2nd Quarter 2018

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Thornburg Investment Income Builder Fund’s net asset value for A ACC shares declined by $0.04 per share ($14.72 to $14.68) during the June quarter. For the trailing 12 months ending 30 June 2018, the Fund’s net asset value increased by $0.61 per share ($14.07 to $14.68).

The Fund’s A share returns of negative 0.27% for the June quarter trailed its blended benchmark (75% MSCI World Index and 25% Bloomberg Barclays U.S. Aggregate Bond Index) return by 1.53% for the quarter. Performance comparisons of the Fund to its blended benchmark over various time periods are 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 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 ending 30 June 2018 was the 24th full calendar quarter since the inception of the Fund in June 2012. In 17 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.

In assessing the second-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. Seven of 11 index sectors showed positive total returns for the second-quarter 2018, with sector results ranging from approximately 12.7% (energy) to negative 4.3% (financials). Stocks of firms in the information technology, consumer discretionary, real estate, health care, and utilities sectors joined energy sector stocks in outperforming the index in the quarter. Stocks of firms in the materials, consumer staples, industrials, and telecommunications sectors joined financial stocks in underperforming the index for the June quarter.
  2. 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.
  3. Fund investments in firms in the following sectors comprised the largest average sector weightings in the portfolio during the second quarter:
    • Financial sector (25% average weighting in the Fund’s equity portfolio, positive 1% change in sector weighting over the quarter)
    • Telecommunications sector (13% average weighting in the Fund’s equity portfolio; negative 2% change in sector weighting over the quarter)
    • Energy sector (12% average weighting in the Fund’s equity portfolio; unchanged sector weighting over the quarter)
    • Health-care sector (8% average weighting in the Fund’s equity portfolio; positive 1% change in sector weighting over the quarter)
    • Information technology sector (6% average weighting in the Fund’s equity portfolio; positive 1% change in sector weighting over the quarter)
    • Consumer staples sector (8% average weighting in the Fund’s equity portfolio; unchanged over the quarter)
    • Industrials sector (6% average weighting in the Fund’s equity portfolio, negative 1% change in sector weighting 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 the first quarter was hindered by its large weighting in the financial and telecommunications sectors and low weighting in firms in the technology and consumer discretionary sectors. The value of the U.S. dollar gained broadly vis-à-vis most foreign currencies. The Fund’s performance relative to the index in the second quarter was helped by overweight positioning in the energy sector, a lower weighting and relative outperformance in the industrial sector, and gains in currency hedges.
  5. Fourteen of the Fund’s equity investments contributed positive returns of at least .05% (five basis points) to the portfolio during the second quarter. Twenty-eight of the Fund’s equity investments contributed negative returns of negative 0.05% or worse in the period.

Fund investments in the financial sector generally exceeded the performance of the equities in the sector of the MSCI World Index in the second quarter, however, the heavy portfolio weighting in these investments was a drag on Fund performance. Ares Capital Corporation, Apollo Investment, CME Group, and MFA Financial were among the strongest performers in the portfolio. European banks BNP Paribas, ING Group, UBS Group, Dutch insurer NN Group, and JP Morgan Chase were weak performers in the quarter.

The Fund’s significant holdings in the telecommunications sector saw disappointing share price performances, 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, pan-African operator MTN Group, Netherlands operator KPN, China Mobile, Deutsche Telekom, and multi-national operator Vodafone in making negative contributions to portfolio performance in the second quarter of 2018. Interestingly, U.S. landline communications network operator CenturyLink delivered a positive quarterly contribution despite posting ongoing subscriber losses. Institutional investors were net sellers of telecommunications sector equities in 2017, and again in the first half of 2018, to redeploy proceeds into more cyclical investments.

Among Fund investments in the energy sector, U.S. pipeline operator ONEOK, Royal Dutch Shell, Italy’s ENI, Canada’s Suncor, U.S. refiner Valero Energy and French multi-national Total each delivered positive returns during the period. The benchmark Brent oil price rose approximately 50% from mid-June 2017 through 30 June 2018. Supply and demand fundamentals appear to be positive for the sector in 2018, following ongoing global consumption increases matched with industry output discipline.

Investments in the technology sector delivered disappointing performances in the June quarter. Taiwan Semiconductor, Samsung Electronics, and ASE Technology each continued to benefit from supplying mission critical components to a growing number of connected devices. However, each was impacted 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, was a modest positive contributor to Fund performance this quarter after its share price dipped to $55.41 in March, 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’slength acquirer, and in shaking up the Qualcomm board of directors.

Fund investments in the industrials sector were negative in the June quarter. U.K defense contractor BAE Systems delivered positive results. European toll-road operator Atlantia delivered negative returns despite a surprisingly strong European economy that continues to provide a tailwind to road traffic, operating profits, and dividend growth (19.6% year-over-year dividend increase).

The Fund’s second-quarter 2018 returns from its holdings in the health-care sector, though positive, lagged the return of this sector within the MSCI World Index during the quarter. Merck & Co. made a strong positive contribution as data continued to accumulate showing significant efficacy in treating various forms of cancer. Novartis and Roche were negative contributors as political rhetoric against drug prices continued, and results from key clinical trials of new drugs from these firms garnered less attention.

Fund investments in the consumer staples sector lagged the overall negative returns of this sector within the index. Walgreens Boots Alliance’s share price was hit at the end of June on concerns that Amazon will become a strong new competitor, despite Walgreens delivering solid earnings results, raising its dividend by 10%, and announcing a share buyback for more than 10% of its outstanding shares. Korea Tobacco & Ginseng recovered a portion of its March quarter share price decline, but this was insufficient to offset the detractors, which also included British American Tobacco.

Among other portfolio holdings, notable contributors to June quarter portfolio performance included Home Depot, casino operator Las Vegas Sands, Washington REIT, and Lamar Advertising. Notable detractors included Électricité de France, Thailand’s Jasmine Broadband Internet Infrastructure, multi-national electric utility ENEL SpA, and German television producer ProSiebenSat1 Media.

A stronger U.S. dollar decreased the value of our non-U.S. assets during the second quarter of 2018. As has been a long-standing element of our risk management, 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 enhanced the relative performance of Thornburg Investment Income Builder Fund during the second 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 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, including trade policies. Concerns about tariffs and trade policy changes were impactful on share price movements of global producers of tradeable goods in the June 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 the global population. Most macro-economic indicators around the world positively surprised in 2017 and the first half of 2018, with the U.S. economy a standout in the June quarter.

Owing to strong recent results, earnings expectations for the MSCI All Country World Index portfolio for 2018 have improved in recent months, along with global economic growth expectations. Most firms held in the portfolio are 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 the second half of 2018. 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 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 United States 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.

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 June 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.

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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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