3rd Quarter 2017

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Thornburg Investment Income Builder Fund's Class A share net asset value increased by $0.54 per share ($14.07 to $14.61) during the quarter. For the trailing 12 months ended 30 September 2017, the Fund's net asset value increased by $1.75 per share ($12.86 to $14.61).

The Fund's A share return of 3.84% for the September quarter matched the return of its blended benchmark (75% MSCI World Index and 25% Bloomberg Barclays U.S. Aggregate Bond Index). The Fund's 13.61% total return for the 12 months ended 30 September 2017, outperformed the blended benchmark by 0.21%. Performance comparisons of the Fund to this benchmark over various periods are shown at right. Reviewing these, you will see the performance of the Fund compares well over longer periods, though disappointing results in late 2014 and 2015 weigh on comparisons over the trailing threeand five-year periods. We are optimistic about the return potential of the Fund's portfolio.

In assessing the third-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 three-month period.

  1. Ten of 11 index sectors showed positive total returns for the third-quarter of 2017, with sector results ranging from approximately negative 0.50% (consumer staples) to almost 9% (energy). Stocks of firms in the materials, financials, industrials, and information technology sectors joined energy-sector stocks in outperforming the index. Stocks of firms in the telecommunications, utilities, real estate, consumer discretionary, and health care sectors joined consumer staples stocks in generally underperforming the index for the September quarter.
  2. Relative to the MSCI World Index, the Fund's portfolio was significantly overweight the higher dividend-paying telecommunications, financial, and energy sectors, as it has been for most of its history.
  3. The Fund's investments in firms in the following sectors comprised the largest average sector weightings in the portfolio during the third quarter:
    • Financials sector (25% average weight in the Fund's portfolio; down roughly 265 basis points during the quarter)
    • Telecommunications sector (17% average weight in the Fund's portfolio; basically unchanged over the quarter)
    • Energy sector (11% average weight in the Fund's portfolio; increasing just over 400 basis points during the quarter)
    • Industrials sector (8% average weight in the Fund's portfolio; down slightly during the quarter)
    • Health care sector (6% average weight in the Fund's portfolio; unchanged during the quarter)
    • Consumer staples sector (8% average weight in the Fund's portfolio; decreasing by roughly 150 basis points during the quarter)
    • Consumer discretionary sector (5% average weight in the Fund's portfolio; unchanged during the quarter)
    • Information technology (4% average weight in the Fund's portfolio; unchanged during the quarter)
  4. The Fund's quarterly performance relative to the MSCI World Index in the third quarter was hindered by its large weighting in the telecommunications sector, currency hedges, and low weighting in firms in the information technology and industrials sectors. The Fund's underweight in the materials sector also dampened the benefit of strong stock selection in the sector. 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 was helped by comparative outperformance from its holdings in the financials, energy, utilities, and materials sectors.
  5. In the Fund's portfolio, 37 investments contributed positive returns of at least 0.05% (five basis points) to overall portfolio performance during the third quarter. Eight of the Fund's investments detracted 0.05% or more for the quarter.

The Fund's average return from its investments in the financials sector were strongly positive in the third quarter of 2017. Exchange operator CME Group, JP Morgan Chase & Co., mortgage REIT MFA Financial, and various European financial firms (including NN Group, BNP Paribas, and ING Groep) were among the strongest performers in the portfolio. We have adjusted the Fund's exposure to these names in recent months, reducing investments in firms that we anticipate will be negatively impacted by higher and more volatile interest rates, while adding to others that would be expected to benefit in such an environment.

The Fund's significant holdings in the telecommunications sector delivered an overall positive performance in the third quarter. However, the quarterly returns did not keep pace with the MSCI World Index. Telenor and Dutch incumbent KPN were significant positive contributors to performance, while CenturyLink delivered a negative return, which weighed on the quarterly result. Institutional investors have been net sellers of telecommunications-sector equities in recent quarters to redeploy proceeds into more cyclical investments. Importantly, long-time portfolio holding China Mobile paid a special dividend in September from its excess cash balances. This payment alone boosted the Fund's quarterly dividend.

Following negative returns in the first half of 2017, the Fund's investments in the energy sector rebounded in the September quarter. The Brent crude oil price increased approximately 20%, from $47.92 to $57.54 during the quarter, following declines in the first half of 2017. Royal Dutch Shell, Italy's ENI, Suncor Energy, refiner Valero Energy, pipeline operator ONEOK, Russia's LUKOIL, and French multinational Total each delivered significant positive returns in the third quarter. Considering a longer time period for hydrocarbon prices, the average Brent oil price fell from approximately $115/barrel in June 2014 to a January 2016 low of $28/ barrel, before recovering to $56.82/barrel at 31 December 2016. Importantly, global demand for oil and natural gas continues to grow in 2017.

The Fund's investments in the industrials sector were also positive in the September quarter. European toll-road operators Vinci and Atlantia each delivered significant positive total returns. In general, the stock prices of these firms are more volatile than their business results. We try to take advantage of this volatility.

The Fund's investments in the consumer discretionary sector were overall positive in the September quarter, led by Home Depot, French media conglomerate Vivendi, and U.S. retailer Target Corporation, which partially recovered from earlier underperformance.

The Fund's third-quarter 2017 returns from its holdings in the health care sector were modestly positive, led by Novartis and Pfizer.

The Fund's investments in the consumer staples sector detracted from portfolio performance in the third quarter. Korea Tobacco & Ginseng and Nestle were the largest detractors in the quarter, and the fund's other consumer staples sector investments did not deliver significant enough positive performance to offset these.

Among other portfolio holdings, notable contributors included Taiwan Semiconductor, chemicals firm LyondellBasell, nickel producer Norilsk Nickel, and European electric utilities Électricité de France and ENEL. Detractors included Qualcomm and Lamar Advertising.

A weaker U.S. dollar elevated the value of our non-U.S. assets during the September quarter; however, 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 restrained portfolio performance during the September quarter. We are more focused on risk control than on reaping possible currency gains from exposure to assets denominated in these currencies. We do not hedge the currency risk of our dividend income exposure to these currencies, so the weaker dollar was modestly positive to the Fund's dividend income for the quarter.

During the third 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 significant elections in France and Germany. Many political and macroeconomic issues remain open. Importantly, overall global consumer spending is growing. Most macroeconomic indicators around the world have positively surprised in the first three quarters of 2017, with the U.S. a relative laggard.

Owing to strong recent results, earnings expectations for the MSCI All Country World Index portfolio for 2017 have improved in 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. It now appears that political gridlock will persist in Washington, D.C., though the U.S. Federal Reserve has stepped up the pace of Federal funds target rate hikes. Most major central banks around the world continue to pursue very easy monetary conditions, so offshore demand for U.S.-dollar bonds remains strong. Yields on various maturities of U.S. government bonds rose slightly in the September quarter:

  • Ten-year U.S. government bond yields moved approximately 0.03% higher. 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 also moved slightly higher, indicated by the 0.01% rise in the FINRA-Bloomberg Active Investment-Grade U.S. Corporate Bond Index, from 3.54% at 30 June to 3.55% at 30 September.
  • High yield ("junk") corporate bond yields dropped, as indicated by the 0.21% decline in the FINRA-Bloomberg High-Yield U.S. Corporate Bond Index, from 5.64% at 30 June to 5.39% at 30 September. During 2016, these yields dropped by 2.65% as spreads to government bond yields compressed, leading to significant price gains on high-yield bonds over the last seven quarters. The bankruptcy of specialty retailer Toys "R" Us caught bond investors by surprise in September, and highlights the headwinds faced by brick-and-mortar retailers.

While low interest rates seen in recent years around the world 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 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 one-half of one percent. Banks in the U.S. have aggressively reduced yields on all deposits. A very large pool of investor dollars is looking for better returns elsewhere, but in sensible investments. We are optimistic the types of income-producing investments owned by Thornburg Investment Income Builder Fund should remain attractive to investors, as these investments' 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 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.

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. © 2017 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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