3rd Quarter 2017

    Portfolio managers are supported by the entire Thornburg investment team.

Download PDF

The three months ended 30 September 2017, marked the third straight quarter of strong returns for the MSCI Emerging Markets (EM) Index. It was also a continuation of the emerging markets recovery, kicked off in early 2016, which has led to positive performance in six of the last seven quarters. The more recent index moves have been driven more by an increase in stock valuations, as positive earnings revisions have slowed. However, at 12.5x 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 17.8x and the MSCI EAFE Index at 14.8x 2018 earnings per share.

Thornburg Developing World Fund delivered a total return of 8.23% (I shares at net asset value) during the quarter, which compares favorably to the MSCI EM Index return of 7.89%. We are pleased with this return, considering our portfolio 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, like what we have experienced since early 2016.

Leading contributors to Fund performance for the quarter included Alibaba Group Holding Ltd., Baidu Inc., Kroton Educacional S.A., Tencent Holdings Ltd., and Sberbank PJSC.

Alibaba Group has performed in excess of our already high expectations, announcing further increases in active buyers and users and increased purchase volume per user, in addition to rapidly growing advertising revenues. The company attributes these advances to better customer engagement and deployment of data analytics tools. Alibaba has also shown success in combating counterfeit product issues while signing up name-brand retailers, such as Victoria's Secret and Moët Hennessy.

Chinese internet search firm Baidu performed well during the period, as it announced revenues in line with our expectations but better-than-expected earnings thanks to effective cost management in its offline-to-online business. Aside from its core search business, Baidu's online video subscription platform continues to grow and is now the number two app in China in terms of time spent. We still see room for improvement in these business segments and remain optimistic about the stock.

Kroton Educacional is a Brazilian education company focused primarily on higher education. There has been some concern about Kroton's ability to manage the transition from government-backed student loans to providing its own financing program on general profitability. Although it is still early, recent results indicate that management is executing well, and the stock rebounded nicely.

Tencent provides internet and mobile services to Chinese consumers and reported favorable results for the quarter, with mobile gaming revenue passing somewhat of a milestone as it exceeded PC revenues for the first time. Advertising revenue growth continues to impress as well. Tencent has improved user engagement but still has ample room to expand the amount of ads that its almost one billion users see.

Sberbank is the dominant banking franchise in Russia, with market leadership in assets, loans, and deposits. The company announced that it had handily exceeded consensus earnings estimates for the quarter, along with an acceleration in loan growth after two anemic years and net interest margin improvement due to improving funding costs. Sberbank also reported a recovery in fee income after previously having removed its full-year guidance.

Top detractors for the period included Controladora Vuela Compañia de Aviación SAB (Volaris), Fibra Uno Administracion S.A., ITC Ltd., KT&G Corp., and Coway Co. Ltd.

Volaris is a low-cost Mexican airline with its main base in Tijuana. It is the country's second-largest airline after Aeroméxico and serves domestic and international destinations in the Americas. Guidance in the recent quarter disappointed elevated expectations for the still nascent market recovery, in large part due to aggressive competition. We think long-term demand growth and the concentrated structure of the low-cost carrier market in Mexico makes this opportunity attractive.

Shares of Mexican real-estate investment trust Fibra Uno sold off following an announcement by management that it would seek to issue equity to fund the acquisition of new real-estate assets. The market has become concerned that it will be difficult to find accretive acquisitions using equity as a funding source, considering the low multiple to net asset value implied by the current share price. We still believe the long-term real-estate opportunity in Mexico is attractive, and Fibra Uno is the leader in this industry.

ITC is an Indian conglomerate that operates businesses in the cigarette, fast-moving consumer goods, and hotels segments, among others. The stock sold off during the quarter despite reporting decent results, due to poor communication regarding a change in domestic cigarette tax policy.

Tobacco company KT&G Corporation executed well in the most recent quarter, reporting above-estimates revenue driven by its cigarette export business. Despite recent market share gains in Korea, the stock was unable to shake off concerns regarding foreign competition related to the introduction of new "heat not burn" products.

Coway Company is a Korean maker of environmental products, such as water cleaners, air purifiers, and water softeners, with the water filtration business accounting for the majority of its revenues. We purchased the stock as a consistent earner with stable revenue sources due to its long-term rental contracts. During the third quarter, the stock ran into a headwind for Korean consumer staples stocks, but the main reasons for its weakness were slowing earnings growth and concern about increasing competition in the water-purifier industry.

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.
Important Information

Source of data: Factset, BBH, Confluence, Bloomberg—unless otherwise stated
Date of data: 30 September 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.

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.

Any securities, sectors, or countries mentioned are for illustration purposes only. Holdings are subject to change. Under no circumstances does the information contained within represent a recommendation to buy or sell any security.

The Fund is a sub-fund of Thornburg Global Investment plc, an open-ended umbrella type investment company with segregated liability between sub-funds, authorised by the Central Bank of Ireland (CBI) on 25 November 2011 as an investment company pursuant to the UCITS Regulations. Authorisation of the Company by the CBI is not an endorsement or guarantee of the Company by the CBI nor is the CBI responsible for the contents of the Prospectus or KIID.

This material constitutes a financial promotion for the purposes of the Financial Services and Markets Act 2000 (the “Act”) and the handbook of rules and guidance issued from time to time by the FCA (the "FCA Rules"). This material is for information purposes only and does not constitute an offer to subscribe for or purchase any financial instrument. Thornburg Investment Management Ltd. ("TIM Ltd.") neither provides investment advice to, nor receives and transmits orders from, persons to whom this material is communicated nor does it carry on any other activities with or for such persons that constitute "MiFID or equivalent third country business" for the purposes of the FCA Rules. All information provided is not warranted as to completeness or accuracy and is subject to change without notice.

The Fund is offered solely to non-U.S. investors under the terms and conditions of the Fund’s current Prospectus. A copy of the full Prospectus and KIID for the Fund may be obtained by contacting the local Paying Agent through the Fund’s Transfer Agent, Brown Brothers Harriman Fund Administrator Services (Ireland) Limited or in the forms and literature section of this website. The Prospectus and KIID contain important information about the Fund and should be read carefully before investing.

This communication and any investment or service to which this material may relate does not constitute an offer or solicitation to invest in the Fund and is exclusively intended for persons who are Professional Clients or Eligible Counterparties for the purposes of the FCA Rules and other persons should not act or rely on it. This communication is not intended for use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.

Administrator: Brown Brothers Harriman Fund Administration Services (Ireland) Limited, Ireland, BBH.Dublin.TA@bbh.com +353.1.603.6490

Please see our glossary for a definition of terms.