- After the first quarter of 2020, which saw a record 23% drop in the MSCI ACWI ex-USA Index, a vigorous second quarter rally following the global market bottom on March 23 sent the index up 16.1%. As of June 30, the ACWI ex-USA Index was still down 11.0% for the year. International ESG indices have continued to outperform, with the MSCI ACWI ex-USA ESG Leaders Index up 17.2% for the quarter and down 8.5% year to date.
- The rally was sparked by record fiscal and monetary stimulus pledged by global governments but found legs on an improvement in COVID-19 numbers in many countries, the beginnings of partial economic reopening and signs of economic recovery and the notion that many stocks had become too cheap in the first quarter’s indiscriminate selloff.
- A number of regions, countries and sectors which had suffered in the first quarter outperformed in the second on these hopes. Notably, the eurozone was an outperformer as the European Central Bank announced a doubling of its monetary stimulus program and the European Commission proposed a plan to raise 750 billion euros for pandemic recovery by selling bonds backed by all 27 members of the European Union—a first. Eurozone and international markets played catch-up with the U.S. in the second half of the quarter on the news, and the thought that a potential reduction in the eurozone risk premium may continue to help markets there.
Second-Quarter 2020 Performance Highlights
- In the second quarter, the Thornburg Better World International Fund (I share class) returned 23.2%, 704 basis points ahead of the MSCI ACWI ex-USA Index return of 16.1%. Year to date the fund is down 0.8%, 1017 basis points ahead of the ACWI ex-USA, which has lost 11.0%.
- First quarter stock returns were highly correlated to the downside and the biggest driver of the fund’s outperformance was not individual stock selection but sector and country allocation and associated currency effects. In the second quarter, stock selection reemerged as a driver of relative performance, with 90% or more of the fund’s outperformance driven by bottom-up stock selection.
- On a sector allocation basis, the biggest drivers were the fund’s underweight in financials and its zero weight in energy, as well as its overweight in information technology and consumer discretionary. The fund’s 4.6% average weight in cash detracted in an up quarter.
- The fund is underweight emerging markets, given the relative lack of ESG opportunities, but performance there was still positive given strong stock selection in China and Brazil. The fund’s overweight in the eurozone was a positive on hopes for additional fiscal and monetary stimulus there. An average 6.3% weight in global companies domiciled in the U.S. was also a positive.
- Stock selection was positive in 10 out of 11 sectors. A table of top and bottom contributors is shown, but among notable outperformers in this market environment were Meituan Dianping, a Chinese website for food delivery and other services, Tencent Holdings Ltd., the largest social and gaming platform in China, Infineon Technologies, a German semiconductor manufacturer, Fresenius Medical Care, a German provider of dialysis services and equipment and XP Inc., a Brazilian online investment and wealth management company.
- Among notable underperformers were Kao Corporation, a Japanese chemical and cosmetics company, Industria de Diseno Textil (Inditex), the world’s biggest fashion company, French telecommunications company Orange, global consumer goods company Unilever, and HDFC Bank, an Indian banking and financial services company.
Current Positioning and Outlook
Portfolio activity decreased in the second quarter, but the fund benefited from the rebound as companies acquired at attractive valuations generated attractive returns, mostly from stock selection. The fund reduced its exposure to Consistent Earners and increased its exposure to Basic Value by 2%, producing a more balanced mix of 37% Consistent Earner, 34% Basic Value, 24% Emerging Franchise and 5% cash at quarter end.
Sector, region and country positioning remained roughly unchanged with a structural zero weight in energy, a continued underweight in financials and a modest overweight in health care and information technology. Given the greater presence of ESG opportunities, we remain overweight the eurozone and Europe in general, and underweight emerging markets for the opposite reason. We are also underweight Canada and Japan and zero weight Australia. The fund has a 5% position in global companies domiciled in the U.S.
The global outlook remains uncertain, with uneven progress in the COVID-19 pandemic and a continued lack of visibility in expectations for corporate earnings and the global economy. Given that situation markets remain dependent on government and central bank stimulus, which has not been in short supply. While we cannot control those factors, one thing we believe is certain is our ability to position the fund to perform well on a relative basis during this period of increased volatility and on an absolute basis in an eventual rebound by owning higher-quality companies at a discount to their long-term intrinsic value. We believe that bottom-up, high conviction active managers like Thornburg will continue to outperform the index and passive managers given the level of dislocation created during international markets’ abrupt decline and sharp rebound so far this year. We believe that the central proposition of the fund will continue to be true, which is that companies which observe and practice ESG principles will be more profitable and efficient and operate with less risk, leading to better risk-adjusted returns over the long run.
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%.