1st Quarter 2018

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For the first quarter of 2018, Thornburg Better World International Fund returned negative 1.40% (I shares), slightly underperforming the MSCI All Country World ex-U.S. (ACWI ex-U.S.) and outperforming the MSCI EAFE indices, which returned negative 1.18% and negative 1.53%, respectively, during the period. Since its end-September 2015 inception, Better World International Fund has returned an annualized 13.03% (I shares) compared with the ACWI ex-U.S. Index return of 12.95%.

In a volatile quarter, nine of the 11 sectors of the ACWI ex-U.S. Index showed negative returns, with performance ranging from negative 4.11% to positive 1.84%. The top-three returning index sectors during the quarter were information technology, utilities, and health care. The bottom-three performing sectors were telecommunication services, materials, and consumer staples. For Thornburg Better World International Fund, the top-performing sectors were information technology, health care, and telecommunication services. Utilities, real estate, and financials rounded out the bottom performers during the period. We expect to, over full market cycles, add value through high active share and superior stock selection through bottom-up quantitative and qualitative analysis and the proactive evaluation of environmental, social, and governance (ESG) standards within our investment framework.

We strive to provide a high total return through the cycle by investing in high-quality, attractively priced companies that we believe have a sustainable competitive advantage, while also having a positive impact on the clients and communities they serve. Our research thoroughly integrates traditional financial as well as ESG metrics. We believe markets typically undervalue the risks and opportunities presented by ESG factors, both in terms of the timing and the magnitude of outcomes. Over the long-term, we view this process as a superior way to invest hard-earned client capital.

Inside Our Strategy

We're proud to introduce Jim Gassman and Di Zhou as portfolio managers of the Better World International Fund as of March 2, 2018. Di and Jim bring with them a combined 41 years of experience to the fund.

Recently, various investors familiar with our holdings have inquired as to whether we are growth or value investors. While the strategy is considered core, and falls within the "Foreign Large Blend" category per Morningstar, nuance is necessary in categorizing ESG portfolios as value, growth, and blend. For example, when ESG factors we view as important are taken into consideration, several businesses become less of a natural fit for the portfolio. Some of these include not just tobacco and heavier hydrocarbon producers, but also various financial organizations, to name a few. Yet these organizations generally score well on traditional metrics employed by value investors, creating somewhat of a conundrum for categorization.

We're value investors, but not in the traditional sense of solely focusing on low price-to-book or price-to-earnings ratios. Rather, we consider growth and long-term sustainability integral components of value, and consider valuation multiples against what we assess to be a stock's intrinsic value, including but not limited to, its earnings power and price appreciation prospects. Is the market accurately assessing the future earnings potential from innovations in energy production or consumer preferences shifting to natural and organic foods? It's a critical question for investors who value a margin of safety, particularly when business models are changing as a result of innovation and structural changes in multiple industries, something that is top of mind for sustainability-based investors.

Ultimately, we're bottom-up investors striving to stay on top of innovation and emerging trends across sectors in our focused-yet-diversified portfolio, while maintaining an eye on valuation metrics. Innovative, disruptive companies are oftentimes fast-growing enterprises, with multiples that may screen poorly for traditional value investors. Stocks that may screen cheaply often do not account for structural shifts in demand that erode earnings power. At the end of the day, our portfolio is designed to be at the core of an investor's international allocation, neither strictly value nor growth, but taking advantage of both schools of thought while maintaining our high standards of sustainability.

ESG Corner

Recently, the U.K. took an important step forward in measuring and reporting gender compensation discrepancies, an important social issue for us. Companies across the U.K. were required to report on pay differences between men and women. As of this writing, more than 10,000 companies have completed a uniform assessment of the gap between what men and women earn on average in their workforce. According to the U.K. Office of National Statistics, the median reported gender pay gap was 18.4%. The data is of course, imperfect, but the exercise helps reveal a structural inequality of opportunity for women in the workforce that employers will need to address, given that they add crucial perspective and input in business planning and development.

The numbers reported highlight the fact that women continue to be under-represented in higher-paying positions, leading to attention-grabbing numbers that shine a light on an issue we view as increasingly important for investors. As we've outlined in previous commentaries, our own industry, financial services, shows large gaps, outlining quite a stark example of entrenched imbalances in a large sector of the U.K. economy. Other sectors facing difficult questions include construction, insurance, and education. The problems are broad, however, and include companies that are generally seen as positive places for women. Of the subsidiaries of companies included in the Times Top 50 Employers for Women (2017), nine in 10 pay women less than they pay men on average.

UK Gender Pay Gap

The data shows that even good employers can have significant pay gaps. What matters to us as investors is management's action plans to tackle and deal with any inequality they find. Pay inequality will ultimately affect a company's competitive position into the future as talented individuals review the newly available data and assess whether or not they want to work for an organization. While this new information only covers a small set of the global economy, it has global implications.

Most businesses have never worked out their gender pay gap. Now that those in the U.K. have, the question remains what they will do about it. Those organizations that make improvement efforts, most likely increasing their effectiveness in acquiring and retaining talent, may be better able to compete in the global economy. This can lead, in our opinion, to positive ESG momentum and increasing stock prices over time. We'll be keeping an eye on this, and other relevant ESG developments across the globe.

The U.K. study is an example of increasing information availability that helps us conduct a holistic analysis of long-term value. Better World International Fund seeks to utilize ESG analysis to enhance risk-adjusted returns. Currently, most of the investment management community does not do this. However, through our study of investment returns when incorporating ESG metrics, they do seem to have alpha-generating informational value. Herein lies a market inefficiency Better World International Fund attempts to exploit for the benefit of our shareholders.

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, charts, tables and graphs is Thornburg Investment Management, Inc., as of 3/31/18.

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