3rd Quarter 2018

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For the third quarter of 2018, Thornburg International Growth Fund returned negative 2.82% (I shares), trailing its benchmark, the MSCI All Country World ex-U.S. Growth Index, which returned negative 0.26%. This brings the year-todate return to 1.11% for the fund, versus negative 2.54% for the index. On September 30, 2018, the net asset value per class I share was $24.51.

U.S. equities maintained their steady advance this quarter, at one point reaching new all-time highs. The story internationally, however, was relatively less encouraging as those markets struggled to find their footing. Although developed international market indices notched a slightly positive return, the emerging markets were once again in negative territory. Additional tariff announcements took a toll on investor sentiment, most notably for Chinese-based equities as well as the renminbi, which both saw their values decline during the quarter. Headlines continue to be dominated by trade, even as global economic activity continues to expand. We are seeing mounting trade concerns sap incremental growth from more export-oriented economies, such as China and the eurozone, and thus the pace of economic expansion has deteriorated. Investors remain keenly focused on what happens next in terms of trade, given the wide-ranging implications to our highly integrated global economy and equity markets.

Performance Discussion

During the quarter, our benchmark was slightly negative with communication services and consumer discretionary detracting most notably. We were overweight each of these sectors. The overweight to consumer discretionary, along with stock selection within the sector, ultimately led to our underperformance relative to the benchmark. The top-performing sector within the benchmark was health care. Our overweight to this sector was beneficial, although stock selection here detracted. Our best-performing sector was information technology, where we experienced relatively limited impact from allocation effects, but realized a performance benefit from 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 five out of 11 of the benchmark’s sectors were in positive territory.

From a geographic perspective, the fund realized negative performance relative to the index primarily due to a significant underweight to Japan, along with stock selection within Japan and Hong Kong. Holdings within developed North America, the eurozone, and Mexico were among the most positive contributors on a geographic basis.

Primary contributors to performance for the quarter included German online payments company Wirecard; global payments solutions provider Worldpay, Inc.; Swiss drug manufacturer Lonza Group; French payment and benefit solutions provider Edenred; and U.K.-based pharmaceutical company AstraZeneca plc.

Long-time holding Wirecard delivered a solid set of financial results during the quarter and raised guidance for this year and 2020. Robust results reflect strong underlying execution as well as Wirecard being well positioned to continue to benefit from the secular growth dynamic of payments digitization.

Worldpay reported an earnings update that saw organic revenue growth accelerate above market expectations. Furthermore, management for the first time quantified for investors the considerable revenue synergy opportunity arising from the merger of Worldpay and Vantiv.

Lonza held a capital markets day and expressed a high degree of confidence in achieving its medium-term financial goals, given its competitive position, the demand environment, and the investments it is undertaking today to sustain growth momentum.

Edenred rallied as its latest earnings report showed an acceleration of all its key performance indicators from the prior quarter. In addition, Edenred’s operations in Brazil realized positive growth after several quarters of declines.

AstraZeneca saw its shares increase for a variety of reasons, including a solid second- quarter earnings report with revenues exceeding expectations, driven in part by outperformance from its newer oncology drugs. We also received additional clinical data points, including a particularly positive one for its cancer drug Imfinzi (durvalumab).

Principal detractors to performance this quarter were German e-commerce company Zalando, Chinese educational services provider TAL Education Group, German pharmaceutical and agricultural chemicals company Bayer AG, and Macau casino operators Galaxy Entertainment Group and MGM China Holdings.

Zalando cut growth and margin guidance due to extremely warm summer weather across Europe, leading to lower consumer demand for fashion, higher discounting, and a delayed start to the fall/winter apparel season.

TAL shares fell as the Chinese government enacted additional regulations on the education sector to set a higher bar for the industry and to reduce the academic burden on students. Although these changes will pressure growth and margins for many companies near term, we believe over the long term high-quality industry leaders with well-defined online strategies, such as TAL, will ultimately be market-share gainers as smaller providers are squeezed out.

During the quarter, Bayer’s recently closed Monsanto business received a highly punitive jury verdict in a California case over the health of the company’s leading crop protection chemical, glyphosate. Despite the overwhelming scientific body of evidence supporting the safety of glyphosate, the litigation introduced a level of uncertainty in the shares that severely impaired our original thesis. We have since exited the position.

Both Galaxy and MGM China shares were weak as investors grew increasingly concerned regarding the pace of future gross gaming revenue (GGR) growth as the combination slowing economic growth in China arising from trade tensions, a declining value of the renminbi, and tighter liquidity conditions for VIP players all took their toll on sentiment in the sector.

Portfolio Activity

The fund experienced a relatively modest level of turnover as we initiated four new positions while also completely selling six holdings during the quarter. Most of the sales were due to fundamental concerns or a breakdown in the original thesis. By acting quickly and decisively to redeploy capital to better ideas, we believe we can protect the portfolio from significant capital impairment as well as position the fund to best capitalize on our highest-conviction ideas.

One of the portfolio additions this quarter that we are excited about is Ubisoft Entertainment, a French developer and publisher of video games. The video game industry has been undergoing a transformative shift from physical retail distribution of games toward digital distribution that is proving to be disruptive in a positive manner for the economic model of the industry. Digital distribution provides superior economics as revenue streams are becoming more recurring or subscription like, more predictable and less hits driven, more targeted as companies can better monetize their most engaged players, as well as more profitable in terms of a higher gross margin profile. U.S.-based companies, such as Activision Blizzard and Electronic Arts, have successfully demonstrated improving financial performance as they have grown their digital penetration of revenues. Ubisoft is a few years behind in the digital journey relative to peers; however, there is nothing structural to suggest that it can’t follow a similar strategy larger peers have undertaken and gradually expand its margins over time. Ubisoft has done an excellent job executing of late, as evidenced by the favorable reviews of its more recent slate of games and strong sales data. As the company continues to publish well received and highly engaging games, we believe Ubisoft is well positioned to catch up to peers in terms of margins and deliver rapid growth in earnings power over the medium term.

Outlook

There are few signs that the trade confrontation between the U.S. and China is set to ease in the near term. The trade pressure that the U.S. is exerting upon China seems to be part of a broader geopolitical strategy. China’s rise toward dominant superpower status means a formidable rival to the U.S. for global leadership, and the trade actions may just be part of an overall more aggressive policy stance by the U.S. toward China to undercut the Middle Kingdom’s rise. In response, China has not backed down, responding in a tit-for-tat manner, but given its roughly $375 billion trade deficit with the U.S., China is simply unable to levy a counter-balancing level of tariffs. Both sides seem resolute in standing their respective ground, although the U.S. is relatively better positioned economically to weather the trade dispute, given strong underlying economic growth, supported by a massive amount of tax-reform-driven fiscal stimulus and a decreasing regulatory burden under the Trump administration. China’s economy is showing signs of slowing and stress, although policymakers are enacting stimulus and devaluing the renminbi to offset increasing U.S. tariffs. A major risk is an uncontained and severe version of what played out in 2015, where too rapid a decline in the renminbi ends up being highly disruptive, destabilizing the financial system, leading to a fall in confidence and large capital outflows. Additionally, too much devaluation of the renminbi may elicit further outcry and policy responses from the U.S. Uncertainty remains high, and we will continue to closely monitor the unfolding situation.

Elsewhere in the world, the crises in some of the more fragile emerging markets seemed relatively contained, and thus are unlikely to spread to such an extent as to derail global growth. We actively tend to shy away from emerging economies that run large current account deficits and are dependent on foreign capital. The risk that we seek to avoid is precisely the one that we have seen play out in the most vulnerable countries, such as Turkey and Argentina. That is, when U.S. rates increase, attracting foreign capital to plug your current account gap becomes incrementally more difficult, if not downright painful from a currency devaluation standpoint. In Europe, unemployment reached another post-crisis low and although global trade concerns are weighing on exports, we believe local consumption can help offset that given the strength in domestic labor markets and thus rising personal incomes. The U.K. continues to negotiate Brexit with the E.U. and while news flow seems to oscillate between hard and soft Brexit scenarios, we believe that ultimately negotiations will result in a semi-soft Brexit outcome.

We have always managed this fund with a long-term perspective, and while volatility and uncertainty are at elevated levels, our focus has and remains on seeking to deliver our shareholders superior riskadjusted returns through a full market cycle. We strive to achieve this through our fundamentally driven process, which employs rigorous, bottom-up analysis that seeks to invest in the most compelling high-quality businesses internationally. These tend to have robust business models that are resilient to disruption and are ideally the industry disruptors themselves, but which we think are undervalued by the market for their long-term growth potential. We are excited about the prospects of the individual companies in the portfolio today and believe they can collectively create substantial business value over the long run.

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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