3rd Quarter 2018

    Portfolio managers are supported by the entire Thornburg investment team.

Download PDF
October 22, 2018 [Mutual Funds commentary, Value]

While this is a quarterly commentary, we remain focused on the long term. We are pleased with our performance since our mid-2012 bolstering of the consistent earning characteristics of the portfolio, with a 155.6% cumulative return (16.2% annualized, I shares) vs. an index return of 143.8% (15.3% annualized) and peer group return of 119.7% (13.4% annualized). Even better, we’ve achieved these results with a beta of 0.96 against the S&P 500 Index, which is lower than 78% of our peer group. (see Chart 1)

Unfortunately, very recent results haven’t looked as promising. Assuming an initial investment of $100 on January 1, 2018, for the year-to-date period we’re now up 7.5% (I shares) vs. the S&P 500 Index return of 10.6%. In Chart 2 you can see we were fighting a good fight through the end of July, nearly in line with the index for the year-to-date period. Since then, however, we’ve trailed, with the S&P 500 Index up 3.85% to our 1.38%..

Cumulative Returns


YTD Returns through 9/30/2018

During the quarter, sector positioning and stock selection proved to be headwinds from a relative return standpoint, though absolute performance was strongly positive. From an allocation standpoint, our cash position and underweight in information technology were the primary drags on relative performance. Our underweights to utilities and real estate—typically considered to be interest rate sensitive sectors— aided relative performance as U.S. Treasury yields backed up during the quarter. Our stock picking was strongest in the financials and materials sectors during the quarter. We had weaker performance from individual names in the consumer staples and information technology sectors.

We work hard to build balance within the portfolio, primarily utilizing our basket structure. If we are successful in this endeavor, our relative returns will usually be driven by the good or bad. That said, it feels strange out there to us. No doubt, active managers in the U.S., especially those focused mostly on large-cap stocks, have been sailing into a headwind over the last 10 years. Again, we’re pleased our relative results since mid-2012 have largely bucked this trend.

We can’t help but wonder at the impact that passive and machine-driven investing are having on the overall markets. Our best guess is that, over time, this will tend to lead to greater dislocations between where a company’s stock trades and the intrinsic value of its business, and perhaps more violent corrections from time to time as these differences are corrected. JPMorgan recently suggested that only about 10% of U.S. equity investment is now done by traditional, discretionary traders. A couple of looks at flows since the financial crisis are shown in Charts 3 and 4.

Domestic Equity Mutual Funds Cumulative Net Withdrawals


Active vs. Passive Equity Flows, Since 2009

Further, industry luminaries have weighed in, including, recently, one of the all-time greats, Stan Druckenmiller: “These algos have taken all the rhythm out of the market and have become extremely confusing to me.” Value investors, as a group, appear to have become a bit dense. But we worry some about how long valuations will take to correct, given that any of the buyers that you’d usually expect to force the adjustment are likely facing redemptions. But, we don’t doubt that, over the long term, stock prices ultimately reflect fundamentals. As we’ve said for some time, the proliferation of indices and index flows may make shortterm dislocations more severe, but ultimately create more opportunity for fundamentals- based, bottom-up investors.

Another Depressing Chart

In Chart 6, you can see some sobering statistics related to the opioid crisis. We bring this up simply to remind investors that one of our weaker holdings recently, Alkermes, sells a drug that we believe is part of the solution. While Vivitrol isn’t the answer for every patient seeking treatment for opioid addiction, we think it offers hope to many of those suffering. Vivitrol blocks the opioid receptor in the brain for 30 days after treatment; i.e., you can’t get high from opioids while you’re on Vivitrol.

The No Jerks Rule

We’ve long said our collegial culture, built on Bill Fries’ belief that to collaborate effectively, we must first respect each other, is a key to the cultural alchemy that has led to long-term success across our investment strategies at Thornburg. It’s good to see this collegial cultural tone find a wider audience. And, hopefully, wider adoption could lead to broadly improved outcomes across the industry (and, more happy people at work!).1

(June 2018–August 2018)
Capital One Financial Corp. – Basic Value Evolent Health, Inc
Owens-Illinois, Inc. – Growth Industry Leaders Callaway Golf Co.
Navient Corp. – Growth Industry Leaders  
Alibaba Group Holdings – Growth Industry Leaders
Mineral Resources Ltd. – Basic Value

Best Performers (Top 5)

  • Thermo Fisher Scientific
    As a leading supplier of research products and services, Thermo Fisher is well positioned to capitalize on the secular growth in research. The stock responded to strong revenues and continued margin improvement.
  • Assured Guaranty Ltd.
    Assured Guaranty continues to get better pricing on new municipal issuance while it manages exposure to Puerto Rico insured bonds. The company is still repurchasing more than 10% of its shares annually at a meaningful discount to book value.
  • Apple, Inc.
    Shares have performed well thanks to the market’s optimism for its latest iPhone models. Further, Apple demonstrated strong revenue and profit trends in its ancillary operating segments of software solutions and device accessories, which provided an element of positive diversification and incremental growth to Apple’s financial model.
  • Medtronic
    The shares rallied after quarterly revenue and earnings, plus newly raised forward guidance beat estimates for this medical device manufacturer. The firm saw strength across several of its product divisions, including across relatively new products within its diabetes franchise.
  • O’Reilly Automotive, Inc.
    Auto parts retailers broadly rebounded from cyclical lows in same store sales. O’Reilly’s same store sales have continued to outpace peers on the back of a best-in-class distribution network. The stock has responded by re-rating to the upside on higher earnings estimates.

Worst Performers (Bottom 5)

  • Domino’s Pizza Group plc
    Domino’s Pizza Group is based in the U.K. and is a separate entity from Domino’s in the U.S. and Australia. The stock experienced weakness during the quarter as warm weather offset orders and comps missed slightly. Also weighing on the stock was a slowing in new franchise openings, due mostly to slow approvals.
  • Devon Energy Corp.
    While the company successfully executed on the sale of numerous non-core assets and has been aggressively pursuing its accelerated buyback program in a rising oil price environment, the stock did not respond favorably to these factors during the quarter.
  • Facebook, Inc.
    Facebook announced a modest earnings miss and guided forward revenue and earnings expectations lower during the quarter. This led to a pullback from the previous highs achieved leading into the quarter.
  • TRI Pointe Group, Inc.
    TRI Pointe Group underperformed as rising mortgage rates, higher home prices, and concerns about a slowdown in home building caused sentiment to shift. Additionally, orders were softer than expected in the short term.
  • US Foods Holding Corp.
    Shares came under pressure when the company pre-announced light quarterly earnings on execution issues and announced a large strategic acquisition of another distributor at a higher valuation than they’ve typically paid.

Looking ahead, we are focused on navigating an uncertain landscape through our time-tested, fundamentals-based, bottom-up investment process and three-basket portfolio construction framework. Our goal is to deliver compelling investment returns over the course of a cycle, while managing the volatility and investor experience along the way. While short-term underperformance is disappointing to us, we are committed to our process and believe we remain on track toward delivering on our long-term goals.

Thank you for investing alongside us in Thornburg Value Fund.


1. Chris Schelling, “The ‘No Jerks’ Rule of Investing,” September 2018, https://www.institutionalinvestor. com/article/b19y8b1zzmx8kx/The-No-Jerks-Rule-of- Investing.

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 9/30/18.

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.