Thornburg Developing World Fund

1st Quarter 2020

Ben Kirby, CFA
Ben Kirby, CFA
Co-Head of Investments and Managing Director
Charles Wilson, PhD
Charles Wilson, PhD
Portfolio Manager and Managing Director
Portfolio managers are supported by the entire Thornburg investment team.
March 31, 2020
Market Review

While economic conditions looked strong for many emerging markets entering 2020, the spread of COVID-19 and to a lesser extent, a price war on oil between Russia and Saudi Arabia, ultimately resulted in the worst quarter for global equities since the Great Financial Crisis. A flight to safety ensued as a general sense of fear overcame the markets, resulting in elevated capital flows out of emerging markets (EM) and into the perceived safety of the U.S. dollar. The impact was especially painful for EM economies with elevated macro sensitivity to oil as well as those seen as too dependent on foreign investment.

First-Quarter 2020 Performance Highlights
  • The Thornburg Developing World Fund (I shares) returned negative 24.72% for the quarter ending March 2020, versus negative 23.60% for the benchmark MSCI Emerging Markets Index. Stock selection within consumer staples, as well as our underweight allocation to materials, contributed positively to our relative performance on a sector level. Stock selection within health care and industrials detracted from relative performance.
  • The portfolio’s overweight allocation to Emerging Latin America and underweight allocation to Emerging Asia negatively impacted relative performance.
First-Quarter Notable Top Performers
  • China Feihe, Ltd. develops and produces infant formula milk and other dairy products. Shares rose sharply on stronger-than-expected year-over-year sales growth primarily driven by accelerating market share gain.
  • Tencent Holdings, Ltd. is a global tech leader, offering everything from gaming and social media to e-commerce and payments systems. Shares ended in positive territory through the global sell-off as the company’s mobile gaming business was seen as a net beneficiary of the COVID19 outbreak and the resulting China shutdown.
  • TAL Education Group delivers comprehensive after-school tutoring services in China. While TAL suspended offline classes amid China’s school shutdowns, the company saw a surge in online traffic during the quarter. While short-term earnings will be impacted by the virus, the increased online penetration may help build longer-term momentum with improved brand awareness.
  • SEA, Ltd. is an IT services company operating gaming, e-commerce and digital payment platforms. Shares rose on strong fourth-quarter results and FY20 guidance. Operating in Southeast Asia, Sea’s digital business segments are seen as net beneficiaries in the current environment, as people look for online alternatives for shopping and entertainment.
  • Prosus N.V. is an investment company focusing on internet, digital media and e-commerce companies. Prosus holds a 31% stake in Tencent. Shares were resilient as Tencent was viewed as a net beneficiary of the COVID-19 outbreak and the resulting China shutdown.
First-Quarter Notable Bottom Performers
  • NMC Health plc is a leading Middle East hospital operator. The stock sold off dramatically following a controversy of suspected malfeasance by the former chairman and CEO. This was a smaller position in the portfolio but is a notable single stock detractor where the sell-off wasn’t related to the global COVID-19 pandemic.
  • Petroleo Brasileiro S.A. (Petrobras) is a vertically-integrated oil and gas producer and the largest company in Brazil. While the company announced solid fourth-quarter earnings in February, the collapse of OPEC+, coupled with COVID-19, led oversupplied crude to historically low prices as demand also plummeted.
  • HDFC Bank, Ltd. is one of the largest financial services companies in India. While the bank reported solid earnings in January, shares sold off on concerns of slowing growth and higher loss provisions amid coronavirus uncertainty.
  • Azul is a small Brazilian low-cost airline. Airlines and other travel-related industries were especially impacted by COVID-19 and the global efforts to contain the outbreak. Downward pressure on the Brazilian Real has compounded the sharp decline of an already challenged business.
  • Samsung Electronics Co. Ltd. is a global leader in semiconductors, mobile and consumer electronics. Shares traded down amid concerns of softening global demand related to consumer electronics and memory.
Current Positioning and Outlook

Entering 2020, the portfolio was positioned for an environment where the base case was improving global growth with a lot of steady-as-she-goes characteristics. Unfortunately, the global economy is grinding to a halt, and we’re expecting increased company-level bifurcation as the virus dissipates. Our view is that a portion of EM companies’ earnings power will likely have a “U” shape, depressed by the coronavirus for a short period of time before recovering. But, for another set of companies, earnings will simply have an “L” shape, down, but without visibility into a recovery because of weaker end markets, worse operational quality and too much debt. Even in normal times, we’re not interested in being exposed to companies at risk of an “L”, and we’re working doubly hard to avoid that risk now.

Over the past month, we have reviewed every name in our portfolio multiple times. We have exited a few names that are great companies but simply have the wrong types of macro sensitivity for this environment. We have trimmed some other great companies where the old portfolio weight exposed us to more unquantifiable/unqualifiable macro risk than we were comfortable with. We’ve added to some existing holdings that were babies thrown out with the bathwater. And we’ve had the chance to consider some names we weren’t holding—but which we’ve been following for a long time while waiting for a buy point (which has now arrived). Given the volatility, we’ve transitioned patiently and are not trying to call the top or bottom in markets.

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 3/31/20.

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.

Diversification does not assure or guarantee better performance and cannot eliminate the risk of investment losses.

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 glossaryglossary (www.thornburg.com/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.