4th Quarter 2017

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For the fourth quarter of 2017, Thornburg International Growth Fund returned 2.47% (I shares), trailing its benchmark, the MSCI All Country World ex-US Growth Index, which returned 5.77%. Although the fund underperformed the benchmark during the quarter, we are pleased to have delivered positive relative performance for the full year, with the fund returning 34.93% (I shares), versus 32.01% for the same index.

It was another positive quarter for global equities and a banner year overall as a broad-based global economic expansion, coupled with muted inflation trends, proved to be a favorable combination for risk assets. U.S. equities continued their streak of positive returns, boosted in part not only from tax reform, but also by continued growth in corporate earnings and earnings multiple expansion—all reflecting the considerable fundamental strength we are seeing in the U.S. economy.

Internationally, stocks (as measured by the MSCI All Country World ex-U.S. Index) were even better, outperforming domestic equities for the first time since 2012 on the back of stronger earnings growth and a weaker dollar. A question often asked is, can the bull market we’ve seen continue?

Performance Discussion

It continued to be a good environment for international equities on a sweeping basis as every sector, except for utilities, posted positive returns. Although information technology delivered better- than-average returns, we saw leadership rotate into more cyclically sensitive areas, with financials and materials the top two performing sectors this quarter. Given our positioning, this proved to be a small headwind to performance. Our best-performing sector was consumer staples, as we benefited from strong underlying stock selection, despite being modestly underweight. We saw disappointing performance in consumer discretionary names, largely driven by a handful of individual stock detractors.

From a geographic standpoint, we found modest success in Asia ex-Japan and the United Kingdom on an absolute basis. The eurozone, although delivering positive returns, was up relatively less than other regions in our benchmark. Our relative overweight here acted as a drag to performance. This positioning, combined with a few idiosyncratic stock detractors in the eurozone, proved to be our worst-performing geography on both an absolute and relative basis.

Leading contributors to performance for the quarter included Japanese cosmetics and skincare company KOSÉ Corp., German online payments company Wirecard AG, U.K.-based online food ordering and delivery platform Just Eat plc, and two different Macau casino operators—MGM China Holdings Ltd. and Galaxy Entertainment Group Ltd.

KOSÉ’s shares rose as earnings revisions continue to step up on an improving growth outlook for three key segments of their business, North America (largely Tarte Cosmetics), Chinese inbound tourist demand, and Japanese domestic consumption.

Long-term holding Wirecard continues to benefit from strong secular growth dynamics as the world increasingly becomes cashless and a large proportion of the world’s payments transactions have yet to convert to fully digital forms. This was evidenced by strong financial results in the most recent quarter, with steady organic growth and margin delivery. Investors are also becoming increasingly confident that Wirecard can achieve upside to their upbeat 2020 growth targets.

Just Eat reported a positive set of results, with an acceleration in order growth in its core U.K. market. Furthermore, U.K. regulators unconditionally approved the acquisition of smaller rival hungryhouse during the quarter. We estimate this acquisition will be nicely accretive to earnings over time.

MGM China Holdings is the locally listed, majority-owned subsidiary of MGM Resorts International that represents MGM’s Macau-based operations. Shares performed well this quarter as investors are beginning to appreciate the enhanced earnings power embedded within the imminent opening of a new $3.5 billion property dubbed MGM Cotai on the Cotai Strip section of Macau. Shares also benefited from strong visitation and gaming revenue trends during the fourth quarter.

Galaxy Entertainment Group rallied as the company continues to take share of gaming revenues within Macau due to a differentiated product offering. Galaxy is also benefiting from strongly positive momentum in visitation trends to Macau.

Principal detractors to performance this quarter were U.K.-headquartered data measurement and analytics services firm Nielsen Holdings plc, German pharmaceuticals, consumer health care and agricultural products company Bayer AG, French online advertising services company Criteo S.A., U.K. medical equipment provider ConvaTec Group plc, and multi-national, but primarily French, telecommunications company Altice NV.

Nielsen continues to experience weakness in their Buy division as their customers in the consumer packaged goods space are seeing slower sales growth and, as a result, are purchasing fewer services from Nielsen. This has depressed the valuation and sentiment around the stock. While Nielsen has started to restructure this division, it will take time for the positive effects of the restructuring to play out.

Criteo shares fell as the company cut guidance and disclosed that a solution they had developed to mitigate revenue declines on mobile Safari web browsers had been blocked by Apple Inc. upon the release of iOS version 11.2.

ConvaTec issued a profit warning as production issues arose after the company moved some of its manufacturing lines from the United States to a lower cost country. This manufacturing issue in a key segment of the business impacted the overall supply chain, hurting growth and causing margins to contract. With fundamentals deteriorating, the margin improvement thesis sidelined and management credibility reduced, we sold the stock.

Bayer’s shares were pressured after reporting a mixed third-quarter result and increased regulatory uncertainty around the acquisition of Monsanto Company being completed. Although we ultimately believe Bayer will be allowed by regulators to purchase Monsanto, we also believe that Bayer shares are attractive on a standalone basis, with or without Monsanto.

Altice sold off heavily as a mismanaged pricing increase in France led to elevated subscriber churn and a shortfall to earnings. Prospects for any further acquisition- led growth now appear dim and investors have begun to question whether the company can turn around their prospects enough to service their heavy debt burden. Due to the increased uncertainty and weaker growth prospects, we exited the position.

Portfolio Activity

We had a relatively limited level of turnover in the portfolio for the quarter, as we balanced the sale of four holdings with the initiation of three new positions.

One of the portfolio additions this quarter was adidas AG, a global footwear and sports apparel company based in Germany. Adidas appears poised to sustainably compound business value for some time to come, due to high levels of innovation in their product portfolio, share gains in North America, and a highly effective digital marketing strategy that is resonating with millennials across the globe. We see scope for margin improvement, gradually closing the gap between itself and peer Nike, Inc. through a variety of levers, such as greater operational focus by management and continued strong growth from China and owned e- commerce channels, where segment margins are accretive to group level margins. We took advantage of share price weakness during the fourth quarter to initiate a position in this high-quality compounder as we believe the market underestimates adidas’s longer- term earnings power.

Outlook

As we look forward, we see the global economy continuing to build upon the synchronized growth upswing and an environment that is conducive to equity returns, absent any major geopolitical or inflation shocks that could curtail global growth. Concerning international equities in particular, growth prospects remain attractive and valuations appear reasonable as earnings multiples remain generally less expensive when compared to U.S. equities. This valuation discount remains relatively wide when evaluating historical ranges.

With global economic fundamentals strengthening and core inflation at low levels, the outlook for equities offers, on balance, more positives than negatives. While this global growth upswing appears durable for now, it can be easy to get carried away with optimism, thus we closely monitor the risk factors that the global economy needs to navigate. One key question is China, which represents both great opportunities, as well as risks. For example, can China successfully rebalance the economy towards higher-quality consumption- led economic growth? If China can manage both this and an orderly deleveraging process, then we envision China and its rapidly expanding middle class contributing to incrementally better global growth trends.

In Europe, we are seeing the continuation of a cyclical rebound and think domestic factors, such as consumer consumption, are poised to help drive growth going forward. We expect the European Central Bank will remain patient and accommodative with monetary policy, with quantitative easing ending in 2019 rather than 2018, but there is risk the eventual unwind is not as gradual as investors expect. In the U.K., the economy has fared better than expected since the 2016 “Brexit” vote, due in large part to a robust external environment, but the downside risks and economic fallout of a hard Brexit path remain an issue to watch. U.S. trade policy—particularly what the U.S. does regarding North American Free Trade Agreement—is another factor to monitor.

We have yet to see major excesses build up in the global economy, except perhaps in the cryptocurrency space, therefore we remain broadly constructive on the outlook for international equities.

While results may vary over shorter time periods, we believe the structure of the fund and our rigorous, fundamentals-driven, bottom-up process, based on time-tested investing principles—such as secular growth, high quality businesses, multiple layers of diversification (including our three-basket structure) and reasonable valuations—can, and has, consistently delivered compelling risk-adjusted returns and lower correlation to peers over the decade-plus life of the fund.

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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