4th Quarter 2017

Portfolio managers are supported by the entire Thornburg investment team.

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Another year of finding great investments and using them to build a balanced portfolio is in the books. Moreover, 2017 marked the 23rd calendar year for Thornburg U.S. Equity Strategy. Happily, it was a successful one.

Broadly, it has been a great five-plus years for equity investors. Stocks have generally gone up, and volatility has marched progressively lower. Will this continue? We won't venture a guess on the direction of the general market (suffice it to say, however, we do see signs of complacency about).

What is more interesting to us, however, is how difficult an environment this has been for highly active, intrinsic value-based investors, especially in the U.S. large-cap equities space.

Over the last five years, the Morningstar Large Blend category has trailed the S&P 500 Index by more than 1.5% per year. What's more, 2017 marked eight consecutive years of underperformance for the category. This is much worse than historical experience. The "whys" are much harder to discern. Could it be that the blind, massive inflows into passive index portfolios focused on large-cap U.S. stocks have made those same stocks tough to beat? Maybe. Mostly, we believe that there are environments that are harder and those that are easier for intrinsic value-based active managers. It sure seems like we've had a long run of the former environment.

Despite this headwind, Thornburg U.S. Equity Strategy investors have fared well, on both an absolute and relative basis. Over the last five years, we outpaced the benchmark by just over 1.0% (net of fees, annualized). One might ask, "have we done this by taking on excess risk in a rising market?" In a word, no. Our beta over this period has been 0.96 (vs. the benchmark S&P 500 Index) and our downside capture (our relative performance in down months), stands at 97.4% over the trailing five-year period.

Our hope and expectation is that we may have even more success against the index and our peers in an environment that is more conducive to active intrinsic value-based investing. As one of these types of investors, we've been sailing into a headwind for the better part of a decade. We believe, at some point, the winds will shift.

A significant challenge for asset managers (and a daily battle for investment consultants) is that investor emotions so often drive investment decisions. This can best be seen in the consistent underperformance of investors in an investment strategy as compared to the actual long-term results of those same strategies (i.e., asset-weighted returns). Too often, investors buy high and sell low. We've recently come across a set of research papers on the topic (via UBS). Nesbitt (1995) and Sapp and Friesen (2007) calculate a 1.08% and a 1.56% annualized difference between portfolio returns and investor returns in those same portfolios (a mix of stock and bond funds between 1984 and 2004). Even more concerning, Nadig (2016) finds a much greater 5% annualized difference between actual and investor returns in the S&P 500 Index exchange-traded funds (ETFs). That's correct, 5%! While it may feel good to be able to see the price in real time, and trade an ETF second by second, this data would suggest that it's quite bad for your long-term investment results. That being said, we hope to earn your trust, and keep it over the long term.

Fourth Quarter Review

For the fourth quarter of 2017, Thornburg U.S. Equity Strategy produced a total return of 4.13% (net of fees), versus 6.64% for the benchmark S&P 500 Index. This brought the strategy's full calendar year 2017 return to 24.83% (net of fees), versus 21.83% for the index. We are pleased with the solid results for 2017, but it is the strategy's longer-term performance that we feel deserves special mention. Since bolstering the portfolio's consistent earners basket characteristics starting in July 2012 (over five and a half years ago), the strategy has returned slightly over 17% (net of fees, annualized) through year-end 2017. By comparison, the S&P 500 Index returned 15.5% over the same period.

As importantly, we've been able to provide this strong absolute (and relative) performance in the context of significantly improved beta and downside capture characteristics. Thornburg U.S. Equity Strategy has had a beta of less than 1.0 vs. the S&P 500 since mid-2012, and average performance in down months has been about in line with that of the index.

Top contributors for the quarter spanned multiple sectors, with names in information technology and the consumer sectors contributing materially to performance. In aggregate, holdings in these three sectors added 4.0% to overall performance during the period. Top performing stocks included long-time holdings as well as more recent portfolio additions. Detracting from returns were investments in health care and industrials. Despite the pullback in the most recent quarter, the portfolio's health care names contributed significantly to calendar year 2017 performance.

Purchases Liquidations
ITT Inc. Office Depot, Inc.
Evolent Health, Inc. Grand Canyon Education, Inc.
Casa Systems, Inc.
Notable purchases and sales includes material transactions other than recently purchased securities, which may be excluded for best execution purposes.

Fourth Quarter Top Contributors

  • Walmart Inc.
    Walmart's re-investment in its business (both in stores and online) continues to pay off. In particular, traffic in Walmart U.S.-based stores grew solidly throughout 2017.
  • TRI Pointe Homes, Inc.
    Strength in the construction and sale of single-family attached and detached homes continues, benefiting shares of California-based homebuilder TRI Pointe.
  • Apple, Inc.
    With tax reform, Apple should be able to put some of its overseas cash to good use.
  • U.S. Foods Holding Corp.
    Continued market share gains with independent restaurant customers, improved margins from higher sales of private-label products, and an intentional shift in customer mix towards higher-value independent customers allowed the company to grow operating income at a high single-digit rate.
  • JPMorgan Chase & Co.
    The passing of tax reform and higher interest rates helped move the stock higher during the final quarter of 2017.

Fourth Quarter Top Detractors

  • General Electric Co.
    During the quarter, GE cut its dividend and future earnings expectations. Its Power business has been the largest source of disappointment, with heightened competition and softening end-demand.
  • Gilead Sciences, Inc.
    Declining earnings due to the erosion of its hepatitis C revenues contributed to weakness during the quarter.
  • Expedia, Inc.
    A third-quarter earnings miss contributed to weakness in shares of Expedia in the fourth quarter.
  • Assured Guaranty Ltd.
    While the company enjoys a solid financial position and expanding profit margins, the deteriorating outlook for municipal debt in Puerto Rico weighed on market sentiment.
  • Oaktree Capital Group LLC
    Oaktree has had difficulty deploying capital in the current market environment. As a result, it is not yet earning management fees on some assets.

Thank you for investing in Thornburg U.S. Equity Strategy.

Contributors to Performance
(Representative Account)
Name Contrib % Avg Wgt %
Walmart Inc. 0.86 3.59
TRI Pointe Homes, Inc. 0.66 2.49
U.S. Foods Holding Corp. 0.60 3.12
JPMorgan Chase & Co. 0.55 4.39
Apple, Inc. 0.40 4.03
Detractors from Performance
(Representative Account)
Name Contrib % Avg Wgt %
General Electric Co. -0.69 2.02
Gilead Sciences, Inc. -0.51 4.29
Assured Guaranty Limited -0.26 2.47
Expedia, Inc. -0.25 1.36
Oaktree Capital Group LLC -0.18 1.75

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 U.S. Equity Strategy is from the U.S. Equity Composite, inception date of November 1, 1995. The U.S. Equity Composite includes discretionary institutional and high net worth accounts invested in the U.S. Equity strategy 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 all 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. Net of fee returns are net of transaction costs and investment advisory fees. For periods prior to 2011, net returns for some accounts in the composite also reflect the deduction of administrative expenses. 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 12/31/17

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3 Yr

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10 Yr

Inception 11/1/1995

 US Equity Composite (Net)






 US Equity Composite (Gross)






 S&P 500 Index






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.

Notable purchases and sales includes material transactions other than recently purchased securities, which may be excluded for best execution purposes.

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.

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.

Please see our glossary for a definition of terms.