as competitors and broad industry conditions.
Once a company passes through this process, the long form research report is created, which includes the calculation of an intrinsic value estimate across a range from best-case scenario to worst case. This long report is then boiled down to a one-page report that accompanies a presentation to a team of colleagues. The team, which extends beyond just the trio responsible for the fund, looks to critique the selection, much like a thesis defense. This often leads to further rounds of research before McMahon and Remily sit down together and discuss a final buy decision, with each manager holding veto power should he feel strongly about a company.
Stocks are constantly monitored once they are in the portfolio and will be sold if the thesis for their purchase proves wrong, conditions change, or the company reaches a preset price target based on the managers’ intrinsic value estimates.
Jason Brady’s efforts on the bond side of the portfolio are similar, except that he often must act more quickly to take advantage of opportunistic purchases. Indeed, while every single share of Bank of America (BAC – Free Value Line Research Report on Bank of America) is identical, every one of its nearly 9,000 bonds is different. While this is an extreme example, it highlights the difference between analyzing a stock and a bond. Thus, Brady spends a great deal of time on the trading desk to watch the markets. For larger purchases, he will consult his co-managers. For smaller purchases that may necessitate quick action, he may need to pull the trigger more quickly.
Where there is much more consensus building is around the broader allocation of the fund between stocks and bonds. Indeed, while there is a clear preference for owning more stocks than bonds, there are no set allocation targets. Thus, when large opportunities arise, Brady can pursue the idea with McMahon and Remily and vice versa.
Such an opportunity took place with regard to bonds during the financial panic, when the fund shifted to an over 40% weighting in fixed income from a low of about 10% of assets. This was a strategic decision that involved all three managers and clearly transcended one-off opportunistic purchases. That heavy bond weighting has since been reduced back to about 17% of assets.
The fund’s trailing annualized five-year return through April, 2011 easily bests that of its Asset Allocation objective group. Although more recent annualized returns have not been above those of its objective group, the fund’s focus on dividend paying equities during the rebound was likely a hindrance—but one that also leads to the fund receiving Value Line’s second best Risk Rank (2). Overall, the fund earns Value Line’s second best Overall Rank (2), which combines consistency of performance with risk.
The fund is a load offering and can only be purchased through a financial intermediary (including online brokerages). A front-end loaded A share, a “level load” C share, and an institutional share class are available. Ongoing fund operating expenses are a little on the high side, but not unreasonable (note that the C share structure includes advertising costs and sales compensation expenses in the expense ratio). Investors seeking a dividend-paying mutual fund should take a deeper look at Thornburg Investment Income Builder.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.