3rd Quarter 2018

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Thornburg Investment Income Builder paid an ordinary quarterly dividend of $0.256 per I share in the quarter ended September 30, 2018. This compares to a dividend of $0.279 for the comparable quarter of 2017. The fund paid $0.983 per I share in the 12-month period ended September 30, 2018, up 7.3% from $0.916 in the prior comparable 12-month period. The dividend per share was lower for A and C shares to account for varying class-specific expenses.

A high percentage of the fund’s dividend is classified as qualified dividend income, which has a lower tax rate than ordinary dividend income. The trailing 12-month dividend yield was 4.5% for the I shares.

The fund’s net asset value increased by $0.63 to $21.96 per share from $21.33 during the September quarter. For the trailing 12 months ended September 30, 2018, the fund’s net asset value increased $0.31 to $21.96 per share from $21.65.

Investment Income Builder’s I share return of 4.17% for the September quarter exceeded that of its blended benchmark (75% MSCI World Index and 25% Bloomberg Barclays U.S. Aggregate Bond Index) by 0.44%. Performance comparisons of Investment Income Builder to its blended benchmark over various periods are shown on the fund performance page.

Over the long term, earnings growth should drive equity prices and dividend payments. We are optimistic about the return potential of the Investment Income Builder portfolio. We currently expect 2018 earnings per share growth of our equity portfolio companies to average close to 10% on a position-weighted average basis.

The quarter ended September 30, 2018, was the 63rd full calendar quarter since the inception of Thornburg Investment Income Builder in December 2002. In 47 of these quarters, the fund delivered a positive total return. The fund has delivered positive total returns in 13 of its 15 calendar years of existence. As of September 30, 2018, Thornburg Investment Income Builder has delivered tax-efficient average annual total returns of more than 9.4% since its inception (A shares, without sales charge).

In assessing the third-quarter 2018 performance of Investment Income Builder, it is constructive to consider the performance in U.S. dollars of the sector components of the MSCI World Index over the three-month period. The MSCI World Index comprises 75%, and the entire equity portion, of the fund’s global performance benchmark:

  1. Nine of 11 index sectors showed positive total returns for the third-quarter 2018, with sector results ranging from approximately 11.5% (health care) to negative 1.0% (real estate). Stocks of firms in the information technology and industrials sectors joined health care sector stocks in outperforming the index in the quarter. Stocks of firms in the consumer discretionary, financials, consumer staples, communications services, utilities, energy, and materials joined real estate stocks in generally underperforming the index in the September quarter.
  2. Relative to the MSCI World Index, Investment Income Builder’s portfolio was significantly overweight the higher dividend-paying telecommunications and financial sectors, as it has been for most of its history.
  3. Investment Income Builder Fund investments in firms in the following sectors comprised the largest average sector weightings in the portfolio during the third quarter:
    • Financial sector (25% average weighting in the fund’s equity portfolio; negative 2% change in sector weighting over the quarter)
    • Communication services sector (16% weighting in the fund’s equity portfolio; negative 1% change in sector weighting over the quarter). Note that the telecommunications sector was combined with certain media and internet companies to create the communication services sector late in the September quarter.
    • Energy sector (14% weighting in the fund’s equity portfolio; plus 1% sector weighting over the quarter)
    • Information technology sector (7% weighting in the fund’s equity portfolio; plus 1% change in sector weighting over the quarter)
    • Health care sector (6% weighting in the fund’s equity portfolio; negative 1% change in sector weighting over the quarter)
    • Consumer staples sector (6% weighting in the fund’s equity portfolio; unchanged over the quarter)
    • Industrials sector (6% weighting in the fund’s equity portfolio; unchanged over the quarter)
    • Consumer discretionary sector (4% weighting in the fund’s equity portfolio; negative 1% sector weighting over the quarter)
  4. The fund’s quarterly performance relative to the MSCI World Index in third-quarter 2018 was hindered by its large weighting in the financial and communication sectors and low weighting in firms in the technology and health care sectors. The value of the U.S. dollar broadly ended the quarter little changed vis-à-vis most foreign currencies. The fund’s relative performance was helped by comparative outperformance from its holdings in the utilities, consumer staples, information technology, and financial services sectors.
  5. In the Investment Income Builder portfolio, 27 equity investments contributed positive returns of at least 0.05% (five basis points) to the portfolio during the third quarter. Eleven of the fund’s equity investments detracted 0.05% or more from third-quarter performance.

Investment Income Builder’s bond holdings delivered modest returns during the quarter. Corporate and U.S. government bond prices were mixed during the quarter, with government and other high credit quality obligations slightly down and lower quality corporate bond prices slightly higher.

Your fund’s investments in the financial sector generally exceeded the performance of the equities in the financial sector of the MSCI World Index in third quarter 2018, however, the heavy portfolio weighting in these investments was a drag on fund performance. NN Group, JPMorgan Chase & Co., CME Group, Ares Capital Corporation, Axa Equitable Holdings, and UBS Group each contributed significantly to portfolio performance. ING Group was a weak performer in the quarter.

Your fund’s significant holdings in the communication services sector delivered positive returns but lagged the overall index in the third quarter. China Mobile, AT&T, and England’s BT Group each made positive contributions to portfolio performance. Vodafone Group, French multi-national telecom network operator Orange, and Africa’s MTN Group each detracted from portfolio performance due to investor concerns about price wars and political risk in some of their key markets. Institutional investors were net sellers of telecommunications sector equities in 2017 and have been sellers again in 2018 to redeploy proceeds into more cyclical investments.

Among Income Builder’s investments in the energy sector, French multi-national Total, Italy’s ENI, and Russia’s Lukoil were among the holdings with positive returns in the third quarter. The benchmark Brent oil price rose approximately 70% from 2017’s mid-June low through September 30, 2018. Of this 70% increase, less than 5% occurred in the September quarter. Supply and demand fundamentals appear to be positive for the sector in 2018, following ongoing global consumption increases, matched with industry output discipline and supply disruptions from major state-owned producers.

Income Builder’s investments in the technology sector delivered strong performances in the September quarter. Taiwan Semiconductor, Qualcomm, and new portfolio addition Broadcom each continued to benefit from supplying semiconductors to a growing number of connected devices, partially offset by concerns that Trump administration trade policies will worsen supply-chain dynamics for these devices. Digital communications component designer Qualcomm, which received a takeover bid of $79/ share from Broadcom last year, ended the quarter with a share price of $72.03 after gradually recovering from a share price in the low $50s last spring, following a U.S. government veto of the takeover. We believe the acquisition proposal was constructive in establishing a valuation benchmark from an arm’s length acquirer and in shaking up the Qualcomm board of directors.

Income Builder’s investments in the industrials sector delivered overall negative returns in the September quarter, well behind sector results. Italian infrastructure operator Atlantia, Australia’s Sydney Airport, and U.K. defense contractor BAE Systems each delivered negative results. Atlantia was the notable detractor, with shares suffering from the tragic collapse of a highway bridge on a viaduct over Genoa in mid-August that pressured its share price 30% lower in the quarter. The bridge was built decades before Atlantia purchased (from the government) a concession to operate large portions of Italy’s toll-road network, but certain Italian politicians cast blame for the collapse on Atlantia.

Investment Income Builder’s third-quarter 2018 returns from its holdings in the health care sector exceeded the return of this sector within the MSCI World Index. However, because the fund’s weighting in these investments was approximately half that of the index, the sector’s total contribution to performance was slightly lower than in the index. Merck again made a strong positive contribution as data continued to accumulate showing significant efficacy of its drug Keytruda in treating various forms of cancer. Novartis, Roche, Pfizer, and AstraZeneca were also positive contributors as investor sentiment improved regarding the prospects for drug prices after actual policy measures appeared less negative than political rhetoric.

Income Builder investments in the consumer staples sector exceeded the overall returns of this sector within the MSCI World Index. Walgreens Boots Alliance’s share price recovered more than 20% in the September quarter. During the first half of 2018, Walgreens delivered solid earnings, raised its dividend by 10% and announced a buyback totaling more than 10% of its shares outstanding. Nonetheless, the shares sold off in late June on concerns that Amazon will become a strong new competitor. The third quarter’s share-price move indicates investors are more comfortable with Walgreens’ relevance to consumers and ability to navigate e-commerce dynamics. Nestle recovered most of its first-half 2018 share price decline. British American Tobacco was the most notable negative contributor to portfolio performance for the quarter.

Among other portfolio holdings, notable contributors to September quarter portfolio performance included Électricité de France, Home Depot, Norilsk Nickel, and Lamar Advertising. Notable detractors included casino operator Las Vegas Sands and chemicals manufacturer LyondellBasell Industries.

A relatively flat U.S. dollar did not significantly impact the value of our non- U.S. assets during the quarter. We hedged most of the currency exposure of our asset positions denominated in the Australian dollar, the British pound, the euro, the Chinese yuan, and the Swiss franc. These hedges steadied the relative day-to-day performance of Thornburg Investment Income Builder during third-quarter 2018, since benchmark indices are not hedged. Hedging had minimal impact on absolute returns this quarter. We are more focused on risk control than on reaping possible currency gains from exposure to assets denominated in these currencies.

Yields on various maturities of U.S. dollar–denominated bonds were mixed during the September quarter:

  • 10-year U.S. Government bond yields moved approximately 20 basis points higher to 3.06%. Since bond prices move in opposite direction to yields, prices of longer maturity U.S. Government bonds modestly declined during the quarter.
  • Investment-grade corporate bond yields, as indicated by the FINRABloomberg Active Investment- Grade U.S. Corporate Bond Yield Index, were flat at 4.29%.
  • High yield (“junk”) corporate bond yields declined 0.43% to a September 30 level of 5.89% for the FINRABloomberg Active High Yield U.S. Corporate Bond Index and were only slightly elevated from 5.82% at December 31, 2017. The spread between high-yield corporate bonds (5.89%) and 10-year U.S. Government bonds (3.06%), at +2.83%, is historically tight. We believe current spreads do not offer adequate compensation for incurring risks of corporate credit deterioration and defaults.

Within its bond portfolio, Investment Income Builder owned significantly fewer U.S. government and agency bonds than the Bloomberg Barclays U.S. Aggregate Bond Index, which delivered a 0.02% September quarter return. You can expect us to increase the portfolio’s allocation to bonds if rising yields and better compensation for taking credit risk lead to significantly lower bond prices. Compensation for credit risk has been particularly squeezed in 2018. Readers of this commentary who are long-time shareholders of Investment Income Builder will recall that the interest-bearing debt portion of the fund’s portfolio has varied over time, ranging from less than 9% in 2015 to 45% at June 30, 2009.

Interest Bearing Investments as a Percentage of Total Portfolio

As of September 30, the fund portfolio included more than 90 bonds and hybrid securities.

Today, investors debate the future direction of the economies of China, Europe, various emerging markets, and the U.S. They consider potential policy actions by the U.S. Federal Reserve, Congress, the Trump administration, and foreign government regulatory and policy actions. Concerns about tariffs and trade policy changes were impactful on share price movements of global producers of tradeable goods in the September quarter. Many political and macroeconomic issues will remain open, but we believe people around the world will continue to buy goods and services and trade with one another. Importantly, overall global consumer spending is growing in 2018, along with global industrial production and global population. Most macro-economic indicators around the world positively surprised in 2017 and 2018 to date. Attention is now turning to 2019, with slower expected growth as central bank tightening continues in the U.S. and gets underway in other countries.

Most firms held in Thornburg Investment Income Builder’s portfolio are expected to deliver positive year-over-year earnings in 2018. Positive economic trends have supported a rotation of investor preferences from more defensive debt and equity assets to more economically sensitive assets, though with increasing debate in recent months around valuation and the expected duration of the global economic growth cycle. It appears that political gridlock will prevail in Washington, DC, into 2019 and 2020. The U.S. Federal Reserve has maintained the pace of Federal funds target rate hikes, moving the upper bound of its target from 0.75% to 2.25% over the last seven quarters. Most major central banks around the world continue to pursue very easy monetary conditions, which artificially suppress interest rates and support prices of financial assets.

While low interest rates are good news for borrowers, they have negative consequences for conservative savers. Interest income as a percentage of the aggregate adjusted gross income of U.S. households fell from 4% in 2007 to 2% in 2016, according to Statistics of Income published by the Internal Revenue Service.

Investors must consider other options. Banks in the U.S. offer below-inflation yields on most deposits. A very large pool of investor dollars is looking for better returns elsewhere, but in sensible investments. We are optimistic that the types of income-producing investments owned by Thornburg Investment Income Builder Fund will experience sustainable popularity among investors as their intrinsic values for income production are recognized. A high percentage of investor funds belong to people over the age of 55, for whom income is an increasingly necessary and desirable attribute.

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%.

30-day SEC Yield as of 9/30/18 – A Shares: 2.83%; I Shares: 3.22%.

Important Information
Before investing, carefully consider the Fund’s investment goals, risks, charges, and expenses. For a prospectus or summary prospectus containing this and other information, contact your financial advisor or visit thornburg.com. Read them carefully before investing.

Unless otherwise noted, the source of all data, charts, tables and graphs is Thornburg Investment Management, Inc., as of 9/30/18.

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.

The views expressed are subject to change and do not necessarily reflect the views of Thornburg Investment Management, Inc. This information should not be relied upon as a recommendation or investment advice and is not intended to predict the performance of any investment or market.

Any securities, sectors, or countries mentioned are for illustration purposes only. Holdings are subject to change. Under no circumstances does the information contained within represent a recommendation to buy or sell any security.

Dividends are not guaranteed.

The performance of any index is not indicative of the performance of any particular investment. Unless otherwise noted, index returns reflect the reinvestment of income dividends and capital gains, if any, but do not reflect fees, brokerage commissions or other expenses of investing. Investors may not make direct investments into any index.

There is no guarantee that the Fund will meet its investment objectives.

Please see our glossary for a definition of terms.

Thornburg mutual funds are distributed by Thornburg Securities Corporation.

Thornburg Investment Management, Inc. mutual funds are sold through investment professionals including investment advisors, brokerage firms, bank trust departments, trust companies and certain other financial intermediaries. Thornburg Securities Corporation (TSC) does not act as broker of record for investors.