Thornburg International Growth Fund

2nd Quarter 2019

Greg Dunn
Greg Dunn
Portfolio Manager and Managing Director
Sean Koung Sun, CFA
Sean Koung Sun, CFA
Portfolio Manager and Managing Director
Portfolio managers are supported by the entire Thornburg investment team.
JULY 16, 2019

The Thornburg International Growth Fund returned 1.57% (I shares) in the second quarter of 2019, trailing its benchmark, the MSCI All Country World ex-U.S. Growth Index, which gained 4.35%. This brings the 2019 year-to-date return to 16.86% for the fund (I shares), versus 17.20% for the index. Since inception, the Thornburg International Growth Fund has returned 7.28% versus 3.38% for the index.

Although international equities finished the quarter in positive territory, markets globally experienced an acute bout of volatility in May as the U.S. unexpectedly ratcheted up trade tensions with two of its largest trading partners, Mexico and China. Markets were further pressured as investors digested soft economic data, suggesting weakening trends in global growth. We saw Treasury and other foreign sovereign yields decrease notably as investors clamored for safe haven assets. It was only after trade tensions de-escalated as tariffs were called off on Mexico and a temporary truce was achieved with China at the G-20 Summit that markets settled and turned. Furthermore, U.S. and European central bank policy makers signaled a more accommodative policy stance, helping to further boost investor confidence. Uncertainty lingers around the eventual outcome of trade negotiations and continues to weigh on valuations of certain foreign equities. The global economy seems late in the cycle, but whether growth remains resilient, albeit at lower levels, with the proper policy and political actions or whether an already softening economy will be further harmed by adverse events remains to be seen.

Top performers for the quarter included German digital payments platform Wirecard AG, global footwear and apparel company adidas AG, Dubai-based payments solutions provider Network International, global payments company Mastercard, Inc. and U.K. investment management services provider Hargreaves Lansdown plc.

Wirecard shares rallied in the quarter as SoftBank announced a €900m investment in the company, representing about a 5.6% stake, via a convertible bond issue. Wirecard also reported financial results reflecting better-than-expected organic revenue growth as well as a slight upgrade to fullyear EBITDA guidance. Adidas shares have re-rated as investors have come to better appreciate its expanding economic moat and its positioning as a long-term winner in a structurally attractive global sportswear market. Adidas remains well placed to outgrow the broader market, expand margins and return meaningful capital to shareholders.

Network International is a recent IPO in which we participated, and it has risen nicely from the offering price. We are excited about its prospects and the company should deliver a consistent and durable growth profile as it addresses the digital payments opportunity in relatively underpenetrated geographies in the Middle East and Africa.

Mastercard continues to execute well with robust organic growth and improving margins and has a long duration secular growth opportunity ahead as payments steadily shift toward more digital forms over time.

Hargreaves Lansdown rose as it reported results that exhibited a resilient level of flows, taking the stock past our price target.

Bottom performers this quarter included U.K. online food delivery marketplace Just Eat plc, Chinese search engine operator Baidu, Inc., U.K.-based fashion e-commerce retailer ASOS plc, leading global luxury goods e-commerce platform Farfetch Ltd. and Swedish online retailer Boozt AB.

Just Eat shares declined as the company reported order growth in the U.K. that fell slightly short of expectations due to unfavorable weather and Easter timing. Furthermore, it was reported that Amazon is planning to invest $575 million into Deliveroo, a U.K.-based food delivery rival, ramping up competitive concerns.

Baidu fell as the company provided financial guidance to the markets that implies a troubling and dramatic slowdown in revenue growth in their core search business due to a combination of a challenging macro and competitive environment.

ASOS shares have suffered as retail and apparel market data from the U.K. and Germany suggest very weak industry growth and underlying consumer demand. Investors are also concerned that rumors of cost cutting and a restructuring plan at the company imply another profit warning.

Farfetch declined despite reporting strong first-quarter earnings on concerns about worsening macro trends in China, as well as trade war fears. For Farfetch and the luxury goods market overall, China is the most important and fastest-growing region, which underpins the long-term secular growth story but creates noise near term.

Boozt saw revenue growth fall short and although it re-iterated guidance for the full year, investors are increasingly cautious that the company can meet expectations, particularly on the margin front given the competitive retail environment and ongoing discounting seen across the industry.

Portfolio Activity

The fund experienced a relatively modest degree of turnover this quarter as we initiated four new positions and completely sold out of seven others.

One of the new portfolio additions this quarter was Capgemini, a French information technology services provider and consultant. We see Capgemini as an attractive means of achieving exposure to the theme of “Digital Transformation” that is currently reshaping various parts of the technology stack as well as how business gets done broadly. We see Digital Transformation as a long duration trend that has only recently started to inflect in terms of growth rates. Whereas businesses in the U.S. are more in the forefront of digital transformation, companies in Europe are generally much further behind, and Capgemini as a company with European roots and a broad European customer base is a natural partner to help companies achieve their digital goals. Although Capgemini’s digital mix trails its largest peer Accenture, the company is rapidly catching up and seeing growth rates of about 20% in this segment, which should reach over 50% of sales in the near term. Underlying execution at the company has been improving, as evidenced by improving growth rates and margin trends. We see valuation at too wide a discount relative to peers and digital transformation as a lasting tailwind that will drive sustained revenue and earnings growth over our investment horizon.


Investors will be watching closely whether this latest ebb in trade tensions is just a temporary pause before talks break down as both sides take on entrenched positions or if parties are genuinely making progress toward a resolution that is ultimately in the interest of all groups involved and the global economy at large.

Although we are seeing a downtrend in various business and consumer confidence indicators, we remain optimistic that despite the continuing economic and trade risks, the global economy will prove more resilient than expected. Across the major developed markets, we see labor and employment conditions as healthy with broadly rising incomes. In the eurozone, for example, unemployment now stands at 7.6%, not far off from pre- crisis levels. Although select labor markets in advanced economies are considered tight, inflation trends broadly have been relatively muted. We believe this will allow the strong dovish signaling we’ve seen from major central banks to become more than mere words, but concrete policy actions.

The Chinese economy heavily influences global trade and business cycles and last year’s growth slowdown on the back of a deleveraging campaign was felt broadly. Although Chinese growth rates are on a structural downtrend, we expect recent stimulus actions to prop up growth. Initially, the measures should offset some of the slowdown and then on a lagged basis later this year, provide a tailwind that will translate into a slight rebound in global growth. Much of that incremental Chinese growth will benefit Europe, particularly the region’s industrial sectors, and the emerging markets more so than the U.S. We believe this backdrop helps the case for favoring select foreign equities with strong fundamentals.

As we enter late-cycle conditions, a slowing global economy appears underway. We believe these conditions will favor stock selection, and the companies that will outperform are the ones we tend to favor: high-quality growth companies that can transcend the economic cycle through secular growth opportunities, superior execution and growing economic moats.

Through our repeatable bottom-up process that relies on deep fundamental research, we are, even in this environment, finding opportunities to deploy capital into businesses with franchise characteristics and durable growth drivers that can deliver compelling risk-adjusted returns over time.

We thank you for investing alongside us in the Thornburg International Growth 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.

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