4th Quarter 2017

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January 19, 2017 [Mutual Funds commentary, Value]

Another year of finding great investments and using them to build a balanced portfolio is in the books. Moreover, 2017 marked the 23rd calendar year for Thornburg Value Fund. Happily, it was a successful one.

Broadly, it has been a great five-plus years for equity investors. Stocks have generally gone up, and volatility has marched progressively lower. Will this continue? We won’t venture a guess on the direction of the general market (suffice it to say, however, we do see signs of complacency about).

What is more interesting to us, however, is how difficult an environment this has been for highly active, intrinsic value–based investors, especially in the U.S. large-cap equities space.

Over the last five years, the Morningstar Large Blend category has trailed the S&P 500 Index by more than 1.5% per year. What’s more, 2017 marked eight consecutive years of underperformance for the category. This is much worse than historical experience. The “whys” are much harder to discern. Could it be that the blind, massive inflows into passive index funds focused on large-cap U.S. stocks have made those same stocks tough to beat? Maybe. Mostly, we believe that there are environments that are harder and those that are easier for intrinsic value–based active managers. It sure seems like we’ve had a long run of the former environment.

Despite this headwind, Thornburg Value Fund shareholders have fared well, on both an absolute and relative basis. Over the last five years, we outpaced the benchmark by 0.8% annualized and our Morningstar peers by 2.4% annualized. This ranks the fund’s I shares in the top 4%, among 1,079 funds in the Large Blend category over the five-year period ended December 31, 2017, based on total returns. One might ask, “have we done this by taking on excess risk in a rising market?” In a word, no. Our beta over this period has been 0.95 (vs. the peer group at 1.0) and our downside capture (our relative performance in down months), at 99%, is much lower than the peer group average of 107%.

Our hope and expectation is that we may have even more success against the index and our peers in an environment that is more conducive to active intrinsic value– based investing. As one of these types of investors, we’ve been sailing into a headwind for the better part of a decade. We believe, at some point, the winds will shift.

A significant challenge for asset managers (and a daily battle for financial advisors) is that investor emotions so often drive investment decisions. This can best be seen in the consistent underperformance of investors in an investment fund as compared to the actual long-term results of those same funds (i.e., asset-weighted returns). Too often, investors buy high and sell low. We’ve recently come across a set of research papers on the topic (via UBS). Nesbitt (1995) and Sapp and Friesen (2007) calculate a 1.08% and a 1.56% annualized difference between fund returns and investor returns in those same funds (a mix of stock and bond funds between 1984 and 2004). Even more concerning, Nadig (2016) finds a much greater 5% annualized difference between actual and investor returns in the S&P 500 Index exchange-traded funds (ETFs). That’s correct, 5%! While it may feel good to be able to see the price in real time, and trade an ETF second by second, this data would suggest that it’s quite bad for your long-term investment results. That being said, we hope to earn your trust, and keep it over the long term.

Fourth Quarter Review

For the fourth quarter of 2017, Thornburg Value Fund produced a total return of 4.17% (I shares), versus 6.64% for the benchmark S&P 500 Index. This brought the fund’s full calendar year 2017 return to 23.81%, versus 21.83% for the index. We are pleased with the solid results for 2017, but it is the fund’s longer-term performance that we feel deserves special mention. Since bolstering the portfolio’s consistent earners basket characteristics starting in July 2012 (over five and a half years ago), the fund’s I shares have returned slightly over 17% annualized through year-end 2017. By comparison, the S&P 500 Index returned 15.5% over the same period. As importantly, we’ve been able to provide this strong absolute (and relative) performance in the context of significantly improved beta and downside capture characteristics. Thornburg Value Fund has had a beta of less than 1.0 vs. the S&P 500 since mid-2012, and average performance in down months has been about in line with that of the index. Top contributors for the quarter spanned multiple sectors, with names in consumer staples, materials, and consumer discretionary contributing materially to performance. In aggregate, holdings in these three sectors added 3.8% to overall performance during the period. Top performing stocks included long-time holdings as well as more recent portfolio additions. Detracting from returns were investments in health care and industrials. The fund’s currency forward positions were also a slight drag on returns. Despite the pullback in the most recent quarter, the fund’s health care names contributed significantly to calendar year 2017 performance.

Fourth Quarter Top Contributors

  • Walmart Inc.
    Walmart’s re-investment in its business (both in stores and online) continues to pay off. In particular, traffic in Walmart U.S.-based stores grew solidly throughout 2017.
  • TRI Pointe Homes, Inc.
    Strength in the construction and sale of single-family attached and detached homes continues, benefiting shares of California-based homebuilder TRI Pointe.
  • Warrior Met Coal, Inc.
    Strong commodity pricing for hard coking coal has provided significant cash flow upside for this company. A large cash return to shareholders also aided total return during the quarter.
  • U.S. Foods Holding Corp.
    Continued market share gains with independent restaurant customers, improved margins from higher sales of private-label products, and an intentional shift in customer mix towards higher-value independent customers allowed the company to grow operating income at a high single-digit rate.
  • JPMorgan Chase & Co.
    The passing of tax reform and higher interest rates helped move the stock higher during the final quarter of 2017.

Fourth Quarter Top Detractors

  • General Electric Co.
    During the quarter, GE cut its dividend and future earnings expectations. Its Power business has been the largest source of disappointment, with heightened competition and softening end-demand.
  • Gilead Sciences, Inc.
    Declining earnings due to the erosion of its hepatitis C revenues contributed to weakness during the quarter.
  • Expedia, Inc.
    A third-quarter earnings miss contributed to weakness in shares of Expedia in the fourth quarter.
  • Assured Guaranty Ltd.
    While the company enjoys a solid financial position and expanding profit margins, the deteriorating outlook for municipal debt in Puerto Rico weighed on market sentiment.
  • Oaktree Capital Group LLC
    Oaktree has had difficulty deploying capital in the current market environment. As a result, it is not yet earning management fees on some assets.

Thank you for your continued trust in us and 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%.

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Unless otherwise noted, the source of all data, charts, tables and graphs is Thornburg Investment Management, Inc., as of 12/31/17.

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