Investment Income Builder Fund - Commentary

3rd Quarter 2020

Jason Brady, CFA
Jason Brady, CFA
President and CEO
Matt Burdett
Matt Burdett
Portfolio Manager and Managing Director
Ben Kirby, CFA
Ben Kirby, CFA
Co-Head of Investments and Managing Director
Brian McMahon
Brian McMahon
Vice Chairman and Chief Investment Strategist
Portfolio managers are supported by the entire Thornburg investment team.

October 1, 2020
This portfolio manager commentary on the Thornburg Investment Income Builder Fund is published amidst the ongoing developments associated with the global pandemic, COVID-19 (coronavirus). Government bodies around the world have taken unusual steps to control the disease and mitigate the consequences of related economic disruption in order to keep the basic structure of the global economy in place to resume normal economic activity when the pandemic is better controlled.

Thornburg Investment Income Builder Fund delivered a 0.99% total return in the September quarter. This followed the worst quarterly return in the fund’s 17.75- year history in the March 2020 quarter and one of the best quarterly returns in the fund’s history in the June quarter. Share prices of a majority of the dividendpaying equities in the fund were lower in the first nine months of 2020, leading to what we believe is a bargain-priced portfolio of income-producing assets in your fund. Listed on the following page in descending order are the 25 largest equity holdings in the fund at quarter end, along with 2020 year-to-date and September quarter share price changes as of September 30, 2020. Also noted are dividend yields at closing September 30 stock prices. Sixteen of these 25 firms have seen share price declines in 2020 to date. Twelve posted share price declines in the September quarter. Together, these 25 firms comprise approximately 67% of the fund’s total assets. Cash and interest- bearing debt comprise around 14% of fund assets, and 29 other common equities and three preferred equities comprise a total of approximately 19% of assets. Individual position sizes range from 5.2% (Taiwan Semiconductor) to approximately 1.3% for those shown near the bottom of the list.

These are not trivial businesses. These firms occupy important positions in their respective markets, and they tend to be well capitalized.

Table 1 | Investment Income Builder Fund—Top 25 Equity Holdings (as of 9/30/20)

(Together, these 25 investments account for approximately 67% of fund assets as of September 30, 2020; cash & interest bearing debt comprise 14% of assets, 32 other equity investments account for 19% of fund assets).

Name of Company 2020 YTD Price Change & Q3 2020 Price Change (+/-) at 9/30/2020 ($US) Last 12 Month Dividend Yield at 9/30/20 Price
Taiwan Semiconductor Manufacturing +34.8%/+40.9% 2.31%
Leading semiconductor chip foundry in the world, fabricating chips used in many digital devices
China Mobile -24.1%/-5.4% 6.58%
World’s largest mobile telecommunications network operator, net cash balance sheet
Orange S.A. -29.2%/-13.0% 5.63%
Multi-national telecommunications network operator, home market is France
Deutsche Telekom +6.7%/-0.3% 4.18%
Multi-national telecommunications network operator, majority owner of T-Mobile USA
The Home Depot, Inc. +27.2%/+10.9% 2.40%
Largest U.S. home improvement retailer, sells hardware & building materials
Broadcom, Inc. +15.3%/+15.4% 3.55%
Develops and markets digital and analogue semiconductors
Samsung Electronics +3.2%/+13.2% 2.43%
Manufactures consumer & industrial electronic products; leading semiconductor producer
Vodafone Group plc -32.0%/-16.9% 7.76%
Multi-national telecommunications company
CME Group, Inc. 16.6%/+2.9% 3.41%
Operates exchanges that trade futures contracts & options on rates, F/X, equities, commodities
AbbVie, Inc. -1.1%/-10.8% 5.27%
Develops and sells pharmaceutical products
Qualcomm, Inc. +33.4%/+29.0% 2.19%
Develops and delivers key components for digital wireless communications products
Roche Holding +5.4%/-1.3% 2.86%
Global health care company develops and sells medicines and diagnostic tools
Enel SpA +9.7%/+0.7% 4.39%
Generates, distributes, and sells electricity and gas in Southern Europe & Latam
JP Morgan Chase & Co. -30.6%/+2.3% 3.71%
U.S.-based global financial services conglomerate serving businesses & individuals
NN Group -1.1%/+11.8% 7.01%
Netherlands-based life and casualty insurer, with market leading positions in Netherlands
Total S.E. 38.0%/-10.4% 9.41%
Produces, refines, transports, and markets oil and natural gas products globally
UBS Group AG -11.5%/-2.9% 6.52%
Global financial services provider to private individual, corporate, and institutional clients
Equitable Holdings, Inc. -26.4%/-5.4% 3.45%
U.S. life insurer and asset manager (controls Alliance-Bernstein)
Walgreens Boots Alliance -39.1%/-15.3% 5.12%
Operates retail drugstores in USA and UK and wholesale pharmaceuticals distributor in EU
Tesco plc -18.9%/-2.8% 4.34%
U.K.-based food retailer, also selling general merchandise from its largest stores
Merck & Co. -8.8%/+7.3% 2.97%
Global health care company develops and sells medicines, vaccines, biologic therapies
AstraZeneca +8.2%/+4.7% 2.55%
Major research driven pharmaceuticals firm, selling products in > 100 countries
Regions Financial Corporation -32.8%/+3.7% 5.35%
U.S. regional banking group, mostly operating in Southeastern U.S. states
Assicurazioni Generali -31.6%/-6.9% 4.21%
Italy-based multinational life & property/casualty insurers
Pfizer, Inc. 6.3%/+12.2% 4.13%
Global health care company develops and sells medicines, vaccines, biologic therapies

The reader will notice a significant number of telecommunications, communications infrastructure, financial and health care firms among these top 25 holdings, as well as other providers of various ingredients important to modern life. Aside from the fact that they have paid attractive dividends, the current crisis reinforces the essential nature of the products and services they provide.

The fund paid an ordinary quarterly dividend of $0.222 per I share in the quarter ending September 30 2020. This compares to a dividend of $0.264 per I share for the comparable quarter of 2019. The fund paid $0.943 per I share for the trailing four quarters, down 5.1% versus the prior year comparable period. The dividend per share was lower for A and C shares to account for varying class specific expenses.

Investment Income Builder’s I share return of 0.99% for the September 2020 quarter trailed its blended benchmark (75% MSCI World Index and 25% Bloomberg Barclays U.S. Aggregate Bond Index), which returned 6.13%. Our blended benchmark benefited significantly from central bank support for the bond component of the blended index and the significant presence of popular technology stocks with high weightings and low or zero percent dividends in the MSCI World Index (Apple, Microsoft, Amazon, Facebook, and Alphabet are the five highest weighted stocks in this index. Performance comparisons of the fund to its blended benchmark over various periods are shown on the previous page. The net asset value of Investment Income Builder’s I shares declined by $0.03 per share ($18.87 to $18.84) during the September quarter. The fund has only partially recovered a $4.10 share price decline that occurred during the month of March alone as the COVID-19 pandemic gained momentum globally and set off a chain reaction of selling across a range of financial assets. That selling wave has been significantly reversed since the final week of March with respect to government bonds and corporate bonds due to a combination of Federal Reserve (and other central bank) buying of these instruments with newly printed money, augmented by private investor buying. The following data show the journey of quoted market prices over a range of more than 34% in recent months for Williams Companies Senior Unsecured Notes maturing in 2024. These bonds have been in the Income Builder Fund for several years, and are representative of other bonds in the portfolio:

Williams Companies Senior Unsecured Notes:
4.55% due June, 24, 2024 | Rated Baa3/ BBB- | Issued June, 2014 | $1.25 Billion Bond Issue

  • March 5, 2020: bond priced at 110.020% of par, to yield 1.96% (just before COVID-19 in USA)
  • March 23, 2020: bond priced at 76.927% of par, to yield 11.57% (last trades before Fed bond purchase program announcement)
  • March 31, 2020: bond priced at 92.027% of par to yield 6.75%.
  • September 30, 2020: bond priced at 110.902% of par to yield 1.33%.
Graph 1 | Quoted price of Williams Companies Senior Unsecured Notes 4.55%, 6/24/24 Bond

Source: Bloomberg

Equities of certain large firms with “growth” narratives have also been bid higher over the last six months. Most dividend-paying stocks have been left behind in the recent rotation of investor dollars into bank deposits, bonds, and growth stocks. We believe this will change, though it is difficult to predict timing. We have increased your portfolio’s exposure to dividend-paying firms that we believe have resilient businesses with strong capital structures. We have reduced or eliminated exposures to less resilient businesses. Compare the sector allocations of the equities in the Income Builder portfolio from 14 February (date of the fund’s highest closing share price this year) and September 30 (see table below).

Sector Sector Weights, Feb. 14 Sector Weights, June 30 Sector Weights, Sept. 30 From Feb. 14 to Sept. 30 +/- Weighting
Financials 21.7% 23.4% 23.9% +2.2%
Communication Services 15.2% 22.5% 19.8% +4.6%
Information Technology 11.1% 14.1% 17.8% +6.7%
Health Care 10.7% 13.0% 11.8% +1.1%
Energy 9.7% 6.8% 5.0% -4.7%
Consumer Staples 4.2% 3.5% 4.7% +0.5%
Consumer Discretionary 5.0% 3.5% 3.9% -1.1%
Utilities 5.2% 5.1% 3.7% -1.5%
Real Estate 4.2% 4.0% 3.2% -1.0%
Materials 5.1% 3.6% 3.2% -1.9%
Industrials 4.6% 0.5% 2.6% -2.0%

We are optimistic about the future return potential of Thornburg Investment Income Builder’s assets. Why? Virtually all the businesses in the portfolio retain their market positions, providing important products and services that generate cash flows to pay attractive dividends. In addition, we believe they are valued very attractively in relation to their own histories and relative to other assets. Bond yields and money market yields have declined below pre-COVID levels. We believe investors will direct capital in the coming quarters into dividend-paying stocks, supporting prices of these.

The quarter ending September 30, 2020, was the 71st full calendar quarter since the inception of Thornburg Investment Income Builder Fund in December 2002. In 53 of these quarters, the fund delivered a positive total return. The fund has delivered positive total returns in 14 of its 17 calendar years of existence.

Ten of 11 sectors of the MSCI World Index delivered positive returns for the September quarter, ranging from +16% for the consumer discretionary sector to negative 16% for the energy sector. The MSCI World Index comprises 75%, and the entire equity portion, of the Thornburg Investment Income Builder’s global performance benchmark. During the quarter, six equity investments contributed positive returns of at least 0.25% to overall portfolio performance. (These most positive contributors included Taiwan Semiconductor, Qualcomm, Broadcom, Samsung Electronics, Home Depot and NN Group). Five equity investments contributed a negative return of below negative 0.25%. (These most negative contributors to September quarter portfolio performance included AbbVie, Valero Energy, Walgreens Boots Alliance, Vodafone and Orange).

Investment Income Builder’s bond holdings also delivered positive returns during the September quarter. U.S. government bond prices were steady, as 10-year U.S. Treasury yields mostly hovered in a tight range near the 0.66% level of June 30, 2020. Corporate and asset-backed bond prices declined modestly late in the quarter but were significantly higher for the three-month period. The Bloomberg Barclays U.S. Corporate High Yield Index declined from 6.87% at June 30 to 5.77% at September 30, 2020, even as default rates on corporate bonds increased.

Readers of this commentary who are longtime shareholders of the fund will recall that the interest-bearing debt portion of the fund’s portfolio has varied over time, ranging from less than 9% in 2015 to 45% at June 30, 2009. We tend to allocate more portfolio assets to interest-bearing debt when yields are more attractive. In the September 2020 fiscal year, approximately 85% of Income Builder’s income was derived from stock dividends, the remainder coming from interest. From today’s vantage point, we would expect to add assets from the more dislocated segments of the bond market that are less subject to price support from central bank buying.

We believe the extreme dislocation caused by the COVID-19 pandemic will be temporary. As we write these words a portion of the global population remains under some type of “restricted activity” order that reduces normal economic activity. When the pandemic passes, we believe people around the world will continue to buy goods and services and trade with each other. The global economy will gradually repair, albeit with important differences. In the meantime, most governments will make reasonable attempts to bridge the material dislocations we currently witness.

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%.

30-day SEC Yield as of 9/30/19 – A Shares: 2.94%; I Shares: 3.30%.

Important Information

Unless otherwise noted, the source of all data, charts, tables and graphs is Thornburg Investment Management, Inc., as of 9/30/20.

Prior to inception of class I shares, performance is calculated from actual returns of the class A shares adjusted for the lower Institutional expenses.

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.

Neither the payment of, or increase in, dividends is guaranteed.

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.

Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, “Barclays”), used under license. Bloomberg or Bloomberg’s licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices. Neither Bloomberg nor Barclays approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.

There is no guarantee that the Fund will meet its investment objectives.

Please see our glossaryglossary ( 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.