2nd Quarter 2018

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During the second quarter of 2018, Thornburg Global Equity Income Fund returned negative 0.33% (A ACC Shares), while the benchmark MSCI World Index returned positive 1.73%. This brings the Fund's first half result to negative 6.97% versus the index at positive 0.43%. For purposes of comparison with our dividend-oriented peer group, our portfolio underperformed the MSCI World High Dividend Yield Index result of negative 3.37% in the first half of 2018.

We continue to manage the Fund with a long-term orientation and emphasis on high-quality dividend-oriented equities. Our performance over the past year has been unsatisfying, but we believe the Fund's multi-year returns are a better indicator of our ability to compound investor capital. We have made some adjustments to holdings in 2018, as discussed below.

Recall that the Fund is designed to deliver an attractive total return using a focused, yet diverse, portfolio of dividend-paying stocks from around the world. A foundational element of Thornburg Global Equity Income Fund is that a differentiated total return can be achieved by investing in companies exhibiting the capital allocation discipline required to pay dividends.

Our strategy pursues capital appreciation and income via a portfolio of companies that have solid future prospects, trade at an attractive valuation to their intrinsic value, and have both the ability and willingness to pay dividends. We believe the Fund's structure—built on our core investment principles of flexibility, focus, and value—gives us a durable framework for value-added investing.

Moreover, dividend income has historically been a critical driver of equity returns and can offer a tangible measure of corporate health. However, instead of focusing on companies with the highest absolute dividend yields, our strategy seeks companies that offer value on a total risk/reward basis. As at 30 June 2018, the dividend yield of the Fund was 3.48% compared to 2.35% for the MSCI World Index. Moreover, we anticipate substantial “special” or extraordinary dividends from certain of our holdings—although we cannot forecast these extra dividends precisely.

Market concerns about a global trade war were prominent in the quarter due to a series of actions by the U.S. and its trading partners. Political events in Europe also weighed on markets. JPMorgan estimates that the first round of the Trump administration's tariff agenda impacts only about 0.1% of U.S. GDP and 0.2% of China's GDP, while enacting more severe measures could affect nearly 30% of U.S. imports and around 4% of U.S. GDP.

In both Italy and Germany, election results raised questions again about eurozone stability, while the U.K. government wobbled through its Brexit planning process. In connection with these factors, U.S. equities substantially outpaced the rest of the world in the second quarter of 2018 (see Chart 1).

Quarterly Equity Market Performance (as at 30 June 2018)

From an industry perspective, seven of the 11 sectors comprising the MSCI World Index delivered positive returns in the second quarter. Sector returns varied from negative 4.3% (financials) to 12.7% (energy). But for the Fund, the weakest performance came from the consumer discretionary sector while consumer staples provided the highest absolute return.

We seek to identify investments that, over time, can deliver a differentiated total return without taking notably more risk. Unfortunately, constructing a portfolio in this fashion does not necessarily drive performance in the very short term, and the Fund did not rebound as strongly as the overall market during the quarter.

Adient plc was the Fund's largest detractor, as the company's profit outlook has been challenged by commodity prices and supplier reliability. During the second quarter, Adient announced several management changes, including replacing the CEO with a turnaround expert to help the company regain its footing. We have reduced our Adient exposure while we evaluate these developments.

Other notable detractors suffered from external factors that spooked investors. Itau Unibanco's shares declined primarily on country-specific concerns as Brazil's currency fell and uncertainty rose about the dynamics of upcoming elections. Dignity plc, which is the U.K.'s largest provider of funeral-related services, fell when the government announced two industry investigations which could ultimately bolster Dignity's business. Gaming and leisure companies Wynn Macau and MGM China underperformed as investors reacted to rising tensions in the U.S.-China trade relationship.

Seaspan, which operates a fleet of containerships, was the Fund's largest contributor. We established our position during the first quarter, when investor expectations were low. In late March, Seaspan announced an accretive acquisition which also helped improve the market's perception of Seaspan's corporate governance. Shares also benefited from improving vessel utilization and pricing (“day rates”) across the industry. The management team at Seaspan appears to be pursuing sensible corporate actions that could bear fruit in the coming quarters.

Other top contributors were spread across regions and sectors. Mercari, which is the dominant platform in Japanese online flea markets, saw shares rise sharply following its IPO. CenturyLink, a U.S. telecom and telecom infrastructure provider, is showing solid fundamental progress as it integrates the 2017 acquisition of Level 3 Communications. Speedcast, an Australian aggregator and re-seller of satellite communications services continues to add new customers and increase its revenue with existing customers. Investors cheered when specialty Irish brewer C&C Group announced the highly accretive acquisition of a wholesale distribution company.

Relative to the index, the portfolio exited the quarter particularly overweight the industrials and consumer discretionary sectors, and notably underweight in information technology and health care. Geographically, the portfolio is overweight Europe and Asia. Emerging markets investments comprise roughly 10% of the portfolio. The average one-year forward price-to-earnings multiple of the companies owned in Thornburg Global Equity Income Fund stands at 13.1x, vs. 15.9x for the MSCI World Index.

Most macro-economic indicators around the world positively surprised in 2017 and the first half 2018, with the U.S. economy a standout in the past few months. U.S. non-farm payrolls reached an all-time high of 149 million in June. It's possible that this U.S. vigor combined with uncertainties around Europe and globalization is what caused the U.S. dollar to reverse a 14-month trend and strengthen during the quarter. In spite of the trade tensions, global consumer spending is growing, and we expect people around the world will continue to buy goods and services, trading with one another.

Owing to strong recent data, earnings expectations for the MSCI World Index for 2018 have improved in recent months, and expectations for global growth remain firm. These positive trends support the continued rotation of investor preferences from debt and defensive equity to more economically sensitive assets. The U.S. Federal Reserve has stepped up the pace of Federal funds target rate hikes, moving the target from 0.75% to 2.00% over the last six quarters. Most major central banks are pursuing easy monetary conditions, which artificially suppress interest rates.

It's important to reiterate that our strategy for Thornburg Global Equity Income Fund is founded on fundamental analysis of individual businesses, not over- reliance on macroeconomic forecasts. We construct the portfolio, as always, on a diversified basis with risk mitigation in mind.

Thank you.

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 June 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.

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.

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To determine a fund's Morningstar Rating™, funds and other managed products with at least a three-year history are ranked in their categories by their Morningstar Risk-Adjusted Return scores. The top 10% receive 5 stars; the next 22.5%, 4 stars; the middle 35%, 3 stars; the next 22.5%, 2 stars; and the bottom 10% receive 1 star. The Risk-Adjusted Return accounts for variation in a managed product's monthly excess performance (excluding sales charges), placing more emphasis on downward variations and rewarding consistent performance. Other share classes may have different performance characteristics. © 2018 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.

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