2nd Quarter 2018

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For the second quarter of 2018, Thornburg Global Opportunities Fund underperformed, with a total return of negative 0.38% (A ACC shares), versus the benchmark MSCI All Country World Index (ACWI) return of 0.53%. This brings the Fund’s first half result to negative 7.02% versus the index at negative 0.43%. After a difficult start to the year, the Fund rebounded early in the second quarter; but external factors caused several portfolio holdings to slump in June, leading to underperformance for this three-month period.

We continue to manage the Fund with a long-term orientation. Our relative underperformance over the past year has been unsatisfying, and we have made adjustments to the portfolio in 2018. Recall that Thornburg Global Opportunities Fund seeks capital appreciation from a focused portfolio of global equity investments. We believe the structure of the Fund—built on our core investment principles of flexibility, focus, and value—gives us a durable framework for value-added investing.

Our framework has produced favorable results over the long term. From its inception on 30 March 2012, through 30 June 2018, the Fund has outperformed the ACWI by an average margin of 113 basis points (or 1.13%) per year. The cumulative result is a total return of 84.10% versus 72.60% for the ACWI.

Concerns regarding 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 2Q18 (see Chart 1).

Second Quarter Equity Market Performance (USD)

From an industry perspective, seven of the 11 sectors comprising the ACWI delivered positive returns in the second quarter. Sector returns varied from negative 5.6% (financials) to positive 10.3% (energy). But for the Fund, two notable areas of strength were internet holdings and industrials, specifically chemicals producers.

Facebook (discussed in this note last quarter) rebounded smartly from its previous underperformance and was our top contributor in the period. In May, the company reported healthy operating results, including user growth, in all four of its major geographic regions. Shares of China’s Baidu also snapped back as the company progresses with its streaming video and autonomous driving initiatives. Another tech holding that sold-off in the first quarter, Alphabet, recovered as market participants became more comfortable with privacy issues.

China’s efforts to rebalance its economy and improve its environmental standards have boosted our materials holdings, including CF Industries and OCI NV.1 For the past few years China has been systematically closing older, and dirtier, inefficient manufacturing plants in the chemicals and other sectors. Through May of this year, Chinese urea (fertilizer) exports were down 80% from the same period in 2015. Lower Chinese exports are tightening global supply/ demand dynamics, supporting ex-China volumes and product pricing (see Chart 2). Shares of CF and OCI each rose over 15% in the second quarter.

Fertilizer Trends

Our investments in Asia generally underperformed, partly due to macroeconomic factors. In addition to the U.S.-China trade tensions, a strengthening dollar and rising U.S. interest rates caused declines across the region—our Macau casino investments, MGM China and Galaxy Entertainment, and Samsung (Korea) were affected.

Satellite communications company EchoStar happens to be classified as a technology company, but it has more in common with telecoms and cable/ pay TV companies, which are generally all classified in the telecommunications sector. Many telecom companies around the world have declined recently. So although EchoStar’s share price performance was frustrating, it is not necessarily out of line for its true peer set over this short time frame. Rounding-out the list of top detractors during the quarter was Spanish airport operator Aena. European transportation shares broadly sold-off over political tensions about open borders and the future of the eurozone and the common currency.

Relative to the index, the Fund exited the quarter particularly overweight the materials and telecommunications sectors, and notably underweight in health care and consumer staples. Geographically, the Fund is overweight Europe and Asia, although it has no direct exposure to Japan. Emerging markets investments comprise roughly 14% of the Fund. The average one-year forward price-to-earnings multiple of the companies owned in Thornburg Global Opportunities Fund stands at 14.6x, vs. 15.2x for the ACWI, while consensus estimates are for our holdings to grow earnings faster than the market in the years ahead.

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 All Country 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 Opportunities 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. We have managed the Fund this way through a wide variety of macroeconomic settings since its inception.

Thank you.

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.

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Source of data: FactSet, BBH, Confluence, Bloomberg—unless otherwise stated.
Date of data: 30 June 2018—unless otherwise stated.

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