3rd Quarter 2017

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International equity markets continued marching higher in the third quarter largely on the back of both strong corporate and improving economic fundamentals. In aggregate, companies posted another round of double-digit earnings growth. It is notable that even with the robust year-to-date return, the price investors are paying for international stocks as measured by forward price/earnings per share is largely the same as at the start of the year and remains well below the equivalent metric for U.S. equity markets at the broad market level.

All sectors in both our benchmark indices produced positive returns in U.S. dollars (USD), with a few marginally negative in local currency terms, as the dollar continued to weaken. The USD's international value is below its year-ago level on the ICE U.S. Dollar Index. Yields on global fixed income securities shifted around but ended the quarter about where they started, and oil began to strengthen, reversing the recent trend.

For the quarter ended 30 September 2017, Thornburg Global Equity Ex-U.S. Fund (the "Fund") returned 3.35% (A shares at net asset value), below the performance for the MSCI EAFE and MSCI All Country World ex-U.S. indices at 5.40% and 6.16%, respectively. Performance over the first three quarters is more favorable for the Fund at 20.45%, compared with the aforementioned indices' 19.96% and 21.13% respective returns.

Contributors to Performance

  • Alibaba Group Holding
    Alibaba is one of the largest internet companies in China, providing e-commerce, internet infrastructure, online financial, and internet content services. Growth in Alibaba's e-commerce business, as measured by gross merchandise value (GMV), remains robust with increasing e-commerce penetration in the lower-tier cities that lack extensive brick-and-mortar retail infrastructure. With almost 450 million annual active buyers generating approximately $550 billion in GMV, Alibaba's most valuable asset is arguably its extensive customer data. Utilizing its big data, Alibaba has runway to perfect its targeted advertisement algorithm and improve its monetization rate. The stock performed well during the quarter as Alibaba continues to deliver better-than-expected top- and bottom-line results on the back of better customer engagement and deployment of data analytics tools.
  • UniCredit S.p.A
    UniCredit, an Italian-headquartered, pan-European retail and commercial bank, continues to execute on its turnaround plan to increase its capital position and profitability. We remain confident in management's ability to implement the plan through better operating efficiency and improved asset quality. The stock remains attractive as its valuation has not reflected the company's progress toward meeting its cost of capital.
  • Infineon Technologies
    Infineon Technologies is a leading manufacturer of semiconductors used in automotive, industrial, and security markets. Its automotive segment is growing twice as fast as global auto sales growth. Infineon benefits from increased semiconductor demand for emission-reduction technology coupled with safety-related improvements, such as advanced driver assistance systems. Infineon is well positioned to take advantage of the upcoming electric vehicle trend.
  • Omron Corp.
    Omron Corp. is a Japanese manufacturer of electronic components and equipment used for factory automation, a secular trend as manufacturers invest in automation to achieve higher operating efficiency. Current executive management came on board five years ago and has focused on improving capital returns by divesting low ROIC (return on invested capital) business units, increasing profit margins, as well as capital returns to shareholders.
  • TAL Education Group
    TAL Education Group 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 can continue gaining market share and expand profit margins by leveraging its well-known household brand of high-quality tutoring, with facilities nationwide that are backed by strong IT infrastructure.

Detractors from Performance

  • Teva Pharmaceutical Industries Ltd.
    Teva Pharmaceutical is the world's largest generic pharmaceutical drug company. Teva drugs comprise 17% of generic prescriptions filled in the U.S. Shares of Teva came under pressure following the quarterly results, as guidance was cut on generic-drug pricing pressure, and the company reduced its dividend materially to meet its debt obligation. U.S. generic drugs have been under considerable pricing pressure, and it is unclear how long it will persist. Teva plans to divest a few of its businesses to help manage its debt load. On a positive note, Teva found a new CEO (Kare Schultz) with a proven turnaround track record from another European pharmaceutical company.
  • Reckitt Benckiser Group plc
    Reckitt Benckiser is a U.K.-based multinational consumer-goods company with name brands such as Lysol, Mucinex, Scholl's, Gaviscon, etc. and recently acquired fast-growing infant-nutrition company Mead Johnson, broadening exposure globally with significant growth in emerging markets. New product challenges, coupled with a cyber attack, pressured Reckitt and caused the company to lower its full-year guidance, which negatively affected the stock price. We believe these headwinds to be temporary and expect its Mead Johnson acquisition to provide a meaningful earnings uplift with the high-quality company.
  • ConvaTec Group plc
    ConvaTec is a U.K.-based medical device company with products in ostomy care, continence, and advanced wound care. Many of its products are consumable, creating a consistent cash-flow stream. While company management is focused on improving profit margins, operating costs for the first half of the year came in higher than market expectations; we believe this to be transitory in nature and that ConvaTec will move forward with profitability improvement.
  • China Unicom Hong Kong Ltd.
    China Unicom, the second-largest mobile and fixed-line operator in China, underperformed the market following its announcement of mixed ownership reform and increased employee ownership, although we view the announcement as positive. China Unicom also stands to benefit from an upcoming public listing of joint-venture tower company, China Tower Co., potentially unlocking value for China Unicom shareholders.
  • Nike, Inc.
    Nike, a global athletic footwear and apparel company, continues to deliver solid earnings growth as it shifts distribution from wholesale (via retailing intermediary) to "direct to consumer" channels. However, short-term challenges have weighed on company performance and investor sentiment as global competitors have stepped up efforts to take share in what we believe to be a structural growth market. We still consider Nike's shares to be undervalued, and they don't reflect the company's revenue growth potential, nor its opportunity to drive margin expansion from the ongoing "manufacturing revolution."

While international equity markets posted robust returns over the first three quarters of the year, earnings growth and local currency appreciation—as opposed to international stocks becoming more expensive on price paid for a unit of earnings (P/E multiple)—are driving much of the performance. We also continue to find interesting stock ideas from our bottom-up process in all three of our baskets: basic value, consistent earners, and emerging franchises. We are confident that our investment philosophy and process will continue to deliver attractive risk-adjusted returns over a full market cycle, as it has in the past.

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: 30 September 2017—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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