4th Quarter 2017

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The three months ended 31 December 2017, marked the fourth straight quarter of strong returns for the MSCI Emerging Markets (EM) Index. It was also a continuation of the emerging markets recovery that kicked off in early 2016, leading to positive performance in seven of the last eight quarters. The most recent index moves have been driven more by an increase in stock valuations, as positive earnings revisions have slowed. However, at 13.1x 2018 earnings per share, emerging market valuations are still not stretched, especially considering the relative valuation compared to developed market indices, such as the S&P 500 Index at 18.7x and the MSCI EAFE Index at 15.4x 2018 earnings per share.

Thornburg Developing World Fund (the "Fund") delivered a total return of 6.63% (I shares at net asset value) during the quarter, compared to the MSCI EM Index return of 7.44%. For the full 2017 calendar year, the Fund returned 35.05%, which compares favorably to the benchmark's 37.28% result on a risk-adjusted basis. We are pleased with this return, considering our fund tends to hold shares in companies that demonstrate stronger business fundamentals, such as consistent free cash flow and low leverage. We believe those types of companies should outperform the broader market over a long period but tend to underperform during strong up-markets of the type we have experienced since early 2016.

Contribution to the portfolio's return was slightly more broad-based in the fourth quarter relative to earlier in the year, with names from each of the fund's three baskets—consistent earners, emerging franchises, and basic value—appearing in the top five contributors for the period. For the full year, large positions in Samsung Electronics Co. Ltd., Alibaba Group Holdings Ltd., and Tencent Holdings Ltd. were significant to the portfolio's strong total return.

Tencent Holdings Ltd., China's largest social messaging and gaming platform, continued to demonstrate the importance of building compelling user experiences, growing revenues 62% year-over-year during the quarter. Tencent's unique knowledge around how its customers play has allowed it to build gaming franchises with numerous nodes of opportunity. Honor of Kings, Tencent's largest contributor to gaming revenues, remains the highest grossing gaming title in history. Tencent's messaging platform, including its dominant WeChat app, continued to be a source of growth and of future opportunity, as Tencent introduced additional targeted advertisements to its user base in certain key markets, amplifying monetization. TenPay, the dominant offline third-party payment platform in China, continued to show sequential growth in total payments processed. Meanwhile, Tencent continued to invest in distribution of this platform to merchants, stemming the profitability of its payments business for now. Tencent remains one of the most unique and socially embedded internet businesses in emerging markets, occupying more time spent on Chinese mobile phones through its messaging, social, video, payment, and other applications than any other competing platform.

Shares of Sanlam Ltd., a South African insurance company, benefited from the election of Cyril Ramaphosa as president of the African National Congress (ANC) during its party Congress in December. Mr. Ramaphosa is perceived by investors as a market-friendly politician with potential to clean up the system following several corruption accusations against South Africa's current president, Jacob Zuma. A more robust outlook for South Africa's equity market should benefit Sanlam, as several of its businesses generate revenues based on fees tied to the level of assets under management. Furthermore, if political change sparks an economic recovery, Sanlam would likely experience an acceleration in sales of new products.

MGM China Holdings Ltd. is the locally listed subsidiary of MGM Resorts International. MGM China is one of the six concession holders allowed to operate casinos in Macau. Shares performed well as the market began to appreciate the upcoming opening of its property, dubbed MGM Cotai. MGM China is expected to open its first Cotai property on January 29, 2018. Cotai is the Las Vegas Strip equivalent in Macau, where the latest and greatest gaming properties reside and where an ever-increasing percentage of tourists visit. MGM China shares also benefited from strong visitation and game play trends in Macau during the fourth quarter. We remain positive on the outlook for MGM China as MGM Cotai opens and ramps utilization over the coming years.

Shares of Sberbank PJSC, the leading banking franchise in Russia, reported a strong set of results during the quarter. Accelerating loan growth, combined with falling provisions for doubtful accounts, is driving strong earnings growth for the company. The company's investor day also shed light on Sberbank's technology leadership. Lastly, with strong returns on equity and high capital levels, Sberbank communicated to shareholders its commitment to a higher dividend payout ratio. We remain constructive on the long-term prospects for the bank.

BBVA Banco Frances S.A., a leading commercial bank in Argentina, reported better-than-anticipated thirdquarter results. With banking penetration in Argentina remaining well below levels exhibited in other emerging markets, and a sounder set of macroeconomic policies under President Mauricio Macri, the Argentinean banking system is poised to grow at an elevated pace for the next several years. BBVA Banco Frances' investments in technology should help the bank continue to benefit from growth in its loan book, without the need to invest heavily in its branch infrastructure.

Top detractors during the period included Kroton Educacional S.A., Emaar Properties PJSC, Grupo Financiero Banorte SAB de CV, Fibra Uno Administracion SA de CV, and Controladora Vuela Compania de Aviacion SAB de CV (Volaris).

Kroton Educacional remains one of the most innovative for-profit education businesses in the world, providing reasonably priced occupational education to aspiring Brazilian students. The company has continued to show resilience in the face of one of Brazil's worst recessions, expanding margins by more efficiently allocating its teaching resources. The shares underperformed during the period due to slowing student intake, which resulted in a 2% year-over-year decline in total students during the quarter. Most of Kroton's students also work full time (which allows them to pay for school and obtain financing as needed), and Brazil's staggering unemployment during the period placed meaningful financial pressure on Kroton's target market. The company has introduced new financing arrangements and compelling online content to remain relevant to Brazilian career switchers and continually improve student outcomes.

Following a strong run in the second and third quarters of the year, shares of Emaar Properties, a leading Dubai-based property developer, sold off in the fourth quarter on the back of two disappointing developments. First, Emaar Properties' much anticipated spin-off of its Dubai development business drew less demand than initially anticipated, and the company sold a smaller percentage of its equity than was expected. Furthermore, investors were disappointed that Emaar Properties will not be distributing the entire proceeds of the Emaar Development spin-off in the form of a special dividend, choosing instead to keep a portion of the capital raised to finance future growth projects. We remain constructive on the long-term growth prospects for Emaar Properties' underlying businesses.

During the quarter, Grupo Financiero Banorte, a leading Mexican bank, announced the acquisition of Grupo Financiero Interacciones, a mid-sized bank in Mexico. While the financial merits of the transaction are quite compelling, the market reacted negatively to the related-party nature of the transaction. Banorte has made several changes to the company bylaws that strengthen corporate governance, including provisions that require minority shareholders to vote on the merits of this specific transaction. We don't believe that this deal negates the corporate governance improvements the company has achieved over the last three years. With strong long-term fundamentals and a supportive valuation, we continue to like the prospects for Banorte.

The MSCI Mexico Index underperformed the MSCI EM Index by close to 17% in the fourth quarter of 2017 and shares of Fibra Uno, a leading real estate company, were no exception. Concerns surrounding the ongoing renegotiation of NAFTA (North American Free Trade Agreement) as well as fears that left-leaning candidate Andres Felipe Lopez Obrador, commonly known as AMLO, could emerge victorious in next year's presidential election continue to dictate the direction of Mexican assets. Fibra Uno continues to exhibit strong fundamentals, with growing rents, high occupancy rates, and stable-to-growing free funds from operation. We continue to like the long-term fundamental drivers of the real estate sector in Mexico and view Fibra Uno's long-term opportunity and fundamentals as attractive at current valuations.

Volaris, Mexico's dominant low-cost airline, continued to grow its passengers carried while operating in a very competitive market. As Mexican bus passengers increasingly switch to flying, which has proven cheaper and safer, competitors, such as VivaAerobús and Interjet, have been adding capacity, at times competing irrationally for passenger traffic. Volaris has responded by managing capacity growth and unbundling pricing through bag fees and other ancillaries. Despite management's best efforts, Volaris has not been able to grow its total revenue per passenger during this period, and is unlikely to grow profitability until the level of competition in the Mexican domestic market recedes. We exited the investment during the period.

Looking forward, we see the fundamentals in many emerging markets continuing to strengthen. In particular, we are positive about the potential impact from the ongoing reform agendas in China and India. We remain optimistic about the opportunity for reform in Brazil as well. The prospects for positive returns in emerging markets equities remain compelling, as we are finding strong businesses selling at attractive valuations, although perhaps a few less than we did at the outset of 2016. We will continue to search for the highest-quality businesses at the best prices.

Thank you for investing in Thornburg Developing World Fund.


Performance data shown represents past performance and is no guarantee of future results. Investment return and principal value will fluctuate so shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than quoted. For performance current to the most recent month end, visit the Prices & Performance page.
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Source of data: Factset, BBH, Confluence, Bloomberg—unless otherwise stated
Date of data: 31 December 2017—unless otherwise stated

Investments carry risks, including possible loss of principal. Additional risks may be associated with investments in emerging markets, including currency fluctuations, illiquidity, volatility, and political and economic risks. Investments in small- and mid-capitalization companies may increase the risk of greater price fluctuations. Investments in the Fund are not insured, nor are they bank deposits or guaranteed by a bank or any other entity.

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