3rd Quarter 2017

    Portfolio managers are supported by the entire Thornburg investment team.

Download PDF
october 20, 2017 [Mutual Funds commentary, Value]

Dating back to the 1930s, value investing has taken different forms over the years, depending on how the approach is applied to the current investment arena. While its premise is simple, value investing’s versatility and openness to interpretation are very much behind its staying power, and why it remains important and relevant to investors some 80 years later.

To be sure, value investing is what we do at Thornburg, like many other firms. Just as important to getting results, however, is always knowing why we do it and, especially, how we do it our way—how we invest, how our investment team is structured, and how our approach to value investing is different from our peers.

With this in mind, we’d like to share the "what" and the "why" of the portfolio in regards to quarterly results, as well as more perspective on "how" we manage the fund very differently and with a long-term view.

In Thornburg Value Fund, we believe we’re different in a way that is effective for us, and which has supported successful investing over the long term. In a way, our frequent challenge at "filling all the boxes" within a process-oriented counterparty checklist is proof positive that we do things differently. If we did it like everyone else, we’d have an easier time. But we like difficult challenges. Difficult can get better results over time. What we hope to make easier, however, is conveying how our distinct, more value-sensitive active approach is different.

Our Differentiated Investment Approach

We invest in promising companies selling at a discount, utilizing both our distinct research approach and unique portfolio construction tool. Our work can be broken down into two parts: 1) finding great investments, and 2) building a balanced portfolio. Our approach gives us the flexibility to seek out the best investment ideas and the appropriate tools to bundle them into a balanced portfolio.

Finding great investments

Our organizational structure and culture are designed to fit our distinctive research process. We don’t work in silos and instead emphasize collaboration and the entrepreneurial pursuit of investment opportunities. Investment ideas often cross industry and geographic boundaries, so we prevent barriers that might stop our analysts from following investment leads.

With all of our analysts looking at many different industries, stock discussions involve a roomful of investment professionals skilled at comparing and contrasting different business models across industries and regions.

Instead of evaluating the best U.S. telecom stock, for example, we discuss which business model with a stable earnings profile is most attractively priced—comparing business models within the telecom, utilities, consumer staples, health care industries, and any other sector our research takes us.

While sector specialists with a narrow focus can be better able to pick up on slight changes within an industry, we think it’s a crowded, over-fished area most investors are looking at. Our wider focus allows us to see paradigm shifts and consequential changes within and across industries. Today, the ways we search for information, the way we socially interact, and the way we buy goods are in flux—our wide lens is better suited to analyze which companies will be the winners and losers.

Building a balanced portfolio

After searching widely for the best investment opportunities, we apply our three baskets—basic value, consistent earners, and emerging franchises—to effectively bundle these ideas into a balanced portfolio. Our goal is to construct a portfolio with an appropriate exposure to cyclical, stable, and growth investments, which has the opportunity to outperform in any market environment.

Our baskets limit factor bets in the portfolio, while giving us the freedom to incorporate our best ideas. Our skill is in selecting individual stocks, not predicting which investment style will outperform in the near term. Our three-basket approach gives us the flexibility in areas where we are strong—individual stock research— while creating appropriate constraints in areas where we don’t have an edge.

We’ve been employing this approach to Thornburg Value Fund since 1995—we believe it to be a durable and common-sense investment strategy. Importantly, it has worked over the long term for our investors.

Results for the quarter

For the quarter ended September 30, 2017, Thornburg Value Fund returned 3.64% (I shares), lagging the S&P 500 Index return of 4.48%.

While we lagged our benchmark during the quarter, we don’t worry as much about underperforming a little in a rising market. This is because we also take measures so that the portfolio can be positioned to protect a bit in a down market—which should also imply it may be a little tougher to keep up as the market hits new highs.

The fund performed in line with the S&P 500 Index through early September. Almost all the benchmark’s relative outperformance was generated in the last 20 trading days of the quarter. The end of September felt a lot to us like the Trump trade rally from election through the end of last year. As the administration began talking more actively about tax reform in early September, we saw high tax-rate companies in the U.S. outperform. Small caps, in particular small-cap value stocks, rallied aggressively. As at year end 2016, the companies that we are invested in tend to have slightly lower U.S. tax rates than the S&P 500 Index and would therefore benefit less from tax reform. Further, in part due to our basket structure, we tend to have less small-cap value exposure within the portfolio. Much of our smaller-cap exposure rests within our emerging franchises basket. These stocks are usually early-stage growth investments, rather than value investments. Our basic value basket, on the other hand, tends to focus on high quality, often large cap, value investments. We don’t have much exposure to small caps in our basic value basket.

Top-performing market sectors during the quarter include information technology, energy, telecommunication services, and materials. Consumer staples traded lower during the quarter. Our lower allocation to IT and our cash position were both drags on relative performance during the period. Our stock selection was slightly negative to returns during the quarter with good stock selection effect in information technology, consumer discretionary, and consumer staples negatively offset by stock selection in industrials, financials, and telecommunication services.

We don’t know whether tax reform will pass. It seems there is a better chance that the Republicans get reforms in the tax code than health care—but there are no guarantees. On a bottom-up basis, we worry that any benefit of successful tax legislation is already reflected in the valuation of many of the biggest beneficiaries. ETFs (exchange-traded funds) that have recently been created as a play on this trend probably aren’t helping matters. As we began 2017, much of last year’s Trump trades reversed. We shall see what Washington, DC, and the market bring us this time around.

Contributors to Performance

  • Gilead Sciences, Inc.
    Earlier this year, we added significantly to our long-held Gilead investment. For the first time in two years, it is again the largest investment in the fund. So far, the additional purchases seem well timed as the stock has rallied following their acquisition of Kite Pharmaceuticals.
  • Facebook, Inc.
    Despite intensifying pressure surrounding whatever role they played in Russia’s interference in the U.S. election, Facebook remains a high-return- on-investment venue for advertising dollars globally. We expect strong business trends to continue.
  • Thermo Fisher Scientific, Inc.
    Thermo Fisher (TMO), a long-time holding, acquired Pantheon during the quarter, which should increase TMO’s revenue and earnings growth.
  • Warrior Met Coal Inc.
    Warrior Met Coal performed well as the net coal price increased during the quarter.
  • O’Reilly Automotive, Inc.
    O’Reilly stock suffered a large drawback after reporting second-quarter earnings as cyclical headwinds limited same-store sales growth in the period, and expectations that this would continue were extrapolated to the future. We entered the stock after its post-earnings pullback and have participated in the recovery to date.

Detractors from Performance

  • Medtronic plc
  • Medtronic underperformed in the quarter after reporting disappointing growth in its fiscal fourth quarter. While quarterly variance based on new product launches can affect short-term volatility, the company continues to grow steadily with its medical technology leadership position.
  • General Electric, Co.
    General Electric reported weak second- quarter earnings, lowering expectations for its power segment earnings. The company is currently undergoing a management transition.
  • Assured Guaranty Ltd. (AGO)
    Following a strong run, AGO’s stock pulled back in the quarter on renewed concerns around the magnitude of losses that will be suffered in Puerto Rico.
  • Alkermes plc
    Alkermes de-rated after investors learned that a phase-3 drug for major depressive disorder will need to pass a higher hurdle before FDA approval. Although the company’s drug pipeline has the potential for significant financial opportunity, our investment case has been based on two commercial products—Aristada and Vivitrol—which are performing in line with expectations.
  • Acushnet Holding Corp.
    While sales of business drivers Pro V1 golf balls and Footjoy gloves and shoes showed their normal consistency, Acushnet suffered some share losses during the period on their lower-tier golf balls and in golf clubs, largely due to Callaway’s positive momentum in the period.

Thank you for investing in Thornburg 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 our literature center. Read them carefully before investing.

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

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.

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.

Funds invested in a limited number of holdings may expose an investor to greater volatility.

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.