3rd Quarter 2018

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For the third quarter of 2018, Thornburg Global Opportunities Fund had a total return of negative 1.18% (Class I shares), while the benchmark MSCI All Country World Index (ACWI) rose 4.28% during the period. This brings the Fund’s year-to-date result to negative 7.72% versus the index’s 3.83% gain. Relative to the benchmark, Fund 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.

As your portfolio managers, we recognize that our recent results have been disappointing. We continue to manage the Fund with a long-term orientation, and we have adjusted portfolio holdings as market conditions and individual investment theses have evolved. 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.

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 an annualized 2% to 3%. Chart 1 depicts the regional performance disparity.

YTD Equity Market Performance (USD)

In the third quarter, nine of the 11 sectors comprising the ACWI delivered positive returns. Sector returns varied from negative 1.6% (real estate) to 10.9% (health care).

Our top contributors were a diversified group from a geographic or industry perspective, while the detractors were weighted markedly toward our non-U.S. holdings, including European airlines and two gaming and entertainment operators in Macau, China.

India’s Reliance Industries has been a standout for the Fund again this year, following its 80% rise in 2017. We purchased Reliance—a leading industrial and retail conglomerate—as it was completing an ambitious investment to create the country’s most advanced wireless telecommunications network. In the past two years, its Jio telecom unit has gone from zero to nearly 20% market share, and now boasts more than 200 million subscribers (see Chart 2). Reliance shares treaded water during the first half of 2018, but our patience was rewarded over the past few months.

An Unprecedented Launch

Long-time U.S. holding T-Mobile also gained during the quarter, based on further business progress. Additionally, in September, T-Mobile announced the hiring of a senior telecom finance executive to spearhead its Sprint merger integration efforts, indicating perhaps some confidence in regulatory approval of the deal.

OCI and CF Industries shares continued to perform well as a continuation of tighter supply/demand dynamics have led to higher fertilizer prices. We added to the OCI position during the second quarter.

Walgreens Boots Alliance’s share price recovered more than 20% in the September quarter. During the first half of 2018, Walgreens delivered solid earnings, raised its dividend by 10% and announced a buyback of more than 10%, of its shares outstanding. Nonetheless, the shares sold off in June on concerns that Amazon will become a strong new competitor. The third quarter’s shareprice move suggests investors are more comfortable with Walgreens’ relevance to consumers and ability to navigate e-commerce dynamics.

Facebook was discussed in this space last quarter; the stock price has been volatile this year, and Facebook was a large detractor from our results in the third quarter. Shares fell sharply in July after the company’s second- quarter results, when management guided to lower earnings growth in the coming quarters as the company invests more in “quality control,” including privacy, compliance, and censorship—as well as its global data center network. Today, the stock trades at just a small premium to “old economy” media companies. With its broad global reach, we believe Facebook can continue to grow faster than that group.

China has been the weakest major bourse this year, and our holdings in two Macau gaming operators, Galaxy Entertainment and MGM China, dragged down our third-quarter results. Recall that we have been investing in Macau (via Galaxy Entertainment) since 2012 and enjoyed strong performance from Galaxy in both 2016 and 2017. Investors have de-rated all Macau operators lately, based partly on worries about various aspects of the simmering trade war with the U.S. But the balance sheets of our companies are improving while the profits have grown steadily throughout the year. In September the government completed an $11 billion high-speed rail project connecting mainland China to Hong Kong, and Macau visitation trends this month, during the national “Golden Week” holiday, were robust.

Shares of European low-cost airlines easyJet and Ryanair fell on concerns about rising oil prices and the uncertainties in Europe cited previously. We trimmed easyJet near its highs early this year but could have managed its evolving outlook more adroitly. Other holdings that declined in the quarter were Italy’s Atlantia infrastructure group and China’s internet search leader Baidu.

Relative to the index, the Fund exited the quarter particularly overweight the communications services sector, and moderately overweight transportation and materials. We are underweight in health care, information technology, and financials. Geographically, the Fund is overweight Europe and Asia, but has no direct exposure to Japan. Emerging markets investments comprise 12% of the portfolio. The average one-year forward price-to-earnings multiple of the companies owned in Thornburg Global Opportunities Fund stands at 14.0x, vs. 15.8x for the ACWI. Consensus estimates are for our holdings to grow earnings faster than the market in the years ahead. We monitor earnings progress closely since earnings growth is the single-most important determinant of future stock price performance.

This year positive economic trends have supported a rotation of investor preferences from more defensive debt and equity assets to more economically sensitive ones, though with increasing debate recently 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.

With our focus on earnings progress and the absolute and relative intrinsic values of the businesses in Thornburg Global Opportunities Fund portfolio, we remain constructive about the longterm prospects for the Fund. Global consumer and business incomes are growing, and we expect people around the world will continue to buy goods and services and trade with one another. We believe the dispersion in equity returns across regions and sectors—or generally lower asset prices—could present opportunities for our investment framework in the years ahead. Patience and a long-term investment orientation have served Thornburg Global Opportunities Fund well since its inception.

Thank you for investing in Thornburg Global Opportunities Fund.


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

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