- The fourth quarter was the best of the year for international markets, with the MSCI ACWI ex- USA Index up 17.0%, outpacing the S&P 500 Index return of 12.1%. After being down in October, markets took off in early November with the announcement by Pfizer and then Moderna of effective vaccines for the COVID-19 virus. The potential for an eventual end to the pandemic sparked a market rally and caused Value stocks to outperform and Growth stocks, which had outperformed all year, to underperform.
- The MSCI ACWI ex-USA Value Index outperformed its Growth counterpart by 650 basis points. Many sectors and countries which had underperformed over the first three quarters outperformed in the fourth quarter as well. Financials, energy and materials outperformed, as did Emerging Latin America (Brazil), Pacific ex-Japan (Australia) and the eurozone.
- After a weak first quarter in which the ACWI ex-USA Index lost 23.4%, the index was up 44.4% over the final three quarters of the year, leading to a 10.7% annual return. The MSCI ACWI ex-USA ESG Leaders Index, composed of companies with high ESG performance relative to their peers, trailed the broader ACWI ex-USA Index in the fourth quarter but outperformed it by 264 basis points for the year, returning 13.3%.
Fourth-Quarter 2020 Performance Highlights
- In the fourth quarter, the Thornburg Better World International Fund (I share class) returned 14.3%, 273 basis points behind the ACWI ex-USA Index—the fund’s only quarter of underperformance in 2020. For the year the fund returned 26.8%, 1610 basis points ahead of the index.
- The fund’s underweight in financials, zero weight in energy and a 6.1% average allocation to cash were negatives during the quarter, as was an underweight in Emerging Asia (particularly South Korea) and Pacific ex-Japan (particularly Australia). All the above, except cash, were positive contributors over the first three quarters and for the year as a whole.
- Stock selection was positive on a sector basis— most positive in consumer discretionary and industrials and most negative in materials, information technology and communication services. A table of top and bottom performers is shown at left, but among notable outperformers in the fourth quarter were Chinese sportswear maker Li-Ning, engineering company Weir Group, medical information services provider M3 Inc. and electric components manufacturer Murata Manufacturing. Among notable underperformers were Alibaba, SAP, Philippine telecom Converge ICT Solutions and British consumer goods company Reckitt Benckiser.
Current Positioning and Outlook
Since April we have been adding to the Basic Value basket as the market recovered, and in the fourth quarter it became the fund’s largest basket allocation at 36%. We have been reducing Consistent Earners over the same period. During the quarter, Basic Value stocks outperformed and Consistent Earners underperformed. At December 31, our basket allocations were 36% Basic Value, 35% Consistent Earners, 23% Emerging Franchise and 6% cash.
Sector, region and country positioning remained roughly unchanged with a structural zero weight in energy, a continued underweight in financials and an overweight in consumer discretionary and industrials. Given the greater presence of ESG opportunities, we remain overweight the eurozone and underweight Emerging Markets for the opposite reason—market weight China and overweight Brazil but underweight everywhere else. We are also underweight Japan and zero weight Canada and Australia. The fund has a 4% position in global companies domiciled in the U.S.
We are constructive about the outlook for international markets in 2021. The bounce in Value versus Growth and a number of other underperforming markets may still have a ways to run, but we believe a balanced and flexible core stance is still the best one in this market. Although there is now a visible path to the end of the COVID-19 pandemic, substantial uncertainties remain around its timing, the path of the global economy and its shape as it emerges on the other side of the pandemic. As it did in 2020, this will create both challenges and opportunities. Better World International’s flexible, bottom-up approach and its commitment to investing in companies with superior ESG performance navigated these uncertainties very successfully in 2020 and, we believe, should continue to do so in 2021.
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%.