The promise of an efficacious vaccine began to materialize in the second quarter as US markets continued to perform, economic activity accelerated, jobs returned, and overall sentiment remained high. However, relatively higher inflation induced partly by supply constraints, and expectations of higher rates, 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 small-cap stocks with cyclical and consumer exposure. However, June was a reversal of the trend as growth stocks resumed leadership. Small/Mid Cap sector leadership measured using the Russell 2500 Index was led by Energy and Communication Services, while Consumer Staples and Utilities relatively underperformed.
First-Quarter 2021 Performance Highlights
- The Thornburg Small/Mid Cap Core Fund returned positive 4.45% (I shares), underperforming the Russell 2500 Index, which returned positive 5.44%, and the S&P 500 Index, which returned positive 8.55%.
- Top-performing sectors were Information Technology and Financials, where stock selection helped drive the performance. Top detracting sectors from relative performance were consumer discretionary and industrials.
- Small/Mid cap stocks, between $2.5 billion and $12 billion market capitalization returned 1.6% and drove relative underperformance against the Russell 2500. On the positive side, the fund’s overallocation to companies with market capitalizations over $12 billion returned 12.7%, beating the overall benchmark. Being underweight smaller companies with market capitalizations under $2.5 billion was also a positive contributor to performance.
Current Positioning and Outlook
The late quarter rotation towards higher-quality growth stocks 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. During these periods, higher-quality stocks tend to perform relatively better, which would favor our general philosophy and current positioning of targeting higher-quality core and reasonably valued growth 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 Biden administration’s infrastructure bill that has a focus on renewables with the potential to benefit many companies we own. The portfolio maintains balanced exposure to consistent earners, emerging franchises, and 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.
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%.