2nd Quarter 2018

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Thornburg Developing World Fund shed 6.76% (I shares) in the second quarter of 2018, outperforming the MSCI Emerging Markets Index, which lost 7.96%. Since its mid-December 2009 inception, Developing World Fund has returned an annualized 6.62% (I shares) compared with the MSCI Emerging Markets (EM) Index return of 3.55%.

Global equities delivered a mixed performance during the April-through-June period. U.S. stocks advanced, while international stocks, particularly in emerging markets, declined on a dollar-denominated basis. Escalating trade tensions and the associated threat of potential disruption to global economic growth dominated financial media headlines. While still just headlines without a material impact on market fundamentals, investors have already become less constructive on economically sensitive risk assets based abroad, and market anxiety has appreciably increased.

After nearly two years of substantial gains and no meaningful correction, emerging markets were probably due for an adjustment. Perhaps unsurprisingly, the selloff that began in the first quarter continued through the second, when all 11 sectors of the EM Index weakened; slumps ranged from 4.71% to 12.70%. Recent earnings revisions have also been negative for all sectors except energy. Returns were even challenged from a geographic perspective. Nearly every index member country experienced negative returns during the quarter, with Turkey and Brazil most in the red, and both recorded 26% declines in dollar terms. The two countries experienced significant currency weakness in the quarter, which contributed to the negative return on the back of a strengthening U.S. dollar and widening twin current account and fiscal deficits. While this period has been painful, we believe it's been a healthy reset of expectations. Many stocks are now trading at attractive levels.

Furthermore, we think the correction and earnings revisions likely have more to do with high expectations entering the year rather than a noticeable deterioration in the outlook. To be sure, growth in some emerging markets is more vulnerable to higher U.S. yields and their impact on local currencies, or to potential escalation of U.S. import tariffs. Higher crude prices don't help many emerging markets, the vast majority of which are actually dependent on oil imports. Domestic political risk may also weigh on some more than others, with Turkey and Brazil, once again, cases in point. But beyond the headline noise and country-specific vulnerabilities, as a group emerging markets are in quite good shape relative to history.

Most now boast floating—not fixed—currency regimes, manageable debt, and external account balances, as well as still solid economic growth. The International Monetary Fund (IMF) is forecasting 4.9% economic growth among developing countries as a whole in 2018, and 5.1% growth in 2019, more than double the 2.4% and 2.2% growth it projects for advanced economies this year and next. Note the growth differential is also widening. With emerging markets accounting for growing shares of global GDP and stock market capitalization amid strong demographic and urbanization tailwinds, we think investors should maintain meaningful and consistent exposure to the asset class.

Top contributors to performance for the quarter included Facebook, Inc.; Baidu, Inc.; Reliance Industries Ltd.; HDFC Bank Ltd.; and TAL Education Group.

Internet companies were notable contributors during the period, rebounding strongly after a difficult first quarter. Facebook management's performance in front of legislators and regulators, along with strong earnings, provided comfort that the company can sustain its dominance as the leading social media platform. Shares of Baidu rebounded with Facebook-related sentiment, in addition to reporting strong earnings and a solid outlook.

Reliance Industries rose on continued strong performance in its petrochemical and refining business. Its emerging mobile telecom business continues to exceed expectations in terms of subscriber acquisition and market share gains. We expect improving cash flow generation as network spending requirements fall and it reduces price promotion over time.

HDFC Bank is arguably one of the highest-quality banks in India, considering the depth of the bank's deposit franchise, the quality of its assets, its profitable loan growth, and compelling value in its subsidiaries. Shares of HDFC Bank outperformed during the quarter thanks to a confluence of factors, including strong retail performance (credit cards, retail loans, and distribution fees), wholesale growth driven by technology platforms suitable for large clients, and strong efficiency as digital initiatives and branch economics continue to work in HDFC Bank's favor.

Shares of TAL Education increased during the quarter following high growth expectations. We trimmed as it approached our target and ultimately sold all remaining shares.

Major detractors for the period include Industrial & Commercial Bank of China Ltd., Sanlam Ltd., BBVA Banco Frances S.A., Cielo S.A., and Itau Unibanco S.A.

Industrial & Commercial Bank of China (ICBC) shares declined as investors became concerned about Chinese growth due to weaker credit growth. We believe that ICBC will benefit from share gains from non-traditional credit channels as the government tries to more closely manage credit expansion. The government continues to manage liquidity in the system even as total credit growth slows.

Sanlam is one of South Africa's oldest companies and arguably its best insurer. Over its 100-year history, Sanlam has evolved and executed on numerous opportunities. Today, Africa and India remain promising regions for Sanlam to scale its core competencies, with increasing earnings contributions reflected in the last earnings update from the company. During the quarter, Sanlam underperformed due to weaker-than-expected Sanlam Personal Finance and Sanlam Investments performance. Additionally, the company announced a share issue to bolster its already strong balance sheet.

BBVA Banco Frances, a leading bank in Argentina, declined roughly in-line with the peso during the quarter. While the medium-term outlook for Argentina remains robust, concerns about higher- than-expected inflation and near-term fiscal deficits led to substantial peso weakness. The IMF has stepped in to aid the government in stabilizing the currency. In return, the government has agreed to more aggressively tackle inflation and fiscal spending. It's likely that near-term growth disappoints, but we believe that is largely reflected in the current stock price. Cielo's shares fell as competitive pressures continue to intensify and Brazil's recent macro recovery is on the verge of stalling, threatened by increasing political risks.

Itau Unibanco fell during the quarter due to country-related concerns. Brazil's currency depreciation combined with uncertainty surrounding an upcoming election weighed on this and other Brazilian banks as they are economically sensitive businesses.

The volatility that returned to the markets in January has extended through mid-2018. For active investors, volatility opens buying opportunities, as security prices can diverge from business fundamentals. Our approach to emerging market investing is through a focused, yet diversified portfolio of attractively priced companies with strong moats and exciting outlooks. Our consistent dollar bias is reflected across the portfolio and tends to provide downside protection in periods of dollar strength. By incorporating downside protection through our stock selection and currency positions, we believe the portfolio can compound off a higher base and potentially generate market-beating returns over a cycle. Although macroeconomic conditions are not ideal in a few developing countries, we believe the correction and subsequent reset in expectations makes this a very compelling entry point for longer-term investors.

Thank you for investing alongside us in Thornburg Developing World 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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