1st Quarter 2018

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Thornburg Investment Income Builder Fund's net asset value for A ACC shares declined by $0.32 per share ($15.04 to $14.72) during the March quarter. For the trailing 12 months ending 31 March 2018, the Fund's net asset value increased by $1.10 per share ($13.62 to $14.72).

The Fund's A share return of negative 2.13% for the March quarter trailed its blended benchmark (75% MSCI World Index and 25% Bloomberg Barclays U.S. Aggregate Bond Index) return by 0.86 percentage points for the quarter. Currency hedges utilized to protect the U.S. dollar value of the Fund's non-U.S. assets detracted roughly 0.73 percentage points from relative performance in the first quarter, as the value of the U.S. dollar declined against many foreign currencies. Performance comparisons of the Fund to its blended benchmark over various periods are shown in the performance section of this website.

Over the longer term, earnings growth should drive equity prices and dividend payments. We are optimistic about the return potential of 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 ending 31 March 2018 was the 23rd full calendar quarter since the inception of the Fund in June 2012. In 17 of these quarters, the Fund delivered a positive total return. It has delivered positive total returns in five of its six calendar years of existence.

In assessing the first-quarter 2018 performance of the Fund, it is constructive to consider the U.S. dollar performance of the sector components of the MSCI World Index over the three-month period (the MSCI World Index comprises 75%, which is the entire equity portion, of the Fund's global performance benchmark):

Nine of 11 index sectors showed negative total returns in the first three months of 2018, with sector results ranging from approximately negative 5.85% (telecommunications) to positive 3.40% (information technology). Stocks of firms in the consumer discretionary and health care sectors joined technology sector stocks in outperforming the index in the quarter. Stocks of firms in the industrials, consumer staples, real estate, utilities, financials, materials, and energy sectors joined telecommunications stocks in underperforming the index for the March quarter.

Relative to the MSCI World Index, the Fund was significantly overweight the higher dividend-paying telecommunications and financial sectors, as it has been for most of its history.

Fund investments in firms in the following sectors comprised the largest average sector weightings in the portfolio during the first quarter:

  1. Financial sector (24% average weighting in the Fund's equity portfolio, up one percentage point over the quarter)
  2. Telecommunications sector (15% weighting in the Fund's equity portfolio, down two percentage points over the quarter)
  3. Energy sector (12% weighting in the Fund's equity portfolio, down one percentage point over the quarter)
  4. Information technology sector (5% weighting in the Fund's equity portfolio, unchanged over the quarter)
  5. Health care sector (7% weighting in the Fund's equity portfolio, up one percentage point over the quarter)
  6. Consumer staples sector (8% weighting in the Fund's equity portfolio, unchanged over the quarter)
  7. Industrials sector (7% weighting in the Fund's equity portfolio, unchanged over the quarter)
  8. Consumer discretionary sector (5% weighting in the Fund's equity portfolio, unchanged over the quarter)

The Fund's quarterly performance relative to the index in the first quarter was hindered by its large weighting in the telecommunications sector, currency hedges, and low weighting in firms in the technology and consumer discretionary sectors. The value of the U.S. dollar broadly declined vis-á-vis most foreign currencies. The Fund's first-quarter performance relative to the index was helped by comparative outperformance from its holdings in the financials, energy, and utilities sectors.

Sixteen of the Fund's equity investments contributed positive returns of at least 0.05% (five basis points) to the portfolio during the first three months of the year, while 23 of the Fund's equity investments contributed negative returns of negative 0.05% or worse in the period.

The Fund's average return from its investments in the financials sector exceeded the performance of the equities in the same sector of the MSCI World Index in the first quarter of 2018. JPMorgan Chase, Singapore's DBS Group, CME Group, Deutsche Boerse, Ares Capital, and Dutch insurer NN Group were among the strongest performers in the portfolio. European banks ING Group, UBS Groep, and HSBC Holdings were weak performers in the quarter.

The Fund's significant holdings in the telecommunications sector delivered disappointing share price performances in the January-through-March period, despite delivering improved overall trajectories of service revenue and operating profits in recent quarters. U.S. network operator AT&T joined England's BT Group, China Mobile, Netherlands operator KPN, and multi-national operator Vodafone in detracting from portfolio performance in the first quarter of 2018. Institutional investors were net sellers of telecommunications sector equities in 2017, and again in the first quarter of 2018, in order to redeploy proceeds into more cyclical investments.

Among the Fund's investments in the energy sector, Lukoil, U.S. pipeline operator ONEOK, Italy's ENI, and French multi-national Total each delivered positive first-quarter returns. Royal Dutch Shell and Canada's Suncor were negative contributors for the quarter, following positive 2017 contributions to portfolio performance. The average Brent oil price rose approximately 50% from mid-June 2017 through 31 March 2018, though virtually all of this appreciation occurred in the last half of 2017. Supply and demand fundamentals appear to be positive for the sector in 2018, as ongoing global consumption increases have been matched with disciplined industry output.

Fund investments in the technology sector delivered mixed performances in the March quarter. Digital communications device designer Qualcomm, which received a takeover bid of $79/ share from Broadcom last year, was a negative contributor to Fund performance after its share price dipped to $55.41 into quarter end, following communication of U.S. government opposition to the proposed combination for national security reasons. 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. Taiwan Semiconductor continued to benefit from supplying semiconductors to a growing number of connected devices. The portfolio was not directly exposed to the recent headline making "data privacy" controversies surrounding some of the largest technology sector firms.

The Fund's investments in the industrials sector were modestly negative in the March quarter, in line with overall sector results. European toll-road operators Vinci and Atlantia each delivered negative returns despite a surprisingly strong European economy that continues to provide a tailwind to road traffic, operating profits, and dividend growth (13.7% and 19.6% year-over-year dividend increases from these firms, respectively.)

The Fund's first-quarter 2018 returns from its holdings in the health care sector lagged the modestly negative return of this sector within the MSCI World Index during the quarter. Merck, Novartis, and Roche Holding each detracted as political rhetoric against drug prices continued; however, results from key clinical trials of new drugs appeared to improve.

Fund investments in the consumer staples sector lagged the overall negative returns of this sector within the MSCI World Index. Korea Tobacco & Ginseng, Walgreen's, and Nestle each detracted from portfolio performance. We sold shares of drugstore operator CVS early in the quarter after considering further information regarding a proposed merger with Aetna that would appear to constrain intermediate-term dividend growth. For this reason, CVS was a positive contributor to quarterly portfolio performance, as we exited before the shares declined later in the quarter.

Among other portfolio holdings, notable positive contributors to March quarter portfolio performance included Électricité de France, casino operator Las Vegas Sands, and Asian infrastructure investor Hopewell Holdings. Negative contributors included building supply retailer Home Depot, Lamar Advertising, British American Tobacco, and U.S. real estate investment trust Washington REIT. As of the end of the quarter, we have reduced our position in Washington REIT.

A weaker U.S. dollar increased the value of our non-U.S. assets during 2018. We hedged a majority 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. As was the case in calendar 2017, these hedges detracted from the relative performance of the Fund during the first quarter, since benchmark indices are not hedged. We are more focused on risk control than on reaping possible currency gains from exposure to assets denominated in these currencies.

Today, investors are debating the future direction of the economies of China, Europe, various emerging markets, and the U.S. They are considering potential policy actions by the U.S. Federal Reserve, Congress, the Trump administration, and foreign government regulatory and policy actions, including trade policies. Many political and macroeconomic issues remain open. Importantly, overall global consumer spending is growing, along with global industrial production. Most macroeconomic indicators around the world positively surprised in 2017 and the first quarter of 2018, with the U.S. a relative laggard.

Owing to strong recent results, earnings expectations for the MSCI All Country World Index for 2018 have improved in recent months, as have global economic growth expectations. Most firms held in the Fund's portfolio are also expected to deliver positive year-over-year earnings in 2018. These positive trends continue to support a rotation of investor preferences from more defensive debt and equity assets to more economically sensitive assets, though with increasing debate around valuation and the expected duration of the global economic growth cycle. Following passage of significant changes to U.S. corporate and personal income tax laws, it appears that political gridlock will prevail in Washington, DC, in 2018. The U.S. Federal Reserve has stepped up the pace of Federal funds target rate hikes, moving the target from 0.75% to 1.75% over the last five quarters. Most major central banks around the world continue to pursue very easy monetary conditions, which artificially suppress interest rates.

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 2.2% in 2009 to less than 0.7% in 2015, 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.

Thank you for investing in Thornburg Investment Income Builder 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.

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.

Any securities, sectors, or countries mentioned are for illustration purposes only. Holdings are subject to change. Under no circumstances does the information contained within represent a recommendation to buy or sell any security.

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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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