Josh Rubin

Portfolio Manager and Managing Director

Josh Rubin is portfolio manager for Thornburg Investment Management. He joined Thornburg in 2017, initially working with the global strategies before being named associate portfolio manager in 2018, and portfolio manager in 2021.

Before Thornburg, Josh worked at Driehaus Capital Management in Chicago, where he was first an associate portfolio manager responsible for emerging markets, and then the portfolio manager of the firm’s Global and certain U.S. strategies. Prior to Driehaus, Josh co-managed the emerging markets equity strategy at Marsico Capital Management in Denver, where he was also a senior analyst covering global companies across sectors. Before asset management, Josh held investment banking and consulting roles.

Josh earned a BSFS in international politics from the Walsh School of Foreign Service at Georgetown University.

MUTUAL FUNDS
Developing World Fund

INSTITUTIONAL STRATEGIES/SEPARATELY MANAGED ACCOUNTS*
Emerging Markets Equity Strategy | Emerging Markets ADR Strategy

UCITS
Developing World Fund

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Environmental criteria consider how a company performs as a steward of nature. Social criteria examine how it manages relationships with employees, suppliers, customers,
and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.

All securities mentioned are current holdings as of May 31, 2021.

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This is directed to INVESTMENT PROFESSIONALS AND INSTITUTIONALINVESTORS ONLY and is not intended for use by any person or entity in any jurisdiction or country
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This communication is exclusively intended for persons who are Professional Clients or Eligible Counterparties for the purposes of the FCA Rules and other persons should not
act or rely on it. This communication is not intended for use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local
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June 15, 2021

Investment success in emerging markets requires preparation and a willingness to accept risk. Julia Sze, impact investor and member of Thornburg’s Board of Directors, moderates a conversation with portfolio managers Charlie Wilson and Josh Rubin as they tackle the themes and processes they use to improve the odds for outperformance in emerging markets.

The Tailwinds Supporting Emerging Market Equities

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This is not a solicitation or offer for any product or service. Nor is it a complete analysis of every material fact concerning any market, industry, or investment. Data has been obtained from sources considered reliable, but Thornburg makes no representations as to the completeness or accuracy of such information and has no obligation to provide updates or changes. Thornburg does not accept any responsibility and cannot be held liable for any person's use of or reliance on the information and opinions contained herein.

Investments carry risks, including possible loss of principal.

Outside the United States

This is directed to INVESTMENT PROFESSIONALS AND INSTITUTIONAL INVESTORS ONLY and is not intended for use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to the laws or regulations applicable to their place of citizenship, domicile or residence.

Thornburg is regulated by the U.S. Securities and Exchange Commission under U.S. laws which may differ materially from laws in other jurisdictions. Any entity or person forwarding this to other parties takes full responsibility for ensuring compliance with applicable securities laws in connection with its distribution.

For United Kingdom: This communication is issued by Thornburg Investment Management Ltd. ("TIM Ltd.") and approved by Robert Quinn Advisory LLP which is authorised and regulated by the UK Financial Conduct Authority ("FCA"). TIM Ltd. is an appointed representative of Robert Quinn Advisory LLP.

This communication is exclusively intended for persons who are Professional Clients or Eligible Counterparties for the purposes of the FCA Rules and other persons should not act or rely on it. This communication is not intended for use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.

March 4, 2021

Josh Rubin
Josh Rubin

From strongly rebounding economic growth to low global rates and manageable inflation dynamics, emerging market stocks are well positioned. But volatility mitigation remains a must.

What's Next: EM is More than "Exposure" - Active Investing Enhances Opportunities

Transcript and Important Information

What’s Next: EM Is More Than “Exposure”—Active Investing Enhances Opportunities February 25, 2021

Adam Sparkman: Good morning and welcome to today’s discussion on emerging markets and how an actively managed approach can enhance the investment opportunities in this attractive asset class. My name is Adam Sparkman, client portfolio manager with Thornburg Investment Management and also the moderator on today’s webcast. I’m joined by colleagues, Charlie Wilson and Josh Rubin, both portfolio managers and managing directors with Thornburg. Today we’ll be covering the evolution of emerging markets, our style balance, high conviction approach to capturing the opportunity and the role EM can play in a client’s portfolio. Before we get started, I’ll just take a few moments to cover some brief housekeeping issues. You can use the Q&A panel for any questions that you’d like to send privately to the speakers, and we will do our best to address them in our Q&A session at the end of the discussion. If your panel doesn’t appear to the right, you should be able to click a question mark at the bottom of your screen that should bring it up. A replay of this webcast will be made available to all participants, and you will have the opportunity to rate and comment on the sessions in a pop-up window at the end of the webcast. We would encourage and would definitely appreciate your feedback. So, before I turn it over to Josh and Charlie, I wanted to quickly highlight EM’s relative performance versus U.S. and non-U.S. markets through COVID and the subsequent recovery. As you can see in the chart, EM has substantially outperformed both the S&P 500 and MSCI EAFE over the period. As a comparatively less mature asset class, this comes as a surprise to many investors especially given the high global uncertainty that we’ve seen over the past year. With this in mind, Charlie, would you walk us through what’s been going on in the emerging markets and what’s positioned the asset class to be durable over this period in ways that it may not have been 10 or 20 years ago.

Charlie Wilson: Maybe just before we jump into the details of what’s going on in emerging markets today, I thought it was worth stepping back and reminding ourselves what we mean by emerging markets. One of the key factors about emerging markets is they are not monolithic, so they’re not one, single market. They’re actually a variety of 27 independent countries that have their own political systems and independent growth drivers. What they share is the fact that they’re all still developing. They’re moving up that per capita income curve, which frankly is the long-term opportunity from an investor’s perspective. They also have quite a bit of weight in terms of global GDP. Today they’re approaching, of global GDP, 60 percent of incremental GDP growth, and they are two-thirds of the global middle class today and should be close to $4 billion in terms of middle-class consumers by the end of the decade. So, we think that this represents a compelling, long-term investment opportunity that we’re very excited about. Maybe just before we jump into the current state of affairs in emerging markets, we thought we’d review how emerging markets have evolved to the current state, and so if you looked back over the last 40 years in the early 80s and, say, early 90s, the GDP growth for advanced economies in emerging markets were largely independent from each other, and that’s because emerging

markets were generally a small part of the global economic story, and they were really not tied to global trade at that point. That changed in the mid-90s and into the 2000s when you started to see a lot of supply chains moving to emerging markets to take advantage of the low-cost labor base, which led to significant investment in infrastructure in those countries, leading to the elevated growth rates through that period. But more recently the emerging markets growth model has been in a period of reset, and that’s because global trade growth had been slower and fixed asset investment in emerging markets has also been slower, which has led to a slowdown in GDP growth in that malaise that we’ve seen over the last decade. The conventional wisdom around emerging markets is that they’re driven by commodities, low-cost labor base, fixed asset investment, but we think this is in the process of changing and becoming much more attractive to long-terms investors.

Many people believe that net exports are a key driver of emerging markets, and we’re actually here making the case that it’s changed over the last decade. Look at net exports in emerging markets in dark blue, U.S. is in green on the bottom, Europe is in the light blue line, and the gold line is Japan. You can see that net exports from emerging markets have fallen for quite some time. And then more recently they’re close to zero, or even negative. A lot of the exports that are happening in emerging markets today are inter-emerging markets, so it’s one country like China trading with India or Korea trading with China, etc., and, and you’re seeing that some developed markets like Japan and the EU have picked up that slack in terms of global trade.

During this last decade, you’ve shifted from heavy investment, trade-driven growth models. We think we’ve seen these new models start to take hold in emerging markets, specifically economic formalization, so just moving from kind of more traditional retail to more formal retail and production, rising domestic consumption. This is just maturing capital markets look from an institutional investor participation perspective, but also just more financial instruments making these more sophisticated markets to traffic in. And then you’re seeing technology like mobile phone connect phase from really driving a lot of new goods and services especially on the Internet and e-commerce side. Just to maybe put a few more numbers around that, the rise of the middle class. In 2009 there were about 800 million people living in emerging markets operating them – middle class consumers living in emerging markets. By 2020 that had risen to about 2.2 billion.

One thing you might note is that during that period the developed-market middle class was largely unchanged and is expected to be largely unchanged to the rest of the decade while EM is expected to nearly double again to close to 4 million people. On the right-hand side, we show that five of the top ten emerging market, five of the top ten middle-class consumer bases are in emerging markets. So, what’s important about this slide is that many people have been talking about the EM consumer for quite some time as an interesting investment opportunity. But the reality was that there weren’t enough people with enough money in their pockets to really be an independent growth driver that could take the reigns from fixed asset investment and from that global trade tailwind. But today we do believe that there are enough consumers in emerging markets to really drive that new model forward. The index has started to reflect this transition in the growth model, so on the left side we show sector weight from 2010 and 2020. The dark blue line at 2010 you can see that energy, material and financials, which are more tied to that old model have contracted substantially over the last decade. Energy and materials alone were over 30 percent combined. And today they’re just over 10 percent combined. Financials have also shrunk during that period, but they’re also still an important part of the emerging market consumer as you’re seeing growth in retail financial services. In the place of this, the decline in energy and materials you see communication services, IP, consumer discretionary start to grow and many of these are catering towards the EM consumer. On the right side you can see something similar at a country level where you see Russian and Brazil contract as they’re large commodity oriented economies. They’ve shrunk as a percentage of the overall index and replaced by a market like India and China which have a much larger consumer base. The other side of it is that during this period you’ve seen the rise of several global leaders across emerging markets. So the investment opportunity at the company level has also become more attractive, and these are household names many of you know. Some of these you might not know. But they’re all global leaders in their respective industry now. And then there’s still domestic champions that have bubbled up during this period. You might not know some of these names, but some of them are very large companies. Some of them over a $100 billion. And they are really driving that next generation of domestic consumer-oriented opportunities from the investment perspective.

Fast forwarding to today, Adam talked about this a little bit, how did emerging markets navigate the crisis last year, and how are they looking going forward? I think one of the important things to note is that the debt to GDP, what we’re showing here in green, is debt to GDP for developed markets and in blue debt to GDP, government debt to GDP I should say for emerging markets. One of the important things to note is that in aggregate you saw debt to GDP in developed markets rise much, much more than you did in an emerging market. And you can see over debt to GDP levels at the government level are much lower in general than developed markets. The big reason for this is because, in many cases, emerging markets need external funding, and so they have to be more fiscally conservative when they’re managing their budget in order to continue to see foreign investment flourish. The same thing held true last year where they really couldn’t go out and aggressively support their economies through fiscal support and they had to remain somewhat disciplined, which puts them in a good shape this year to continue to provide some level of support going forward, and really this is not an area of concern for us. So looking at key cyclical factors, which we think are aligning for EM this year, and frankly some of these things were true in 2020 before the pandemic hit, we see low interest rates in the U.S. have really taken off some key pressure on the dollar, which has been a headwind for many emerging markets for most of the last decade. In our outlook we see an opportunity for the dollar to remain somewhat stable, perhaps even weakening a bit. We had visibility not just in the low U.S. interest rates, but also globally low interest rates as many central banks continue to support their economy. That’s generally a good set up for emerging markets. We’ve seen commodity prices recover and that creates some support for those markets that are still involved with commodity exports. But it also makes it easier for many, many countries to not only plan their budgets because those countries that are tied to commodities generally receive a lot of fiscal income from the sale of commodities, but also it helps central banks to understand the inflation outlook within those countries as well. We’re seeing accelerating GDP growth across emerging markets really accelerating relative to DM as well, which is, which is an important part of emerging market outperformance, healthy balance sheets as we mentioned, and then we’re also seeing faster corporate earnings growth across emerging markets. And then finally we expect emerging market growth to be strong across several countries, including some of the largest India and China.

In aggregate you can see our real GDP growth in 2021 at 6.3 percent across emerging markets versus 4.3 in advanced economies, so developed markets. That was that pulling away that I was talking about where emerging markets seem to be bouncing back stronger, albeit from a lower base after last year because they couldn’t support their economies to the same level that many developed market economies did. The important part about this too is globally we have a synchronized recovery this year, and that’s also usually a good setup for emerging markets. Investors have become more comfortable pushing money off shores towards international markets which really could support not just emerging markets but also developed international markets as well. So, with that, I’ll turn it over to Josh to talk about how we navigate through emerging markets and cap for some of these opportunities.

Josh Rubin: Well, thanks Charlie. Thanks everyone. I also appreciate everybody’s time today, and Charlie just covered a number of elements reflecting the opportunity, but also the complexity of investing in emerging markets. And we like to look at that backdrop as the foundation or delivering alpha with stock selection.

I’m going to speak more about the stock side of what we do, and we hope that, as you think about general exposure to emerging markets, you’ll think about Thornburg because we can help deliver a differentiated way to participate in this opportunity. First, our goal is to deliver differentiated returns of stock selection, but at the same time we’re looking to navigate the unique risks of emerging markets with a balanced and comprehensive approach to risk management. We do this with, first and foremost, focusing on what we call strong businesses. With our stock selection we are looking for the very strongest businesses across emerging markets. There are many mediocre companies that offer exposure to these countries, but there’s a much smaller universe that we believe can provide differentiated returns over the medium-to-long term. We use the strong business term very intentionally because it connotes more than just quality or a certain growth rate. But given the ups and downs of EM, we really care about management teams that we can trust to execute a clear strategy and who we believe can adapt to changing environments. We’re looking for companies with particularly strong positions in their value teams that offer a really clear proposition to customers. It might be price or quality or service or something similar, and we want them to have the ability to manage their own supply chain effectively as well. Equally important, we do care about certain aspects of financial metrics of course. We believe that cash flow and balance sheets strength are uniquely important in emerging markets. Less developed capital markets mean that lending can shut down overnight in a crisis, or while what we’re used to in developed markets is that markets typically see interest rates fall when the economy slows. But in emerging markets, often we seen interest rates rise during periods of economic uncertainty, so borrowers are not just bailed out by the central bank. Consequently, companies that generate free cash flow can continue investing in their business during down turns allowing them to be even stronger when exiting a rough economic patch.

Overall, we look at strong businesses as the types of companies that can win in good times, but even more importantly, they can also win when the going gets tough. Out of several thousand companies that are EM oriented, we think that around 400 companies meet our strong business criteria. We’re consistently updating this watch list, but these 400 or so companies are the pond where we’re generally fishing. Like many other investors, we certainly care about the price we pay when we buy a stock, and we carefully watch the investment pieces while we own it, but for today, I really want to focus on what strong businesses mean. Here, we’re showing three different types of strong businesses. Severstal is a Russian steel company. So theoretically this is a commodity business that might not seem that special. Walmex is the public-relisted Mexican subsidiary of Walmart, and Natura and Company is a Brazilian cosmetics company that has expanded throughout Latin America and is now successfully growing across many other emerging markets in Europe, Africa and, and Asia. So while they all operate in different markets, we do think they have many fundamental characteristics in common. We’ve only listed a few, but we hope this, this can highlight the ways that different types of companies can be strong businesses in similar ways. Severstal is essentially the lowest cost producer in the world, so although it cannot set the price because steel’s a commodity, it will consistently earn a more attractive margin than it’s peers throughout the cycle. In fact in 2020 when many steel makers were losing money, Severstal had over 30 percent margins. Walmex you know, just like Walmart in the U.S., is an everyday low price leader, but because of its unique logistics and its ability to purchase at scale, it can deliver low prices also with higher margins than it’s competitors. Higher margins tend to lead to the company’s ability to invest in more growth than their peers. And Natura is not specifically about price, but they are about diversity. They offer price points for all income levels, and because across emerging markets people have skin tone colors that are across the board, Natura offers something for everybody, not a one-size-fits-all solution. And because they have a unique ability to source natural ingredients, largely in the Amazon Rainforest customers appreciate the organic qualities of their products, but customers really appreciate they can get what they need in product type at where they need to be relative to their income. Also importantly, for what I talked about for capital structure, none of these companies carry a lot of debt. So if capital markets shut down where they operate, they can all pay down their debt without needing to worry about how banks or bond holders are going to push them around.

From a different angle when we really think about cash flow generation, EBIDA is a standard metric that many investors use for thinking about cash flow relative to the income statement, but operating cash flow is the true measure of the cash a company has available to invest in growth or pay dividends, or make acquisitions. Each of these companies have very clear and consistent measures for converting revenue into EBIDA and that EBIDA into operating cash flow, and most importantly, when we think about their needs for growth, each of them has a pretty attractive cushion between that operating cash flow and the capital expenditures they need to make. So, even in 2020, when we were uncertain about the av, outlook for the overall environment, we knew these companies could continue differentiating themselves from the competition because they could afford to invest in that growth.

Finally, we’re looking for emerging market companies that are employing best-in-class practices across the board, whether it’s having leadership trained at global companies, or historically really executing well across environments along with good corporate governance that allows us to know that as minority shareholders we’ll be treated fairly, whichever type of company you’re looking at from a Russian steel mill to a Walmart subsidiary to a cosmetics company, we as shareholders, are binding to the same strong characteristics from the management team. Now, once we take strong businesses, what we want to be able to do is diversify what is essentially a 50-stock portfolio, and that means that with 27 countries and 11 sectors, we cannot just look like the index. Instead, we think a better way to balance the portfolio is somewhat to look like the index more from a style perspective rather than a country or sector allocation. There’s a lot of ways to slice and dice the index. We’re showing you one way. Quantitively, about 40 percent of the index looks to be value-oriented and about 60 percent looks to be growth-oriented.

Qualitatively it tends to look the same way. And what’s important for us is value and growth stocks are available across sectors and across countries. The right-hand chart just shows that whether it is defensive sectors like consumer staples, or cyclical sectors like technology and industrials, or rate-sensitive areas like financial, we can find growth companies and value companies of the board. Consequently, when we build our portfolio, we structure it to be roughly 40-40-20 in terms of how we balance it. About 40 percent what we call basic values which are similar to what you would think of for normal value companies except that they No. 1 fit our strong business criteria so they’re not just cigar butts that we’re hoping will bounce back. They are very much strong businesses, but they do have more cyclical earning streams, and these comprise about 40 percent of the portfolio, Severstal is, is a name that fits that criteria. We also hold around 40 percent of what we call consistent earners. These are companies that grow above GDP. They’ve proven themselves to be strong businesses across market cycles, but they’ve also shown lower sensitivity to external forces or macro cycles. Walmex, Natura both fit in this area of being consistent earners where their, their category and their price-to-value proposition to customers has allowed steadier earnings growth through the cycles. Emergent franchises, which I don’t have an example for are companies that we believe are on the cusp of proving themselves as strong businesses, but they haven’t yet lived through a full market cycle or enough market cycles with product or new service offering for us to declare it definitively. We intentionally keep this a smaller part of the portfolio, but these are the businesses that, that appear to have those characteristics of strong businesses. Often their higher growth companies, and we look forward to them growing into consistent earners over time. Now, what’s important is these three types of businesses participate in the environments differently, and they balance the portfolio.

In the first quarter of 2020 consistent earners outperformed within portfolio relative to the other two baskets. From April through October, just before the COVID vaccine was announced, emerging franchises were the best-performing basket within the portfolio and from November through yesterday basic values have been the best performing, um portion of the portfolio. In general we’re looking to pick stocks in each basket that outperform over time, but as the market environment changes for things that we can predict or that we can’t predict, we think the three baskets allow us to manage the balance of the market locations to create a core type of return in the portfolio. Another element of emerging market risk that we look to manage is currency risk. Again as Charlie mentioned, 27 countries in emerging markets, each has its own currency, its own central bank. We don’t dislike any particular country, and we’re not going a top-down overlay of country allocations, but in countries that tend to have weakening currencies, and we assess this with general macro indicators like inflation differentials and budget and trade deficits, for countries that tend to have a weakening currency, we will require a higher return to compensate us for that risk of currency depreciation. Our goal is that a U.S. dollar–based investor, or a local currency investor anywhere in the world isn’t at risk from emerging markets currency depreciation. The chart on the right shows how the portfolio has been positioned over time relative to the countries that tend to have weaker currencies. And what you see is that in most periods because of requiring the additional compensation, we often are in lien with or underweight these countries. More recently, and we can talk about this more in Q&A, we have to overweight position in countries with weaker currencies and that’s related to some of the cyclical factors Charlie described as well as just finding some companies that offer a return profile that we think compensates us appropriately. Finally, this is not an ESG portfolio, but we do integrate ESG into what we do because we think that helps us with idea generation and with risk management. Again, using the three companies for briefest examples, Severstal has very good corporate governance, and it treats its local community very well from the S portion of ESG. However, as a steel company by definition is a dirtier company. Rather than simply applying a negative overlay and saying we don’t like companies that are carbon emitters, what we do like about a company like Severstal is that it’s in the top 25^th percentile of steel companies globally as far as carbon emission and it has cut its carbon emissions by over 40 percent in the last 30 years. What that means is that as the world evolves and regulatory environments involve, evolve, Severstal should have lower risks from incremental regulatory costs because it’s already been addressing environmental concerns proactively. Similarly, for Walmart a retailer doesn’t tend to have a large carbon footprint, but a little over a decade ago, Walmart parent and many Walmart subsidiaries around the world had trouble with the systemic issue of bribery, and so Walmex from 2013 to 2019 aggressively invested in corporate governance measures to ensure that both the supply chain and other parts of business operations would not have risks around legal penalties or fines again in the future. So for Walmex, the S, how it treated the community, or the E, how it treated the environment, were never a big question, but understanding that it’s made the governance improvements, and again, should provide a competitive advantage because of how it operates going forward. Natura is an all-around ESG company, and they actually build their brand around ESG when they even market to consumers. In their case what we’re thinking about is is this a true competitive advantage? Or are they simply spending too much on something consumers don’t value? In this case we’re considering the ESG as all on it’s own a unique advantage for generating revenue, not only generating bottom-line or protecting against future risks. With that, I’m going to turn it over to Adam, and happy to talk more about strong businesses in the Q&A.

Adam Sparkman: Thank you for that overview, Josh. Given the long-term structural evolution that we’ve seen across the EM landscape that Charlie outlined, we believe investors could really benefit from rethinking the role and level of exposure that the asset class plays in their overall portfolio allocation. With 27 independent countries, currencies and central banks, EM’s economic and market cycles are often out of sync with what you’re seeing in developed and U.S. markets. As you’ll see in the left-hand side of this chart, EM provided really strong leadership towards the beginning of the decade. This was the time when they were benefitting from sustained fixed-asset investment and also a lot of growth in global trade. After holding their ground through the great financial crisis of 07 to 09 you know, they kept up fine, but struggled coming out of that as we had an overhang of stimulus related to the financial crisis, and the era of raising interest rates and U.S. dollars as well as commodity price sell offs. Since then, the EM has continued to evolve. We’ve seen strong performance as we’ve mentioned over the past 14 months or so, and we believe that the economic drivers, and equity markets within emerging markets could really continue to support their own economies and that this theme of diversification and less correlation to developed and U.S. markets can really continue into the future. It’s an important diversification aspect and has been really over the past 30 years. The good news is that the relative volatility of the asset class has significantly declined over the past 10, 20 and 30 years as emerging markets has become more domestic consumption oriented and less reliant on exporting to developed countries. You’ve really seen the spread of share price volatility between these three indexes close over time, and if you look at really just over the past couple years, EM volatility has essentially been the same as both the S&P, or the MSCI US index. The good news is that investors can benefit from this less correlated return for a while in their portfolio without some of the historical worry that people have had about EM volatility. I want to spend just a couple minutes pivoting back to the Thornburg Developing World portfolio, and what you’ll see in this chart is the outperformance and underperformance monthly periods of the inception of the strategy, and how we compared to the index. We really believe that EM should be a permanent and meaningful allocation for many investors, not just something that clients use as a risk-on or risk-off trade, and our goal is to provide access to the unique companies in these faster-growing economies in ways that make it easier for investors to sleep at night. Utilizing the four layers of stock selection and risk management that Josh has highlighted, we have consistently delivered a compelling spread of both that upside participation in the asset class and that downside protection. Whether markets have been led by growth or value, we’ve been able to keep up and provide that core-like return stream driven by stock selection through the cycle. If you looked in aggregate, the strategy on that three-year trailing basis has outperformed the Index roughly two-thirds of time and when markets have been up, you know, we’ve added excess performance of close to 200 basis points and more than 400 basis points in down markets. And what we believe is equally important to the results is how we’ve done it, and why we believe it’s repeatable moving into the future. By consistently balancing our exposure across the style spectrum, we were able to minimize the impact of allocation effects and allow our high-conviction stock selection to drive returns. As you can see in these charts, over a variety of trailing time periods, both our value and growth names have reliably outperformed their relative style nexus. While there’s many reasons for bullish in the long-term outlook for EM, culling growth and value rotations you know, that’s difficult, and something that that we’re not hanging our hat on. By sticking to our process and focusing on strong businesses and diversifying our concentrated portfolio, we believe we can continue to drive client’s compelling long-term access to the asset class through variety of market environments. And with that I’d love to turn it over to Q&A. I’ve got some questions up here, so Josh and Charlie, you wanna unmute and jump, jump back on. We’ll continue the discussion. I’m looking quickly through here. So one question I want to start with, and I think it’s something that’s been top of mind for a lot of investors over the past couple months, is concerns around China. We’ve seen, I believe they called it the blacklist, you have roughly 40 companies that Donald Trump had constructed. So, concerns around some of the recent regulatory things that have been happening in China, as well as some of those U.S. geopolitical tensions and how it impacts your outlook on companies like Alibaba or Tencent.

Charlie Wilson: Josh, do you want to start with that one?

Josh Rubin: Overall, from a geopolitical perspective, the particular risks are new, but these are the types of risks that we have been assessing in emerging markets for, for a long time.

Sometimes because of United States actions and sometimes just because of other governments’ actions. Specifically with the geopolitical issues, usually the types of companies that we would consider strong businesses are not the same types of companies that get put on the sanctions lists. And that’s because the types of companies put on the sanctions list typically their competitive advantage is not an operation competitive advantage, but it is an advantage related to the relationship with the state or the relationship of some of their controlling shareholders or managers to the state. We have been very aware of this, but so fa,r other than one company which was an indirectly related subsidiary to one of these companies added to the list in China, we haven’t had to take any portfolio action. The company in the portfolio that we did trim, or we did exit there was indirectly, an indirect subsidiary, we did that out of an abundance of caution. The other action that we took during the course of 2020 is we had previously owned the Ali Baba U.S.-listed ADR shares, and we converted that into the Hong Kong listing last year so that if the U.S. government were to take any action around the ADR shares we would still have liquidity in Hong Kong. We bought a stock last year that historically it’s primary listing was the U.S. ADR, but they also have a Hong Kong listing, and so we chose to buy the Hong Kong shares, just to ensure liquidity on that front. But even in the near term, we’re looking at the situation’s being pretty status quo where we know the measures that the Trump administration implemented. We don’t expect a near-term reversal by the Biden administration, so we think we’ve covered our bases in terms of assessing the risks and making sure we don’t have the wrong exposure in the portfolio.

Charlie Wilson: One other thing I would add is that the question we get a lot is, do you invest in Sadone Enterprises or companies that are involved with government agencies, and I know that in the last decade that generally has not been a great pond to fish in in terms of investment opportunities. They actually were some of the strongest performers in the 2000 to 2010 time period. And I think that our approach is to not exclude companies purely on their relationship with the government, but just to understand the dynamics and how that might impact the outlook for the company. In some cases, companies have had general government relationships are overly discounted and provide a good opportunity. We’re willing to look at those as long as we understand that they’re on the right side of government policy going forward.

Adam Sparkman: All right. Thank you both. Pivoting a little bit, but staying a bit in the same vein: What does worry you about emerging markets and what do you think could potentially go wrong in 2021?

Charlie Wilson: I talked a little bit about the outlook, and there’s several technical factors lining up in addition to the structural underpinning of the strong, emerging market middle class growth. I think that probably our biggest concern is around inflation. Emerging markets today have really had the benefit of low interest rates and developed markets which will allow the central banks to have some cushion and lower interest rates to support economic growth. But they are very sensitive to inflation, and if you do start to see inflation popping back up across emerging markets, you might see several central banks forced to raise interest rates which could, I wouldn’t say completely derail the up cycle, but it would definitely, slow it down a bit. Emerging markets can do very well during periods of rising interest rates, as long as interest rates are rising for the right reason, meaning synchronized global roads and pressuring prices is actually not a terrible outcome for emerging markets. If you looked at a 2003 to 2007 time period, you had quite a large movement in US. 10-year rates during that period, but emerging markets currencies actually appreciated and emerging market GDP growth was very strong. It’s not impossible for emerging markets to still do well in that environment, but that would definitely be something that we would be focused on.

Josh Rubin: And another thing I would quickly add is a valuable thing for the current setup is that interest rates are generally still providing real yields across emerging markets compared to developed markets. So I think the current measurement in the U.S. is that the 10-year treasury still has a negative real yield of 50 to 70 basis points relative to expected inflation over the next couple years. But in countries like India or Indonesia where bond yields are still at 5 to 7 percent, investors are still earning a positive real yield, and so if we see rising interest rates in the U.S. that doesn’t necessarily mean that emerging markets need to raise interest rates as much as the U.S. That’s really the balance from what Charlie just said; it’s okay for there to be inflation, you just don’t want too much inflation, and it’s okay for interest rates to rise a little bit, but you just have to balance how much they need to rise in relation to developed markets.

Adam Sparkman: Thanks Josh. To pivot to the portfolio a little bit, could you give us an example of a successful investment from your emerging franchise basket, and is it common to have stocks in that basket potentially migrate over to the consistent earner after, after kind of stabilizing their growth period, their growth rate?

Charlie Wilson: I would say probably the most successful emerging franchise investment that we’ve made would be Tencent which we’ve held since the inception of the fund. That now is classified as a consistent earner, and Ali Baba is had a similar trajectory starting off as an emerging franchise, and then make the moving into consistent earners. The way that we typically see our emerging franchise stocks works is that they tend to reach a point where they’re overvalued with respect to near-term growth opportunities. Historically the way that we tended to trade them is that they reach a point where we think that the outlook for those stocks is maybe too optimistic and we exit them, and then they wait for a period where expectations are reset and we can find a better entry point. Again, going back to Josh’s point about our 400 stocks that we follow, they stay on that list as long as they haven’t violated any of our strong business criteria. And we will continue to follow them waiting for a better entry point. And so many stocks, especially in our emerging franchise category, move in and out of the portfolio based on valuation at the time.

Adam Sparkman: Thanks Charlie. I had a couple questions come in about allocation to emerging markets and questions about, you know, potential increases and, and where to take that allocation too, so, I don’t know if you have specific thoughts on that. Obviously all investors are different. One thing that I will point out and then hand it off to Charlie and Josh for comment is, I think we showed it on the first slide, GDP on a per purchasing power parity basis is getting close to

50 percent in emerging markets, but relative to the global market cap of EM, emerging markets are roughly 13 percent of equitable market cap, so significantly underweight relative to where you know, where they fit in real GDP terms. And additionally, where the growth is coming, we’ve seen spreads increasing accelerating GDP in emerging markets, so moving forward and a lot having to do with that that theme of the rising middle class, that seems to be where the growth is coming from. Charlie and Josh, what would you say to somebody who’s interested in potentially upping their allocation to emerging markets?

Josh Rubin: I’ll take a first stab you know, number one what we tend to here is people are generally thinking in the 10 to 20 percent range relative to what you just talked about Adam, as far as global market cap compared to global GDP, that range definitely doesn’t feel scary to me. And I think a big question that we sort of find ourselves bouncing around with investors is that often times people think that adding to EM means reducing their U.S. exposure, and what people are also just wondering is does adding to EM mean rebalancing some of their developed international exposure. In thinking about where they might be taking some of the same risks for lower economic growth and potentially more competitive markets. People are saying, if I don’t believe in European growth, meaning fully reaccelerating, maybe I wanna allocate a little bit of that European exposure into faster GDP countries and companies that don’t have as much competition relative to what a developed market context might have. So, it’s a little bit of, the total EM exposure and it’s also maybe a question of total international exposure, and how much EM is within that total international exposure.

Charlie Wilson: The other thing that I would add is that you know, the first part of the presentation was really talking about how EM has evolved as an asset class, and so it’s less about beta to global GDP or global trade or commodity super cycles, it’s more about domestic consumption which actually looks a lot more like a developed market portfolio. If you look at the leadership of EM, it looks a lot more today like an EAFE or really more like a U.S.-type portfolio in terms of the sector allocations. You’re always still going to have dislocations in EM; you still don’t have an institutional investor base largely across most of the asset class which means that you have stock price volatility that overshoot on both the up and downside. So, you still need a careful approach to risk management, but the volatility profile is improving with something that Adam talked about, and we think that actually should lead to more room in a portfolio overall considering that some of the longer-term risks have abated somewhat.

Adam Sparkman: Given the global pandemic, digital transformation was a big theme in 2020. What are some ways that the digital transformation theme is playing out in your current portfolio?

Josh Rubin: Charlie, maybe I’ll start. I would frame the question or answer it slightly differently, which is there’s typically good businesses that are solving problems for their customers, and in normal environments one of the attractive things about investing in emerging markets is that there’s a lot of problems to solve and that allows a diverse array of opportunities to invest in.

During 2020, COVID was the singular global problem to solve, whether the disease itself or the economic lockdowns, and so that did lead to e-commerce technology and other elements like digital transformation being a primary place for investor attention. So, number one, we do have a number of investments in areas that benefit from that, sometimes in telecoms that have unique growth related to fiber to the home or fiber to the business where they’re really improving connectivity for the long-term work from home or just knowing that we’re going to be in a more digital world because of the transformation. We have IT services companies that are real leaders in improving sort of, consumer engagement and in revenue generation. If you think about the historic use of IT services, it was lower back office costs, but the future of IT services adding value is about digital engagement and generating revenue, not just lowering costs, and so, we have an Argentine company as well as an Eastern European company doing that, but the bigger opportunity relative to the digital transformation going forward in a lot of ways, is companies that are actively and aggressively investing in transforming their businesses to participate in more of an omni channel world, both brick-and-mortar or physical services as well as e-commerce or digital services. And so, that’s a place where there are new disruptors who have entered, but there are also older economy companies who have been adapting very successfully and that creates a really interesting opportunity for leadership. Just to use two examples from what I talked about today, Walmex for a number of years has been investing both in their logistics as well as talking about e-commerce capabilities. They didn’t have a chance to prove it until 2020 when their e-commerce grew almost 200 percent, and so, again, that’s not the Amazon of Mexico, it’s the Walmart of Mexico, but it delivered Amazon-type growth in 2020 with it’s e-commerce because it’s adapting to be more than just the old version of Walmex. For Natura, historically relied on an in-person sales model similar to Avon, where it had almost a million consultants who had personal relationships with buyers and they would take orders in person, deliver product in person, and Natura has aggressively made a transformation where they still have those sales consultants but they also have a very advanced digital marketing strategy that involves Facebook and WhatsApp and you know, personalized websites for shoppers and for the consultants. Again, it’s a traditional business that’s made the transition and that’s what makes it attractive today. I would say going forward, we don’t need to only be thinking about the IT companies that solved 2020, but we can be thinking about all of the other companies that are enabled by adopting new technologies going forward.

Adam Sparkman: Thanks Josh. We’ve obviously highlighted emerging markets strong performance and how durable that they’ve been through COVID and especially coming out of it in this recovery an audience member, points out the significant outperformance here recently that we’ve seen, just in 2021 to emerging markets and is curious on your thoughts as what inning we might be in for emerging market outperformance relative to developed markets and, can this pace continue through the rest of the year?

Charlie Wilson: I’ll take that. My answer to this question is always we’re in the first inning if your horizon, if your investment horizon’s long enough, but realistically, if you look at the drivers of performance over the last year, a lot of it has come from North Asia meaning China, Korea, and Taiwan those markets. Part of the reason for that is because they were very effective in dealing with their policy response from a healthcare perspective, and it was very effective, and so they were able to deal with the virus quickly, and you started to see many industries across those countries start to recover by Q2 and into Q3, and in some cases they were above pre-COVID levels by Q4. Also note that Korea and Taiwan are very tech heavy in terms of tech hardware which has been in heavy demand for all of this year as we work from home. That’s been a tailwind for those countries. But if you look around the rest of EM again, this is where we have to continue to remind ourselves that although they benefit from similar trends around demographics and income growth, they’re all very different countries that have different economic models. The rest of EM has somewhat lagged those three markets and the reason for that is because people have been a lot less certain about how they navigate through this period.

They didn’t have the same fiscal strength. They didn’t have the healthcare policy response. They weren’t able to lock down in the same ways and, and extend those lockdowns when necessary. I look at Latin American, specifically parts of Africa, Southeast Asia those are laggard markets, and there’s still opportunity for them to recover, and especially in a low interest rate environment, those are the countries that tend to benefit because tend to have more volatile effects. I think on a short-term basis, there’s definitely some more room for EM to go, and the headline, the headline evaluations are really dominated by the big the big five, which are close to 25 to 30 percent of the index today which have very lofty evaluations because they’re tied to internet and technology but the rest of EM is much more in line with long-term metrics that I think it still leaves a lot of opportunity for investors with the right time horizon.

Adam Sparkman: I’ll ask you to keep your crystal ball out for one more performance-related question. Over the last couple years we’ve seen strong outperformance of growth stocks, not just in emerging markets but globally, relative to value, and that’s definitely been accelerated with COVID; given some of the cyclical factors that you highlighted earlier in the presentation, do you think that it’s a good setup for emerging markets value to finally make a bit of a comeback this year?

Josh Rubin: I’ll try my crystal ball first. One of the reasons that value stocks worked well in developed markets for several decades leading into the early 2000s was consistently high economic growth and generally attractive levels of inflation, and value stocks have been more challenged over the last couple decades because with lower economic growth and lower inflation there wasn’t the same opportunity for operating leverage and sometimes just not the same opportunity to penetrate new markets. But a nice thing about emerging markets is, again, they still tend to operate in the sweet spot for local inflation and even slow growth tends to be pretty attractive relative to a developed market context. India might be disappointed to only deliver 5 percent GDP growth, but obviously Europe, Japan, or even the U.S. would love to have 5 percent real GDP growth. So business cycles still functioning in a traditional sense across most emerging markets, those business cycles do allow value-oriented, value-oriented stocks to still deliver attractive performance. Where we sit today is it was tough to have business cycles over the last 5 or 6 years when you had those macro factors that that Charlie talked about at the beginning. When commodity prices are declining, when the U.S. is initiating a trade war, things like that, those are all going to depress the business cycle, but both coming out of COVID as well as having greater visibility into what the commodity price outlook is or what geopolitics are, those should allow business cycles to shine through and that can allow value-oriented companies both to grow market share but especially to deliver operating leverage which tends to translate into attractive stock returns.

Adam Sparkman: Thanks Josh, and I know we’re pressing up here close to the end of the hour, there’s several question that unfortunately we haven’t had time to get to today, but I’m happy to follow up individually and make sure we get your questions answered. And Josh, Charlie, thanks so much for taking the time today to give us some insight into your outlook about emerging markets broadly and how you’re navigating the universe. I know that for both these guys, a lot of this is really just the tip of the iceberg and we’re happy to provide more specifics on any questions you have related to EM or our strategy more broadly. Thank you so much for joining us today. Feel free to reach out, and we would definitely appreciate and encourage you to please provide feedback about the webcast in the pop-up as you sign off. Thanks again.

Josh Rubin: It was very kind of everyone to give us some of your time today, thanks very much.

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March 4, 2021

Emerging markets have been off to a fast start and are poised for continued growth this year. However, investing in EM often requires a balanced approach to fully capture the opportunity. Please join Thornburg’s EM equity team breaks down the sector’s recent performance, ESG factors in identifying risks and how to effectively use EM strategies within your portfolio.

India Advances as Option for Global Manufacturers, but Snags Remain

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June 2020

Josh Rubin

Digitization and greater foreign exchange stability help India's case as an alternative to China in the global supply chain, though heavy manufacturers still face some obstacles.