1st Quarter 2018

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In 2017, we saw synchronized global expansion, low inflation, and accommodative monetary policy leading to strong equity returns, and that sentiment carried into January as fundamentals pointed to further solid economic development and robust corporate earnings growth. In January, the S&P 500 Index returned 5.73%, the MSCI EAFE Index returned 5.02%, and the MSCI Emerging Markets Index returned 8.33%. Following the strong January, investors began fretting about higher inflation and a potentially more hawkish U.S. Federal Reserve. Subsequently, trade tensions began escalating notably. We, however, expect the U.S. and China to reach agreements and avoid a global trade war, in turn improving access to the Chinese market. In the interim, expect noisy, headline-driven negotiations to keep volatility on the forefront.

During the last two months of the quarter, the S&P 500 Index declined 6.13%, the MSCI EAFE Index declined 6.23%, and the MSCI Emerging Markets Index declined 6.39%. On the European political front, Germany finally formed a government where Germany's center-left Social Democratic Party of Germany agreed to join Chancellor Merkel's center-right Christian Democratic Union and Christian Social Union parties in a renewed "grand coalition." Political uncertainty continues in Italy after its election, in which the anti-establishment Five-Star Movement and anti-immigration League party garnered increasing support. On a positive note, both parties downplayed anti-European Union rhetoric as of late; therefore, we don't see Italy attempting to part from the E.U. However, the road to form a coalition government could be lengthy, further supporting elevated levels of market volatility.

For the quarter ended 31 March 2018, Thornburg Global Equity Ex-U.S. Fund returned negative 2.93%, compared the MSCI EAFE and MSCI All-Country World ex-U.S. indices' returns of negative 1.53% and negative 1.18% respectively.

Contributors to Performance

  • China Petroleum & Chemical Corp.
    China Petroleum & Chemical Corp. (Sinopec) is China's largest oil refiner and petrochemical producer and distributor. Its upstream business benefited from increasing oil prices, and its strong cash generation supports a high dividend payout ratio. During the quarter, the State Administration of Taxation announced that refineries and wholesalers will be required to draw up invoices through the VAT (value-added tax) system to close consumption tax loopholes. This decision should eliminate capacity from uneconomical refineries in an over supplied industry, resulting in higher refinery margin, beneficial to Sinopec.
  • Électricité de France S.A.
    Électricité de France (EDF) produces, transmits, distributes, imports, and exports electricity. EDF boasts the largest nuclear power generation capacity in France and is vital for the reliability of electricity provisions across Europe. We believe the company possesses undervalued nuclear assets and the arrival of France's new long-term energy plan and carbon price could provide upside potential in share prices.
  • TAL Education Group
    TAL Education Group (TAL) provides K–12 after-school tutoring services in China in subjects such as mathematics, physics, chemistry, and English. With rising urbanization, favorable demographics, and intense competition for admission into top schools in China, TAL benefits from a supply-demand imbalance coupled with gaining market share resulting from favorable brand recognition.
  • UniCredit SpA
    UniCredit, an Italian-headquartered, pan-European retail and commercial bank, remains in the midst of a turnaround to increase its capital position and profitability. We remain confident in management's ability to implement the plan to improve operating efficiency and asset quality.
  • Ryanair Holdings plc
    Ryanair is Europe's premier low-cost carrier. It is enjoying a cyclical improvement in its markets following the industry's oversupplied conditions of 2015 and 2016. Ryanair is also making strides this year toward additional network expansion, including new routes serving cities in Germany and Ukraine.

Detractors from Performance

  • BRF S.A.
    BRF (Brasil Foods) is one of the world's largest protein companies, focusing on poultry and processed food under brands such as Perdigao, Sadia, and Qualy. BRF is among the world's largest exporters of poultry meat, accounting for approximately 14.5% of world trade in poultry. It is well positioned to capture growing global protein consumption, as consumer incomes increase. In addition, the agricultural advantages of Brazil—climate, water, and soil conditions—give BRF a cost advantage, facilitating international expansion. BRF underperformed during the period as its domestic business margins shrank from investment to re-establish shelf space, coupled with management turnover.
  • Commerzbank AG
    Commerzbank is a banking and financial services company headquartered in Frankfurt, Germany. Its share price has been under pressure, driven by expectations that interest rate hikes are being pushed further into the future. Our investment thesis on the underlying restructuring story has not changed. We expect to see a significant improvement in operating profit driven by lower loan losses and lower restructuring costs. We believe that a sustainable improvement of return on equity will lead to a re-rating in its valuation.
  • General Electric Co.
    General Electric is a diversified industrial and financial services conglomerate. The company serves a wide variety of end markets globally, including power and water, aviation, oil and gas, health care, appliances and lighting, energy management, transportation, and finance. During the quarter, its share price declined on continued disappointment from its power segment and upcoming accounting restatement. We have reduced our stake.
  • Brilliance China Automotive Holdings, Ltd.
    Brilliance China Automotive manufactures sedans and minibuses in China, its subsidiary BMW Brilliance, a joint venture with BMW, produces and sells BMW passenger vehicles in mainland China. During the quarter, Brilliance missed earnings estimates due to extra provisioning for the minibus business. Excluding minibus impact, core earnings and BMW joint venture (JV) contribution is in line with expectation. The stock corrected because of concerns on future product localization risk due to possible import tariff cuts. We agree that the Chinese government will loosen JV requirement and gradually reduce import tariffs, but it may take longer than current expectation.
  • Kingfisher plc
    Kingfisher is a home-improvement retailer with operations predominately in the U.K., France, and Poland. The company is now in the middle stage of a five-year transformational plan known as "ONE Kingfisher," the primary pillar of which is significant consolidation of the group's supply chain. We believe successful execution on this plan will see the company turn its competitive advantage in scale into a competitive advantage in price, which will ultimately lead to better sales and a meaningful uplift in profitability. Although the stock gave back recent gains after management cited headwinds in the U.K., we find the stock to be attractively valued despite those concerns.

We maintain conviction in our portfolio in a volatile market driven by headlines on trade tensions, inflation, a hawkish U.S. Federal Reserve, and geopolitical uncertainties. With volatility comes opportunity to acquire good companies at compelling prices. Our bottom-up process continues leading us to interesting companies across our baskets: basic value, consistent earners, and emerging franchises. We are confident that our investment philosophy and process will continue to deliver attractive riskadjusted returns over a full market cycle.

Thank you for investing in Thornburg Global Equity Ex-U.S. 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: 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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