2nd Quarter 2018

    Portfolio managers are supported by the entire Thornburg investment team.

Download PDF

The second quarter of 2018 saw several geopolitical events hit news headlines—and global equity markets—to varying degrees. Though spells of volatility returned, some developed market indices posted point-to-point gains, despite the noisy environment. In the U.S., the S&P 500 Index returned 3.43%. Internationally, the developed market MSCI EAFE Index declined 1.24%. Emerging markets bore the brunt of investor concern, with the MSCI EM Index plunging 7.96%. The inclusion of emerging markets in the MSCI ACWI ex-U.S. Index, coupled with the exclusion of the U.S., impacted that index's performance, which shed 2.61% in the period.

Following the Italian general election, the Five-Star Movement and the League surprised the market and agreed to form a coalition government. Though the parties have opposite beliefs in fiscal and some political policies, they are unified in their anti-establishment posture. Thus, dormant fears of a potential euro-exit were reinvigorated, initially causing a sell-off in Italian sovereign bonds and bank stocks. We broadly see these fears, and their effects, to be overestimated and do not expect Italy to attempt an exit from the eurozone. Nonetheless, we closely monitor the market volatility they generate.

In addition to the Italian election, ongoing concerns over a global trade war escalated during the quarter due to a series of tit-for-tat tariff moves between the U.S. and its trading partners, most notably China, the E.U., and Canada and Mexico within the North America Free Trade Agreement framework. The net effect of these actions will not be fully known for some time, but what is likely in the meantime is episodic market volatility. Through it all, however, we remain sanguine about the ability of our investments to thrive over a reasonable time horizon. For instance, should the current rhetoric evolve into more severe tariffs on U.S. imports from China, the Chinese government would have several policy levers to pull to offset the negative effects of declining exports: it could inject liquidity into the system, depreciate the relative value of renminbi, or increase state-led domestic investment, to name but a few. These countermeasures would likely stimulate Chinese domestic consumption, which could provide a tailwind to domestic-facing companies.

For the quarter ended June 30, 2018, Thornburg International Value Fund returned negative 4.62% (I Shares), compared to the MSCI EAFE and MSCI ACWI-ex U.S. Indices' returns of negative 1.24% and negative 2.61%, respectively.

Top Contributors

  • SAP SE
    SAP is an international software company based in Walldorf, Germany. The company is the market leader in enterprise resource planning (ERP) software and a major competitor in other complementary areas, such as customer relationship management and human resources management. Recent investments have fueled SAP's expansion into cloud services, which have driven significant growth. The company's new S/4HANA platform is positioned to become the next generation of ERP software and is quickly changing the way that companies operate on a day-to-day basis. This past quarter has seen an uptick in adoption of S/4HANA as corporations such as Walmart, Nestle, and Royal Dutch Shell have made the jump over to the new platform and we anticipate an acceleration in this trend as competitors realize the need to make the shift to remain operationally relevant.
  • Teva Pharmaceutical Industries Ltd.
    Teva is a global pharmaceutical company operating in generic and specialty medicines, mainly in the U.S. and Europe. Teva has more than 1,700 generic products in its pre-approved pipeline. It secures most of its active pharmaceutical ingredients from its own 18 manufacturing facilities. The stock started to underperform a year ago due to lower-than-expected U.S. generic drug pricing, leverage, and lack of a management team. While still early in its turnaround initiatives, investors started to gain confidence in new CEO Kare Schultz' aggressive cost-cutting objectives and potential for de-leveraging. As a result, the stock rebounded during the second quarter.
  • Sinopec
    China Petroleum & Chemical Group (Sinopec) is China's largest oil refiner, petrochemical producer, and distributor. China's maturing economy and growing urbanization drive strong demand for fuels and petrochemical products. Sinopec benefits from an upgraded product mix and volume growth that is also displacing imports. Rising oil prices and upstream asset quality have also helped profitability. Strong free cash flow is supported by relatively limited spending requirements, positioning the company to continue sustaining its dividend payout at a relatively high level.
  • Royal Dutch Shell plc
    We expect oil major Royal Dutch Shell to deliver growth in free cash flow and to raise cash returns to shareholders. The stock performed well in the quarter given higher oil prices and a potential share buyback announcement.
  • Canadian Pacific Railway Ltd.
    We believe Canadian Pacific is one of the best managed and most efficient railroads in the world following an impressive turnaround led by railroad legend, Hunter Harrison, who was brought out of retirement to lead the organization in 2012. Margins increased more than 20% across a fiveyear span—from 19% in 2011 to 41% in 2016. Trade concerns aside, Canadian Pacific stands to benefit from a strong North American economy, especially with opportunities in intermodal and energy businesses. Recent volumes have been strong as the company has taken share from its Canadian rival using capacity that was created during the turnaround.

Bottom Contributors

Financial services was the worst performing sector within the MSCI EAFE Index during the second quarter. Banks were the worst performing industry group within the financial services sector, and European banks were the worst performing regionally in U.S. dollar terms. The challenges come from a combination of rising geopolitical risk in Italy, and European Central Bank statements indicating the outlook for rates and rate hikes is down and out, respectively. As a result, European banks re-rated and contributed negatively to performance during the period. An increase in bond yields and steeper yield curves would clearly be positive for banks. However, we continue to focus on self-help stories and proven business models in this environment.

  • UniCredit SpA
    UniCredit is the second-largest bank in Italy, third largest in Germany and the leading bank in Austria and in Central Eastern Europe. The stock underperformed as the market discounted the lower earnings growth due to delayed rate hikes and higher political risk premiums. We believe the self-help initiatives are a more meaningful driver of the stock. As UniCredit executes on portfolio restructuring, cost discipline and faster non-core rundown, we expect it to deliver higher returns and unlock the path to higher dividends/capital redeployment in the medium term.
  • Commerzbank AG
    Commerzbank is Germany's second-largest bank. The bank serves over 18 million private and small business clients and over 60,000 corporate and institutional clients. A sharp decline in the German 10-year bund yield and a flattening of European yield curves due to risk aversion and softening macro data are the drivers of Commerzbank's underperformance during the quarter. Our investment thesis for its 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 a sustainable improvement in return on equity will lead to a re-rating in its valuation.
  • Barclays plc
    Barclays is a U.K. universal bank offering retail, commercial, and investment banking services. Its main markets are the U.K., where it has a leading credit card franchise, and the U.S., where it has a significant investment bank. We see positive momentum on revenue over the coming few years from riskweighted asset recycling; growth in U.S. cards and U.K. mortgages; lower liability costs and normalization of non-core businesses.
  • AMS AG
    AMS AG is an Austrian producer of highly technical sensors and related equipment. The company's solutions are used in consumer applications, such as cellular handsets, and its 3D and light sensing solutions have been particularly important for AMS' growing opportunity in this segment. AMS also produces sensors for the automotive, industrial, and medical markets. As the computational abilities of the average smartphone continues to grow exponentially, and as consumers globally use handsets for increasingly more applications, 3D technology has now become possible and promises to solve numerous pain points for the customer. Virtual reality/augmented reality, remote health care services, and apparel are some of the areas that appear ripe for disruption by 3D technology. Through a series of acquisitions and organic growth, AMS now has capabilities across some of the most important parts of the 3D sensor, including the vertical cavity surface emitting laser (VCSEL), wafer level optics, and infrared sensors. The stock has been challenged recently due to unexpected changes in the design of the 3D sensor developed by AMS' main customer, and uncertainty surrounding the selling price of the new parts that AMS will provide. It has partnered with other key members of the 3D sensor supply chain to provide a "one-stop shop" to smaller handset makers that do not have the capabilities to develop their own solutions, and, as a result, AMS remains well positioned to democratize what we believe will be a game-changing technology.
  • OMRON Corporation
    OMRON is a Japanese producer of electronic components used in factory automation. The largest and fastest-growing segment in OMRON is its industrial automation, which sells electronic controllers, motors, precision measuring equipment, and other key components used in the development of modern factory and warehouse automation. Given its long corporate history and the depth of its products, it has benefited from broad investment in factory automation in China and Europe, particularly. It boasts segments involved in health care, producing blood pressure monitors; its social systems provides ticket gates for public transport, among other functions; automotive electronics; and electronic and mechanical components. The stock has been challenged recently as the Japanese yen strengthened against the euro and U.S. dollar during the second quarter; OMRON benefits from a stronger euro and dollar. Additionally, PMI data coming out of China and factory orders for industrial automation equipment out of Japan appear to have softened based on near-term data points. Longer term, OMRON appears well positioned as it upgrades its product portfolio, cuts costs to increase margins and returns on capital, and benefits from a growing category long term.

While volatility and bouts of unsatisfying performance are top of mind in the short term, it is our long-term lens and bottom-up, fundamental analysis that have led to our long-run outperformance. We maintain conviction in our philosophy, process, and three-basket portfolio construction process, all of which have combined to create positive outcomes for long-term clients. Having been through many of these environments in the past, we believe that our patience and diligence can be rewarded when volatility creates valuation opportunities.

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%.

Important Information
Before investing, carefully consider the Fund’s investment goals, risks, charges, and expenses. For a prospectus or summary prospectus containing this and other information, contact your financial advisor or visit thornburg.com. Read them carefully before investing.

Unless otherwise noted, the source of all data is Thornburg Investment Management, Inc., as of 6/30/18.

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.

The views expressed are subject to change and do not necessarily reflect the views of Thornburg Investment Management, Inc. This information should not be relied upon as a recommendation or investment advice and is not intended to predict the performance of any investment or market.

Any securities, sectors, or countries mentioned are for illustration purposes only. Holdings are subject to change. Under no circumstances does the information contained within represent a recommendation to buy or sell any security.

The performance of any index is not indicative of the performance of any particular investment. Unless otherwise noted, index returns reflect the reinvestment of income dividends and capital gains, if any, but do not reflect fees, brokerage commissions or other expenses of investing. Investors may not make direct investments into any index.

There is no guarantee that the Fund will meet its investment objectives.

Please see our glossary for a definition of terms.

Thornburg mutual funds are distributed by Thornburg Securities Corporation.

Thornburg Investment Management, Inc. mutual funds are sold through investment professionals including investment advisors, brokerage firms, bank trust departments, trust companies and certain other financial intermediaries. Thornburg Securities Corporation (TSC) does not act as broker of record for investors.