3rd Quarter 2017

Portfolio managers are supported by the entire Thornburg investment team.

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Dating back to the 1930s, value investing has taken different forms over the years, depending on how the approach is applied to the current investment arena. While its premise is simple, value investing's versatility and openness to interpretation are very much behind its staying power, and why it remains important and relevant to investors some 80 years later.

To be sure, value investing is what we do at Thornburg, like many other firms. Just as important to getting results, however, is always knowing why we do it and, especially, how we do it our way—how we invest, how our investment team is structured and how our approach to value investing is different from our peers.

With this in mind, we'd like to share the "what" and the "why" of the portfolio in regards to quarterly results, as well as more perspective on "how" we manage the strategy very differently and with a long-term view.

In Thornburg U.S. Equity Strategy, we believe we're different in a way that is effective for us, and which has supported successful investing over the long term. In a way, our frequent challenge at "filling all the boxes" within a process-oriented counterparty checklist is proof positive that we do things differently. If we did it like everyone else, we'd have an easier time. But we like difficult challenges. Difficult can get better results over time. What we hope to make easier, however, is conveying how our distinct, more value-sensitive active approach is different.

Our Differentiated Investment Approach

We invest in promising companies selling at a discount, utilizing both our distinct research approach and unique portfolio construction tool. Our work can be broken down into two parts: 1) finding great investments, and 2) building a balanced portfolio. Our approach gives us the flexibility to seek out the best investment ideas and the appropriate tools to bundle them into a balanced portfolio.

Finding great investments

Our organizational structure and culture are designed to fit our distinctive research process. We don't work in silos and instead emphasize collaboration and the entrepreneurial pursuit of investment opportunities. Investment ideas often cross industry and geographic boundaries, so we prevent barriers that might stop our analysts from following investment leads.

With all of our analysts looking at many different industries, stock discussions involve a roomful of investment professionals skilled at comparing and contrasting different business models across industries and regions.

Instead of evaluating the best U.S. telecom stock, for example, we discuss which business model with a stable earnings profile is most attractively priced—comparing business models within the telecom, utilities, consumer staples, health care industries and any other sector our research takes us.

While sector specialists with a narrow focus can be better able to pick up on slight changes within an industry, we think it's a crowded, over-fished area most investors are looking at. Our wider focus allows us to see paradigm shifts and consequential changes within and across industries. Today, the ways we search for information, the way we socially interact, and the way we buy goods are in flux— our wide lens is better suited to analyze which companies will be the winners and losers.

Building a balanced portfolio

After searching widely for the best investment opportunities, we apply our three baskets— basic value, consistent earners, and emerging franchises—to effectively bundle these ideas into a balanced portfolio. Our goal is to construct a portfolio with an appropriate exposure to cyclical, stable, and growth investments, which has the opportunity to outperform in any market environment.

Our baskets limit factor bets in the portfolio, while giving us the freedom to incorporate our best ideas. Our skill is in selecting individual stocks, not predicting which investment style will outperform in the near term. Our three-basket approach gives us the flexibility in areas we are strong—individual stock research—while creating appropriate constraints in areas where we don't have an edge.

We've been employing this approach to Thornburg U.S. Equity Strategy since 1995—we believe it to be a durable and common-sense investment strategy. Importantly, it has worked over the long term for our investors.

Results for the quarter

For the quarter ended September 30, 2017, Thornburg U.S. Equity Strategy returned 3.73% (net of fees), lagging the S&P 500 Index return of 4.48%.

While we lagged our benchmark during the quarter, we don't worry as much about underperforming a little in a rising market. This is because we also take measures so that the portfolio can be positioned to protect a bit in a down market—which should also imply it may be a little tougher to keep up as the market hits new highs.

The strategy performed in line with the S&P 500 Index through early September. Almost all the benchmark's relative outperformance was generated in the last 20 trading days of the quarter. The end of September felt a lot to us like the Trump trade rally from election through the end of last year. As the administration began talking more actively about tax reform in early September, we saw high tax rate companies in the U.S. outperform. Small caps, in particular small-cap value stocks, rallied aggressively. As at year end 2016, the companies that we are invested in tend to have slightly lower U.S. tax rates than the S&P 500 Index and would therefore benefit less from tax reform. Further, in part due to our basket structure, we tend to have less small-cap value exposure within the portfolio. Much of our smaller-cap exposure rests within our emerging franchise basket. These stocks are usually early stage growth investments, rather than value investments. Our basic value basket, on the other hand, tends to focus on high quality, often large cap, value investments. We don't have much exposure to small caps in our basic value basket.

Top-performing market sectors during the quarter include information technology, energy, telecommunication services, and materials. Consumer staples traded lower during the quarter. Our lower allocation to IT and our cash position were both drags on relative performance during the period.

Purchases and LiquidationsOur stock selection was slightly negative to returns during the quarter with good stock selection effect in information technology, consumer discretionary and consumer staples negatively offset by stock selection in industrials, financials, and telecommunication services.

We don't know whether tax reform will pass. It seems there is a better chance that the Republicans get reforms in the tax code than health care—but there are no guarantees. On a bottom-up basis, we worry that any benefit of successful tax legislation is already reflected in the valuation of many of the biggest beneficiaries. ETFs (exchangetraded funds) that have recently been created as a play on this trend probably aren't helping matters. As we began 2017, much of last year's Trump trades reversed. We shall see what Washington, D.C., and the market bring us this time around.

Contributors to Performance

  • Gilead Sciences, Inc.
    Earlier this year, we added significantly to our long-held Gilead investment. For the first time in two years, it is again the largest investment in the strategy. So far, the additional purchases seem well timed as the stock has rallied following their acquisition of Kite Pharmaceuticals.
  • Facebook, Inc.
    Despite intensifying pressure surrounding whatever role they played in Russia's interference in the U.S. election, Facebook remains a high return on investment venue for advertising dollars globally. We expect strong business trends to continue.
  • Thermo Fisher Scientific, Inc.
    Thermo Fisher (TMO), a long-time holding, acquired Pantheon during the quarter, which should increase TMO's revenue and earnings growth.
  • O'Reilly Automotive, Inc.
    O'Reilly stock suffered a large drawback after reporting second-quarter earnings as cyclical headwinds limited same-store sales growth in the period, and expectations that this would continue were extrapolated to the future. We entered the stock after its post-earnings pullback and have participated in the recovery to date.
  • Apple, Inc.
    Apple performed well during the third quarter with investors excited about the new iPhone launch.

Detractors from Performance

  • Medtronic plc
    Medtronic underperformed in the quarter after reporting disappointing growth in its fiscal fourth quarter. While quarterly variance based on new product launches can affect short-term volatility, the company continues to grow steadily with its medical technology leadership position.
  • General Electric, Co.
    General Electric reported weak second- quarter earnings, lowering expectations for its power segment earnings. The company is currently undergoing a management transition.
  • Assured Guaranty Ltd. (AGO)
    Following a strong run, AGO's stock pulled back in the quarter on renewed concerns around the magnitude of losses that will be suffered in Puerto Rico.
  • Alkermes plc
    Alkermes de-rated after investors learned that a phase-3 drug for major depressive disorder will need to pass a higher hurdle before FDA approval. Although the company's drug pipeline has the potential for significant financial opportunity, our investment case has been based on two commercial products—Aristada and Vivitrol—which are performing in line with expectations.
  • Acushnet Holding Corp.
    While sales of business drivers Pro V1 golf balls and Footjoy gloves and shoes showed their normal consistency, Acushnet suffered some share losses during the period on their lower-tier golf balls and in golf clubs, largely due to Callaway's positive momentum in the period.

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

Contributors to Performance
(Representative Account)
Name Contrib % Avg Wgt %
Gilead Sciences, Inc. 0.65 4.49
Facebook, Inc. 0.45 3.55
Thermo Fisher Scientific, Inc. 0.37 4.29
O'Reilly Automotive, Inc. 0.30 1.72
Apple, Inc. 0.28 3.89
Detractors from Performance
(Representative Account)
Name Contrib % Avg Wgt %
Medtronic plc -0.36 2.95
General Electric Co. -0.28 2.67
Assured Guaranty Limited -0.24 2.73
Alkermes plc -0.20 1.44
Acushnet Holdings Corp. -0.18 1.58

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 9/30/17

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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 9/30/17.

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.