2nd Quarter 2018

Portfolio managers are supported by the entire Thornburg investment team.

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Thornburg U.S. Equity Strategy returned 3.78% (net of fees) during the second quarter of 2018, vs. a 3.43% gain for the S&P 500 Index. For the first-half, our 2.80% advance modestly outpaced the S&P 500's 2.65% increase.

Once again, index returns this year have been driven by a very narrow set of large technology companies. Partly because of this, it remains a tough time for active managers within our universe.

Stock selection effect drove our positive relative return during the quarter, more than offsetting some weakness from sector positioning. Our cash position and underweight in information technology were the primary drags on performance. Our underweight to industrials aided relative performance. Our stock picking was strongest in the consumer staples and financials sectors during the quarter. We had weaker performance from individual names in the consumer discretionary and health-care sectors.

Growth Stocks

Recent growth outperformance is nothing new for this market. Growth stocks have outperformed value stocks six quarters in a row, and in 15 of the last 20 quarters. Surely, less expensive stocks are due for a comeback.

At the risk of sounding too much like John Kerry, it's more complicated than that.

For example, let's take a quick look at the telecommunications sector. In the age of the internet, with mobile data usage growing rapidly and an integral part our daily lives, the telecommunications companies that provide those services in the U.S. must be hugely important to our economy, right? Well, not so, based on their combined market caps. In fact, telecom stocks are near historic lows as a percentage of the S&P 500 Index (see Chart 1). For this exercise we are using S&P's Global Industry Classification Standard (GICS).

Telecom Sector weight in S&P 500 Index Over Time

So, is the telecom sector due for a huge comeback? Will the sector be much larger as a percentage of the index in five years than it is today? While we generally shy away from bold predictions in these commentaries, this one we feel confident about: no, definitively not. In fact, the telecom sector, as we know it, is going away at the end of September. It will be replaced by the new "Communication Services Sector" and add currently designated consumer discretionary names such as Netflix and Comcast, as well as some presently tagged information technology names, including Facebook, Google and Activision, to the traditional telecom stocks.

Why does this matter? We think it underlines the fact that the world is changing. And perhaps at an accelerating pace. Our flexible perspective works really well in this sort of environment, which makes confident, big picture predictions hard. Will value stocks come back? What's a value stock? The telecommunications sector would certainly qualify today. But that sector won't even exist come September.

We understand the world is changing, and we do see more opportunity in relatively cheaper stocks today. That's beginning to show in portfolio positioning. Still, we try to avoid factor bets or portfolio exposures based on macro themes over which we have no control. But we have always had the flexibility to go where we see discrete opportunities. And recently, the fastest-growing, tech-related growth companies look too expensive to us.

Growth company management teams, by the way, seem to agree with us, if the rate at which they are issuing convertible securities is any indication (see Chart 2).

Tech Company Issuance of Bonds that can Convert to Stock

To be sure, we fight the urge to move too far toward cheaper, out-of-favor companies because they can stay out of favor for long periods of time. But, in the context of a balanced portfolio, our stock picking drives incremental moves in portfolio positioning. In Chart 3 you can see that the strategy's forward price/earnings today is lower than that of the overall market.

Price/Earnings, Using FY1 Estimates for Thornburg US Equity Stratgey

Since the founding of the U.S. Equity Strategy in 1995, our commitment to building a balanced portfolio to focus on returns driven through idiosyncratic—stock specific—elements rather than broad-based market factors has benefited our clients. Over the last five years, for example, idiosyncratic risk has been the key driver of our good results (see Charts 4 and 5).

Drivers of Performance 5 Year Multi-Factor Attribution for Thornburg US Equity Strategy

Building a balanced portfolio forms a core tenet of our strategy and one which we will safeguard—no matter which direction the current wind may blow.

A Quick Note on Our Flexible Perspective

From a recent read, The Power of Habit by Charles Duhigg:

"When people are asked to do something that takes self-control, if they think they are doing it for personal reasons, if they feel like it's a choice, or something they enjoy because it helps someone else, it's much less taxing. If they feel like they have no autonomy. If they're just following orders, their willpower muscles get tired much faster."

We believe our flexible approach to team organization, allowing the pursuit of investment ideas across sector and geography, keeps the work exciting.

Notable Purchases and Sales - US Equity Strategy

Best Performers (Top Five)

  • Devon Energy Corp.
    Higher oil prices and expense reductions should result in better margins and earnings, especially when combined with substantial non-core asset sales that are expected to lead to significant company share buy backs and debt paydowns. The company's continued portfolio transformation and streamlining should highlight what we believe is a sharp divergence between its share price and the value of its remaining assets.
  • US Foods, Inc.
    Somewhat slower overall revenue growth has been tempered by a margin benefiting mix shift towards independent restaurants, driving continued growth in EBITDA.
  • Nomad Foods Ltd.
    Continued organic revenue growth and increasing market share in the frozen food category has led to strong earnings growth and multiple expansion toward peer multiples, resulting in a stronger share price.
  • Evolent Health, Inc.
    The continued move toward value-based payment methods from feefor- service payment for health-care services has kept demand for Evolent's core consulting offering strong. Growth continued against muted expectations and further the market received more clarity from Washington, DC, that value-based care outcomes are less likely to get caught up in health-care reform.
  • Facebook, Inc.
    Following a first-quarter pullback in Facebook shares in the wake of the Cambridge Analytica fallout, strong revenue and profit results helped drive a share price recovery during the second quarter. While we worry about potential new privacy regulation, we believe continued strong advertising revenue gains are likely to be the primary driver of stock price performance in the coming quarters.

Worst Performers (Bottom Five)

  • Casa Systems, Inc.
    Casa, an equipment provider to cable companies, has shown dramatic stock price volatility since it's stock market debut last year. We're excited about the growth potential for Casa in the support of broadband network expansion amongst cable operators. While the stock had declined significantly from its highs before our purchase, it's down a bit further since.
  • RPC Group plc
    The stock traded lower on the firm's recent interim report. We see developments at the company differently than the market and are not worried about an announced step-up in growth capex spending. Further, while the rate of announced acquisitions has slowed, RPC is displaying the strength of its model, with good organic developments at past acquired businesses.
  • Gilead Sciences, Inc.
    Gilead reported weak results for their first calendar quarter, though revenues were impacted by temporary inventory destocking in their HIV business. These results may represent the bottom for earnings following the spectacular growth and equally spectacular decline of their hepatitis C business.
  • Starbucks Corp.
    Starbucks pre-announced weak results for their second quarter, including weak same-store sales in the U.S. and China. The U.S. comparative year-over-year result seemed mostly related to issues surrounding the incident in their Philadelphia store. The China result was more worrisome.
  • Alkermes plc
    Alkermes has also shown surprising volatility since our investment. We trimmed our position on strength during the first quarter and added back to the stock after a pullback recently. Sales results for one of their most important early-launch drugs, Vivitrol, have been somewhat disappointing, though we expect them to pick up in coming quarters.

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

Contributors to Performance
(Representative Account)
Name Contrib % Avg Wgt %
Devon Energy Corp. 0.81 2.48
Nomad Foods Ltd. 0.64 3.23
US Foods, Inc. 0.61 4.23
Evolent Health, Inc. 0.53 1.27
Facebook, Inc. 0.50 2.59
Detractors from Performance
(Representative Account)
Name Contrib % Avg Wgt %
Alkermes plc -0.71 2.04
Casa Systems, Inc. -0.32 0.69
Starbucks Corp. -0.30 2.03
Gilead Sciences, Inc. -0.23 3.60
RPC Group plc -0.22 2.87

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 6/30/18

1 Yr

3 Yr

5 Yr

10 Yr

Inception 11/1/1995

 US Equity Composite (Net) 11.04% 10.65% 14.41% 9.18% 11.00%
 US Equity Composite (Gross) 11.50% 11.10% 14.89% 9.63% 11.64%
 S&P 500 Index 14.37% 11.93% 13.42% 10.17% 9.09%

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.

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.