U.S. Equity Strategy - Commentary

2nd Quarter 2021

Ben Kirby, CFA
Ben Kirby, CFA
Co-Head of Investments and Managing Director
Portfolio managers are supported by the entire Thornburg investment team.
July 1, 2021
Market Review

The promise of an efficacious vaccine began to materialize in the second quarter as US markets continued to perform, economic activity accelerated, jobs returned, and overall sentiment remained high. However, relatively higher inflation induced partly by supply constraints, and expectations of higher rates, dampened what has otherwise been a quick recovery from the pandemic-driven recession last year. U.S. equity benchmarks finished the second quarter at or near record highs, notching impressive gains for the first half of 2021, thanks to a strong tailwind from historic fiscal and monetary stimulus.

After stumbling out of the gate in January, the S&P 500 Index posted five consecutive monthly gains, finishing the first half of 2021 with a total return of 15.2%. The Russell 1000 Value Index (16.9%) outperformed the Russell 1000 Growth Index (13%) by 3.9% in the first half 2021 but Value’s lead may not last. Growth staged a late quarter comeback and outperformed Value by 6.1% thanks to a more hawkish Federal Reserve at the June Federal Open Market Committee (FOMC). Small and micro-caps posted the largest gains for the first half of the year, with the Russell Microcap Index returning 29% followed by the S&P 400 Midcap Index, which returned 17.6%.

Second-Quarter 2021 Performance Highlights
  • The Thornburg U.S Equity Strategy posted a total return of 5.59%, net of fees, during the quarter, trailing the S&P 500 Index which posted a total return of 8.55%. Despite the near-term underperformance, over the previous 1-year period the U.S. Equity Strategy has returned 41.11%, net of fees, slightly ahead of the S&P 500 Index which has returned 40.79%.
  • During the quarter, the performance of the Thornburg U.S. Equity Strategy was driven by strong absolute returns in communication services, financials and energy sectors. Stock selection within those sectors was the primary driver of relative performance versus the benchmark.
  • The underperformance during the quarter was driven by the health care, information technology, consumer discretionary and consumer staples sectors. Within those areas, stock selection was the driving force of the underperformance, with half of the total coming from the health care sector alone.

Current Positioning and Outlook

The economy still seems to be in the early recovery stages of the cycle following the lockdowninduced recession, but there are risks and mixed signals being given off by the markets. There is plenty of debate about how those concerns will unfold, but it seems the market has shifted its focus to the strength of the growth rebound, the implications for inflation, and the timing of central bank moves to taper asset purchases and eventually raise interest rates. U.S. equity benchmarks finished the quarter hovering around record highs, but those results were driven by fewer and fewer stocks. The S&P 500 Index set record highs in June and did so with only 4% of the companies in the index setting new highs.

The recovery has lead asset classes that performed poorly during the lockdown to become the winners in the post-vaccine phase, but as we move away from early cycle to mid-cycle, we expect that to change. We anticipate strong economic growth in the U.S. through the second half of the year with GDP growth that could be the best since 1984. Inflation should show signs of easing as demand begins to moderate and supply bottlenecks lessen. This should release inflationary pressures in the near term, but an upward pressure on wage growth could be a sign of its resurgence.

While the late quarter rotation towards higher quality growth stocks and away from value names hurt performance, the balance struck in the portfolio has produced solid results over the last year. As the market recovery matures and moves into mid-cycle, we believe higher quality stocks will benefit in that type of environment. Also, a more balanced market environment will emerge that is less about style and more about longer term earnings potential which plays to our strengths. Our continual focus on companies with strong free cash flow prospects and responsible capital allocation should allow us to deliver solid results.

Thank for your continued support and for investing alongside us.

Important Information

Performance data for the U.S. Equity Strategy is from the U.S. Equity Composite, inception date of 1 November 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 1 January 2014, the composite includes separately managed institutional and high net worth accounts. Prior to 1 January 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. 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. 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 0.75%, this increase would be 142%.

Unless otherwise noted, the source of all data, charts, tables and graphs is Thornburg Investment Management, Inc., as of 6/30/21.

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.

Thornburg adjusts the characteristics of certain derivatives to, in our investment team's opinion, more accurately reflect their market exposure.

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.

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