Thornburg Better World International Fund

2nd Quarter 2019

Jim Gassman
Jim Gassman
Portfolio Manager and Managing Director
Di Zhou, CFA, FRM
Di Zhou, CFA, FRM
Portfolio Manager and Managing Director
Portfolio managers are supported by the entire Thornburg investment team.
JULY 18, 2019

Global equity markets continued their 2019 advance in the second quarter but May witnessed the first material market drawdown of the year, triggered by collapsing trade talks between the U.S. and China. Markets had assumed that the talks were progressing well and nearing a successful conclusion, based on comments coming out of negotiations, but on May 5th President Trump threatened to raise tariffs on $200 billion of Chinese goods, from 10% to 25%, and to place new tariffs of 25% on the remaining $325 billion of Chinese products, claiming that China had reneged on previous commitments. Along with increasing political tension, investors also saw macroeconomic data that pointed to a further loss of momentum across the global economy. The market was firmly in “risk off” mode and the MSCI All Country World Index (ACWI) was down 5.93% in May, with emerging market equities underperforming developed market equities. Global government bond yields fell in May and June with expectations of earlier and more aggressive rate cuts from the U.S. Fed. With the promise of a resumption of trade negotiations between China and the U.S. after the G-20 Summit, markets rebounded in June and finished positively for the quarter.

For the quarter the Thornburg Better World International Fund (I shares) returned 4.32% versus 2.98% for the MSCI ACWI ex-U.S. Index and 3.68% for the MSCI EAFE Index. Year to date, the fund has returned 14.87% versus 13.60% for the MSCI ACWI ex-U.S. Index and 14.03% for the MSCI EAFE Index.

For the quarter and year to date, the portfolio’s outperformance versus its benchmark index on a sector basis has been driven almost entirely by bottom-up stock selection, which is central to the fund’s investment process.

Top Performers:

  • Sony Corporation
    Sony manufactures audio, home video game consoles, communications and information technology products, and is also involved in the music, movie, computer and online entertainment industries. The stock rose in the second quarter as an activist investor engaged with management to unlock value by organizational restructuring. Sony’s stock trades at a discount to peers with exposure to promising end markets like gaming, music, pictures and semiconductors. We expect Sony to continue to increase shareholder returns (buybacks) and improve return on capital discipline across its businesses.
  • Shanghai International Airport Co., Ltd.
    Shanghai International Airport Co. operates Pudong and Hongquiao airports in Shanghai, China. The stock outperformed during the quarter, driven by positive operating momentum in the duty-free space, which generates a majority of the company’s earnings. A notable improvement in Pudong airport’s on-time rate over the last couple of years has also given investors confidence that the government will allow it to open a new terminal later this year, supporting future volume growth.
  • SAP SE
    SAP is one of the largest global software companies with more than 400,000 customers in over 180 countries. It is the leader in enterprise application software which is applicable for nearly all types of industries and for every major market. During the quarter, SAP revised 2023 margin guidance upwards and announced it was evaluating a multi-year share buyback. The surprise margin guidance upgrade and potential capital allocation discipline, combined with an investment from an activist investor, drove up the stock price.
  • AIA Group Ltd.
    AIA Group Limited is the second-largest life insurance company in the world by market value and the largest publicly listed Pan-Asian life insurance group. AIA offers life insurance and wealth management services in 18 markets across the Asia/Pacific region. AIA continues to deliver strong growth and improved capital returns. The stock also reacted positively to speculation that China would open up its insurance market to foreign companies sooner than planned.
  • Aena SME, S.A.
    Aena is the largest global airport operator. It operates 46 airports in Spain as well as concessions in the U.K., Colombia, Mexico and Jamaica. Aena’s stock appreciated after continued growth in Spanish airport traffic and retail sales. Additionally, Aena assets are considered to be long duration infrastructure assets, which benefit in times of falling interest rates.

Bottom Performers:

  • Royal Bank of Scotland Group
    The Royal Bank of Scotland offers retail and commercial banking services under the RBS and NatWest brands and private banking through Coutts, Child & Co., and Drummonds. It has the second-largest branch network in the U.K. and has operations in Ireland, Europe, the U.S. and Asia. RBS underperformed during the quarter as Brexit risk heightened, the global economy showed some signs of weakness, central banks are expected to lower interest rates and the U.K. government executed on a slower buyback program. In the meantime, RBS is one of the few European banks that has excess capital and plans to return it to shareholders, which should drive positive stock returns.
  • Ubisoft Entertainment
    Ubisoft is one of the largest video game publishers in the world, with well-known titles, such as Assassin’s Creed, Far Cry, Just Dance, Prince of Persia and others on gaming devices and consoles from Sony, Microsoft and Nintendo as well as on PCs. The U.S. accounts for more than 45% of Ubisoft’s revenue. Ubisoft’s share price was down as fourth-quarter revenues missed company guidance and competition remains tough for traditional video game makers with the popularity of free online games such as Fortnite. Longer term, we believe Ubisoft is attractively valued versus its peers.
  • Alibaba Group Holding Ltd.
    Alibaba provides online retail marketplace services to over 700 million active monthly users in China. It also provides e-commerce services outside China, fintech, cloud computing, logistics platform service and online video services. As the most dominant player in its market, Alibaba benefits from the fast-growing e-commerce industry in China. The stock sold off in May, along with other Chinese companies, on trade and economic concerns. The liquidation of Altaba’s stake in Alibaba also added to the selling pressure.
  • Infineon Technologies AG
    Infineon Technologies is an integrated semiconductor company with the largest or second-largest market share in its key end markets. In the second quarter, slower-than-expected auto recovery put pressure on Infineon, given its large automotive exposure. Investors also disliked the proposed timing of an acquisition deal announced by management as the company would need to finance part of it with equity, which trades at a very low valuation.
  • Focused Photonics Hangzhou, Inc.
    Focused Photonics is China’s leading manufacturer of analytical instrumentation for industrial process and environmental monitoring. Fundamentally, Focused Photonics benefits from the rising density of the monitoring network and the expansion of monitoring items will likely drive ~30% growth for China’s Environmental Monitoring System industry. In the second quarter the stock lost some value due to trade war worries and the concern one of the company’s founders may have to sell some of his stock in a forced situation due to a potential margin call. We continue to believe the stock is undervalued.

Thank you for investing alongside us in the Thornburg Better World International 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

Unless otherwise noted, the source of all data, charts, tables and graphs is Thornburg Investment Management, Inc., as of 6/30/19.

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.

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.