Thornburg's Sean Sun likes high-quality growth companies with "optionality." How the semiconductor tariff carve-out helps. By Jacob Sonenshine

International growth stocks were off to a decent start this year after a tough 2024, until DeepSeek and tariff talk clobbered U.S. stocks and halted rallies elsewhere. The one-two punch -- from the Chinese artificial-intelligence start-up with a more efficient mousetrap, and the Trump administration's move to upend global trade -- has pressured the portfolios that Sean Sun helps to run for Thornburg Investment Management, including the Thornburg International Growth fund. Still, the fund, with about $700 million in assets, was just about even on the year through April 2, compared with a loss of almost 5% in the S&P 500 index and 10% in the Nasdaq Composite through that date.

Sun, who holds an M.B.A. from the University of Chicago Booth School of Business, joined Thornburg in 2012 and became a portfolio manager in 2017. The International Growth fund had a stellar 2020 but lost about 30% over the next few years, primarily due to its exposure to Chinese stocks, which struggled until recently. A couple of big holdings in other sectors also didn't work out.

Yet, plenty of stocks in Sun's portfolio rallied sharply in the past few years, and the future looks just as bright, while some of his Chinese holdings have begun to recover. Sun, who oversees $1.5 billion in all, looks for high-quality companies with competitive moats and "optionality" -- or features that could deliver big gains in future revenue and earnings.

Sun recently spoke with Barron's about Thornburg's investment approach and the allure of Taiwan Semiconductor Manufacturing, ASML Holding, Tencent Holdings, and Novo Nordisk. He followed up in an email exchange with his and the firm's views on President Donald Trump's April 2 tariff announcement.

An edited version of the conversation and correspondence follows.

Barron's : How would you describe your investment approach? Sean Sun: We are international investors who look for differentiated, high-quality companies with durable growth prospects, selling at reasonable valuations. We believe there is significant value in understanding change, such as technological inflection points that will make the future look markedly different from the past.

We evaluate companies through three lenses: how well they innovate, how effectively they allocate capital, and how efficiently they operate. This framework allows us to identify businesses with not only resilience but also growth potential and optionality.

We group our growth companies into three baskets: industry leaders, consistent growers, and emerging growth companies. This allows us to have diversified sources of growth. The power law principle in venture capital dictates that the majority of returns tend to be concentrated in just a few investments. Others on Wall Street have also noted that just a small percentage of stocks drive most investment returns. We're trying to find that great handful of companies that will drive the majority of returns.

You've owned Taiwan Semiconductor and ASML for a while. What makes them favored holdings, and what is the outlook for each?

Taiwan Semi and ASML have been in the portfolio for a long time. They are both winners as the semiconductor industry grows. The industry is expected to approach $1 trillion in revenue by the end of 2030.

Taiwan Semiconductor exemplifies our focus on structural growth drivers. It is the most critical supplier of semiconductors for artificial-intelligence applications. The company supplies Nvidia, Advanced Micro Devices -- all the big players. All roads lead to Taiwan Semi for chip production, especially advanced AI chips.

To put some numbers on the story, Taiwan Semi recently guided for 45% annual growth in AI-related revenue over the next five years. Last year, the company generated about $15 billion in AI revenue. We expect total revenue to grow at a sustainable 20% annual rate over the medium term. The stock is trading for just 19 times forward 12-month earnings, a discount to the S&P 500 and other AI leaders. High growth potential and a relatively low valuation make for a compelling combination.

Taiwan Semi sits in a geopolitical hot spot, given China's avowed interest in reclaiming Taiwan. How do you assess that risk for the company?

We are mindful of the risks posed by tensions over Taiwan, and while we can't know for certain if a military conflict will occur, we believe the likelihood of a near-term invasion remains low. While Beijing's unification rhetoric persists, a military assault would face significant obstacles and be economically devastating, not just to Taiwan Semi, but also globally. In a way, the company's critical importance, or "silicon shield," might serve as a deterrent. Taiwan Semi's recent expansion outside Taiwan, including to Arizona, also represents a strategic hedge against this risk. While we continue to monitor geopolitical developments, we believe that the stock's valuation is unfairly discounted relative to the risk.

Let's have a closer look at ASML.

ASML is a great example of a company benefiting from technological inflection -- that is, the evolution of more complex chips to train and run AI models. ASML has a unique position as the leading manufacturer of extreme ultraviolet lithography machines, which are critical in chip making. Without ASML equipment, you can't produce next-generation chips.

The company's growth disappointed Wall Street last year, but its 2025 guidance points to a rebound, indicating revenue growth of 16% this year. ASML has guided for revenue of about 52 billion euros [$56.3 billion] by 2030. We think there is significant upside to that estimate, given the growth of AI and demand for next-generation memory chips.

Does the valuation reflect that growth potential?

ASML has a price/earnings multiple in the low 20s, based on forward earnings. That is well below the long-term average of just above 30 times. There is a reasonable case to be made that the valuation will return to the long-term average, We aren't adding to our position at the current price because we are overweight ASML, but we like it for the long term.

How will the Trump administration's announcement of " baseline" and "reciprocal" tariffs affect these companies?

Companies like Taiwan Semi and ASML are relatively insulated because of the carve-outs for key sectors. In 2024, only about 16% of ASML's equipment shipments were directed to the U.S., and the majority of Taiwan Semi's chips are sent to assembly hubs in Asia before being incorporated into end products such as smartphones and PCs. Nevertheless, while the direct effect may be limited, the broader impact, such as rising costs for consumer electronics, is likely to build over time.

The newly announced tariffs inject a level of uncertainty and volatility we haven't seen since the early days of the pandemic. Markets may be underreacting, especially if these rates turn out to be final, given the potential knock-on effects to global consumption and trade.

We view this more as an opening move in a broader negotiation rather than a definitive policy endpoint. At this stage, there are carve-outs for key sectors -- including copper, pharmaceuticals, semiconductors, and certain lumber products -- which help to moderate the immediate impact.

Tencent is the second-largest position in the International Growth fund. It has rebounded this year along with other Chinese stocks. What lies ahead?

As I mentioned, we want to own companies that not only can grow despite macro challenges, but also have optionality of some sort. Tencent is a great example of this, as AI is enhancing its products. Tencent has a diversified ecosystem, with businesses in payments, gaming, fintech, social media, advertising, and so on. AI provides the optionality. The company is leveraging AI to drive more time spent on its social-media platforms, and provide greater monetization on its advertising platforms.

Companies that have a lot of data are best positioned to benefit from AI, and Tencent has a lot of data. Its Chinese chat platform, WeChat, has over a billion users.

While the Chinese economy faced headwinds in the past few years, given the bursting of the country's real estate bubble and other setbacks, Tencent's business model demonstrated resilience. The company grew revenue by 10% overall in 2024, but its advertising revenue grew faster, and there is more room to monetize the business in terms of ad load.

Tencent generates a lot of cash. The company can fund its AI investments with existing cash flow. It can continue to deliver margin expansion and grow earnings faster than revenue, perhaps at a midteens rate. Capital allocation is excellent. Tencent bought back shares steadily in recent years, through the downturn in China's economy. That helped the company deliver even better earnings growth.

Tencent is trading for about 19 times earnings. Is the multiple too low? Chinese tech stocks were trading at discounted multiples due to a regulatory crackdown several years ago by the Chinese government. But the mood has changed ever since the DeepSeek moment. [DeepSeek stunned the tech world in late January with its AI model, developed for much less money than competitors' models.] The CCP [Chinese Communist Party] is starting to realize that it needs to support China's tech companies that are pushing the frontier of AI.

Given that the business climate around technology companies in China is improving, especially from a government policy standpoint, that should lead to an improved earnings multiple for Tencent. And that is in addition to the company's improved growth and the benefits that AI is delivering to its platforms.

Novo Nordisk, another large holding and a leading maker of GLP-1 drugs, has fallen more than 50% since last June, erasing almost all of its earlier gains. Why are you still invested in the drugmaker?

We were talking about probably adding more stock. Novo now trades for 17 times earnings. That is the lowest multiple since 2017, when the business had much lower growth prospects and the company didn't have a successful obesity drug. We think it is very attractive.

The global obesity market is projected to grow from $24 billion in 2023 to about $130 billion by 2028. Novo isn't just riding the wave of a single obesity drug, but is what we call a pipeline-in-a-product company. Its GLP-1 franchise isn't useful only in treating obesity, but also has advantages in treating cardiovascular conditions, chronic kidney disease, liver disease, and maybe, over time, Alzheimer's. It is like a wonder drug with a pipeline of additional indications.

Also, structurally, there isn't enough supply to meet the demand. So, while obesity itself could be a huge market, if you add up all these other indications that the company is targeting, it could be unlocking $100 billion-plus type markets. To get the core obesity market and that optionality at a near-decade trough multiple is interesting and attractive.

Thanks, Sean.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

Corrections & Amplifications Performance and portfolio information relate to Thornburg International Growth fund (TINGX). An earlier version of this interview erroneously linked them to the Thornburg International Growth exchange-traded fund.

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