1st Quarter 2018

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During the first quarter of 2018, Thornburg Global Equity Income Fund underperformed its index, returning negative 6.66%, versus a return of negative 1.28% for the benchmark MSCI World Index. The trailing 12-month return was 10.77% for the Fund, versus 13.59% for the same index. Recall that the Fund is designed to deliver an attractive total return using a focused yet diverse portfolio of dividendor future dividend-paying stocks from around the world. 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.

As the name implies, dividend income forms a core part of the underlying philosophy of Thornburg Global Equity Income Fund. We invest for income and capital appreciation via a portfolio of companies that have both the ability and willingness to pay dividends. Dividend income has historically been a primary driver of equity returns and can offer a tangible measure of corporate health. Rather than focus on companies with the highest absolute dividend yields, however, we focus on companies that offer value on a total risk/reward basis. As of 31 March 2018, the dividend yield of the Fund was 3.32% compared to 2.36% for the MSCI World Index.

Following the steady price appreciation and calm of 2017, the early months of 2018 have featured significant volatility—recessionary fears, trade conflicts, and political uncertainty have all played a role. Global equities were marked down by approximately $5 trillion from 1 February to 9 February, and one measure of S&P 500 Index volatility rose about threefold. This hampered our own investing efforts and dragged on all bourses. For many global markets, it was the first quarter in two years with a negative return, even though most widely tracked economic indicators show all major economies continue to grow in unison, a trend that began in 2016. The U.K. was the worst-performing market in the quarter—in fact, a recent Bank of America survey indicated that the U.K. is currently the most avoided market (i.e., underweighted) by institutional investors, and more underweighted than at any time since the survey began in 1999 (see Chart 1).

From an industry perspective, only two of the MSCI World Index’s 11 sectors delivered positive returns for the March quarter (information technology 3.40% and consumer discretionary 1.80%). Nine sectors produced a negative result, ranging from negative 5.85% (telecommunications services) to negative 1.23% (health care).

We seek to gather investments that, over time, can together deliver a differentiated total return without taking notably more risk. Unfortunately, constructing a portfolio in this fashion does not necessarily reduce market sensitivity in the very short term, and the Fund did not behave more defensively during the February and March reversal.

Beyond global markets’ weakness, first quarter performance was impacted by a number of company-specific developments. Top portfolio detractors for the period are discussed below.

Colony NorthStar, Inc. was the Fund’s biggest detractor. The company is a diversified real estate company formed by the 2016 merger of Colony in Los Angeles and NorthStar in New York. We were attracted to it based in part on its valuation (priced at discount to net asset value), cost savings opportunity, and stated plan to swiftly streamline and upgrade its portfolio. However, progress was too slow and its most recent report fell short of our expectations.

The shares of Adient plc, a leading supplier of automotive seating, suffered when it reduced 2018 guidance primarily due to challenges with meeting profit margins. Margin improvement is largely linked to operational restructuring and better cost management of commodity inputs, and management determined these headwinds were more severe than it had embedded in previous guidance. Teekay LNG Partners L.P., MGM China Holdings Ltd., and Bellway plc each reported solid results and strong operational progress during the quarter, but the shares showed more market sensitivity than many other holdings during the period.

Positive contributions to performance came from many sectors and regions of the world. Top-performing names during the quarter are discussed below.

Europe’s leading low-cost airlines, easy- Jet plc and Ryanair Holdings plc, were the Fund’s two-largest contributors in the period, and they reflect the value of patience in holding quality companies trading at attractive valuations, even when shares underperform over short periods. During the last year, each company’s share price has declined by 10% or more on multiple occasions due to macro concerns, or when negative news headlines were worse than the actual fundamentals would imply. The companies’ prospects have continued to improve, even if some investors’ knee-jerk reaction was to sell on short-term headlines.

Bank of N.T. Butterfield & Son Ltd., Bermuda’s oldest and largest independent financial institution, saw its shares rise after announcing an accretive acquisition of Deutsche Bank’s banking businesses on the islands of Cayman, Guernsey, and Jersey. The operations were immaterial to Deutsche Bank, but enhance N.T. Butterfield’s offshore capabilities and increase its credibility as a buyer of similar businesses. Wynn Macau Ltd. contributed positively with another quarter of strong gaming activity and a seemingly clean resolution of former chairman Steve Wynn’s retirement from the company. Brazilian bank Itau Unibanco Holding S.A. is benefiting from favorable macro trends in Brazil, the reduction of political risk premia, and management guidance around maintaining disciplined underwriting standards.

Relative to the index, we exited the quarter most overweight the industrials and consumer discretionary sectors, and most underweight information technology and health care. Geographically, the Fund is underweight the U.S., has no direct exposure to Japan, and we are overweight most other regions. Emerging market investments comprise about 12% of the portfolio. The average one-year forward price-to-earnings multiple of the companies owned in Thornburg Global Equity Income Fund stands at 13.0x, versus 15.8x for the MSCI World Index.

Investors continue to debate the future direction of the major economies and potential policy actions by the U.S. Federal Reserve and the Trump administration. Trade conflicts, asset prices, and Brexit uncertainty are also in focus. Importantly, overall global consumer spending is growing in 2018, along with global industrial production and the global population. Most macroeconomic indicators around the world positively surprised in 2017 and the first quarter of 2018, with the U.S. a relative laggard.

Owing to strong recent data, earnings expectations for the MSCI World Index portfolio for 2018 have improved in recent months, along with global economic growth forecasts. These positive trends continue to support a rotation of investor preferences from defensive debt and 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 1.75% over the last five quarters. Other major central banks around the world continue to pursue easy monetary conditions, which artificially suppress interest rates.

It’s important to reiterate that 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 for investing in Thornburg Global Equity Income Fund.

 

1.Manish Kabra, CFA, Paulina Strzelinska, and James Wei, “European Fund Manager Survey – Growth Capitulation,” Bank of America Merrill Lynch, March 2018.

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: 31 March 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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