1st Quarter 2018

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For the first quarter of 2018, Thornburg International Growth ADR Strategy-Wrap returned 1.34% (net of fees), exceeding its benchmark, the MSCI All Country World ex-U.S. (ACWI) Growth Index, which returned negative 0.87%.

Global markets rallied sharply to start the first month of the year as investors cheered both positive global economic growth data as well as the considerable and unprecedented level of late-cycle fiscal stimulus that recently enacted U.S. tax reform was expected to unleash. However, that excitement quickly gave way to mounting concerns around elevating trade tensions and increasingly hawkish central bank policies. This rattled markets, and we experienced a sharp rise in volatility for the first time in well over a year. Rather than de-escalating quickly, we saw proposed tariff plans between the U.S. and China increase in a tit-for-tat manner. Although global growth remains generally above trend, a full-blown trade war between the world's super powers would create a "stagflationary" environment that will both dampen growth and boost inflation, negatively impacting the ability of central banks to effectively set policy. With volatility returning and trade concerns mounting, equity indices, both in the U.S. and internationally, ended up posting negative returns this quarter.

Performance Discussion

During the quarter, only three of the benchmark's 11 sectors delivered positive returns in local currency terms. Those three sectors were information technology, utilities, and financials. Although the portfolio saw a benefit from being overweight information technology during the quarter, our best-performing sectors were consumer discretionary and industrials as we achieved strong relative performance from positive underlying stock selection effects. The worst-performing sectors this quarter were energy, real estate, telecommunication services, and materials in that order. The portfolio had limited-to-no exposure to many of these sectors, contributing modestly to outperformance in the quarter.

From a geographic perspective, the portfolio delivered positive results relative to the benchmark out of every region except for emerging Latin America. We realized particularly good performance out of the eurozone, EMEA (emerging Europe, the Middle East, and Africa), and Japan. Although our allocation effects to each of these geographies were relatively neutral, we benefited from favorable stock selection. As a reminder, the portfolio's regional exposure is not a top-down call or a function of specific targets that we set, but rather an organic output of our rigorous, fundamentally driven bottom-up process that seeks to invest in high-quality businesses, wherever they may be internationally.

A weaker U.S. dollar in the first quarter enhanced the returns of non-U.S. equities in both the benchmark and our portfolio; however, on a relative basis, our portfolio benefited modestly less than the benchmark due to our regional positioning and underlying currency mix.

Leading contributors to performance for the quarter included Japanese cosmetics company KOSÉ Corp., Italian online luxury fashion retailer YOOX Net-A-Porter Group, German footwear and apparel company adidas AG, Russian internet company Yandex NV, and French employee benefits and solutions administrator Edenred.

KOSÉ continues to benefit from multiple growth drivers, including rising demand for its premium skincare products from Chinese consumers, increasing market share in its domestic market and the rapid growth of its Tarte brand, which according to some surveys, is one of the most popular cosmetics brands in the U.S. with millennials.

Yandex's stock rallied as the company exhibited robust core search growth trends led by share gains in Russia and taxi results that suggest a path to profitability over the medium term as competitive intensity falls post the merging of operations with Uber.

YOOX rose as it received an all-cash acquisition offer from Swiss luxury goods company Richemont at a roughly 26% premium to the prior closing price.

Adidas re-rated upwards, closing some of the valuation gap to Nike, as it announced a €3 billion share repurchase program alongside an upwardly revised margin target, implying an attractive earnings growth algorithm over the medium term.

Edenred posted strong earnings, exceeding its own mid-term guidance targets. Furthermore, improving economic fundamentals in one of its key markets, Brazil, offers potential for further upside to earnings power.

Principal detractors from performance this quarter were German pharmaceuticals, agriculture, and consumer health company Bayer AG, U.K.-based tobacco products company British American Tobacco plc, Macau casino operator MGM China Holdings Ltd., Swedish online casino software developer NetEnt AB, and Irish ingredients and flavors manufacturer Kerry Group plc.

Bayer experienced share weakness due to slowing industry-wide growth in agriculture and consumer health, which has also impacted peers. Although the timeline for the completion of the acquisition of Monsanto has been extended, recent news suggests that the company may be finally nearing U.S. anti-trust approval.

British American Tobacco's shares have fallen alongside broader consumer staples stocks, but also investor sentiment has weakened due to a variety of company-specific factors, such as a mixed earnings report and outlook as well as increased risk that the FDA may further regulate parts of the cigarette portfolio.

MGM opened its brand new MGM Cotai casino this quarter, and while we expect the property to gain meaningful market share as it matures, the market is becoming increasingly concerned that the pace of ramp up may be more gradual than previously expected.

NetEnt has seen organic growth slow in the face of maturing end markets and unfavorable regulatory changes. Furthermore, the company is undergoing a management transition as the board recently fired the chief executive for underperformance.

Kerry's earnings expectations have come down as adverse currency movements, namely a stronger euro, are pressuring margins. Although these currency headwinds dampen near-term earnings growth, the underlying fundamentals of the business and long-term outlook remain encouraging as Kerry continues to outgrow the industry.

Portfolio Activity

We had a relatively modest level of turnover in the portfolio as we initiated four new positions while also completely selling four positions during the quarter. One of the portfolio additions this quarter that ranked well within and made it through our high-quality growth investing process was U.K.-based global pharmaceutical company AstraZeneca plc. Quantitatively, the company scores well on various quality factors, such as return on equity, margins, leverage, and earnings quality. Additionally, the company ranks well ahead of peers in terms of its composite ESG (environmental, social, and governance) score. As we performed our bottom-up fundamental research on the stock, we found a lot to like qualitatively as well. We see a business with attractive growth prospects and an improving fundamental and free cash flow profile as the business benefits from the growth of recently approved drugs and a healthy pipeline of potential blockbuster drugs. In particular, we are excited about a growing oncology portfolio and believe that over time it can represent nearly 40% of Astra's revenues. The growth of the oncology franchise should drive expanding margins, and we believe that markets are underestimating the longer-term earnings power of the business. Although not a primary part of our M&A (mergers & acquisitions) as Astra's portfolio of long-duration assets would be an interesting target to a larger pharmaceutical company looking to add accretive earnings or replenish a pipeline.

Outlook

We remain optimistic that global growth can continue to be broad based and above trend, but we do see a moderation in momentum. Although there are few, if any, overall winners in a trade conflict, we do expect the companies we own in this portfolio to prove relatively more insulated in such an event, thanks to their robust business models and sustainable competitive advantages within the secular growth themes we favor.

As we always have, we do not attempt to time markets or geopolitical events. Rather, we take a long-term, disciplined approach to investing. Through our fundamentally driven process, we seek to capture the most compelling high-quality growth stocks internationally, while effectively managing risk, to deliver our shareholders superior risk-adjusted returns through the market cycle.

We thank you for your confidence, trust, and investing in Thornburg International Growth ADR Strategy-Wrap.

Contributors to Performance
(Representative Account)
Name Contrib % Avg Wgt %
KOSÉ Corporation 0.65 2.25
YOOX Net-A-Porter Group SpA 0.63 2.60
Edenred 0.47 2.51
adidas AG 0.45 2.42
Yandex NV 0.40 2.36
Detractors from Performance
(Representative Account)
Name Contrib % Avg Wgt %
Kerry Group plc -0.32 2.17
MGM China Holdings Ltd. -0.30 1.94
NetEnt AB -0.28 0.89
Bayer AG -0.27 3.11
British American Tobacco plc -0.26 2.02

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 3/31/18

1 Yr

3 Yr

5 Yr

Inception 5/1/2010

International Growth ADR Wrap Composite (NET)   21.06% 7.07% 6.44% 8.02%
International Growth ADR Wrap Composite (“PURE” GROSS)  24.63% 10.26% 9.62% 11.25%
MSCI AC World ex-U.S. Growth Index  19.92% 7.28% 6.84% 6.48%

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.

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.