4th Quarter 2017

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Thornburg Investment Income Builder Fund's (the "Fund") Class A share net asset value increased by $0.43 per share (from $14.61 to $15.04) during the quarter period 31 December 2017. For the trailing 12 months ended 31 December 2017, the Fund's net asset value increased $1.85 per share, from $13.19 to $15.04. The Fund's A share return of 2.94% for the December quarter underperformed its blended benchmark (75% MSCI World Index and 25% Bloomberg Barclays U.S. Aggregate Bond Index) return by 127 basis points for the quarter (one basis point equals 1/100 of one percent). The Fund's 14.03% total return for calendar year 2017 trailed the blended benchmark by 339 basis points for the 12-month period. Currency hedges utilized to protect the U.S. dollar value of the Fund's non-U.S. assets detracted approximately 440 basis points from relative performance in 2017, as the value of the U.S. dollar declined by double-digit percentages against many foreign currencies, including a 12.4% decline against the euro. Performance comparisons of the Fund to its blended benchmark over various periods are shown in the performance section of this website. Reviewing these, you will see that the performance of the Fund compares well over longer periods, though disappointing results in late 2015 weigh on comparisons over the trailing three- and five-year period. We are optimistic about the return potential of the Thornburg Investment Income Builder Fund portfolio.

The quarter ended 31 December 2017, was the 22nd 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 fourth quarter 2017 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 threemonth period. For the equity index component of our benchmark:

  1. Ten of 11 index sectors showed positive total returns for the fourth quarter of 2017, with sector results ranging from negative 0.44% (utilities) to 8.32% (technology). Stocks of firms in the materials, consumer discretionary, energy, financials, and consumer staples sectors joined technology sector stocks in outperforming the index. Stocks of firms in the industrials, real estate, telecommunications, and health care sectors joined utility stocks in generally underperforming the index for the December quarter. In general, stocks of firms in sectors that are most sensitive to fluctuations in economic activity performed better, while stocks of firms in sectors less sensitive to changes in economic growth lagged in both the December quarter and calendar 2017 as a whole.
  2. Relative to the MSCI World Index, the Fund's portfolio was significantly overweight the higher dividend-paying telecommunications 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 Fund portfolio during the last quarter of 2017:
    • Financial sector (23% average weighting in the Fund's equity portfolio, down roughly two percentage points during the quarter)
    • Telecommunications sector (17% average weighting in the Fund's equity portfolio, effectively flat during the quarter)
    • Energy sector (13% average weighting in the Fund's equity portfolio, increasing two percentage points during the quarter)
    • Information technology sector (5% average weighting in the Fund's equity portfolio, increasing roughly one percentage point during the quarter)
    • Health care sector (6% average weighting in the Fund's equity portfolio, effectively unchanged during the quarter)
    • Consumer staples sector (8% average weighting in the Fund's equity portfolio, effectively unchanged during the quarter)
    • Industrials sector (7% average weighting in the Fund's equity portfolio, down approximately one percentage point during the quarter)
    • Consumer discretionary sector (5% average weighting in the Fund's equity portfolio, effectively flat during the quarter)
  4. The Fund's quarterly performance relative to the MSCI World Index in the October–December period was hindered by its large weighting in the telecommunications sector, currency hedges, and low weighting in firms in the materials, technology, and consumer discretionary sectors. The value of the U.S. dollar broadly declined vis-á-vis most foreign currencies. The Fund's performance relative to the MSCI World Index in the fourth quarter was helped by comparative outperformance from its individual holdings in the technology, telecommunications, and utilities sectors.
  5. In the Fund's portfolio, 70 and 31 equity investments contributed positive returns of at least 0.05% (five basis points) to the portfolio during calendar 2017 and the fourth quarter of 2017, respectively. Fifteen of the fund's equity investments detracted 0.05% or more for calendar year 2017 and 13 detracted 0.05% or more during the fourth quarter.

The Fund's average return from its investments in the financial sector lagged the performance of the equities in the finance sector of the MSCI World Index in the fourth quarter, though they outperformed significantly for 2017 as a whole. JPMorgan Chase, Singapore's DBS Group, CME Group, and UBS were among the strongest performers in the portfolio. Some of these were weak performers in prior quarters, so patience was rewarded. BNP Paribas and MFA Financial were weak performers in the quarter.

The Fund's significant holdings in the telecommunications sector delivered mixed performances in the final quarter of 2017, and for the year as a whole. France's Orange and multi-national network operator Vodafone joined Norway's Telenor in delivering impactful positive December quarter and 2017 returns. U.S. network operators AT&T and CenturyLink joined England's BT Group in detracting from portfolio performance in 2017. Institutional investors were net sellers of telecommunications sector equities in 2017 to redeploy proceeds into more cyclical investments.

Among the Fund's investments in the energy sector, Royal Dutch Shell plc and U.S. refiner Valero each delivered strong positive returns in the fourth quarter and for the year as a whole, while pipeline operator ONEOK was a negative contributor. The average Brent oil price fell from approximately $115/ barrel in June 2014 to a January 2016 low of $28/barrel, before recovering to more than $65/barrel at the end of 2017. The overall performance of our portfolio's energy sector investments was positive in 2017, following a strong 2016. Supply and demand fundamentals appear to be positive for the sector in early 2018, following another strong global consumption increase last year.

The Fund's investments in the technology sector were strongly positive in the December quarter and for 2017 as a whole. Digital communications device designer Qualcomm received a takeover bid in early November, while Taiwan Semiconductor continued to benefit from supplying semiconductors to a growing number of connected devices. A new investment in Samsung Electronics was a modest drag on portfolio performance in the December quarter, despite a strong commercial performance by the company in 2017 that led to increased revenue and earnings estimates for the firm in 2018.

Fund investments in the industrials sector were generally positive in the December quarter and for 2017 as a whole, led by European toll-road operators Vinci and Atlantia. A surprisingly strong European economy provided a tailwind to road traffic.

The Fund's fourth-quarter 2017 returns from its holdings in the health care sector lagged the barely positive return of this sector within the MSCI World Index during the quarter. Merck, Novartis, and Roche Holding each made negative contributions as political rhetoric against drug prices continued and results from key clinical trials of new drugs were mixed.

The Fund's investments in the consumer staples sector were positive in the fourth quarter and for the year as a whole, though the performance of these investments lagged overall equity market returns. Korea Tobacco & Ginseng contributed strongly to portfolio performance, while drugstore operators Walgreens and CVS were negative contributors in the quarter due to investor concerns about possible future competition from Amazon. These latter two will realize material benefits from lower U.S. corporate income tax rates, though a proposed merger between CVS and health insurer Aetna has received a lukewarm response from investors.

Among other portfolio holdings, notable contributors in the December quarter and 2017 portfolio performance included building supply retailer Home Depot, casino operator Las Vegas Sands, utility Électricité de France, wireless communications tower operator Crown Castle International, chemicals manufacturer LyondellBasell Industries, and miner MMC Norilsk Nickel. Other negative contributors included U.S. real estate investment trust Washington REIT.

A weaker U.S. dollar increased the value of our non-U.S. assets during 2017. 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. These hedges detracted significantly from the relative performance of the Fund during 2017, 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.

During the last quarter of 2017, investors debated the future direction of the economies of China, Europe, various emerging markets, and the U.S. They considered potential policy actions by the U.S. Federal Reserve, Congress, the Trump administration, and policy actions following the important National Congress Party in China last autumn. 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 have positively surprised in 2017, with the U.S. a relative laggard.

Owing to strong recent results, earnings expectations for the MSCI World Index portfolio for 2018 have improved for most world markets in recent months, along with global economic growth expectations. These trends continue to support a rotation of investor preferences from more defensive debt and equity assets to more economically sensitive assets. 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 1.50% during 2017. Most major central banks around the world continue to pursue very easy monetary conditions, and these policies proved strongly supportive of financial asset prices in 2017. Yields on various maturities of U.S. government bonds rose during the December quarter:

  • 10-year U.S. government bond yields moved approximately 0.10% higher during the December quarter, but ended 2017 virtually unchanged from the year-end 2016 level, at 2.44%. Since bond prices move in opposite direction to yields, prices of longer-maturity U.S. government bonds modestly declined during the quarter.
  • Investment-grade corporate bond yields, as indicated by the FINRA-Bloomberg Active Investment-Grade U.S. Corporate Bond Index, were effectively unchanged for the quarter at 3.57%. For calendar 2017, this index showed a drop in corporate bond yields from 3.84% to 3.57%, indicating tighter credit risk spreads for corporate credit.
  • High yield ("junk") corporate bond yields dropped for the year, but rose during the December quarter, as indicated by the year-end level of 5.82% for the FINRA-Bloomberg High-Yield U.S. Corporate Bond Index, versus 5.39% at 30 September and 6.41% at 31 December 2016.

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. Yields on taxable and tax-exempt money funds average below 1%. 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: 31 December 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.

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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