4th Quarter 2017

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For the fourth quarter of 2017, Thornburg International Growth ADR Strategy–Wrap returned 1.51% (net of fees), trailing its benchmark, the MSCI All Country World ex-U.S. Growth Index, which returned 5.77%. Although the portfolio underperformed the benchmark during the quarter, we are pleased to have delivered solid positive performance for the full year, with the strategy returning 30.87% (net of fees), versus 32.01% for the same index.

It was another positive quarter for global equities and a banner year overall as a broad-based global economic expansion, coupled with muted inflation trends, proved to be a favorable combination for risk assets. U.S. equities continued their streak of positive returns, boosted in part not only from tax reform, but also by continued growth in corporate earnings and earnings multiple expansion—all reflecting the considerable fundamental strength we are seeing in the U.S. economy.

Internationally, stocks (as measured by the MSCI All Country World ex-U.S. Index) were even better, outperforming domestic equities for the first time since 2012 on the back of stronger earnings growth and a weaker dollar. A question often asked is, can the bull market we’ve seen continue?

Performance Discussion

It continued to be a good environment for international equities on a sweeping basis as every sector, except for utilities, posted positive returns. Although information technology delivered better-than-average returns, we saw leadership rotate into more cyclically sensitive areas, with financials and materials the top two performing sectors this quarter. Given our positioning, this proved to be a small headwind to performance. Our best-performing sector was consumer staples, as we benefited from strong underlying stock selection, despite being modestly underweight. We saw disappointing performance in consumer discretionary names, largely driven by a handful of individual stock detractors.

From a geographic standpoint, we found modest success in Asia ex-Japan and the United Kingdom on an absolute basis. The eurozone, although delivering positive returns, was up relatively less than other regions in our benchmark. Our relative overweight here acted as a drag to performance. This positioning, combined with a few idiosyncratic stock detractors in the eurozone, proved to be our worst-performing geography on both an absolute and relative basis.

Leading contributors to performance for the quarter included Japanese cosmetics and skincare company KOSÉ Corp., German online payments company Wirecard AG, consumer food and nutrition company Kerry Group plc, Macau casino operator MGM China Holdings Ltd., and Chinese internet company Tencent Holdings Ltd.

KOSÉ’s shares rose as earnings revisions continue to step up on an improving growth outlook for three key segments of their business, North America (largely Tarte Cosmetics), Chinese inbound tourist demand, and Japanese domestic consumption.

Long-term holding Wirecard continues to benefit from strong secular growth dynamics as the world increasingly becomes cashless and a large proportion of the world’s payments transactions have yet to convert to fully digital forms. This was evidenced by strong financial results in the most recent quarter, with steady organic growth and margin delivery. Investors are also becoming increasingly confident that Wirecard can achieve upside to their upbeat 2020 growth targets.

Kerry Group is the leading business in the fast-growing flavors and ingredients market, helping consumer packed goods and restaurant companies respond to changing consumer preferences for more natural ingredients. Its customer base is an attractive mix of large, global firms with significant brand recognition but less nimble product lines, and smaller businesses that are increasingly gaining grocery store shelf space. During the fourth quarter, the company announced strong organic revenue growth. Particularly strong was its Chinese business, where there are fewer established brands and consumers are more willing to try new products, leading to shorter product cycles, which is beneficial to Kerry’s results.

MGM China Holdings is the locally listed, majority-owned subsidiary of MGM Resorts International that represents MGM’s Macau-based operations. Shares performed well this quarter as investors are beginning to appreciate the enhanced earnings power embedded within the imminent opening of a new $3.5 billion property, dubbed MGM Cotai, on the Cotai Strip section of Macau. Shares also benefited from strong visitation and gaming revenue trends during the fourth quarter.

Tencent, China’s largest social messaging and gaming platform, continued to demonstrate the importance of building compelling user experiences, growing revenues 62% year-over-year during the quarter. Tencent’s unique knowledge around how its customers play has allowed it to build gaming franchises with numerous nodes of opportunity. Tencent remains one of the most unique and socially embedded internet businesses in emerging markets, occupying more time spent on Chinese mobile phones through its messaging, social, video, payment, and other applications than any other competing platform.

Principal detractors to performance this quarter were U.K.-based Merlin Entertainments plc, German pharmaceuticals, consumer health care and agricultural products company Bayer AG, French online advertising services company Criteo S.A., U.K. medical equipment provider ConvaTec Group plc, and multi-national, but primarily French, telecommunications company Altice NV.

Merlin Entertainments operates theme parks and family entertainment resorts in the United Kingdom, continental Europe, and the U.S. While European operations showed decent results, weakness in its U.K. and U.S. attractions weighed on Merlin’s performance. The combination of poor weather and worries over terrorist attacks in the U.K., along with a three-day closure of its Legoland park in Florida, caused management to revise guidance downward. We remain optimistic about Merlin’s growth prospects and the opportunity that its partnership with Lego Brand—one of the most valuable consumer brands in the world—represents.

Criteo shares fell as the company cut guidance and disclosed that a solution they had developed to mitigate revenue declines on mobile Safari web browsers had been blocked by Apple Inc. upon the release of iOS version 11.2.

ConvaTec issued a profit warning as production issues arose after the company moved some of its manufacturing lines from the United States to a lower-cost country. This manufacturing issue in a key segment of the business impacted the overall supply chain, hurting growth and causing margins to contract. With fundamentals deteriorating, the margin improvement thesis sidelined, and management credibility reduced, we sold the stock.

Bayer’s shares were pressured after reporting a mixed third-quarter result and increased regulatory uncertainty around the acquisition of Monsanto Company being completed. Although we ultimately believe Bayer will be allowed by regulators to purchase Monsanto, we also believe that Bayer shares are attractive on a standalone basis, with or without Monsanto.

Altice sold off heavily as a mismanaged pricing increase in France led to elevated subscriber churn and a shortfall to earnings. Prospects for any further acquisition- led growth now appear dim and investors have begun to question whether the company can turn around their prospects enough to service their heavy debt burden. Due to the increased uncertainty and weaker growth prospects, we exited the position.

Notable Portfolio Activity

We had a relatively limited level of turnover in the portfolio for the quarter, as we balanced the sale of three holdings with the initiation of three new positions.

One of the portfolio additions this quarter was adidas AG, a global footwear and sports apparel company based in Germany. Adidas appears poised to sustainably compound business value for some time to come, due to high levels of innovation in their product portfolio, share gains in North America, and a highly effective digital marketing strategy that is resonating with millennials across the globe. We see scope for margin improvement through a variety of levers, such as greater operational focus by management and continued strong growth from China and owned e-commerce channels, where segment margins are accretive to group level margins. We took advantage of share price weakness during the fourth quarter to initiate a position in this high- quality compounder as we believe the market underestimates adidas’s longer-term earnings power.

Outlook

As we look forward, we see the global economy continuing to build upon the synchronized growth upswing and an environment that is conducive to equity returns, absent any major geopolitical or inflation shocks that could curtail global growth. Concerning international equities in particular, growth prospects remain attractive and valuations appear reasonable as earnings multiples remain generally less expensive when compared to U.S. equities. This valuation discount remains relatively wide when evaluating historical ranges.

With global economic fundamentals strengthening and core inflation at low levels, the outlook for equities offers, on balance, more positives than negatives. While this global growth upswing appears durable for now, it can be easy to get carried away with optimism, thus we closely monitor the risk factors that the global economy needs to navigate. One key question is China, which represents both great opportunities, as well as risks. For example, can China successfully rebalance the economy towards higher-quality consumption- led economic growth? If China can manage both this and an orderly deleveraging process, then we envision China and its rapidly expanding middle class contributing to incrementally better global growth trends.

In Europe, we are seeing the continuation of a cyclical rebound and think domestic factors, such as consumer consumption, are poised to help drive growth going forward. We expect the European Central Bank will remain patient and accommodative with monetary policy, with quantitative easing ending in 2019 rather than 2018, but there is risk the eventual unwind is not as gradual as investors expect. In the U.K., the economy has fared better than expected since the 2016 “Brexit” vote, due in large part to a robust external environment, but the downside risks and economic fallout of a hard Brexit path remain an issue to watch. U.S. trade policy—particularly what the U.S. does regarding North American Free Trade Agreement—is another factor to monitor. We have yet to see major excesses build up in the global economy, except perhaps in the cryptocurrency space, therefore we remain broadly constructive on the outlook for international equities.

While results may vary over shorter time periods, we believe the structure of the strategy and our rigorous, fundamentals- driven, bottom-up process, based on time-tested investing principles—such as secular growth, high-quality businesses, multiple layers of diversification (including our three-basket structure), and reasonable valuations—can, and has, consistently delivered compelling risk-adjusted returns and lower correlation to peers over the decade-plus life of the strategy.

We thank you for investing in Thornburg International Growth ADR Strategy–Wrap.

Contributors to Performance
(Representative Account)
Name Contrib % Avg Wgt %
KOSÉ Corporation 0.66 2.18
Wirecard AG 0.57 2.82
MGM China Holdings Limited 0.50 1.96
Kerry Group plc 0.36 2.29
Tencent Holdings Ltd. 0.33 1.91
Detractors from Performance
(Representative Account)
Name Contrib % Avg Wgt %
Altice NV -1.44 1.07
Criteo S.A. -0.52 1.10
Merlin Entertainments plc -0.37 1.27
ConvaTec Group plc -0.37 0.25
Bayer AG -0.36 3.53

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 Growth ADR Strategy is from the International Growth ADR Wrap Composite, inception date of May 1, 2010. The International Growth ADR Wrap Composite includes discretionary wrap accounts invested in the International ADR Growth Strategy. 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. “Pure” Gross returns do not reflect the deduction of any expenses, including trading costs and are supplemental to net returns. Beginning January 1, 2009, net returns reflect the deduction of the maximum total wrap fee which is currently 3% per annum. Net returns are derived from subtracting 1/12th of 3% from each account's monthly gross return. The total wrap fee includes all charges for the trading costs, portfolio management, custody and other administrative fees. Prior to January 1, 2009 net returns reflect actual wrap fees for each account in the composite. Beginning January 1, 2014 returns reflect the deduction of transaction costs for some accounts in the composite. The standard fee schedule currently in effect is: 1% to 3% on all assets. Fees may be negotiated in lieu of the standard fee schedule. Actual fees may vary depending on, among other things, the applicable fee schedule and portfolio size. The firm's fees are available upon request and also may be found in Part II of its Form ADV.

 As of 12/31/17

1 Yr

3 Yr

5 Yr

Inception 5/1/2010

International Growth ADR Wrap Composite (NET)   30.87% 7.68% 8.07% 8.11%
International Growth ADR Wrap Composite (“PURE” GROSS)  34.70% 10.89% 11.30% 11.33%
MSCI AC World ex-U.S. Growth Index  32.01% 9.29% 7.97% 6.82%

Unless otherwise noted, the source of all data is Thornburg Investment Management, Inc., as of 12/31/17.

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 herein 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.