2nd Quarter 2018

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For the second quarter of 2018, Thornburg International Growth ADR Strategy- Wrap returned 0.16% (net of fees), outpacing its benchmark, the MSCI All Country World ex-U.S. Growth Index (the index), which returned negative 1.42%. This brings the year-to-date return to 1.50% for the strategy, versus negative 2.28% for the index.

Global equities delivered a mixed performance this quarter, with U.S. indices in positive territory but international indices, particularly in emerging markets, posting negative returns on a dollar-denominated basis. Escalating trade tensions and the risk they pose to the global economic upswing dominated the headlines during the quarter. We have yet to see recent trade actions play out negatively in corporate earnings in a broad-based manner. However, investors have already become less constructive on economically sensitive risk assets based abroad, and market anxiety has appreciably increased.

Performance Discussion

During the quarter, our benchmark index gained on a local currency basis with most sectors in positive territory. The top-performing sector was energy on the back of rising oil prices. We saw relatively neutral performance from our energy holdings. Health care was the second-best performing sector; however, we underperformed due to a single, stock-level detractor. The sectors that most underperformed the benchmark were telecommunications services and financials, where we benefited from having zero holdings and underweight positioning, respectively. Our best-performing sector was information technology, where we experienced relatively limited impact from allocation effects, but instead saw performance benefit from positive stock selection.

Despite delivering positive returns in local currency terms, the benchmark produced negative returns as the U.S. dollar gained broadly against most foreign currencies. This acted as a headwind to returns for dollar-based investors, and once adjusted for currency, only three out of 11 of the benchmark's sectors were in positive territory.

From a geographic standpoint, the strategy realized positive performance relative to the index from most regions, with Japan, China, and Europe leading the way with stock selection the primary driver. Our emerging markets exposure was below the benchmark, which favored performance. Within emerging markets, we had limited exposure to the more fragile countries and currencies, but we were overweight China and Hong Kong. Our exposure in China, however, is weighted toward technology and domestic consumption, and thus we believe more insulated from escalating trade war risks. The Hong Kong–listed, Macau-based casino operators represented our worst-performing geography.

Top contributors to performance for the quarter included German digital payments company Wirecard AG, U.S.- based transaction processing and technology company Mastercard, Inc., Japanese apparel e-commerce leader Start Today, U.K.-domiciled online automotive marketplace Auto Trader Group, and oil and gas major Royal Dutch Shell.

Long-held portfolio position Wirecard reported earnings exceeding street expectations, with underlying growth momentum robust as the company benefits from the secular trend of the digitization of payments.

Shares of Mastercard increased following an outsized earnings beat. Overall payment volumes have been strong.

Start Today rose as the company provided further clarity on its plans for the launch of a custom-fitted private label brand offering enabled by their “Zozosuit” body measurement device and technology. Investors were excited by the prospect that, if successful, Start Today will accelerate growth and expand its market opportunity not only in Japan, but abroad as well.

Auto Trader's shares broke out as it reported earnings that, despite macro headwinds and a softer used-car environment in the U.K., proved its business model rather resilient, with enough offsetting levers from pricing/upselling and new products to deliver better growth than the market expected.

The Royal Dutch Shell Group is engaged in the business of producing, refining, storing, transporting, supplying, and distributing petroleum and petroleum products in over 135 countries. We expect Royal Dutch shell to deliver growth in free cash flow and to improve cash returns to shareholders. The stock performed well in the quarter given higher oil prices and the expectation for strong operating cash-flow generation.

Primary detractors from performance last quarter were Brazilian payment solutions company Cielo S.A., Macau casino operator Galaxy Entertainment, Irish pharmaceutical company Alkermes plc, U.K.-based e-commerce company ASOS plc, and German bank Commerzbank AG.

Cielo's shares fell as competitive pressures continued to intensify and Brazil's recent macro recovery was showing signs of stalling, threatened by increasing political risks.

Galaxy declined as reported gross gaming revenues for Macau as a whole decelerated and fell short of street expectations due in part to weakening in the VIP segment, as well as the effect of the World Cup, which diverted attention and spending.

Alkermes saw its shares fall sharply as the U.S. Food & Drug Administration sent a Refusal to File (RTF) letter to the company regarding its pipeline depression drug ALKS 5461. Although the FDA rescinded the RTF letter just two weeks later and accepted the drug for review, the stock has yet to fully recover, and we exited the position on heightened pipeline risk and generally weaker trends in its marketed products.

ASOS, alongside many other e-commerce companies, sold off on the U.S. Supreme Court ruling that states have the authority to collect sales tax on online transactions by companies that do not have a physical presence in their territory.

Commerzbank's shares declined as European banks broadly underperformed due to weaker economic activity data, a flattening bund yield curve, and growing trade tensions.

Notable Purchases and Sales

Outlook

The global economy continues to experience a steady pace of expansion, although growth has become less synchronized with leadership again shifting toward the U.S. Europe experienced a pronounced wave of growth last year, yet it appears that momentum is cooling based on indicators of industrial activity and signals remain mixed going forward. Trade concerns are a major factor weighing on business confidence and clouding the outlook in Europe. We believe Europe can continue to grow, albeit at a more moderate trend and the risk of recession remains very low, given accommodative monetary policy out of the European Central Bank.

The brunt of recent dollar strength and mounting trade tensions has fallen distinctly on emerging markets. Roughly 80% of foreign currency debt held by emerging market countries is in U.S. dollars and levels of debt as a percentage of GDP are relatively high when compared to history. This puts emerging markets in a vulnerable position, in which a vicious cycle can play out of a weakening currency: decreased ability to service dollar-denominated debt would pressure the current account via capital outflows, leading to further weakening of the currency. In addition to monitoring the situation in emerging markets broadly, we are also paying close attention to China, where growth is moderating and credit conditions are tightening. Part of the slowdown is purposeful, as policy makers prioritize quality of growth over sheer magnitude. However, if economic conditions worsen dramatically, we expect policymakers to provide support, as they have historically. The key concern will be how impactful such actions would be amid a deepening trade confrontation with the U.S.

The overriding wild card is trade and given recent events, it is too early to call for a re-acceleration in global growth. The global economy can be vulnerable to even relatively small shocks, such as increased input prices due to tariffs. Trade actions have consequences, and over time those can spill over into Main Street and the real economy. We hope that more rational heads prevail and trade tensions abate, but given the risks from rising protectionism, we see volatility remaining heightened.

Our process and approach to investing remain consistent with a focus on high-quality companies with wide economic moats and low macroeconomic dependence. The stocks we own have the potential to grow rapidly because of secular or stock-specific factors that we've identified. They have the ability to sustainably compound business value over long time horizons. This results in a collective portfolio of stocks that we believe can navigate even choppier seas, and provide our investors with a return profile that is attractive on a risk-adjusted basis over a full market cycle.

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

Contributors to Performance
(Representative Account)
Name Contrib % Avg Wgt %
Wirecard AG 1.08 3.46
Start Today Co. Ltd. 0.54 1.94
Mastercard, Inc. 0.27 2.31
Auto Trader Group plc 0.26 2.43
Royal Dutch Shell plc 0.22 2.38
Detractors from Performance
(Representative Account)
Name Contrib % Avg Wgt %
Cielo S.A. -0.56 1.35
Galaxy Entertainment Group Ltd. -0.48 3.12
Alkermes plc -0.42 0.14
ASOS plc -0.33 1.89
Commerzbank AG -0.23 0.55

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 6/30/18

1 Yr

3 Yr

5 Yr

Inception 5/1/2010

International Growth ADR Wrap Composite (NET)   11.14% 7.19% 6.30% 7.79%
International Growth ADR Wrap Composite (“PURE” GROSS)  14.44% 10.39% 9.48% 11.01%
MSCI AC World ex-U.S. Growth Index  9.90% 6.56% 7.18% 6.09%

Unless otherwise noted, the source of all data is Thornburg Investment Management, Inc., as of 6/30/18.

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.