3rd Quarter 2017

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The three months ended September 30, 2017, marked the third straight quarter of strong returns for the MSCI Emerging Markets (EM) Index. It was also a continuation of the emerging markets recovery, kicked off in early 2016, which has led to positive performance in six of the last seven quarters. The more recent index moves have been driven more by an increase in stock valuations, as positive earnings revisions have slowed. However, at 12.5x 2018 earnings per share, emerging market valuations are still not stretched, especially considering the relative valuation compared to developed market indices such as the S&P 500 Index at 17.8x and the MSCI EAFE Index at 14.8x 2018 earnings per share.

Thornburg Developing World Fund delivered a total return of 8.56% (I shares) during the quarter, which compares favorably to the MSCI EM Index return of 7.89%. We are pleased with this return, considering our fund tends to hold shares in companies that demonstrate stronger business fundamentals such as consistent free cash flow and low leverage. We believe those types of companies should outperform the broader market over a long period but tend to underperform during strong up markets, like what we have experienced since early 2016.

Leading contributors to fund performance for the quarter included Alibaba Group, Baidu, Kroton Educacional, Tencent, and Sberbank.

Alibaba Group is the fund's largest holding and has performed in excess of our already high expectations, announcing further increases in active buyers and users and increased purchase volume per user, in addition to rapidly growing advertising revenues. The company attributes these advances to better customer engagement and deployment of data analytics tools. Alibaba has also shown success in combating counterfeit product issues while signing up name-brand retailers, such as Victoria's Secret and Moët Hennessy.

Chinese internet search firm Baidu performed well during the period, as it announced revenues in line with our expectations but better-than-expected earnings thanks to effective cost management in its offline-to-online business. Aside from its core search business, Baidu's online video subscription platform continues to grow and is now the #2 app in China in terms of time spent. We still see room for improvement in these business segments and remain optimistic about the stock.

Kroton Educacional is a Brazilian education company focused primarily on higher education. There has been some concern about Kroton's ability to manage the transition from government-backed student loans to providing its own financing program on general profitability. Although it is still early, recent results indicate that management is executing well, and the stock rebounded nicely.

Tencent provides internet and mobile services to Chinese consumers and reported favorable results for the quarter, with mobile gaming revenue passing somewhat of a milestone as it exceeded PC revenues for the first time. Advertising revenue growth continues to impress as well. Tencent has improved user engagement but still has ample room to expand the amount of ads that its almost 1 billion users see.

Sberbank is the dominant banking franchise in Russia, with market leadership in assets, loans, and deposits. The company announced that it had handily exceeded consensus earnings estimates for the quarter, along with an acceleration in loan growth after two anemic years and net interest margin improvement due to improving funding costs. Sberbank also reported a recovery in fee income after previously having removed its full-year guidance.

Top detractors for the period included Volaris, Fibra Uno, ITC, KT&G, and Cielo.

Volaris is a low-cost Mexican airline with its main base in Tijuana. It is the country's second-largest airline after Aeroméxico and serves domestic and international destinations in the Americas. Guidance in the recent quarter disappointed elevated expectations for the still nascent market recovery, in large part due to aggressive competition. We think long-term demand growth and the concentrated structure of the low-cost carrier market in Mexico makes this opportunity attractive.

Shares of Mexican real estate investment trust Fibra Uno sold off following an announcement by management that it would seek to issue equity to fund the acquisition of new real estate assets. The market has become concerned that it will be difficult to find accretive acquisitions using equity as a funding source, considering the low multiple to net asset value implied by the current share price. We still believe the long-term real estate opportunity in Mexico is attractive and Fibra Uno is the leader in this industry.

ITC is an Indian conglomerate that operates businesses in the cigarette, fast-moving consumer goods, and hotels segments, among others. The stock sold off during the quarter despite reporting decent results, due to poor communication regarding a change in domestic cigarette tax policy. We exited the stock for better opportunities as the earnings outlook became more uncertain.

Tobacco company KT&G Corporation executed well in the most recent quarter, reporting above-estimates revenue driven by its cigarette export business. Despite recent market share gains in Korea, the stock was unable to shake off concerns regarding foreign competition related to the introduction of new "heat not burn" products.

Brazilian electronic payments firm Cielo continued to suffer from cyclical pressures, resulting in weaker-than-expected revenue growth. Cielo continues to manage costs effectively in the weak environment, which should lead to stronger earnings power as revenue growth returns.

Looking forward, we see the fundamentals in many emerging markets continuing to strengthen. In particular, we are positive about the potential impact from the ongoing reform agendas in China and India. We remain optimistic about the opportunity for reform in Brazil as well. The prospects for positive returns in emerging markets equities remain compelling, as we are finding strong businesses selling at attractive valuations, although perhaps a few less than we did at the outset of 2016. We will continue to search for the highest-quality businesses at the best prices.

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

Investments carry risks, including possible loss of principal. Additional risks may be associated with investments outside the United States, especially in emerging markets, including currency fluctuations, illiquidity, volatility, and political and economic risks. Investments in small- and mid-capitalization companies may increase the risk of greater price fluctuations. Investments in the Fund are not FDIC insured, nor are they bank deposits or guaranteed by a bank or any other entity.

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