1st Quarter 2018

    Portfolio managers are supported by the entire Thornburg investment team.

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Thornburg Long/Short Equity Fund returned a negative 0.35% (I shares) during the first quarter of 2018, outperforming on a relative basis the 0.76% decline in the S&P 500 Index, as well as the Morningstar category's average loss of 0.80%. The fund's 31.5% average net long exposure during the period—amounting to roughly half that of the category average—worked as designed in what turned out to be the first three-month slump in the benchmark index since the third quarter of 2015.

Volatility is back. After a historic calendar-year low in volatility readings, including 12-consecutive positive months for the S&P 500 in 2017, it didn't take long to break the streak in 2018. Is the volatility here to stay? We won't venture a guess. More important to us was the portfolio's positioning amid the spike in volatility during the period. On down days for the market, the fund's downside capture was just 30% of the S&P 500 Index return during the quarter, in-line with its net long exposure and hedging mandate. For example, on February 8th, when the S&P 500 closed at its lowest level of the quarter, the index was down 3.3% from the start of the year, while the fund remained in nicely positive territory, up 1.5% in the same period. On some of the biggest, scariest days for the broad markets these past three months, Thornburg Long/Short Equity Fund performed much better.

Growth investments led the market during the quarter, and our portfolio, which exhibits a skew toward "growth at a reasonable price," benefited. Our long book was up 1.5% during the period, floating well above the underwater S&P 500. However, our short investments also rose due to their own growth orientation during the quarter, so we lost money on them. The difference was company-specific developments on both sides of the book, especially among our worst performers.

As a reminder, we employ a six-basket approach to portfolio construction: three baskets on the long side and three baskets on the short side. We believe this design aids in building a more diversified and balanced portfolio. When we short securities, we are focused on generating alpha. We also look for short positions to provide a hedge, i.e., to mitigate factor risks that can arise from our bottom-up fundamental stock picking.

Long and Short Baskets

With the news this past quarter about Cambridge Analytica's illicit use of Facebook user data, we have been debating our investments in the space (listen to "FAANG Dominance: Consuelo Mack interviews Portfolio Manager Connor Browne" at thornburg.com/news and read our blog posts After #ZuckerbergHearing and The Tech Wreck at thornburg.com/globalperspectives). As we have reviewed our long-time experience with these companies across Thornburg funds, we are struck by how our approach to finding great investments has positioned us to understand the impact these businesses are having on the world.

Our unique research process emphasizes collaboration across equity and fixed income teams, as well as the far and wide pursuit of investment opportunities across industry and geographic boundaries. Our broad perspective, coupled with fundamental, bottom-up research, allows us to see paradigm shifts and consequential changes across industries. Thornburg's holistic, disciplined approach is better suited to analyze which companies and industries may be the winners in times of disruption.

Notable Buys and Sells

Best Performers (Top 5)

Long Book

  • KOSÉ Corp.
    KOSÉ is a Japanese company that manufactures, retails, and exports cosmetics including makeup, skin care, and hair-care products. We have long had a Japanese short investment or two in the portfolio. That has made us all the more interested in long ideas generated by the team in Japan. This investment recommendation from Sean Sun, a portfolio manager of our Thornburg International Growth Fund, was a great investment. Since quarter end, we sold our shares at price target.
  • Pure Storage, Inc. (PSTG)
    Pure Storage is an emerging enterprise storage company whose all-flash offerings are helping drive the adoption of flash storage as it continues to take share from hard disk drives. The company achieved its first profitable quarter and sales again came in above expectations.
  • Casa Systems, Inc. (CASA)
    Casa is a broadband equipment company that supplies primarily cable companies. It proved a successful investment, and we recently exited the position at price target.
  • Amazon.com, Inc. (AMZN)
    Amazon continued its run as it grows its large ecommerce and cloud computing businesses and begins competing, often effectively, in industry after industry.
  • Palo Alto Networks, Inc. (PANW)
    The company continues to benefit from its competitive advantages in the security software industry. The near-term impacts associated with moving from product to subscription revenues are becoming better understood amongst investors. With cybersecurity investment growing to meet constant threats, we expect this company to continue growing.

Worst Performers

Long Book

  • ADT, Inc. (ADT)
    ADT is a U.S. home and business security monitoring firm. We bought it after its private equity owner, Apollo Group, brought it back to the public markets. We like the long-term secular growth trend in household security monitoring in the U.S., where ADT enjoys a leadership position in a very fragmented market. It has sustained a strong competitive position, despite significant cable and telecom provider attempts to gain share. We also like the predictable nature of a subscription- based revenue model. But we don't like the legacy controversy around this investment; the short investor interest that the company has attracted; management's decision to disclose less data; nor ADT's hefty debt load. We worked with the underwriter on the initial public offering to help set a price that was well below the original "range," and believed the positives outweighed the negatives and the new price level. So far that has not been our experience, and the stock broke its IPO price and has traded materially lower since then. We are monitoring developments against our initial investment thesis closely.
  • Devon Energy Corp. (DVN)
    Devon Energy is a low-cost oil and gas producer. The stock underperformed in the first quarter, despite higher oil prices, largely due to three items: a) lower-than-expected first-quarter production forecasts as wells from non-operated rigs were tied in later than expected, b) the company noted it would not pursue a share buyback plan (since reversed), and c) the company's sales of non-core assets, though progressing, were slower than some investors may have hoped.

Short Book

  • Square, Inc. (SQ)
    Square provides integrated, mobile payment solutions to small- and medium-sized businesses. We believe its recent share price gains derive from investor willingness, for now, to pay a higher price per unit of earnings for some growth companies than has been the case historically. While Square's first-quarter results were marginally better than expected, with a 12-month forward price-to-earnings of 113x, they don't support the recent shareprice gains in our opinion.
  • BofI Holding, Inc. (BOFI)
    Bank of the Internet is the holding company for BofI Federal Bank (the Bank). The Bank is a diversified financial services company. It provides consumer and business banking products through its branchless, low-cost distribution channels and affinity partners. We believe the company's profits will trend lower as deposit and credit costs normalize. Recent strength in shares can be attributed to investor focus on the company's short-term earnings.
  • New York Times Co. (NYT)
    NYT is a media company. New York Times' shares outperformed in the first quarter on the back of strong subscriber growth, driven by elevated levels of political news flow. Additionally, Facebook's decision to improve the quality of newsfeed has helped the sentiment on this stock.

Thank you for your continued trust.

Contributors to Performance
Contrib % Avg Wgt %
KOSÉ Corp. 0.74 2.52
Pure Storage, Inc. 0.73 2.77
Casa Systems, Inc. 0.57 0.95
Amazon.com, Inc. 0.57 2.15
Palo Alto Networks, Inc. 0.51 2.19
Detractors from Performance
Contrib % Avg Wgt %
ADT, Inc. -1.17 2.10
Square, Inc. -0.73 -2.07
BofI Holding, Inc. -0.69 -2.25
Devon Energy Corp. -0.65 2.72
New York Times Co. -0.61 -2.30

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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Data prior to 12/30/16 is from the predecessor fund.

Notable purchases and sales includes material transactions other than recently purchased securities, which may be excluded for best execution purposes.

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