3rd Quarter 2017

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International equity markets continued marching higher in the third quarter largely on the back of both strong corporate and improving economic fundamentals. In aggregate, companies posted another round of double-digit earnings growth. It is notable that even with the robust year-to-date return, the price investors are paying for international stocks as measured by forward price/earnings per share is largely the same as at the start of the year and remains well below the equivalent metric for U.S. equity markets at the broad market level.

All sectors in both our benchmark indices produced positive returns in U.S. dollars (USD), with a few marginally negative in local currency terms, as the dollar continued to weaken. The USD's international value is below its year-ago level on the ICE U.S. Dollar Index. Yields on global fixed income securities shifted around but ended the quarter about where they started, and oil began to strengthen, reversing the recent trend.

For the quarter ended September 30, 2017, Thornburg International Equity ADR Strategy returned 3.42% (net of fees), below the performance for the MSCI EAFE and MSCI All Country World ex-U.S. indices at 5.40% and 6.16%, respectively. Performance over the first three quarters is more favorable for the strategy at 20.87%, compared with the aforementioned indices' 19.96% and 21.13% respective returns.

Contributors to Performance

  • Alibaba
    Alibaba is one of the largest internet companies in China, providing e-commerce, internet infrastructure, online financial, and internet content services. Growth in Alibaba's e-commerce business, as measured by gross merchandise volume (GMV), remains robust with increasing e-commerce penetration in the lower-tier cities that lack extensive brick-and-mortar retail infrastructure. With almost 450 million annual active buyers generating approximately $550 billion in GMV, Alibaba's most valuable asset is arguably its extensive customer data. Utilizing its big data, Alibaba has runway to perfect its targeted advertisement algorithm and improve its monetization rate. The stock performed well during the quarter as Alibaba continues to deliver better-than-expected top- and bottom-line results on the back of better customer engagement and deployment of data analytics tools.
  • Omron Corp.
    Omron Corp. is a Japanese manufacturer of electronic components and equipment used for factory automation, a secular trend as manufacturers invest in automation to achieve higher operating efficiency. Current executive management came onboard five years ago and has focused on improving capital returns by divesting low ROIC (return on invested capital) business units, increasing profit margins, as well as capital returns to shareholders.
  • Infineon Technologies
    Infineon Technologies is a leading manufacturer of semiconductors used in automotive, industrial, and security markets. Its automotive segment is growing twice as fast as global auto sales growth. Infineon benefits from increased semiconductor demand for emission reduction technology, coupled with safety-related improvements such as advanced driver assistance systems. Infineon is well positioned to take advantage of the upcoming electric vehicle trend.
  • Wirecard
    Wirecard provides a variety of services to facilitate electronic and mobile payment transactions and is well positioned to capture the structural shift to digital payments. With the entry into the U.S. market and the acquisition of Citi's merchant acquiring business in the Asia Pacific, Wirecard can deliver a fully integrated end-to-end payment services platform on a global basis. In addition to strong earnings growth, Wirecard's market-leading position and global footprint have increased merger and acquisition speculation, further driving stock performance.
  • Commerzbank
    Commerzbank, a banking and financial services company headquartered in Frankfurt, Germany, performed strongly as the competitiveness of German banking relative to the rest of Europe has improved. Looking forward, cost-saving initiatives should further improve profitability, and consolidation in the German banking market could drive topline growth. Meanwhile, its valuation is still well below European banking peers, at about half of reported book value.

Detractors to Performance

  • Teva Pharmaceutical
    Teva Pharmaceutical is the world's largest generic pharmaceutical drug company. Teva drugs comprise 17% of generic prescriptions filled in the U.S. Shares of Teva came under pressure following the quarterly results, as guidance was cut on generic-drug pricing pressure, and the company reduced its dividend materially to meet its debt obligation. U.S. generic drugs have been under considerable pricing pressure, and it is unclear how long it will persist. Teva plans to divest a few of its businesses to help it manage its debt load. On a positive note, Teva found a new CEO (Kare Schultz) with a proven turnaround track record from another European pharmaceutical company.
  • Reckitt Benckiser
    Reckitt Benckiser is a U.K.-based multinational consumer-goods company with name brands such as Lysol, Mucinex, Scholl's, Gaviscon, etc., and recently acquired fast-growing infant-nutrition company Mead Johnson, broadening exposure globally with significant growth in emerging markets. New product challenges, coupled with a cyber-attack, pressured Reckitt and caused the company to lower its full-year guidance, which negatively affected the stock price. We believe these headwinds to be temporary and expect its Mead Johnson acquisition to provide a meaningful earnings uplift with the high-quality company.
  • Nike
    Nike, a global athletic footwear and apparel company, continues to deliver solid earnings growth as it shifts distribution from wholesale (via retailing intermediary) to "direct to consumer" channels. However, short-term challenges have weighed on company performance and investor sentiment as global competitors have stepped up efforts to take share in what we believe to be a structural growth market. We still consider Nike's shares to be undervalued and don't reflect the company's revenue growth potential, nor its opportunity to drive margin expansion from the ongoing "manufacturing revolution."
  • ConvaTec
    ConvaTec is a U.K.-based medical device company with products in ostomy care, continence, and advanced wound care. Many of its products are consumable, creating a consistent cashflow stream. While company management is focused on improving profit margins, operating costs for the first half of the year came in higher than market expectations; we believe this to be transitory in nature and that ConvaTec will move forward with profitability improvement.
  • China Unicom
    China Unicom, the second-largest mobile and fixed-line operator in China, underperformed the market following its announcement of mixed ownership reform and increased employee ownership, although we view the announcement as positive. China Unicom also stands to benefit from an upcoming public listing of joint-venture tower company, China Tower Co., potentially unlocking value for China Unicom shareholders.

While international equity markets posted robust returns over the first three quarters of the year, earnings growth and local currency appreciation—as opposed to international stocks becoming more expensive on price paid for a unit of earnings (P/E multiple)—are driving much of the performance. We also continue to find interesting stock ideas from our bottom-up process in all three of 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, as it has in the past.

Thank you for investing in Thornburg International Equity ADR Strategy.

Contributors to Performance1
(Representative Account)
Name Contrib % Avg Wgt %
Alibaba Group Holding Ltd. - ADR 0.65 3.08
Omron Corp. 0.49 3.32
Infineon Technologies - ADR 0.48 2.63
Wirecard AG - ADR 0.42 1.09
Commerzbank AG - ADR 0.34 2.91
Detractors from Performance1
(Representative Account)
Name Contrib % Avg Wgt %
Teva Pharmaceutical Industries Ltd. - ADR -0.96 1.25
Reckitt Benckiser Group plc - ADR -0.24 2.32
Nike, Inc. -0.20 1.52
ConvaTec Group plc - ADR -0.17 1.33
China Unicom (Hong Kong) Ltd. - ADR -0.16 2.31

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 9/30/17 1 Year 3 Year 5 Year 10 Year Inception
International ADR Composite (NET)    15.79% 4.69% 6.61% 1.86% 8.35%
International ADR Composite (GROSS)    16.42% 5.28% 7.23% 2.50% 9.04%
MSCI AC World ex-U.S. Index    19.61% 4.70% 6.97% 1.28% 7.93%
MSCI EAFE Index  19.10% 5.04% 8.38% 1.34% 7.42%

Unless otherwise noted, the source of all data is Thornburg Investment Management, Inc., as of 9/30/17.

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.

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.

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.