October 1, 2021
This Portfolio Manager Commentary on Thornburg Investment Income Builder is published amidst the ongoing developments associated with the global coronavirus pandemic, Covid-19. 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 as we resume normal economic activity now that the pandemic appears to be better controlled.
Thornburg Investment Income Builder paid an ordinary quarterly dividend of $0.329 per I share in the quarter ending September 30, 2021. This is +48% compared to the dividend of 22.2¢ per I share for Q3 2020. The fund paid $1.159 per I share for the trailing four quarters, +22.9% versus the prior year comparable period. The dividend per share was lower for A and C shares, to account for varying class specific expenses. We currently expect more than 70% of your Investment Income Builder’s equity holdings to increase dividends in calendar 2021 vs 2020. This was the primary driver of the fund’s higher income this year. Your fund’s interest income was also higher year on year.
The net asset value of Investment Income Builder’s I shares decreased by $0.45 per share ($23.58 to $23.13) during the September quarter and increased by $4.28 per share ($18.84 to 23.13) for the year ending September 30, 2021. In 2021 your fund recovered more than all of the share price decline that occurred from February 14, 2020, to March 31, 2020, as the Covid-19 pandemic gained momentum globally and set off a chain reaction of selling across a range of financial assets.
Investment Income Builder’s I share total return of -0.51% for the September quarter trailed its blended benchmark (75% MSCI World Index and 25% Bloomberg-Barclay’s U.S. Aggregate Bond Index), which returned 0.03% for the quarter. For the 12 months ending September 30, 2021, Investment Income Builder’s I share return of 29.18% exceeded the blended benchmark return of 20.89%.
The quarter ending September 30, 2021, was the 75th full calendar quarter since the inception of Thornburg Investment Income Builder in December 2002. In 56 of these quarters, the fund delivered a positive total return. The fund has delivered positive total returns in 14 of its 18 calendar years of existence. Importantly, Thornburg Investment Income Builder has delivered an average annualized total return of more than 8.9% since its inception, split between quarterly income distributions and share price appreciation.
Listed at right in descending order are the 25 largest equity holdings in the fund at quarter end, along with their 2020 calendar year and 2021 share price changes in $US through September 30. Also noted are dividend yields at closing September 30, 2021, stock prices. Together, these 25 firms comprise 67% of the fund’s total assets. Cash & interest-bearing debt and hybrid securities comprise around 13% of fund assets, and 25 other common equities comprise a total of approximately 20% of fund assets. Individual position sizes of the 25 equities listed range from 4.3% (Taiwan Semiconductor) of fund assets to approximately 1.4% for those shown near the bottom of the list.
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 Covid crisis reinforced the essential nature of the products and services they provide.
|Name of Company||2020 Year Price Change||Yth 2021 Price Change +/- at Sep. 30 2021||Dividend Yield at Sep. 30 2021 Price|
|Taiwan Semiconductor Manufacturing Co. Ltd.||70.5%||10.5%||1.90%|
|Leading semiconductor chip foundry in the world, fabricating chips used in many digital devices|
|Vodafone Group plc||-15.2%||-7.6%||6.90%|
|Multi-national telecommunications company|
|Multi-national telecommunications network operator, home market is France Telecom|
|Produces, refines, transports, and markets oil and natural gas products globally|
|Develops and markets digital and analogue semiconductors|
|Samsung Electronics Co. Ltd.||54.2%||-15.9%||4.06%|
|Manufactures consumer & industrial electronic products; leading semiconductor producer|
|China Mobile Ltd.||-32.5%||6.6%||7.22%|
|World’s largest mobile telecommunications network operator, net cash balance sheet|
|CME Group, Inc.||-8.6%||6.2%||3.13%|
|Operates exchanges that trade futures contracts & options on rates, F/X, equities, commodities|
|Develops and sells pharmaceutical products|
|JPMorgan Chase & Co.||-8.9%||28.8%||2.44%|
|U.S. based global financial services conglomerate serving business & individuals|
|UK based food retailer, also selling general merchandise from its largest stores|
|NN Group N.V.||15.8%||20.6%||5.30%|
|Netherlands based life and casualty insurer, with market leading positions in Netherlands|
|The Home Depot, Inc.||21.6%||23.6%||2.01%|
|Largest U.S. home improvement retailer, sells hardware & building materials|
|Chimera Investment Corp.||-53.2%||44.9%||8.89%|
|U.S.-listed mortgage REIT|
|Assicurazioni Generali SpA||-15.0%||21.4%||5.49%|
|Italy-based multinational life & property/casualty insurers|
|Roche Holding AG||7.9%||4.6%||2.66%|
|Global health care company develops and sells medicines and diagnostic tools|
|Regions Financial Corp.||-6.1%||32.2%||3.19%|
|U.S. regional banking group, mostly operating in Southeastern U.S. states|
|Develops and delivers key components for digital wireless communications products|
|Global health care company develops and sells medicines, vaccines, biologic therapies.|
|Deutsche Telekom AG||12.5%||9.5%||3.46%|
|Multi-national telecommunications network operator, majority owner of T-Mobile USA|
|Diversified miner & commodities trader|
|Walgreens Boots Alliance, Inc.||-36.5%||18.0%||4.00%|
|Operates retail drugstores in USA and UK and wholesale pharmaceuticals distributor in EU|
|Generates, distributes, and sells electricity and gas in Southern Europe & Latam|
|Equitable Holdings, Inc.||1.8%||15.8%||2.43%|
|U.S. life insurer and asset manager (controls Alliance-Bernstein)|
|Merck & Co., Inc.||-10.1%||-3.7%||3.46%|
|Global health care company develops and sells medicines, vaccines, biologic therapies.|
These are not trivial businesses. These firms occupy important positions in their respective markets, and they tend to be well capitalized.
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 March 31, 2020, to September 30, 2021:
|Sector||Mar. 31, 2020||Jun. 30, 2020||Sep. 30, 2020||Dec. 31, 2020||Mar. 31, 2021||Jun. 30, 2021||Sep. 30, 2021|
Five of eleven sectors of the MSCI World Index delivered positive returns for the September quarter, ranging from +3% for the information technology sector to approximately 0.5% for the utilities sector. The six negative sector returns within the Index portfolio ranged from -1% for industrials to -5% for materials businesses. The MSCI World Index comprises 75%, and the entire equity portion, of the Thornburg Investment Income Builder’s global performance benchmark. In the Income Builder portfolio, 11 equity investments contributed positive returns of at least 0.10% to overall portfolio performance during Q3 2021. (These most positive contributors included Dutch insurer NN Group, JPMorgan Chase, UK retailer Tesco, gas & oil producer and processor TotalEnergies, U.S. financial firm Regions Financial, diversified miner Glencore, and Pfizer). Twelve of the fund’s equity investments made negative September quarter contributions to portfolio performance of below -0.10%. These detractors from fund performance included Samsung Electronics, multinational telecommunications services providers Vodafone and Orange, semiconductor provider Qualcomm, exchange operator CME Group, and European utilities Enel and Endesa.
Investment Income Builder’s bond holdings delivered modest positive returns during the September quarter as interest payments overcame small price declines. 10-year U.S. Treasury bond yields rose slightly from 1.47% at June 30 to 1.49% at September 30. Corporate and assetbacked bond prices declined marginally in the September quarter as tight yield spreads to government bonds widened slightly. The Bloomberg-Barclays U.S. Corporate High Yield Index rose from 3.75% at June 30 to 4.04% at September 30 (yield to lower of call price or maturity). Robust appetite for interest income from a range of investors fully offset the formidable new supply of debt issuance.
Readers of this commentary who are long-time shareholders of Thornburg Investment Income Builder 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 year ended September 30, 2021, approximately 73% of Income Builder’s income was derived from stock dividends, the remainder coming from interest.
The outlook for bond returns is extremely cloudy. The “real” yield on the 10 year U.S. Treasury note (market yield on 10 year UST of 1.49% minus core consumer price index of 4.00%) is near a multi-decade low at -2.51% using the August 2021 consumer price index. This real yield level coincides with market expectations that the U.S. Federal Reserve will soon “taper” its purchases of U.S. Treasuries, leaving market participants to decide whether a negative real yield is satisfactory. The trailing 30-year average real yield on 10 year U.S. Treasury notes was +1.81%, so the current difference vs average is extreme. At the moment accommodative central banks, better- than-expected credit performance, and mechanical asset allocations by institutional investors that rebalance from equities to bonds when equities rise are supportive of high bond prices and low interest rates. At September 30, 2021, the $68.1 trillion Bloomberg Barclays Global Aggregate Bond Index showed an average maturity of 9.15 years and a yield of 1.17%. Approximately 19% of the bonds in this index traded at market yields of below 0% at September 30, 2021.
We are optimistic about the future return potential of Thornburg Investment Income Builder’s assets. Why? Virtually all the businesses in your 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. The weighted average price/operating cash flow ratio for Thornburg Investment Income Builder’s equity portfolio tabulated using Bloomberg reported trailing year results was approximately 7.2x as of September 30, significantly below the 12.6x price/cash flow ratio of the MSCI All Country World equity index. Income Builder’s 5.4% weighted average equity portfolio dividend yield was more than twice the 1.97% dividend yield of the MSCI Index. We believe investors will direct capital in the coming quarters into dividend paying stocks, supporting prices of these.
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%.