For the second quarter of 2019, the Thornburg All Cap Growth Strategy returned 3.11% (net of fees), trailing its benchmark, the Russell 3000 Growth Index (the index), which returned 4.50%. This brings the year-to-date 2019 return to 21.73% for the strategy, versus 21.41% for the index. Since inception, the strategy has returned 7.28% annualized versus 6.46% for the index.
Global markets experienced an acute bout of negative volatility in May as the United States unexpectedly ratcheted up trade tensions with two of its largest trading partners, Mexico and China. Both domestic and foreign financial markets were further pressured as investors digested soft economic data suggesting weakening trends in global growth. We saw treasury and other foreign sovereign yields decrease notably as investors clamored for safe haven assets. It was only after trade tensions de-escalated when tariffs on Mexico were dropped and a temporary truce was achieved with China at the G-20 Summit that markets settled and turned. Furthermore, U.S. and European central bank policy makers signaled a more accommodative policy stance, helping to boost investor confidence. Uncertainty lingers around the eventual outcome of trade negotiations and continues to weigh on markets.
With the global economy appearing to be late in the cycle, it remains to be seen whether proper policy and political actions will keep growth resilient or whether an already softening economy will be further harmed by adverse events.
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Top performers for the quarter included Facebook, Visa, DexCom, Fleetcor Technologies, and Expedia.
- Facebook shares continued their recovery from last year’s swoon and have been a strong contributor to results year to date. Despite the company’s well-publicized privacy and security challenges, it’s fundamental operating metrics have been healthy and shares have recovered in part from less of a revenue deceleration than previously feared.
- Visa continues to execute well with robust organic growth and improving margins and has a long duration secular growth opportunity ahead as payments steadily shift towards more digital forms over time.
- FleetCor Technologies is a global provider of fleet payment cards and commercial payment solutions. FleetCor reported a solid quarter and raised guidance. Fuel card growth accelerated and reassured investors after hitting a speed bump last year.
- DexCom develops, manufactures and distributes glucose-monitoring systems. DexCom reported revenue growth that far exceeded expectations and demonstrated continued strong adoption of their Continuous Glucose Monitoring solutions.
- Expedia is the world’s largest online travel agency by bookings. Expedia operates in effectively a duopoly market and recent investments and acquisitions stand to add to the company’s existing platform scale. Shares traded up on an improving macro outlook following a softening stance from the Federal Reserve, which could encourage more consumer discretionary spending.
Bottom performers this quarter included Pivotal Software, Arista Networks, Alphabet, Affiliated Managers Group and SS&C Technologies.
- Pivotal Software provides software solutions to help enterprises transition their businesses to the cloud. In the quarter, the newly public company saw a shift in demand as potential customers took longer to reach deal closure, leading to downward guidance. The business has inherent lumpiness but still appears well positioned among peers.
- Arista Networks primarily provides switching equipment for large data centers and campuses. Arista traded down during the quarter as they hit a “speed bump” in demand, resulting in a soft guide for the second quarter.
- Alphabet sold off in June following media reports that the U.S. Department of Justice is investigating the company’s competitive practices. While regulatory proceedings can put an overhang on a stock, there are numerous examples where these have been very attractive buying opportunities for long-term investors.
- Affiliated Managers Group is a global asset manager. The company saw a nearly 12% drop in assets under management (AUM) in 2018. Earnings reported during the quarter showed continued weak AUM trends.
- SS&C engages in the development and provision of software solutions. While recent reported earnings were in line with market expectations, organic growth deceleration remains a key concern.
Investors will be watching closely whether this latest ebb in trade tensions is just a temporary pause before talks breakdown as both sides take on entrenched positions or if parties are genuinely making progress towards a resolution that is ultimately in the interest of all groups involved and the global economy at large.
Although we are seeing a downtrend in various business and consumer confidence indicators, we remain optimistic that despite the continuing economic and trade risks, that the global economy will prove to be more resilient than expected. Across the major developed markets, we see labor and employment conditions as healthy with broadly rising incomes. In the Eurozone, for example, unemployment now stands at 7.6%, not far off from pre-crisis levels. Although select labor markets in advanced economies are considered tight, inflation trends broadly have been relatively muted. We believe this will allow the strong dovish signaling we’ve seen from major central banks to become more than merely words, but concrete policy actions.
As we enter late cycle conditions, a slowing global economy appears to be underway. We believe these conditions will favor stock selection and the companies that will outperform are the ones we tend to favor, that is high quality growth companies that can transcend the economic cycle through secular growth opportunities, superior execution and growing economic moats.
Through our repeatable bottom-up process that relies on deep fundamental research, we are, even in this environment, finding opportunities to deploy capital into businesses with franchise characteristics and durable growth drivers that can deliver compelling risk adjusted returns over time.
We thank you for investing in the Thornburg All Cap Growth Strategy.