Small/Mid Cap Growth Fund - Commentary

3rd Quarter 2021

Steven Klopukh, CFA
Steven Klopukh, CFA
Portfolio Manager and Managing Director
Tim McCarthy, CFA
Tim McCarthy, CFA
Portfolio Manager and Managing Director
Portfolio managers are supported by the entire Thornburg investment team.
October 1, 2021
Market Review

Economic growth materialized in the third quarter but did not translate to a positive market environment for small- and mid-cap stocks as returns were overall negative and volatile throughout the quarter. Some significant reasons for the volatility were relatively higher inflation induced partly by supply constraints, and yield beginning to creep upwards. These two factors dampened what has otherwise been a quick recovery from a similarly quick recession last year. The start of this quarter was a continuation of last quarter’s trends where investors favored growth and stocks higher on the market-cap spectrum. However, rising oil and gas prices throughout the year began to boost energy stocks and the rising rate environment benefitted financials, which were the top-performing sectors for the quarter within the Russell 2500. Another noteworthy element of the quarter was the declining significance of the growth and value style factors in explaining stock performance and the reemergence of the profitability factor.

Third-Quarter 2021 Performance Highlights
  • The Thornburg Small/Mid Cap Growth Fund returned negative 1.27% (I shares), outperforming the Russell 2500 Growth Index, which returned negative 3.53%, and underperforming the Russell 3000 Growth Index, which returned positive 0.69%.
  • The top sector contributors to performance were industrials and information technology, driven primarily by stock selection. The communication services and consumer staples sectors were the largest relative detractor, but both are relatively smaller weights in the Fund.
  • Market capitalization was a notable factor within the portfolio as larger growth stocks outperformed smaller growth stocks. An overallocation and stock selection to companies with a market capitalization over $12 billion drove outperformance for the quarter. Conversely, an under allocation to stocks with market capitalizations under $12 billion was a positive, but not enough to overcome stock selection, making this group of stocks a detractor for the quarter.

Current Positioning and Outlook

The importance of profitability in the third quarter, mixed with continued inflation, rising yields, and higher energy prices reinforces our outlook that this is an accelerated economic cycle. As such, we appear to be shifting away from early cycle behavior with peaking economic conditions to more mid-cycle behavior, albeit with volatility along the way. During these periods, higher-quality growth stocks tend to perform relatively better, which would favor our general philosophy and current positioning of targeting higher these types of stocks. Even so, as we move further along in this economic cycle, we would expect a more balanced market environment that is less about style and more about longer-term earnings power. We remain encouraged with the bipartisan infrastructure bill that has a focus on renewables with the potential to benefit many companies we own. The portfolio maintains a barbell exposure to higher growth disruptive and emerging franchises and to reopening beneficiaries. The portfolio is exposed to ongoing and emerging investment themes, including animal health, digital payments, analog to digital enablers, energy transition, among other important secular themes. We continue to focus on companies with strong free cash flow prospects and responsible capital allocation, which we believe will be important in an environment of heightened volatility and slowly rising yields.

Thank for your continued support and for investing alongside us.

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 9/30/21.

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.

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