3rd Quarter 2018

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During the third quarter of 2018, Thornburg Global Equity Income Fund returned negative 4.28% (I USD Accumulating (Unhedged)), while the benchmark MSCI World Index returned positive 4.98%. This brings the Fund’s year-to-date result to negative 10.59% (I USD Accumulating (Unhedged)) versus the index at positive 5.43%. For purposes of comparison with our dividend-oriented peer group, our Fund underperformed the MSCI ACWI High Dividend Yield Index result of 5.40% during the quarter.

As your portfolio managers, we recognize that our recent results have been disappointing. Relative to the benchmark, portfolio performance was challenged by the dramatic strength of U.S. markets compared to the rest of the world. In addition, certain company-specific events caused several portfolio stocks to decline during the quarter. We have made some adjustments to holdings in 2018, discussed below. Recall that the portfolio 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.

The Fund 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.

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 investment strategy seeks companies that offer value on a total risk/reward basis. As at 30 September 2018, the portfolio’s gross dividend yield was 3.7% compared to 2.3% for the MSCI World Index.

Geopolitical concerns were prominent during the quarter. The resilience of the eurozone has been questioned this year due to a host of developments including the Brexit negotiations, Italian election results, and the turmoil in Turkey. Moreover, rising oil prices and U.S. interest rates, as well as trade tensions, have produced a stronger dollar and higher volatility, particularly in Asian equities. These factors have resulted in far greater dispersion of outcomes across regional equity markets in 2018, compared to the prior three years, a period when the U.S. outperformed other developed and emerging markets at only an annualized 2% to 3%. Chart 1 depicts regional performance disparities and the overall contribution of higher-yielding equities.

Quarterly Equity Market Performance (as at 30 June 2018)

From an industry perspective, nine of the 11 sectors comprising the MSCI World Index delivered positive returns in the third quarter. Sector returns varied from negative 1.0% (real estate) to the weakest performance came from the consumer discretionary sector while information technology 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.

In addition to the factors cited above, we experienced several stock-specific drivers that led to significant underperformance in the quarter. Our largest detractor was Atlantia, an Italian-listed toll road operator that experienced a left-tail event with the collapse of the Morandi bridge in Genoa, Italy, killing 43 people. The bridge was built by the government in the 1960s and operated by Atlantia under a concession. The populist-coalition government used this tragedy as a political opportunity to criticize privatizations and the E.U. Causes and liabilities have not been determined, though Atlantia’s shares declined 30% following the August accident.

Our second-largest detractor was Speedcast International, an Australian aggregator and re-seller of satellite communications services. Speedcast’s most recent earnings release disappointed investors due to a delay in the recovery of the offshore oil services market. Gaming and leisure companies Wynn Macau and MGM China Holdings, underperformed as investors reacted to rising tensions in the U.S.-China trade relationship, in addition to fears of slowing Chinese economic activity. Another notable detractor was German multinational pharmaceutical and life sciences company Bayer AG.

Our top contributor was CenturyLink, a U.S. telecom and telecom infrastructure provider, which is showing solid fundamental progress as it integrates the 2017 acquisition of Level3 Communications. In addition, Bank of N.T. Butterfield & Son contributed strongly. N.T. Butterfield & Son benefited from higher U.S. interest rates and recently completed accretive tuck-in acquisitions aiding profit growth.

CF Industries shares continued to perform well as a continuation of tighter supply/demand dynamics have led to higher fertilizer prices. CK Hutchison was also a top contributor after unveiling strong financial results and increasing its dividend. The Hong Kong-based conglomerate, which owns a globally diversified portfolio of infrastructure, telecom, energy, and retail businesses, grew underlying profits by 13%, an acceleration from the slower growth rate seen in recent years, and raised its interim dividend by 12%. Rounding out the list of notable contributors was Microsoft Corp.

Relative to the index, the portfolio exited the quarter particularly overweight in the industrials and consumer discretionary sectors, and notably underweight in information technology and health care. Geographically, the Fund is overweight Europe and Asia, although it has no direct exposure to Japan. Emerging markets investments comprise roughly 6% of the portfolio. The average one-year forward price-to-earnings multiple of the companies owned in Thornburg Global Equity Income Fund stands at 13.2x, vs. 16.5x for the MSCI World Index.

Positive economic trends have been supporting a rotation in investor preferences from more defensive debt and equity assets to more economically sensitive ones, though with recently increasing debate around valuation and the duration of the global economic growth cycle. The U.S. Federal Reserve has moved the upper bound of its target from 0.75% to 2.25% over the last seven quarters, but most major central banks continue to pursue very easy monetary conditions, which support prices of financial assets. As attention turns to 2019, investors will evaluate the interplay between expected economic growth, inflation, capacity investment in various industries, technological change, government regulation, and the inevitable monetary tightening that accompanies a transition from government-administered negative real interest rates and quantitative easing to market-determined prices for financial assets.

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

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.

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.

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