4th Quarter 2017

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Equity markets delivered solid fourth-quarter returns, which were driven by continued healthy global economic growth, a strong earnings season, and U.S. tax cuts. Over the course of 2017, growth in Europe and Japan surprised to the upside, while emerging markets benefited from increased global demand and a recovery in commodity prices, leading to what is largely being referred to as synchronized global growth. Indeed, real global GDP (gross domestic product) growth returned to its long-term, 50-year average.

Also during the year, geopolitical risks abated following Emmanuel Macron's victory in the French presidential election last spring and his La République en Marche! (translation: "The Republic Onwards!") political party taking control of Parliament. Structural reforms, such as U.S. tax cuts, French labor market liberalization, and China's supply side capacity cuts, coupled with robust earnings growth and international currency appreciation, vis-á-vis the U.S. dollar, all drove strong returns for the year.

For the quarter ended December 31, 2017, Thornburg International Value Fund returned 3.61% (I shares), compared with the MSCI EAFE and MSCI All-Country World ex-U.S. indices' gains of 4.23% and 5.00%, respectively. Full-year performance for Thornburg International Value Fund came out to 25.47% versus 25.03% for the MSCI EAFE and 27.19% for the MSCI All-Country World ex-U.S. indices.

Contributors to Performance:

  • Ping An Insurance (Group) Company of China, Ltd.
    Ping An Insurance, a leading financial conglomerate involved in insurance, pension, banking, brokerage, trust, and other financial services, is the second-largest life and property & casualty insurer in China in terms of premiums. Coupled with the improving macroeconomic environment in China and balance sheet risk reduction, shares of Ping An Insurance fared well for the quarter. We believe that the stock remains discounted relative to top peers and expect the valuation discount to narrow from continued growth in its P&C business, coupled with the potential to unlock value from its digital businesses via listing.
  • Reliance Industries Ltd.
    Reliance Industries, India's largest petrochemical and second-largest refining company, has diversified into retail, media, and, most recently, telecommunication businesses. While Reliance Industries' core business of refining and petrochemicals remains robust, its telecom business, JIO, has delivered on all targets. It acquired a large subscriber base and continues adding net new subscribers while starting to charge tariffs that gradually elevate every quarter.
  • Shin-Etsu Chemical Co., Ltd.
    Shin-Etsu, a premier Japanese chemicals firm supplying highly competitive products, benefits from its leading global market share in PVC resin through its U.S.-based subsidiary, Shintech, and significant production cost advantages. The increasingly robust global economy drove demand for Shin-Etsu Chemicals' various applications, driving top-line volume growth. Along with volume growth, price improvement, and margin expansion, Shin-Etsu Chemical shares performed robustly.
  • Credit Suisse Group AG
    Credit Suisse, a global investment bank based in Switzerland, is in the middle of a multi-year restructuring that involves a shift in focus from investment banking to higher-margin wealth management businesses, particularly in Asia. The company, which may ramp shareholder returns, is executing well on the plan, even as shares remain discounted compared to global peers.
  • Daikin Industries, Ltd.
    Daikin manufactures air conditioning and refrigeration products for residential and industrial use globally and is a clear beneficiary of an improving global economy. During the quarter, Daikin produced revenue and profits exceeding its guidance and analyst expectations. It also upgraded full-year estimates based on a continued bright outlook in more profitable, higher-end residential HVAC.

Detractors from Performance

  • UniCredit SpA
    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 through better operating efficiency and improved asset quality. The stock remains attractive as its valuation has not reflected the company's progress toward meeting its cost of capital.
  • 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, GE cut its dividend and future earnings expectations. The power business has been the largest source of disappointment, with heightened competition and softening end-market demand.
  • 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, experience-based consumption, such as travel, should continue to gain consumers' wallet share. While Ctrip delivered better- than-expected third-quarter sales and earnings, fourth-quarter guidance was lowered due to regulatory changes influencing bundled sales of air ticketing, affecting short-term revenue and margins. We believe Ctrip's long-term growth outlook remains intact, with travel-based market share gains on the horizon, as online travel remains underpenetrated.
  • ConvaTec Group plc
    ConvaTec is one of three large manufacturers of chronic and heavily recurring health-care products, such as ostomy bags and urinary catheters. Production challenges arose as the company moved some of its manufacturing lines to a lower-cost jurisdiction, leading to downward earnings revisions as sales and margins came under pressure. We reduced our position in the company.
  • BRF SA
    BRF (Brasil Foods) is one of the largest producers of fresh and frozen protein foods globally, 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's share price came under pressure as its domestic business margins shrank from investment to re-establish shelf space in both processed and more natural products. BRF's near-term goal is to position its brand with domestic consumers as Brazil's domestic market improves.

As we enter 2018, global growth improvement remains the base case. The eurozone's above-trend expansion appears resilient. In Japan, an accommodative central bank and potentially weaker currency should also provide continued support for its economy. Meanwhile, Chinese President Xi Jinping has vowed to stay focused on prioritizing the quality of economic growth over its quantity. The global economic backdrop appears compelling, and yet valuation for international stocks remains reasonable. We're finding interesting stocks from our bottom-up process in all three of 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, as it has in the past.

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 12/31/17.

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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