2nd Quarter 2018

    Portfolio managers are supported by the entire Thornburg investment team.

Download PDF
April 19, 2018 [Mutual Funds commentary, Value]

Thornburg Value Fund returned 4.23% (I shares) during the second quarter of 2018, vs. a 3.43% gain for the S&P 500 Index and the Morningstar category's average return of 2.68%. For the first half, our 2.46% advance just trailed the S&P 500's 2.65% increase but outpaced the Morningstar category's 1.68% return. As a result, Morningstar ranks the fund in the top 35% of the Large Blend category for the six-month period, ending June 30, 2018 (based on total returns, among 1,411 funds).

Once again, index returns this year have been driven by a very narrow set of large technology companies. Partly because of this, it remains a tough time for active managers in the Morningstar Large Blend universe. Despite the consistent headwinds buffeting the category, according to Morningstar, over the five years ending June 30, 2018, Thornburg Value Fund has outpaced 97% of its peers (based on total returns, among 1,042 funds), despite carrying a market risk exposure (beta) lower than 82% (among 1,200 funds in the category for the same period) in a rising market (see Chart 1).

Five-Year Annualized Risk/Reqrd for Thornburg Value Fund as of 6/30/18

Stock selection effect drove our positive relative return during the quarter, more than offsetting some weakness from sector positioning. Our cash position and underweight in information technology were the primary drags on performance. Our underweight to industrials aided relative performance. Our stock picking was strongest in the consumer staples and financials sectors during the quarter. We had weaker performance from individual names in the consumer discretionary and health-care sectors.

Growth Stocks

Recent growth outperformance is nothing new for this market. Growth stocks have outperformed value stocks six quarters in a row, and in 15 of the last 20 quarters. Surely, less expensive stocks are due for a comeback.

At the risk of sounding too much like John Kerry, it's more complicated than that.

For example, let's take a quick look at the telecommunications sector. In the age of the internet, with mobile data usage growing rapidly and an integral part our daily lives, the telecommunications companies that provide those services in the U.S. must be hugely important to our economy, right? Well, not so, based on their combined market caps. In fact, telecom stocks are near historic lows as a percentage of the S&P 500 Index (see Chart 2). For this exercise we are using S&P's Global Industry Classification Standard (GICS).

Telecom Sector Weight in S&P 500 Index Over Time

So, is the telecom sector due for a huge comeback? Will the sector be much larger as a percentage of the index in five years than it is today? While we generally shy away from bold predictions in these commentaries, this one we feel confident about: no, definitively not. In fact, the telecom sector, as we know it, is going away at the end of September. It will be replaced by the new "Communication Services Sector" and add currently designated consumer discretionary names such as Netflix and Comcast, as well as some presently tagged information technology names, including Facebook, Google and Activision, to the traditional telecom stocks.

Why does this matter? We think it underlines the fact that the world is changing. And perhaps at an accelerating pace. Our flexible perspective works really well in this sort of environment, which makes confident, big picture predictions hard. Will value stocks come back? What's a value stock? The telecommunications sector would certainly qualify today. But that sector won't even exist come September.

We understand the world is changing, and we do see more opportunity in relatively cheaper stocks today. That's beginning to show in portfolio positioning. Still, we try to avoid factor bets or portfolio exposures based on macro themes over which we have no control. But we have always had the flexibility to go where we see discrete opportunities. And recently, the fastest-growing, tech-related growth companies look too expensive to us.

Growth company management teams, by the way, seem to agree with us, if the rate at which they are issuing convertible securities is any indication (see Chart 3).

Tech Company Issuance of Bonds that can Convert to Stocks

To be sure, we fight the urge to move too far toward cheaper, out-of-favor companies because they can stay out of favor for long periods of time. But, in the context of a balanced portfolio, our stock picking drives incremental moves in portfolio positioning. In Chart 4, you can see that Value Fund's forward price/earnings today is lower than that of the overall market.

Price/Earnings using FY1 Estimates

Since the founding of the Thornburg Value Fund in 1995, our commitment to building a balanced portfolio to focus on returns driven through idiosyncratic—stock specific—elements rather than broad-based market factors has benefited our clients. Over the last five years, for example, idiosyncratic risk has been the key driver of our good results (see Charts 5 and 6).

Drivers of Performance - Thornburg Value Fund vs S&P 500 - 5-Yr Annualized Sector Attribution Drivers of Performance - Thornburg Value Fund - 5 Yr Multi-factor Attribution

Building a balanced portfolio forms a core tenet of our strategy and one which we will safeguard—no matter which direction the current wind may blow.

A Quick Note on Our Flexible Perspective

From a recent read, The Power of Habit by Charles Duhigg:

"When people are asked to do something that takes self-control, if they think they are doing it for personal reasons, if they feel like it's a choice, or something they enjoy because it helps someone else, it's much less taxing. If they feel like they have no autonomy. If they're just following orders, their willpower muscles get tired much faster."

We believe our flexible approach to team organization, allowing the pursuit of investment ideas across sector and geography, keeps the work exciting.

Best Performers (Top Five)

  • Devon Energy Corp.
    Higher oil prices and expense reductions should result in better margins and earnings, especially when combined with substantial non-core asset sales that are expected to lead to significant company share buy backs and debt paydowns. The company's continued portfolio transformation and streamlining should highlight what we believe is a sharp divergence between its share price and the value of its remaining assets.
  • US Foods, Inc.
    Somewhat slower overall revenue growth has been tempered by a margin benefiting mix shift towards independent restaurants, driving continued growth in EBITDA.
  • Nomad Foods Ltd.
    Continued organic revenue growth and increasing market share in the frozen food category has led to strong earnings growth and multiple expansion toward peer multiples, resulting in a stronger share price.
  • Evolent Health, Inc.
    The continued move toward value-based payment methods from fee-for-service payment for health-care services has kept demand for Evolent's core consulting offering strong. Growth continued against muted expectations and further the market received more clarity from Washington, DC, that value-based care outcomes are less likely to get caught up in health-care reform.
  • Facebook, Inc.
    Following a first quarter pullback in Facebook shares in the wake of the Cambridge Analytica fallout, strong revenue and profit results helped drive a share price recovery during the second quarter. While we worry about potential new privacy regulation, we believe continued strong advertising revenue gains are likely to be the primary driver of stock price performance in the coming quarters.

Worst Performers (Bottom Five)

  • Casa Systems, Inc.
    Casa, an equipment provider to cable companies, has shown dramatic stock price volatility since it's stock market debut last year. We're excited about the growth potential for Casa in the support of broadband network expansion amongst cable operators. While the stock had declined significantly from its highs before our purchase, it’s down a bit further since.
  • RPC Group plc
    The stock traded lower on the firm's recent interim report. We see developments at the company differently than the market and are not worried about an announced step-up in growth capex spending. Further, while the rate of announced acquisitions has slowed, RPC is displaying the strength of its model, with good organic developments at past acquired businesses.
  • Gilead Sciences, Inc.
    Gilead reported weak results for their first calendar quarter, though revenues were impacted by temporary inventory destocking in their HIV business. These results may represent the bottom for earnings following the spectacular growth and equally spectacular decline of their hepatitis C business.
  • Starbucks Corp.
    Starbucks pre-announced weak results for their second quarter, including weak sam-store sales in the U.S. and China. The U.S. comparative year-over-year result seemed mostly related to issues surrounding the incident in their Philadelphia store. The China result was more worrisome.
  • Alkermes plc
    Alkermes has also shown surprising volatility since our investment. We trimmed our position on strength during the first quarter and added back to the stock after a pullback recently. Sales results for one of their most important early-launch drugs, Vivitrol, have been somewhat disappointing, though we expect them to pick up in coming quarters.

Thank you for investing alongside us in the 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 thornburg.com. Read them carefully before investing.

Unless otherwise noted, the source of all data, charts, tables and graphs 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.

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

Based on total returns, Morningstar ranked the fund (I shares) in the top 77% for the one-year period, 3% over five years, and 66% over 10 years, among 1353, 1042, and 776 Large Blend funds, respectively, as of 6/30/18. Based on beta, Morningstar ranked the fund (I shares) in the top 43% for the one-year period, 82% over five years, and 9% over 10 years, among 1398, 1200, and 1051 Large Blend funds, respectively, as of 6/30/18. © 2018 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.

The Fund may invest in shares of companies through initial public offerings (IPOs). IPOs have the potential to produce substantial gains and there is no assurance that the Fund will have continued access to profitable IPOs. As Fund assets grow, the impact of IPO investments on performance may decline.

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.