1st Quarter 2018

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In 2017, we saw synchronized global expansion, low inflation, and accommodative monetary policy leading to strong equity returns, and that sentiment carried into January as fundamentals pointed to further solid economic development and robust corporate earnings growth. In January, the S&P 500 Index returned 5.73%, the MSCI EAFE Index returned 5.02%, and the MSCI Emerging Markets Index returned 8.33%. Following the strong January, investors began fretting about higher inflation and a potentially more hawkish U.S. Federal Reserve. Subsequently, trade tensions began escalating notably. We, however, expect the U.S. and China to reach agreements and avoid a global trade war, in turn improving access to the Chinese market. In the interim, expect noisy, headline-driven negotiations to keep volatility on the forefront.

During the last two months of the quarter, the S&P 500 Index declined 6.13%, the MSCI EAFE Index declined 6.23%, and the MSCI Emerging Markets Index declined 6.39%. On the European political front, Germany finally formed a government where Germany's center-left Social Democratic Party of Germany (SPD) agreed to join chancellor Merkel's center-right Christian Democratic Union and Christian Social Union parties (CDU/CSU) in a renewed "grand coalition." Political uncertainty continues in Italy after its election, in which the anti-establishment Five-Star Movement and anti-immigration League party garnered increasing support. On a positive note, both parties downplayed anti-European Union rhetoric as of late; therefore, we don't see Italy attempting to part from the E.U. However, the road to form a coalition government could be lengthy, further supporting elevated levels of market volatility.

For the quarter ended March 31, 2018, Thornburg International Value Fund returned negative 2.29% (I shares), compared the MSCI EAFE and MSCI All-Country World ex-U.S. indices' returns of negative 1.53% and negative 1.18% respectively.

Contributors to Performance

  • China Petroleum & Chemical Corp.
    China Petroleum & Chemical Corp. (Sinopec) is China's largest oil refiner and petrochemical producer and distributor. Its upstream business benefited from increasing oil prices, and its strong cash generation supports a high dividend payout ratio. During the quarter, the State Administration of Taxation announced that refineries and wholesalers will be required to draw up invoices through the VAT (value-added tax) system to close consumption tax loopholes. This decision should eliminate capacity from uneconomical refineries in an over supplied industry, resulting in higher refinery margin, beneficial to Sinopec.
  • Électricité de France S.A.
    Électricité de France (EDF) produces, transmits, distributes, imports, and exports electricity. EDF boasts the largest nuclear power generation capacity in France and is vital for the reliability of electricity provisions across Europe. We believe the company possesses undervalued nuclear assets and the arrival of France's new long-term energy plan and carbon price could provide upside potential in share prices.
  • TAL Education Group
    TAL Education provides K-12 after-school tutoring services in China in subjects such as mathematics, physics, chemistry, and English. With rising urbanization, favorable demographics, and intense competition for admission into top schools in China, TAL benefits from a supply-demand imbalance coupled with gaining market share resulting from favorable brand recognition.
  • UniCredit S.p.A.
    UniCredit, an Italian-headquartered, pan-European retail and commercial bank, remains in the midst of a turnaround to increase its capital position and profitability. We remain confident in management's ability to implement the plan to improve operating efficiency and asset quality.
  • Ctrip.com International, Ltd.
    Ctrip.com, the premier online travel agency in China offers a broad set of travel-related services, such as air tickets, train tickets, hotel, car rental, travel insurance, etc. As discretionary income in China grows, we see experience- based consumption, such as travel, continuing to gain consumers' wallet share. With dominant market share in online travel, Ctrip benefits from increasing penetration of online from offline. In recent years, Ctrip has also been consolidating the online travel industry, and we expect to see margin improvement in the coming years as a result.

Detractors from Performance

  • BRF S.A.
    BRF (Brasil Foods) is one of the world's largest protein companies, focusing on poultry and processed food under brands such as Perdigao, Sadia, and Qualy. BRF is among the world's largest exporters of poultry meat, accounting for around 14.5% of world trade in poultry. It is well positioned to capture growing global protein consumption, as consumer incomes increase. In addition, the agricultural advantages of Brazil—climate, water, and soil conditions—give BRF a cost advantage, facilitating international expansion. BRF underperformed during the period as its domestic business margins shrank from investment to re-establish shelf space, coupled with management turnover.
  • Commerzbank AG
    Commerzbank is a banking and financial services company headquartered in Frankfurt, Germany. Its share price has been under pressure, driven by expectations that interest rate hikes are being pushed further into the future. Our investment thesis on the underlying restructuring story has not changed. We expect to see a significant improvement in operating profit driven by lower loan losses and lower restructuring costs. We believe that a sustainable improvement of return on equity will lead to a re-rating in its valuation.
  • General Electric Co.
    General Electric is a diversified industrial and financial services conglomerate. The company serves a wide variety of end markets globally, including power and water, aviation, oil and gas, health care, appliances and lighting, energy management, transportation, and finance. During the quarter, its share price declined on continued disappointment from its power segment and upcoming accounting restatement. We have reduced our stake.
  • British American Tobacco plc
    British American Tobacco (BAT) is engaged in the manufacture and sale of cigarettes and other tobacco-related products in more than 200 markets worldwide. It is also the world leader in vapor tobacco and a close number two in heat-not-burn and the company firmly believes that its next-generation products can claim lower adverse health impacts, potentially leading to decreased regulatory scrutiny. BAT started to underperform in July 2017, when the U.S. Food and Drug Administration announced its long-term plans to explore nicotine reduction in combustible cigarettes. In addition, higher interest rates and a strong British pound were also headwinds on the stock.
  • Credit Suisse Group AG
    Credit Suisse is a global investment bank based in Switzerland. The company is in the final stage of a multiyear restructuring plan which is predicated on an ambitious downsizing of the group's cost base and a strengthened focus on the wealth management business. While the market's outlook around profitability and shareholder returns has improved over our holding period, we think there is still more to go.

We maintain conviction in our portfolio in a volatile market driven by headlines on trade tensions, inflation, a hawkish U.S. Federal Reserve, and geopolitical uncertainties. With volatility comes opportunity to acquire good companies at compelling prices. Our bottom-up process continues leading us to interesting companies across our baskets: basic value, consistent earners, and emerging franchises. We are confident that our investment philosophy and process will continue to deliver attractive risk-adjusted returns over a full market cycle.

Thank you for investing alongside us in Thornburg International Value 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 3/31/18.

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.

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