Thornburg International ADR Strategy

2nd Quarter 2019

Lei Wang, CFA
Lei Wang, CFA
Portfolio Manager and Managing Director
Di Zhou, CFA, FRM
Di Zhou, CFA, FRM
Portfolio Manager and Managing Director
Portfolio managers are supported by the entire Thornburg investment team.
JULY 18, 2019

Global equity markets continued their 2019 advance in the second quarter but May witnessed the first material market drawdown of the year, triggered by collapsing trade talks between the U.S. and China. Markets had assumed that the talks were progressing well and nearing a successful conclusion based on comments coming out of negotiations, but on May 5th President Trump threatened to raise tariffs on $200 billion of Chinese goods, from 10% to 25%, and to place new tariffs of 25% on the remaining $325 billion of Chinese products, claiming that China had reneged on previous commitments. Along with increasing political tension, investors also saw macroeconomic data that pointed to a further loss of momentum across the global economy. The market was firmly in “risk off” mode and the MSCI All Country World Index (ACWI) was down 5.93% in May, with emerging market equities underperforming developed market equities. Global government bond yields fell in May and June with expectations of earlier and more aggressive rate cuts from the U.S. Federal Reserve. With the promise of a resumption of trade negotiations between China and the U.S. after the G-20 Summit, markets rebounded in June and finished positively for the quarter.

For the quarter, the Thornburg International ADR Strategy returned 4.16% (net of fees), versus 2.98% for the MSCI ACWI ex-USA Index and 3.68% for the MSCI EAFE Index. Year-to-date, the strategy has returned 20.50% (net of fees) versus 13.60% for the MSCI ACWI ex-USA Index and 14.03% for the MSCI EAFE Index.

For the quarter and year to date, the strategy’s outperformance versus its benchmark indices has been driven almost entirely by bottom-up stock selection, which is central to the strategy’s investment process. As a result, the strategy has recouped most of its underperformance versus its benchmark indices in 2018, a down year for global markets.

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 The holdings identified do not represent all of the securities purchased, sold or recommended for advisory clients.

Top Performers

  • SAP SE
    SAP is the leader in enterprise application software which is applicable for nearly all types of industries and for every major market. The company is one of the largest global software companies with more than 400,000 customers in over 180 countries. During the quarter, SAP revised 2023 margin guidance upwards and announced it was evaluating a multi-year share buyback. The surprise margin guidance upgrade and potential capital allocation discipline, combined with an investment from an activist investor, drove up the stock price.
  • Nintendo Co., Ltd.
    Nintendo is one of the world’s largest makers of video games and hardware. Nintendo announced a partnership with Tencent to distribute its Switch console in China, sending its stock up more than 14% in one day. We continue to like Nintendo as Switch is still a few years away from the end of its product cycle and because of the company’s strategy to drive mobile gaming revenue.
  • adidas AG
    Adidas designs, manufactures and sells athletic footwear, sports apparel, sports equipment and accessories. It is the largest sportswear manufacturer in Europe and the second largest worldwide after Nike. Adidas also owns Reebok, and is a shareholder in the German football club Bayern Munich. The stock performed well due to strong execution from the management team. Going forward, we continue to believe adidas is well positioned to capture the large and growing global sportswear market.
  • Canadian Pacific Railway Ltd.
    Canadian Pacific Railway (CP) provides rail and intermodal freight transport services throughout North America. We believe Canadian Pacific is one of the best managed and most efficient railroads in the world. The stock performed well in the quarter, driven by positive fundamentals. CP delivered best-in-class growth in the second quarter after a 1Q 2019 earnings miss. We continue to believe CP’s volume growth is supported by growth in intermodal and merchandise end markets, and by new service offerings.
  • Wirecard AG
    Wirecard is a global internet technology and financial services provider. The company offers electronic payment solutions and risk management, as well as the issuing and processing of physical and virtual cards. The company, which was down in the fourth quarter of 2018 and the first quarter of 2019 on allegations of questionable accounting methods and other financial irregularities in its Asian operations, rebounded 35% in the second quarter as it announced a strategic partnership with SoftBank including a $1 billion investment. Additionally, first quarter results, payments growth and raised forward guidance helped reassure investors.

Bottom Performers

  • Kose Corp.
    Kose is a Japanese cosmetics and skincare company. Kose’s shares underperformed on concerns over slower China growth, an ongoing crackdown on daigou—intermediaries who purchase overseas goods for Chinese consumers for a fee in order to evade import taxes and duties—and quarterly profits and company forward guidance that came in below expectations. Despite the earnings miss, we still believe Kose will compound at an attractive rate given the secular growth outlook for skincare and cosmetics in China.
  • Ubisoft Entertainment S.A.
    Ubisoft is one of the largest video game publishers in the world, with well known titles such as Assassin’s Creed, Far Cry, Just Dance, Prince of Persia and others, on gaming devices and consoles from Sony, Microsoft and Nintendo as well as on PCs. The U.S. accounts for more than 45% of Ubisoft’s revenue. Ubisoft’s share price was down as quarterly revenues missed company guidance and competition remains tough for traditional video game makers with the popularity of free online games such as Fortnite. Longer term, we believe Ubisoft is attractively valued versus its peers.
  • Alibaba Group Holding Ltd.
    Alibaba provides online retail marketplace services to over 700 million active monthly users in China. Outside China, the company also provides e-commerce services, fintech, cloud computing, logistics platform services and online video services. The stock sold off in May along with other Chinese companies on trade and economic concerns. The liquidation of Altaba’s stake in Alibaba also added to the selling pressure.
  • China Petroleum & Chemical Corp.
    China Petroleum & Chemical Corp. (Sinopec) is China’s largest oil refiner and petrochemical producer and distributor. China’s maturing economy and urbanization drives strong demand growth for fuels and petrochemical products. Sinopec’s strong free cash flow is supported by relatively limited spending requirements, positioning the company to continue to sustain dividend payouts at a relatively high level. Sinopec underperformed during the quarter as the oversupply situation in China worsened due to new capacity start-ups, coupled with weak domestic demand which weighed on Sinopec’s downstream profitability.
  • Huazhu Group Ltd.
    Huazhu Group is the largest hotel group in China. The group owns and operates over 3,000 hotels under several brands in more than 350 cities in China. Macro concerns related to the re-escalation of trade tensions, pressures on cash flow related to increased spending for expansion and a first quarter earnings miss which led to analyst downgrades caused the stock to underperform during the quarter. Going forward we believe a rich brand portfolio, strong products, solid management and efficient operations give Huazhu an advantage in an industry with a good long-term outlook.

Thank you for investing in the Thornburg International ADR Strategy.

Important Information

Unless otherwise noted, the source of all data, charts, tables and graphs is Thornburg Investment Management, Inc., as of 6/30/19.

Performance data for the International ADR Strategy is from the International ADR Composite, inception date of August 1, 2003. The International ADR Composite includes discretionary institutional and high net worth accounts 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 broker-sponsored accounts in the same composite. Returns are calculated using a time-weighted and asset-weighted calculation including reinvestment of dividends and income. Periods less than one year are not annualized. Individual account performance will vary. The performance data quoted represents past performance; it does not guarantee future results. Gross of fee returns are net of transaction costs. Net of fee returns are net of transaction costs and investment advisory fees. 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 0.75%, this increase would be 142%.

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.

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.

The information provided in this report 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.

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.

Holdings may change daily and may vary among accounts.

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.

Please see our glossary for a definition of terms.

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