3rd Quarter 2018

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Thornburg Investment Income Builder Fund paid an ordinary quarterly dividend of $0.082 per I USD Distributing (Unhedged) share in the quarter ended 30 September 2018. This compares to a dividend of $0.087 for the comparable quarter of 2017.

The Fund’s net asset value for the same class increased by $0.32 to $10.88 per share from $10.56 during the September quarter. For the trailing 12 months ended 30 September 2018, the net asset value increased $0.25 to $10.88 per share from $10.63.

The Fund’s I USD Distributing (Unhedged) share return of 4.63% for the September quarter exceeded that of its blended benchmark (75% MSCI World Index and 25% Bloomberg Barclays U.S. Aggregate Bond Index) by 0.90%. Performance comparisons of the Fund to its blended benchmark over various periods are shown performance section of this website.

Over the long term, earnings growth should drive equity prices and dividend payments. We are optimistic about the return potential of the Thornburg Investment Income Builder Fund portfolio. We currently expect 2018 earnings per share growth of our equity portfolio companies to average close to 10% on a position-weighted average basis.

The quarter ended 30 September 2018, was the 25th full calendar quarter since the inception of the Fund in June 2012. In 18 of these quarters, the Fund delivered a positive total return. The Fund has delivered positive total returns in five of its six calendar years of existence. As at 30 September 2018, Thornburg Investment Income Builder Fund has delivered annual total returns of 8.03% since its inception (I USD Accumulating (Unhedged) shares).

In assessing the third-quarter 2018 performance of the Fund, it is constructive to consider the performance in U.S. dollars of the sector components of the MSCI World Index over the three-month period. The MSCI World Index comprises 75%, and the entire equity portion, of the Fund’s global performance benchmark.

  1. Nine of 11 index sectors showed positive total returns for the third-quarter 2018, with sector results ranging from approximately 11.5% (health care) to negative 1.0% (real estate). Stocks of firms in the information technology and industrials sectors joined health care sector stocks in outperforming the index in the quarter. Stocks of firms in the consumer discretionary, financials, consumer staples, communications services, utilities, energy, and materials sectors joined real estate stocks in generally underperforming the index in the September quarter.
  2. Relative to the MSCI World Index, your Fund’s portfolio was significantly overweight the higher dividend- paying communications and financial sectors, as it has been for most of its history.
  3. Fund investments in firms in the following sectors comprised the largest average sector weightings in the portfolio during the third quarter:
    • Financial sector (25% average weighting in the Fund’s portfolio; unchanged over the quarter)
    • Communication services sector (14% weighting in the Fund’s portfolio; negative 1% change in sector weighting over the quarter). Note that the telecommunications sector was combined with certain media and internet companies to create the communication services sector late in the September quarter.
    • Energy sector (12% weighting in the Fund’s portfolio; unchanged over the quarter)
    • Information technology sector (8% weighting in the Fund’s portfolio; plus 2% change in sector weighting over the quarter)
    • Health care sector (10% weighting in the Fund’s portfolio; positive 2% change in sector weighting over the quarter)
    • Consumer staples sector (8% weighting in the Fund’s portfolio; unchanged over the quarter)
    • Industrials sector (5% weighting in the Fund’s portfolio; negative 1% change over the quarter)
    • Consumer discretionary sector (3% weighting in the Fund’s portfolio; unchanged over the quarter)
    • Consumer discretionary sector (5% average weighting in the Fund’s equity portfolio; unchanged over the quarter)
  4. The Fund’s quarterly performance relative to the MSCI World Index in third-quarter 2018 was hindered by its large weighting in the financial and communication sectors and low weighting in firms in the technology and health care sectors. The value of the U.S. dollar broadly ended the quarter little changed vis-à-vis most foreign currencies. The Fund’s relative performance was helped by comparative outperformance from its holdings in the utilities, consumer staples, information technology, and financial services sectors.
  5. In the Fund’s portfolio, 30 equity investments contributed positive returns of at least 0.05% (five basis points) to the portfolio during the third quarter. Thirteen of the Fund’s equity investments detracted 0.05% or more from third-quarter performance.

Your Fund’s investments in the financial sector generally exceeded the performance of the equities in the financial sector of the MSCI World Index in third quarter 2018, however, the heavy portfolio weighting in these investments was a drag on performance. NN Group, JPMorgan Chase & Co., CME Group, Ares Capital Corporation, Axa Equitable Holdings, and UBS Group each contributed significantly to portfolio performance. ING Group was a weak performer in the quarter.

Your Fund’s significant holdings in the communication services sector delivered slightly positive returns but lagged the communication services component of the index in the third quarter. China Mobile, AT&T, and England’s BT Group each made positive contributions to portfolio performance. Vodafone Group, French multi-national telecom network operator Orange, and Africa’s MTN Group each detracted from portfolio performance due to investor concerns about price wars and political risk in some of their key markets. Institutional investors were net sellers of telecommunications sector equities in 2017 and have been sellers again in 2018 to redeploy proceeds into more cyclical investments.

Among Fund investments in the energy sector, French multi-national Total, Italy’s ENI, and Russia’s Lukoil were among the holdings with positive returns in the third quarter. The benchmark Brent oil price rose approximately 70% from 2017’s mid-June low through 30 September 2018. Of this 70% increase, less than 5% occurred in the September quarter. Supply and demand fundamentals appear to be positive for the sector in 2018, following ongoing global consumption increases, matched with industry output discipline and supply disruptions from major state-owned producers.

Investments in the technology sector delivered strong performances in the September quarter. Taiwan Semiconductor, Qualcomm, and new portfolio addition Broadcom each continued to benefit from supplying semiconductors to a growing number of connected devices, partially offset by concerns that Trump administration trade policies will worsen supply-chain dynamics for these devices. Digital communications component designer Qualcomm, which received a takeover bid of $79/ share from Broadcom last year, ended the quarter with a share price of $72.03 after gradually recovering from a share price in the low $50s last spring, following a U.S. government veto of the takeover. We believe the acquisition proposal was constructive in establishing a valuation benchmark from an arm’s length acquirer and in shaking up the Qualcomm board of directors.

Fund investments in the industrials sector delivered overall negative returns in the September quarter, well behind sector results. Italian infrastructure operator Atlantia, and U.K. defense contractor BAE Systems delivered negative results. Atlantia was the notable detractor, with shares suffering from the tragic collapse of a highway bridge on a viaduct over Genoa in mid- August that pressured its share price 30% lower in the quarter. The bridge was built decades before Atlantia purchased (from the government) a concession to operate large portions of Italy’s toll-road network, but certain Italian politicians cast blame for the collapse on Atlantia.

The Fund’s third-quarter 2018 returns from its holdings in the health care sector exceeded the return of this sector within the MSCI World Index. However, because the Fund’s weighting in these investments was less than that of the index, the sector’s total contribution to performance was slightly lower than in the index. Merck again made a strong positive contribution as data continued to accumulate showing significant efficacy of its drug Keytruda in treating various forms of cancer. Novartis, Roche, Pfizer, and AstraZeneca were also positive contributors as investor sentiment improved regarding the prospects for drug prices after actual policy measures appeared less negative than political rhetoric.

Investments in the consumer staples sector exceeded the overall returns of this sector within the MSCI World Index. 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 totaling more than 10% of its shares outstanding. Nonetheless, the shares sold off in late June on concerns that Amazon will become a strong new competitor. The third quarter’s share-price move indicates investors are more comfortable with Walgreens’ relevance to consumers and ability to navigate e-commerce dynamics. Nestle recovered most of its first-half 2018 share price decline. British American Tobacco was the most notable negative contributor to portfolio performance for the quarter.

Among other portfolio holdings, notable contributors to September quarter portfolio performance included Électricité de France, Home Depot, Norilsk Nickel, and Lamar Advertising. Notable detractors included casino operator Las Vegas Sands and chemicals manufacturer LyondellBasell Industries.

A relatively flat U.S. dollar did not significantly impact the value of our non- U.S. assets during the quarter. We hedged most of the currency exposure of our asset positions denominated in the Australian dollar, the British pound, the euro, the Chinese yuan, and the Swiss franc. These hedges steadied the relative day-to-day performance of Thornburg Investment Income Builder Fund during third-quarter 2018, since benchmark indices are not hedged. Hedging had minimal impact on absolute returns this quarter. We are more focused on risk control than on reaping possible currency gains from exposure to assets denominated in these currencies.

Today, investors debate the future direction of the economies of China, Europe, various emerging markets, and the U.S. They consider potential policy actions by the U.S. Federal Reserve, Congress, the Trump administration, and foreign government regulatory and policy actions. Concerns about tariffs and trade policy changes were impactful on share price movements of global producers of tradeable goods in the September quarter. Many political and macroeconomic issues will remain open, but we believe people around the world will continue to buy goods and services and trade with one another. Importantly, overall global consumer spending is growing in 2018, along with global industrial production and global population. Most macroeconomic indicators around the world positively surprised in 2017 and 2018 to date. Attention is now turning to 2019, with slower expected growth as central bank tightening continues in the U.S. and gets underway in other countries.

Most firms held in Thornburg Investment Income Builder Fund’s portfolio are expected to deliver positive year-over-year earnings in 2018. Positive economic trends have supported a rotation of investor preferences from more defensive debt and equity assets to more economically sensitive assets, though with increasing debate in recent months around valuation and the expected duration of the global economic growth cycle. It appears that political gridlock will prevail in Washington, DC, into 2019 and 2020. The U.S. Federal Reserve has maintained the pace of Federal funds target rate hikes, moving the upper bound of its target from 0.75% to 2.25% over the last seven quarters. Most major central banks around the world continue to pursue very easy monetary conditions, which artificially suppress interest rates and support prices of financial assets.

While low interest rates are good news for borrowers, they have negative consequences for conservative savers. Interest income as a percentage of the aggregate adjusted gross income of U.S. households fell from 4% in 2007 to 2% in 2016, according to Statistics of Income published by the Internal Revenue Service.

Investors must consider other options. Banks in the U.S. offer below-inflation yields on most deposits. A very large pool of investor dollars is looking for better returns elsewhere, but in sensible investments. We are optimistic that the types of income-producing investments owned by Thornburg Investment Income Builder Fund will experience sustainable popularity among investors as their intrinsic values for income production are recognized. A high percentage of investor funds belong to people over the age of 55, for whom income is an increasingly necessary and desirable attribute.

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 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.

The views expressed are subject to change and do not necessarily reflect the views of Thornburg Investment Management, Inc. This information should not be relied upon as a recommendation or investment advice and is not intended to predict the performance of any investment or market.

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To determine a fund's Morningstar Rating™, funds and other managed products with at least a three-year history are ranked in their categories by their Morningstar Risk-Adjusted Return scores. The top 10% receive 5 stars; the next 22.5%, 4 stars; the middle 35%, 3 stars; the next 22.5%, 2 stars; and the bottom 10% receive 1 star. The Risk-Adjusted Return accounts for variation in a managed product's monthly excess performance (excluding sales charges), placing more emphasis on downward variations and rewarding consistent performance. Other share classes may have different performance characteristics. © 2018 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.

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