Thornburg Limited Term Income Strategy

4th Quarter 2019

Jason Brady, CFA
Jason Brady, CFA
President and CEO
Lon Erickson, CFA
Lon Erickson, CFA
Portfolio Manager and Managing Director
Jeff Klingelhofer, CFA
Jeff Klingelhofer, CFA
Co-Head of Investments and Managing Director
Portfolio managers are supported by the entire Thornburg investment team.
December 31, 2019
Market Review

For the fourth quarter, the Bloomberg Barclays Intermediate Government/Credit Index returned 0.37%, while the broader fixed income market represented by the Bloomberg Barclays U.S. Aggregate Bond Index returned 0.18%. In general, 2019 was a strong year for fixed income investors. For much of the year, sovereign bonds reacted as one would expect to weaker economic data, with bond yields broadly tracking the manufacturing surveys lower. Central bank monetary stimulus appeared to achieve policy maker goals of boosting investor sentiment and lifted all boats. Such strong returns for both traditional risk-off and risk-on assets, at the same time, is unusual.

Performance Highlights
  • During the fourth quarter, the Thornburg Limited Term Income Strategy (net of fees) returned 0.48%, slightly outperforming the benchmark. The strategy returned 5.91% in 2019, underperforming the longer duration Bloomberg Barclays Intermediate Government/Credit Index return of 6.80%.
  • In this market, the portfolio benefited from its underweight in duration relative to the benchmark. The U.S.-China trade war dominated rate volatility during the quarter, with tit-for-tat tariffs likely contributing to a notably contractionary manufacturing PMI. Amid mixed economic data, the Fed cut rates a third time in October. In December, the U.S. and China reached a preliminary agreement on a trade deal, lifting risk assets.
  • A meaningful allocation to investment grade credit supported portfolio performance as credit spreads declined during the quarter from 153 basis points (bps) to 93 bps, despite higher leverage in the market and flat to weaker coverage metrics. Largely, we believe this to be the result of risk-on sentiment amid additional liquidity provided by global central banks. Corporate credit continues to provide investors with some additional yield in a yield-starved world.
Current Positioning and Outlook

Neither credit nor duration provide much compensation for investors relative to the potential risks. We believe defensive positioning is prudent given the asymmetrical downside potential for fixed income in a lengthy credit cycle. Last year was very good across the spectrum; 2020 is unlikely to be so indiscriminate and such high returns will likely be harder to obtain.

With this in mind, we continue to move portfolios up in quality—by rating certainly, but also largely by the defensive nature of a security’s underlying cash flows. We continue to favor the consumer over government or corporate paper, specifically ABS and MBS as consumer re-leveraging with unsecured and auto loans ticks up. Importantly, however, consumer balance sheets and general credit metrics remain strong due to a healthy job market and rising incomes.

Federal Reserve Chairman Jerome Powell stated in mid-December that the Fed intends to keep rates where they are until it sees “a significant move up in inflation that’s also persistent.” This clearly suggests policy tightening is a considerable time away. However, recent observations also tell us flip-flops are possible. If the global economy reaccelerates, bond yields may move higher, rather than fall as they did in 2019. Portfolio duration still sits toward the lower end of our historic ranges as a balanced approach to duration and credit risks is, we believe, key to success in 2020.

Important Information

Performance data for the Limited Term Income Strategy is from the Limited Term Income Composite, inception date of February 1, 1993. The Limited Term Income Composite includes all non-wrap discretionary accounts invested in the Limited Term Income Strategy. Returns are calculated using a time-weighted and asset-weighted calculation. Returns reflect the reinvestment of income and capital gains. Periods less than one year are not annualized. Individual account performance will vary. The performance data quoted represents past performance; it does not guarantee future results. Gross of fee returns are net of transaction costs. Net of fee returns are net of transaction costs and investment advisory fees. For periods prior to 2011, net returns for some accounts in the composite also reflect the deduction of administrative expenses. Thornburg Investment Management Inc.’s fee schedule is detailed in Part 2A of its ADV brochure. Performance results of the firm's clients will be reduced by the firm's management fees. For example, an account with a compounded annual total return of 10% would have increased by 159% over ten years. Assuming an annual management fee of 0.75%, this increase would be 142%.

Unless otherwise noted, the source of all data, charts, tables and graphs is Thornburg Investment Management, Inc., as of 12/31/19.

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.

Holdings may change daily and may vary among accounts.

U.S. Treasury securities, such as bills, notes and bonds, are negotiable debt obligations of the U.S. government. These debt obligations are backed by the “full faith and credit” of the government and issued at various schedules and maturities. Income from Treasury securities is exempt from state and local, but not federal, taxes.

Portfolios investing in bonds have the same interest rate, inflation, and credit risks that are associated with the underlying bonds. The value of bonds will fluctuate relative to changes in interest rates, decreasing when interest rates rise.

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.

Portfolio construction will have significant differences from that of a benchmark index in terms of security holdings, industry weightings, asset allocations and number of positions held, all of which may contribute to performance, characteristics and volatility differences. Investors may not make direct investments into any index.

Please see our glossaryglossary (www.thornburg.com/glossary) for a definition of terms.

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