3rd Quarter 2017

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For the third quarter of 2017, Thornburg Better World International Fund returned 3.18% (I shares), lagging its benchmarks, the MSCI AC World Ex-U.S. and MSCI EAFE indices, which returned 6.16% and 5.40%, respectively, during the period.

Markets continued to climb the proverbial wall of worry throughout the quarter, as geopolitical risks were brushed aside in favor of increased expectations regarding global growth. Over the quarter, all 11 sectors of both indices showed positive returns, with health care and consumer staples rounding out the bottom performers. Both sectors continue to feature prominently in the fund for their stability in cash flows and confluence of ESG (environmental, social, and goverance) and financial leadership. While many of the stocks within these sectors performed well, overall these sectors lagged in rising markets.

In a reversal from last quarter, the energy sector proved to be the best performer for the MSCI AC World Ex-U.S. Index, followed by materials. The fund currently has no exposure to the energy sector, consistent with the team's structural view on changing energy economics favoring clean energy over conventional fossil fuel production and the regulatory risk associated with oil and gas producers. As current investors are aware, in addition to our structural viewpoint, we screen out heavy hydrocarbon industries as part of our ESG process. The result is a very low-emissions portfolio. Instead, we have invested in sustainable companies within commodity countries. These economies and currencies tend to benefit from rising energy and materials markets and contribute to the fund's performance during these periods. The fund's Norwegian holdings were a notable contributor in the quarter, for example.

Markets remain complacent, in our view. The CBOE Volatility Index, or VIX, a measure of general "fear" in the market, closed at 9.5 at the end of September, well below its long-term average around 20. Gains globally have been broad and appear to have lulled investors into a comfortable sense of calm. It would seem that nothing can go wrong. However, if history is any guide, these are exactly the times when investors should be concerned. After all, market turbulence always seems to arrive as a surprise. For Better World International Fund, our most important task is managing for risk-adjusted returns.

Too many investors spend the majority of their time focused on the potential upside to differentiate themselves. It's understandably tempting as markets rise most years. However, a truly effective way to outperform over the long run is to truncate the downside by focusing on risk as much as the upside during stock selection and portfolio construction. Based on Morningstar data, there have been 504 trading days since the inception of Better World International Fund, even in a generally up market there have been 229 trading days where the MSCI AC World Ex-U.S. Index was down; of those 229 down days, we outperformed on 79% of them. Now, we won't always be as defensively positioned as we are today.

Like most things in life, there is a time and place for everything. The types of quality stocks with bright prospects that we like are generally trading at rich levels, while many other less interesting stocks are at less demanding levels, leaving the index just slightly expensive. Given a more favorable environment for future expected returns (i.e., a less frothy market from a valuation perspective), this note would be about the opportunities that lie ahead. However, as things stand now we maintain a keen eye toward the risks that lie just over the horizon.

For us, the most important risk-management principle is using our stock selection process to minimize permanent capital loss. The ESG factors we integrate into our investment process help to limit risk in several ways, and in particular, help us avoid potentially catastrophic incidents in companies that can wipe out value. We've outlined in other notes how focusing on both environmental and governance factors can help avoid potential risk, but one social issue has proven particularly important of late.

Data security is coming to the forefront as a key risk for company management and investors alike. The impact on a portfolio (or) company can be multifold—loss of investor assets, reputational damage, litigation, and regulatory sanctions are just a few of the issues that can arise. Cyber attacks can have significant financial implications on a company's bottom line, as the recent Equifax data breach has outlined.

As complicated as cybersecurity can be, ESG analysis can help us identify red flags which can put portfolios at risk. Prior to the announcement of the breach, MSCI ESG research downgraded Equifax for risks related to data security, citing insufficient measures related to preventing such events. The company had experienced previous breaches exposing the data of 431,000 employees of a key client. While ESG is no panacea, it can help reduce the probability of exposing the portfolio to such a risk.

Our ESG integration process emphasizes material ESG factors that can impact the financials of certain companies and sectors more than others. For data security we conduct additional analysis particularly for companies in the technology and financial sectors. Here, many of the fund's portfolio holdings stand out for their data security policies and investments, thus demonstrating management focus on long-term sustainability.

Generally, we view the integration of ESG into our investment process as a lens into prospective investments that allows us to highlight efficiencies and risks, which might otherwise be overlooked by standard financial analysis alone. We believe the proactive incorporation of environmental, social, and governance issues are indicators of high-quality, forward-looking management with a focus on effective stewardship of capital. Strong management coupled with productive capital allocation leads to, in our view, financial outperformance over the long term.

Thank you for investing alongside us in Thornburg Better World International Fund.

Performance data shown represents past performance and is no guarantee of future results. Investment return and principal value will fluctuate so shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than quoted. For performance current to the most recent month end, see the mutual funds performance page or call 877-215-1330. The maximum sales charge for the Fund’s A shares is 4.50%.

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Unless otherwise noted, the source of all data is Thornburg Investment Management, Inc., as of 9/30/17.

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