3rd Quarter 2018

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For the third quarter of 2018, Thornburg Developing World Fund returned negative 2.53% (Class I shares), trailing the MSCI Emerging Markets Index, which returned negative 1.09% during the period. Since its inception, Developing World Fund has returned an annualized 0.77% compared with the MSCI Emerging Markets Index return of 4.72%. Emerging markets posted a negative quarter, following increased concerns surrounding U.S.-China trade tensions. Global equities delivered mixed performance for the quarter, with U.S. indices posting the strongest results among developed markets, due primarily to above-average corporate earnings for S&P 500 Index companies. Trade tensions previously affected only those companies and industries which were directly targeted by U.S. and Chinese tariffs. A shift occurred during the third quarter where investors de-rated stocks within multiple sectors fearing a more general slowdown in growth as tariff actions affected economies more broadly. Investors were also generally less constructive on economically sensitive risk assets, and we witnessed a rotation away from growth towards value stocks.

Performance Discussion

From a sector perspective, only five of 11 sectors within the MSCI Emerging Markets Index posted positive results. However, this was an improvement compared to the prior quarter where all sectors were negative. The top-three performing index sectors during the quarter were energy, materials, and industrials. The bottom-three performing index sectors were consumer discretionary, communication services and health care. For the Fund, the top-performing sectors were financials, energy, and health care. In the case of financials and health care, stock selection benefited performance. Real Estate, consumer discretionary, and communication services rounded out the bottom performers during the period. Stock selection detracted within each of these sectors.

From a geographic standpoint, China represents the largest weight within the MSCI Emerging Markets Index and was the largest single detractor overall. Although we were underweight China relative to the index, stock selection within China resulted in relative underperformance. We did not own any stocks within Turkey or Greece, however, the two largest country detractors on a total return basis for the index. Top contributors to performance for the quarter included Reliance Industries Ltd., Grupo Financiero Banorte, Taiwan Semiconductor Manufacturing, Qualcomm, Inc., and Novartis AG.

Reliance Industries is India’s largest petrochemical and second-largest refining company. Reliance Industries has also diversified into retail, media, and most recently telecom businesses. Reliance’s performance in refining and petrochemical has been strong, benefiting from its scale and integration advantages. Its telecom business, JIO, already accounts for 20% of India’s wireless subscribers within two years of launch and is now the most profitable telco in India.

Banorte is a leading bank in Mexico. Banorte stock rallied during the quarter amidst a strong earnings and guidance report.

Taiwan Semiconductor Manufacturing Company was the world’s first dedicated semiconductor foundry and has long been the leading company in its field. It also produces lighting and solar products. Shares increased during the quarter following analyst upgrades, reduced spending and an optimistic smartphone outlook.

Qualcomm is an American multi-national semiconductor and telecommunications equipment company that designs and markets wireless telecommunications products and services. It derives most of its revenue from chipmaking and the bulk of its profit from patent licensing businesses. During the period, Qualcomm launched a Dutch tender offer, which increased interest in the shares.

Novartis AG manufactures pharmaceutical and consumer health care products. Shares increased during the quarter following solid growth results and re-confirmed guidance for the remainder of 2018.

Major detractors for the period included Tencent Holdings Ltd., Sunny Optical Tech, Alibaba Group Holdings, Ctrip .com International, and Hangzhou Hikvision Digital. The top five detractors for the quarter were all China-based companies. Chinese stocks were dragged downward during the quarter due to an ongoing tariff war between the U.S. and China. China has recently taken several steps to bolster its economy in hopes of offsetting the tariff-related effects. We expect these measures to drive positive results throughout the remainder of 2018. However, until the tariff-disputes are fully resolved, we are likely to see a continuation of heightened volatility in Chinese stocks.

Our approach to emerging market investing is through a focused, yet diversified portfolio of attractively priced, free-cash-flow-generative stocks, mainly from emerging markets firms that have natural dollar hedges in their revenue base or less vulnerability in the external balance of their home countries. Our flexible and balanced process has benefited the Fund as the market shifted from growth-led stocks in 2017 to value-led names in 2018. Although macroeconomic conditions have been challenging within many emerging market countries, we believe great companies can still rise to the challenge and distinguish themselves over the long term.

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 2018—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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