1st Quarter 2018

Portfolio managers are supported by the entire Thornburg investment team.

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In 2017, we saw synchronized global expansion, low inflation, and accommodative monetary policy leading to strong equity returns, and that sentiment carried into January as fundamentals pointed to further solid economic development and robust corporate earnings growth.

In January, the S&P 500 Index returned 5.73%, the MSCI EAFE Index returned 5.02%, and the MSCI Emerging Markets Index returned 8.33%. Following the strong January, investors began fretting about higher inflation and a potentially more hawkish U.S. Federal Reserve. Subsequently, trade tensions began escalating notably. We, however, expect the U.S. and China to reach agreements and avoid a global trade war, in turn improving access to the Chinese market. In the interim, expect noisy, headline-driven negotiations to keep volatility on the forefront.

During the last two months of the quarter, the S&P 500 Index declined 6.13%, the MSCI EAFE Index declined 6.23%, and the MSCI Emerging Markets Index declined 6.39%. On the European political front, Germany finally formed a government where Germany's center-left Social Democratic Party of Germany agreed to join chancellor Merkel's center- right Christian Democratic Union and Christian Social Union parties (in a renewed "grand coalition."

Political uncertainty continues in Italy after its election, in which the anti-establishment Five-Star Movement and anti-immigration League party garnered increasing support. On a positive note, both parties downplayed anti–European Union rhetoric as of late; therefore, we don't see Italy attempting to part from the E.U. However, the road to form a coalition government could be lengthy, further supporting elevated levels of market volatility.

For the quarter ended March 31, 2018, Thornburg International ADR Strategy returned negative 1.46% (net of fees), compared the MSCI EAFE and MSCI All-Country World ex-U.S. indices' returns of negative 1.53% and negative 1.18% respectively.

Contributors to Performance

  • China Petroleum & Chemical Corp.
    China Petroleum & Chemical Corp. (Sinopec) is China's largest oil refiner and petrochemical producer and distributor. Its upstream business benefited from increasing oil prices, and its strong cash generation supports a high dividend payout ratio. During the quarter, the State Administration of Taxation announced that refineries and wholesalers will be required to draw up invoices through the VAT (value-added tax) system to close consumption tax loopholes. This decision should eliminate capacity from uneconomical refineries in an over-supplied industry, resulting in higher refinery margin, beneficial to Sinopec.
  • Électricité de France S.A.
    Électricité de France (EDF) produces, transmits, distributes, imports, and exports electricity. EDF boasts the largest nuclear power generation capacity in France and is vital for the reliability of electricity provisions across Europe. We believe the company possesses undervalued nuclear assets and the arrival of France's new long-term energy plan and carbon price could provide upside potential in share prices.
  • TAL Education Group
    TAL Education provides K-12 afterschool tutoring services in China in subjects such as mathematics, physics, chemistry, and English. With rising urbanization, favorable demographics, and intense competition for admission into top schools in China, TAL benefits from a supply–demand imbalance, coupled with gaining market share resulting from favorable brand recognition.
  • Petroleo Brasileiro S.A.
    Petroleo Brasileiro (Petrobras), a Brazilian integrated energy company with upstream and downstream operations, benefited from firming oil price. We sold our shares at price target and in favor of superior risk-adjusted return opportunities.
  • Ryanair Holdings plc
    Ryanair is Europe's premier low-cost carrier. It is enjoying a cyclical improvement in its markets following the industry's oversupplied conditions of 2015 and 2016. Ryanair is also making strides this year toward additional network expansion, including new routes serving cities in Germany and Ukraine.
  • Detractors from Performance

    • BRF S.A.
      BRF (Brasil Foods) is one of the world's largest protein companies, focusing on poultry and processed food under brands such as Perdigao, Sadia, and Qualy. BRF is among the world's largest exporters of poultry meat, accounting for around 14.5% of world trade in poultry. It is well positioned to capture growing global protein consumption, as consumer incomes increase. In addition, the agricultural advantages of Brazil—climate, water, and soil conditions—give BRF a cost advantage, facilitating international expansion. BRF underperformed during the period as its domestic business margins shrank from investment to re-establish shelf space, coupled with management turnover.
    • Commerzbank AG
      Commerzbank is a banking and financial services company headquartered in Frankfurt, Germany. Its share price has been under pressure, driven by expectations that interest-rate hikes are being pushed further into the future. Our investment thesis on the underlying restructuring story has not changed. We expect to see a significant improvement in operating profit, driven by lower loan losses and lower restructuring costs. We believe that a sustainable improvement of return on equity will lead to a re-rating in its valuation.
    • Brilliance China Automotive Holdings, Ltd.
      Brilliance China Automotive manufactures sedans and minibuses in China, its subsidiary BMW Brilliance, a joint venture with BMW, produces and sells BMW passenger vehicles in mainland China. During the quarter, Brilliance missed earnings estimates due to extra provisioning for the minibus business. Excluding minibus impact, core earnings and BMW joint venture (JV) contribution is in line with expectation. The stock corrected because of concerns on future product localization risk due to possible import tariff cuts. We agree that the Chinese government will loosen JV requirement and gradually reduce import tariffs, but it may take longer than current expectation.
    • Reckitt Benckiser Group plc
      Reckitt Benckiser (RB) is a U.K.-based multinational consumer goods company with name brands such as Lysol, Mucinex, Scholl's, Gaviscon, etc. and recently acquired infant-nutrition company Mead Johnson. Reckitt Benckiser was one of the potential buyers of Pfizer's consumer health business. Investors were worried that RB would have to either increase its already elevated leverage or issue equities to complete the deal. RB decided to walk away from buying the business and the stock rebounded as a result.
    • Kingfisher plc
      Kingfisher is a home-improvement retailer with operations predominately in the U.K., France, and Poland. The company is now in the middle stage of a five-year transformational plan known as "ONE Kingfisher," the primary pillar of which is significant consolidation of the group's supply chain. We believe successful execution on this plan will see the company turn its competitive advantage in scale into a competitive advantage in price, which will ultimately lead to better sales and a meaningful uplift in profitability. Although the stock gave back recent gains after management cited headwinds in the U.K., we find the stock to be attractively valued despite those concerns.

    We maintain conviction in our portfolio in a volatile market driven by headlines on trade tensions, inflation, a hawkish U.S. Federal Reserve, and geopolitical uncertainties. With volatility comes opportunity to acquire good companies at compelling prices. Our bottom-up process continues leading us to interesting companies across our baskets: basic value, consistent earners, and emerging franchises. We are confident that our investment philosophy and process will continue to deliver attractive risk-adjusted returns over a full market cycle.

    Thank you for investing in Thornburg International ADR Strategy.

    Contributors to Performance1
    (Representative Account)
    Name Contrib % Avg Wgt %
    TAL Education Group 0.55 2.66
    Electricite de France S.A. 0.52 3.28
    China Petroleum & Chemical Corp. 0.50 2.81
    Petroleo Brasileiro S.A. 0.46 0.61
    Ryanair Holdings plc 0.28 1.95
    Detractors from Performance1
    (Representative Account)
    Name Contrib % Avg Wgt %
    Brilliance China Automotive Holdings Ltd. -0.52 2.23
    Commerzbank AG -0.44 3.41
    BRF SA -0.41 0.91
    Reckitt Benckiser Group plc -0.26 2.13
    Kingfisher plc -0.26 1.95

    1. Past performance does not guarantee future results. To obtain the calculation methodology and a list showing the contribution of each holding in the representative account to the overall account's performance during the reporting period, please email a request to bdg@thornburg.com. The holdings identified do not represent all of the securities purchased, sold or recommended for advisory clients.


Important Information

Performance data for the International ADR Strategy is from the International ADR Composite, inception date of August 1, 2003. The International ADR Composite includes discretionary institutional and high net worth accounts that are not part of a broker-sponsored or wrap program. Effective January 1, 2014, the composite includes separately managed institutional and high net worth accounts. Prior to January 1, 2014, the composite also included broker-sponsored accounts that paid transaction costs. The composite was redefined to include broker-sponsored accounts in the same composite. Returns are calculated using a time-weighted and asset-weighted calculation including reinvestment of dividends and income. Returns are annualized for periods greater than one year. 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. 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 .75%, this increase would be 142%.

As of 3/31/18 1 Year 3 Year 5 Year 10 Year Inception
International ADR Composite (NET)    13.17% 4.15% 4.83% 2.77% 8.08%
International ADR Composite (GROSS)    13.75% 4.71% 5.42% 3.41% 8.76%
MSCI AC World ex-U.S. Index    16.53% 6.18% 5.89% 2.70% 7.92%
MSCI EAFE Index  14.80% 5.55% 6.50% 2.74% 7.35%

Unless otherwise noted, the source of all data is Thornburg Investment Management, Inc., as of 3/31/18.

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.

The Strategy may invest in shares of companies through initial public offerings (IPOs). IPOs have the potential to produce substantial gains and there is no assurance that the Strategy will have continued access to profitable IPOs. As Strategy assets grow, the impact of IPO investments on performance may decline.

The information provided in this report should not be considered a recommendation to purchase or sell any particular security. There is no assurance that any securities discussed herein will remain in an account's portfolio at the time you receive this report or that securities sold have not been repurchased. The securities discussed may not represent an account's entire portfolio and in the aggregate may represent only a small percentage of an account's portfolio holdings. It should not be assumed that any of the securities transactions or holdings discussed were or will prove to be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein.

Portfolio holdings and characteristics shown herein are from a representative account managed within the investment composite. The representative account is selected based on account characteristics that Thornburg believes accurately represent the investment strategy as a whole. Should these characteristics change materially, Thornburg may select a different representative account. Holdings may change daily and may vary among accounts, which may contribute to different investment results. The representative account information is supplemental to the strategy’s composite and GIPS compliant presentation.

Holdings may change daily and may vary among accounts.

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 glossary for a definition of terms.