3rd Quarter 2017

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For the third quarter of 2017, Thornburg International Growth Fund returned 7.8% (I shares), exceeding its benchmark, the MSCI All Country World ex-U.S. Growth Index, which returned 6.3%. This brings the year-to-date return to roughly 32% (I shares) for the fund, versus 25% for the same index. On September 30, 2017, the net asset value per class I share was $24.48.

The global growth backdrop remains healthy as all 45 economies tracked by the Organization for Economic Cooperation and Development (OECD) are showing synchronized economic expansion for the first time since 2007. While the U.S. is exhibiting steadily accelerating growth, the growth dynamics are stronger internationally. Expanding manufacturing output, business investment, job creation, and trade are leading to improving economic growth prospects internationally. Furthermore, we are seeing rising optimism as leading indicators, such as producer and consumer confidence, remain at heightened levels. Reflecting this dynamic, earnings growth for international companies has been stronger than domestic companies, and international equities once again outperformed their domestic peers this quarter.

Performance

During the quarter, nine out of 11 sectors in the fund's benchmark delivered positive gains in local currency terms. The two sectors that did not, consumer staples and utilities, were only slightly negative. Once returns were adjusted into dollar denominated terms, then all sectors posted positive returns. The top-performing sector was once again information technology, where the fund benefited from both an overweight allocation as well as strong underlying stock selection. The portfolio generated solid returns from the consumer discretionary and industrials sectors, as selection effect helped drive returns there. Where we saw disappointing performance was in health care, as a few individual detractors acted as a modest drag to returns.

On a geographic basis, we found success in the eurozone and the United Kingdom. The eurozone continued to be one of the better-performing regions and the fund was a relative overweight as compared to the benchmark. We also had good stock-level outcomes, in particular from companies we own based in Germany and Italy. Although the United Kingdom was a laggard in terms of regional performance, we were able to transcend this regional headwind with effective stock selection, in particular digital payments companies based in the U.K. whose businesses are global in nature with strong secular growth.

A weaker U.S. dollar in the third quarter elevated the returns of non-U.S. holdings. We did not have any currency hedges in place during the quarter, thus we captured this positive benefit. As a reminder, we employ currency hedging as a risk mitigation tool rather than as a means to enhance returns. Generally our default approach is not to hedge currencies, but we will engage in hedging if the cost is low and if we believe it serves to reduce portfolio-level risk.

Leading contributors to performance for the quarter included German online payments company Wirecard, U.K.-based payments-processor Worldpay, Italian online luxury fashion retailer Yoox Net-A-Porter Group, U.K.-based payments solutions company Paysafe Group and Chinese internet search engine Baidu.

Two of our top contributors received acquisition offers that boosted their stock prices in the quarter. Paysafe Group accepted an all-cash offer from a consortium of private equity bidders (Blackstone Group and CVC Capital). The deal is pending customary approval conditions, but we anticipate closing toward the end of this year or early next.

Worldpay announced in the third quarter that it received an offer from U.S.-based payments company Vantiv to effectively merge in a combined cash and stock deal.

Long-term holding Wirecard benefited as recent consolidation in the payments space boosted its earnings multiple. Furthermore its recent analyst day event in Munich highlighted various opportunities and positive trends that should underpin robust growth for years to come.

Yoox reported solid results as sales growth accelerated on a sequential basis. Combined with better-than-expected margins, this helped to quell some fundamental concerns, leading to a re-rate of the stock to be more in-line with peers during the quarter.

Baidu's stock rallied as the core search business continued to recover and the company delivered substantial margin improvement as it rationalizes spending in the offline-to-online segment of the business. Furthermore, its online video business iQiyi, which is the leader by time spent, benefited as talks of an initial public offering in 2018 contributed to investor price discovery of this key asset.

Principal detractors to performance this quarter were U.K. real estate broker Foxtons Group, French online advertising services company Criteo, U.K. medical equipment provider Convatec, Irish biotech firm Alkermes and Indian cigarettes and consumer-goods company ITC Limited.

Foxtons continued to suffer in the aftermath of Brexit, as a weakening currency and softness within the London housing market led to declining real estate transaction activity.

Criteo is a French retargeting company that works with internet retailers to serve personalized online advertisements to consumers who have previously visited the company's website. During the quarter Apple announced that its new operating system would automatically purge third-party internet cookies that Criteo uses to track Safari internet browser users. This caused investors to worry that Criteo's personalized advertising could be rendered less effective.

ConvaTec is a medical device company with products in ostomy care, continence, and advanced wound care. The company reported an unexpectedly rough quarter, with high operating expense growth and the sudden departure of its chief financial officer. We continue to hold the stock, as its products are high quality, and there is growing demand as developed world populations continue to age, representing an attractive tailwind for the firm.

Alkermes was down modestly as prescription trends suggest moderating growth for its key drugs. However, we remain excited about the drug pipeline and feel its long-term intrinsic value is underappreciated by the market. Rounding out the list of third-quarter detractors was ITC Limited. The stock fell as the Indian government unexpectedly revised cigarette tax rates upward under the new goods-and-services tax regime.

Portfolio Activity

We had modest turnover in the portfolio during the quarter as we balanced the sale of four holdings with the addition of four new positions. Of the four sales this quarter, two stocks achieved our price targets while the other two stocks were sold to redeploy capital toward higher-conviction ideas with greater potential upside.

One of the portfolio additions this quarter was Kerry Group, an Irish company that is the largest global player in the highly fragmented ingredients and flavors market. Consumers are currently undergoing a multi-decade shift toward healthier lifestyles and scrutinizing their dietary choices more closely. Food companies today are faced with the challenge of providing more nutritious offerings while still providing a compelling taste profile. Kerry's core competency is to provide food companies with integrated solutions that balance taste, texture, and nutrition using all-natural ingredients. This capability is becoming increasingly valuable as manufacturers of large packaged foods leverage Kerry for reformulating their popular offerings with fewer artificial ingredients, while smaller upstart food companies require Kerry's expertise in developing new products to gain market share. We see Kerry Group as being exceptionally well positioned for the secular changes the food industry is undergoing.

Outlook

Global gross domestic product growth has been upbeat, and we expect the synchronized economic momentum that the global economy is experiencing to continue given what we are seeing in terms of macro and micro fundamentals. As inflationary pressures remain subdued, we do not anticipate that major central banks will enact sharp interest-rate increases that could disrupt economic growth and cause equity markets conditions to turn unfavorable.

The eurozone is seeing a broad-based upswing and appears to be in the early phases of an extended expansion. Despite eurozone unemployment falling to its lowest level since 2009, there remains a large amount of slack in the labor markets that is helping to keep a lid on inflationary pressures. This lack of wage growth is positive for corporate margins and should help European companies deliver operating leverage and gradually close the margin gap relative to U.S. corporations. Although we think the European Central Bank will begin to taper bond purchases next year, we believe overall inflation will stay contained, resulting in policy makers preserving accommodative monetary policy. Thus, we see European equities as being in a sweet spot of steady growth, easy monetary policy, limited inflation and attractive valuation levels that are still relatively lower than domestic equities.

While we closely monitor the economic data, we are primarily focused on company-specific drivers of profit growth and business value creation. Employing a fundamentals-driven, bottom-up process, we continue to find attractive investment opportunities in high-quality companies with long runways for growth. In particular these are companies exposed to secular trends that are less mature or less penetrated in international markets as opposed to domestically and can sustainably compound business value over an extended period of time. This process and approach to investing has served to deliver leading risk-adjusted returns over the 10-plus year life of this fund, and we are excited about the long-term prospects of the individual companies currently in the portfolio today.

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

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