1st Quarter 2018

Portfolio managers are supported by the entire Thornburg investment team.

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For the first quarter of 2018, Thornburg U.S. Equity Strategy produced a total return of negative 0.94% (net of fees), versus a negative 0.76% for the benchmark S&P 500 Index. While we are slightly disappointed with the results so far in 2018, as long-term, bottom-up, high-conviction investors, we focus on the long run. Shorter measurement periods won't always go our way, even when we're enthusiastic about market conditions creating opportunities for greater capital appreciation down the road. That's how we feel about the first three months of 2018.

Volatility is back. After a historic calendar- year low in volatility reading, including 12 consecutive positive months for the S&P 500 Index in 2017, it didn't take long to break the streak in 2018. Is the volatility here to stay? We won't venture a guess. More important to us was the portfolio's positioning amid the spike in volatility during the period. Generally, our positioning was sound during choppy periods of the quarter. On down-market days, our downside capture was just 85% of the S&P 500 Index return during the quarter. We're pleased with this result, which reflects Thornburg U.S. Equity Strategy's good, solid defense.

Yet, we trailed for the quarter. The reasons were company specific. We always have names that perform well and names that perform worse during any short-term period. Unfortunately, this time around the balance was skewed toward names that performed poorly these past three months. Our top five stocks contributed 1.75% to performance during the quarter, while our bottom five detracted 2.36%. Sector attribution points to the same conclusion—most of our relative underperformance for the period was stock specific. We'll touch on individual contributors below.

The good news is that increased volatility and some significant moves lower in individual stocks that we don't own has left the team more excited about our investment priorities lists than we have been for a long time. We are constructive on the long-term investment opportunities created by the recent increase in stock market volatility.

With the news this past quarter about Cambridge Analytica using Facebook user data for nefarious purposes, we've been thinking (and talking) a lot about our investments in the space. As we have reviewed our multi-decade experience with these investments, we are struck by how our approach to finding great investments has positioned us to understand the impact these businesses are having on the world.

Our unique research approach emphasizes collaboration and the entrepreneurial pursuit of investment opportunities across industry and geographic boundaries. Our wider lens allows us to see paradigm shifts and consequential changes across industries. Thornburg's holistic perspective is better suited to analyze which companies and industries may be the winners in times of disruption.

While the first quarter proved challenging, several sectors provided positive performance. Individual stocks in the health care and information technology sectors contributed positively. In aggregate, holdings in these two sectors provided over 1.80% to performance during the period. Detracting from returns were investments in industrials, energy, consumer staples, and telecommunications services. In aggregate, holdings in these sectors detracted roughly 2.65% from performance. Sector performance noted above includes only those sectors with the most significant impact during the quarter.

First-Quarter Top Contributors

  • Casa Systems, Inc.
    Casa is a broadband equipment company that supplies primarily cable companies. Shares of Casa have climbed as the company successfully executes on its business model.
  • Thermo Fisher Scientific, Inc.
    The company continues to show strength on impressive earnings growth. The academic/government end market should be helped by increased National Institutes of Health funding.
  • Pure Storage, Inc.
    Pure Storage is an emerging enterprise storage company whose all-flash offerings are helping drive the adoption of flash storage as it continues to take share from hard disk drives. The company achieved its first profitable quarter and sales again came in above expectations.
  • Palo Alto Networks, Inc.
    The company continues to benefit from its competitive advantages in the security software industry. The near-term impacts associated with moving from product to subscription revenues are becoming better understood amongst investors. With cybersecurity investment growing to meet constant threats, we expect this company to continue growing.
  • PennyMac Mortgage Investment Trust
    The company is an operating REIT (real estate investment trust); it originates and services all of the mortgages that it owns. As the industry goes through a transition in which legacy distressed mortgages are rolling off, the company is in a good position to benefit.

First-Quarter Top Detractors

  • ADT, Inc.
    Security monitoring company ADT was brought back to the public markets by its private equity owner Apollo Group. We like the long-term secular growth trend in household security monitoring in the U.S.; ADT's leadership position in a very fragmented market; its sustained, strong competitive position despite significant cable and telecom provider attempts to gain share; and the predictable nature of a subscription-based revenue model. We don't like the legacy controversy around this investment; the short investor interest that the company has attracted; management's decision to disclose less data; nor ADT's hefty debt load. We worked with the underwriter on the initial public offering (IPO) to help set a price that was well below the original "range," at which we believed the positives outweighed the negatives. So far that has not been our experience, and the stock broke its IPO price and has traded materially lower since. We are monitoring developments against our initial investment thesis closely.
  • Devon Energy Corp.
    Devon underperformed in the first quarter, in spite of higher oil prices, largely due to three items: a) lowerthan- expected first-quarter production forecasts as wells from non-operated rigs were tied in later than expected, b) the company noted it would not pursue a share buyback plan at this time (since reversed), and c) the company's sales of non-core assets are progressing, but slower than some investors may have hoped.
  • Walmart Inc.
    In hindsight, we should have trimmed our Walmart position more significantly as it approached price target earlier in the year. As it happened, we carried a reasonably significant weight into Walmart's fourth-quarter earnings announcement. While Walmart U.S. store traffic remained very strong, many were disappointed by a dramatic slowdown in online growth for the company. We aren't as worried about the slowdown in online growth. We are less excited, however, that Walmart signaled significant further incremental price investment for 2018. This could be viewed as reinvestment of the company's tax reform savings, or it could be an indicator of a more competitive environment. We remain convicted, though recent developments warrant monitoring.
  • United Parcel Service, Inc.
    UPS has been weak of late due to higher-than-expected capex spending and concern that Amazon could become a competitor in parts of its delivery business.
  • Citigroup, Inc.
    Citigroup, along with some other global-oriented banks, underperformed the market and more U.S.-focused peers.

Thank you for your continued trust and for investing in Thornburg U.S. Equity Strategy.

Notable Purchases Liquidations
ADT, Inc. T-Mobile U.S., Inc.
RPC Group plc General Electric Co.
Teekay LNG Partners LP International Flavors & Fragrances, Inc.
Starbucks Corp. Phibro Animal Health Corp.
Notable purchases and sales includes material transactions other than recently purchased securities, which may be excluded for best execution purposes.
Contributors to Performance
(Representative Account)
Name Contrib % Avg Wgt %
Casa Systems, Inc. 0.58 1.06
Thermo Fisher Scientific, Inc. 0.36 4.81
Pure Storage, Inc. 0.30 1.23
PennyMac Mortgage Investment Trust 0.26 2.12
Palo Alto Networks, Inc. 0.25 1.16
Detractors from Performance
(Representative Account)
Name Contrib % Avg Wgt %
ADT, Inc. -1.06 1.60
Devon Energy Corp. -0.48 2.03
Walmart, Inc. -0.30 3.26
United Parcel Service, Inc. -0.28 2.56
Citigroup, Inc. -0.25 2.97

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 3/31/18

1 Yr

3 Yr

5 Yr

10 Yr

Inception 11/1/1995

 US Equity Composite (Net) 14.07% 10.46% 14.20% 8.49% 10.94%
 US Equity Composite (Gross) 14.53% 10.91% 14.67% 8.94% 11.59%
 S&P 500 Index 13.99% 10.78% 13.31% 9.49% 9.03%

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.

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.