3rd Quarter 2017

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For the third quarter of 2017, Thornburg Core Growth Fund returned 3.31% (I shares), versus the Russell 3000 Growth Index return of 5.93%. On September 30, 2017, the net asset value per Class I share was $34.67.

U.S. stocks continued to grind higher during the period, as prices were supported by a synchronized global expansion, strong earnings, and the potential for supportive government policies. Markets have largely ignored escalating U.S. tension with North Korea, or the multiple catastrophic hurricanes that struck during the quarter. Strong fundamentals have supported rising stock prices this year, while earnings growth and positive revisions have helped to drive returns. We've seen limited expansion of valuation multiples for the broader market. Strong fundamentals will need to persist to support market valuations, which are the highest they've been since the early 2000s.

It was a mixed quarter for Thornburg Core Growth Fund, highlighted by unusual sector leadership. The fund's best-performing sectors were materials, financials, and consumer staples. These sectors are low weights on a relative basis, and the returns of each were driven by the strong performance of one or two individual stocks. Our holdings in materials were led by fertilizer producer CF Industries Holdings, financials was driven by long-time holding Affiliated Managers Group, and consumer staples continued to be buoyed by strong performance from Monster Beverage Corp. Information technology represents the fund's largest sector exposure, and it modestly lagged the market, primarily due to the strength in semiconductor stocks and the fund's lack of exposure to that subsector. The biggest drag on performance this quarter came from industrials stocks, where we were underweight and saw poor performance driven by weakness in our Acuity Brands and General Electric holdings.

Top contributors:

  • Nevro Corp.
    Nevro is a medical device company that provides products that treat chronic pain, specifically a spinal cord stimulation system for the treatment of back pain. This product is positioned as an alternative to opioid drug remedies. During the period, Nevro was able to deliver better-than-expected quarterly results driven by strong demand and improved sales force efficiency.
  • PayPal Holdings
    Digital and mobile payments platform PayPal delivered a solid quarter by both beating our estimates and raising future revenue guidance, with the share price rising accordingly. The firm has established a very strong position for two secular trends: the shift from cash to digital payments and the move toward mobile payments. Recent European transactions in the payments space have highlighted the enviable leadership position that PayPal has developed in digital payments. The stock remains a top holding.
  • CF Industries Holdings
    CF Industries is a global manufacturer and distributor of nitrogen and phosphate fertilizer products. As the leading U.S. supplier of crop fertilizer, it benefits from secular growth in food demand. During the quarter we saw industry fundamentals improve as inventory levels fell, Chinese firms began to act more rationally, the European market started to stabilize, and competitors began raising prices.
  • Visa, Inc.
    Visa is the largest card network and payment processor in the world, and a long-time Thornburg Core Growth Fund holding. Visa reported consistent results, which showed a modest acceleration in volume growth and led to a re-rating of the stock during the quarter.
  • Affiliated Managers Group
    Affiliated Managers Group is an investment management company with holdings in an array of alternative, hedge fund, private equity, and traditional asset managers. During the period the firm benefited from higher-than-expected performance fees given favorable market returns, as well as strong flows into alternative assets and global equities.

Top detractors:

  • Zillow Group
    Zillow provides real estate information to buyers, sellers, renters, and real estate professionals through its website and mobile applications. The stock fell on what we judged to be a combination of profit-taking and worries over a possible settlement with the Consumer Financial Protection Bureau. We retain our conviction in the stock and used the weakness as an opportunity to add to our position.
  • Chipotle Mexican Grill
    Chipotle continued to experience food safety issues during the quarter, with the stock falling considerably following reports of a norovirus outbreak at one of its restaurants. Although the stock had shown signs of recovery, with restaurant-level margins improving and better cost management at the corporate level, same-store-sales comparisons continue to disappoint.
  • Acuity Brands
    Long-time holding Acuity Brands is the leader in lighting solutions for the commercial construction market in North America. The ongoing slowdown in small projects has persisted longer than expected, negatively affecting sentiment surrounding the stock. The long-term thesis remains compelling, and we expect small project weakness to be temporary.
  • Newell Brands
    Newell is a consumer products conglomerate offering a broad range of brands from Rubbermaid plastic products to Yankee Candles. Investors lost confidence this quarter in light of the Toys "R" Us bankruptcy (Newell owns Graco, a Toys "R" Us supplier). We believe Newell has a strong collection of brands, the opportunity to cut costs in their business, and the benefit of being channel agnostic (online/offline). We continue to hold the stock and find the valuation very attractive at these levels.
  • DexCom
    DexCom is a medical-device maker focused on continuous glucose monitoring systems for diabetes patients. The stock was roughly flat for the majority of the period but declined significantly following the U.S. Food and Drug Administration's announcement that it had approved a competitor device for broader use than analysts expected. This opened it up to compete with DexCom for Medicare reimbursement. Although this is a negative development for the stock, we felt the market reaction was too severe given the superiority of DexCom's product compared to the new entrant. We used the decline as an opportunity to add to the stock.

We continue to adhere to our process and philosophy that employ rigorous, bottom- up fundamental analysis as we strive to build a portfolio of great businesses with attractive growth prospects.

Thank you for investing alongside us in Thornburg Core Growth 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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