2nd Quarter 2018

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For the second quarter of 2018, Thornburg International Growth Fund returned 2.02% (I shares), outpacing its benchmark, the MSCI All Country World ex-U.S. Growth Index (the index), which returned negative 1.42%. This brings the year-to-date return to 4.04% for the fund, versus negative 2.28% for the index. On June 30, 2018, the net asset value per class I share was $25.22.

Global equities delivered a mixed performance this quarter, with U.S. indices in positive territory but international indices, particularly in emerging markets, posting negative returns on a dollar-denominated basis. Escalating trade tensions and the risk they pose to the global economic upswing dominated the headlines during the quarter. We have yet to see recent trade actions play out negatively in corporate earnings in a broad-based manner. However, investors have already become less constructive on economically sensitive risk assets based abroad, and market anxiety has appreciably increased.

Performance Discussion

During the quarter, our benchmark index gained on a local currency basis with most sectors in positive territory. The top-performing sector was energy on the back of rising oil prices. We saw relatively neutral performance here as our slight underweight was offset by positive stock selection. Health care was the second-best performing sector; however, we underperformed modestly due to a single, stocklevel detractor. The sectors that most underperformed the benchmark were telecommunications services and financials, where we benefited from having zero holdings and underweight positioning, respectively. Our best-performing sector was information technology, where we experienced relatively limited impact from allocation effects, but instead saw performance benefit from positive stock selection.

Despite delivering positive returns in local currency terms, the benchmark produced negative returns as the U.S. dollar gained broadly against most foreign currencies. This acted as a headwind to returns for dollar-based investors, and once adjusted for currency, only three out of 11 of the benchmark's sectors were in positive territory.

From a geographic standpoint, the fund realized positive performance relative to the index from most regions, with Japan, China, and Europe leading the way with stock selection the primary driver. Our emerging markets exposure was below the benchmark, which favored performance. Within emerging markets, we had limited exposure to the more fragile countries and currencies, but we were overweight China and Hong Kong. Our exposure in China, however, is weighted toward technology and domestic consumption, and thus we believe more insulated from escalating trade war risks. The Hong Kong-listed, Macau-based casino operators represented our worst-performing geography.

Top contributors to performance for the quarter included German digital payments company Wirecard AG, Chinese video-streaming service iQiyi, Japanese apparel e-commerce leader Start Today, U.K.-based online automotive marketplace Auto Trader Group, and Japanese ecommerce platform Mercari.

Long-held portfolio position Wirecard reported earnings exceeding street expectations, with underlying growth momentum robust as the company benefits from the secular trend of the digitization of payments.

Shares of iQiyi rallied as investors came to better appreciate the long-term monetization opportunity and the valuation multiple discount to peers, such as Netflix, narrowed. We have followed iQiyi for many years as it developed as a private company within Baidu and were excited for the opportunity to own the company via a public offering in March. Despite its rocky trading start, we stuck with the shares, given its attractive valuation relative to peers. However, we eventually exited the position during the quarter as it quickly achieved our price target.

Start Today rose as the company provided further clarity on its plans for the launch of a custom-fitted private label brand offering enabled by their "Zozosuit" body measurement device and technology. Investors were excited by the prospect that, if successful, Start Today will accelerate growth and expand its market opportunity not only in Japan, but abroad as well.

Auto Trader's shares broke out as it reported earnings that, despite macro headwinds and a softer used-car environment in the U.K., proved its business model rather resilient, with enough offsetting levers from pricing/upselling and new products to deliver better growth than the market expected.

We participated in Mercari's initial public offering and still own the stock. We like the business' long-term prospects as it is Japan's dominant platform in the online flea market category. Its innovations have helped grow the market and take share. If Mercari can replicate even a fraction of its success in new markets, such as the U.S., it can potentially grow at a rapid pace for years to come.

Primary detractors from performance last quarter were Brazilian payment solutions company Cielo S.A., Macau casino operator Galaxy Entertainment, Irish pharmaceutical company Alkermes plc, U.K.-based e-commerce company ASOS plc and German bank Commerzbank AG.

Cielo's shares fell as competitive pressures continued to intensify and Brazil's recent macro recovery was showing signs of stalling, threatened by increasing political risks.

Galaxy declined as reported gross gaming revenues for Macau as a whole decelerated and fell short of street expectations due in part to weakening in the VIP segment, as well as the effect of the World Cup, which diverted attention and spending.

Alkermes saw its shares fall sharply as the U.S. Food & Drug Administration sent a Refusal to File (RTF) letter to the company regarding its pipeline depression drug ALKS 5461. Although the FDA rescinded the RTF letter just two weeks later and accepted the drug for review, the stock has yet to fully recover, and we exited the position on heightened pipeline risk and generally weaker trends in its marketed products.

ASOS, alongside many other e-commerce companies, sold off on the U.S. Supreme Court ruling that states have the authority to collect sales tax on online transactions by companies that do not have a physical presence in their territory.

Commerzbank's shares declined as European banks broadly underperformed due to weaker economic activity data, a flattening bund yield curve, and growing trade tensions.

Portfolio Activity

We initiated five new portfolio positions while also completely selling out of six other holdings during the quarter.

One of the portfolio additions this quarter was Start Today, a Japanese e-commerce company that we had previously and profitably owned many years ago. The stock regained our attention during one of our frequent international research trips, in this case, to Japan. After speaking with the CFO in a one-on-one meeting, we performed further fundamental, bottom-up research on the stock, as is our process. As we rigorously evaluated the company, we discovered a leading, high-quality platform business model that offers a compelling value proposition to both fashion brands and consumers. Start Today has attractive growth prospects as it benefits from not only the secular trend of rising e-commerce penetration in Japan, but also incremental growth avenues from the launch of a new custom-fitted private label line of clothing. Although only shirts and jeans will be available at launch, we can envision Start Today offering a gradually expanding selection of clothing over time and thus enhancing growth and long-term earnings power. An interesting consumer behavior observation we had is that apparel return rates are much lower in Japan than in the U.S. or Europe. Japanese consumers are simply less inclined to return products for fit and other issues and as a result are less likely to order fashion online in the first place, relative to consumers in other highly developed economies. The body measurement device and technology that Start Today is launching should help many consumers overcome this hurdle and ultimately expand the addressable market meaningfully. Considering the multitude of growth opportunities ahead, we believe Start Today is trading below its long-term intrinsic value and can deliver considerable returns as the company successfully executes over time.

Outlook

The global economy continues to experience a steady pace of expansion, although growth has become less synchronized with leadership again shifting toward the U.S. Europe experienced a pronounced wave of growth last year, yet it appears that momentum is cooling based on indicators of industrial activity and signals remain mixed going forward. Trade concerns are a major factor weighing on business confidence and clouding the outlook in Europe. We believe Europe can continue to grow, albeit at a more moderate trend and the risk of recession remains very low, given accommodative monetary policy out of the European Central Bank.

The brunt of recent dollar strength and mounting trade tensions has fallen distinctly on emerging markets. Roughly 80% of foreign currency debt held by emerging market countries is in U.S. dollars and levels of debt as a percentage of GDP are relatively high when compared to history. This puts emerging markets in a vulnerable position, in which a vicious cycle can play out of a weakening currency: decreased ability to service dollar- denominated debt would pressure the current account via capital outflows, leading to further weakening of the currency. In addition to monitoring the situation in emerging markets broadly, we are also paying close attention to China, where growth is moderating and credit conditions are tightening. Part of the slowdown is purposeful, as policy makers prioritize quality of growth over sheer magnitude. However, if economic conditions worsen dramatically, we expect policymakers to provide support, as they have historically. The key concern will be how impactful such actions would be amid a deepening trade confrontation with the U.S.

The overriding wild card is trade and given recent events, it is too early to call for a re-acceleration in global growth. The global economy can be vulnerable to even relatively small shocks, such as increased input prices due to tariffs. Trade actions have consequences, and over time those can spill over into Main Street and the real economy. We hope that more rational heads prevail and trade tensions abate, but given the risks from rising protectionism, we see volatility remaining heightened.

Our process and approach to investing remain consistent with a focus on high-quality companies with wide economic moats and low macroeconomic dependence. The stocks we own have the potential to grow rapidly because of secular or stock-specific factors that we've identified. They have the ability to sustainably compound business value over long time horizons. This results in a collective portfolio of stocks that we believe can navigate even choppier seas, and provide our investors with a return profile that is attractive on a risk-adjusted basis over a full market cycle.

We thank you for investing alongside us in Thornburg International 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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