Thornburg Developing World Fund

2nd Quarter 2019

Ben Kirby, CFA
Ben Kirby, CFA
Portfolio Manager and Managing Director
Charles Wilson, PhD
Charles Wilson, PhD
Portfolio Manager and Managing Director
Portfolio managers are supported by the entire Thornburg investment team.
25 JULY 2019

Global equities posted strong returns during the period. A selloff did occur in May on fears of slowing global growth and a prolonged trade war but rebounded in June following dovish comments from Federal Reserve Chairman Jerome Powell. The pattern was reminiscent of fourth quarter 2018 and first quarter 2019, albeit in a compressed timeline.

The MSCI Emerging Markets (EM) Index generated positive returns, which were muted compared to the MSCI EAFE and S&P 500 indices, primarily due to weak performance from China. Within the EM Index, Russia, Brazil and South Africa drove returns higher, while China and Korea detracted. Chinese stock indices experienced double-digit losses in May as investors sought safe havens outside the crosshairs of the U.S.–China trade war.

A halt to U.S. dollar strengthening, brought about by the Fed’s dovish turn, broadly benefited emerging market currencies during the period.

Performance Discussion

For the second quarter of 2019, the Thornburg Developing World Fund returned 3.58% (Class I shares), ahead of the MSCI EM Index, which returned 0.61% during the period. Year to date, the Developing World Fund has returned 19.05% (Class I shares), compared with the MSCI EM Index return of 10.58%.

The Fund employs a basket approach, comprising “Basic Value” (BV), “Consistent Earner” (CE) and “Emerging Franchise” (EF) stocks. This additional layer of diversification is unique to Thornburg and is intended to provide exposure to a wide range of companies with varied cash flow and market cycle characteristics.

Our balanced approach to investing with a focus on risk management benefited the portfolio. We started 2019 with an increased weight in the EF basket as many names had become attractive following a broad selloff. These names performed well during the first quarter and as we rebalanced our basket weights in April, the EF weight was reduced, reflecting higher valuations. Assets from the EF basket reduction were redistributed among the CE and BV baskets, which overall were the strongest performers in the quarter.

Top Performers

Top performers during the quarter included Sberbank, AZUL S.A., Novatek, Network International and B3—Brasil Bolsa Balcao. Sberbank is Russia’s leading bank, with over 40% market share in deposits. It continues to execute well, growing faster than GDP, deepening consumer loan penetration, and extending its technology leadership compared to other Russian banks and even many banks in developed European countries. Sberbank is also demonstrating its commitment to returning excess capital to shareholders; it paid an annual dividend of 6.5% to shareholders of record in June.

AZUL S.A. is a Brazil-based airline operator. The carrier delivered an outstanding quarter despite continued headwinds from foreign exchange, fuel prices and a weak Brazilian economy. Key drivers were a continuation of capacity growth and margin expansion, resulting from increased passenger traffic, a fuel-efficient fleet, an increase in cargo traffic and a successful loyalty program. It also benefited from system- wide capacity reduction related to the Avianca bankruptcy.

B3 is the leading platform for trading equities, options and fixed income in Brazil. Lower Brazilian interest rates have made equity investing relatively more attractive for domestic investors, and expectations are that foreign investors will be more interested in Brazilian investments if the country’s pension reform bill is passed this year. Moreover, lower interest rates have made it more attractive for companies to issue bonds, improving the outlook for bond origination volumes moving forward.

Network International is a payment processor based in Dubai with a strong presence in both the Middle East and Africa. We participated in Network’s IPO after determining that the IPO price represented a particularly attractive value, given the company’s high organic growth rate and potential to improve margins. We also appreciate Network’s durable competitive position.

Novatek, which is based in Russia, explores, produces, and processes natural gas and liquid hydrocarbons. International liquified natural gas (LNG) sales increased sharply, thanks to the ramp of LNG trains from the Yamal project. Domestic natural gas sales also increased year over year. Additional Yamal project trains are expected to be complete by the end of 2019, ahead of original expectations in terms of timing and budget. During the quarter, the company finalized stake sales for its next major LNG project, Arctic LNG 2, which crystallized the value of this project and funded Novatek’s portion of capex.

Bottom Performers

Bottom performers for the period included First Quantum Minerals, Glencore, Zee Entertainment, Hangzhou Hikvision and Alibaba.

First Quantum mines and produces copper and gold, mostly within its mining operations in Africa. The stock price declined following prolonged copper oversupply, project cost overruns and delays on Cobre Panama and increased geopolitical uncertainty in Zambia.

Glencore is a diversified natural resources company that operates in metals and minerals, energy products and agricultural products. Shares fell during the quarter following news that the company was under investigation by the U.S CFTC for possible corrupt practices related to activities in Nigeria and the Democratic Republic of Congo. We believe the issues won’t materially impact the earnings power of the business and internal policies and procedures will be strengthened during the process.

Zee Entertainment Enterprises is an Indian mass media company with interests in television, film, mobile content, internet, print and related businesses. Zee produces and develops Hindi films, serials, game shows and children’s programs. Zee’s shares declined during the second quarter, following a delay in the settlement of financial difficulties experienced by the controlling shareholder (the Essel Group). While the controlling shareholders personal difficulties have no impact on Zee’s business, the promoter has pledged part of his holdings to fund outside business investments. We purchased the stock following the initial decline as concerns mounted regarding this issue and the stock subsequently recovered as investors became confident in a short-term resolution. The shares retraced when the time to resolution became extended.

Hangzhou Hikvision Digital Technology develops, manufactures and sells video surveillance products. Shares fell due to concerns over the U.S.–China trade war, which may impact foreign demand for its services and its ability to source some higher-value components for its most sophisticated systems.

Alibaba dominates the online retail marketplace in China. It also provides e-commerce services outside China, fintech, cloud computing, logistics platform service and online video services. The stock sold off in May and was down 7% for the quarter along with other Chinese companies due to trade and economic concerns. We believe Alibaba’s businesses have multi-year earnings growth opportunities that are not reflected in the current share price, in part because current earnings are temporarily depressed by investments in high-potential projects.


We think the recent shift in U.S. monetary policy toward a more accommodative stance represents a turning point for emerging market stocks. The persistent overhang of potential dollar strength has forced many emerging market central banks to maintain a tighter-than-normal monetary policy to defend their currencies, keep inflation at bay and minimize the potential for external shocks. With the shift in the U.S. monetary policy, we expect less upward pressure on the dollar, which should give other central banks some room to ease. We expect a stable dollar, during a period of weaker growth in the U.S., to drive investor enthusiasm for overseas markets in general and in particular emerging markets, given the potential for acceleration following a weak period.

The combination of accelerating growth across emerging markets, a favorable currency outlook and attractive valuations compared to U.S. stocks sets up a golden hour for emerging markets equity investing. Although recent macroeconomic conditions have been challenging within many emerging markets, we believe their prospects are improving and are excited about the near-term prospects for our holdings.

Thank you for investing in Thornburg Developing World Fund.

Important Information

Source of data: Factset, BBH, State Street, Confluence, Bloomberg—unless otherwise stated

Date of data: 30 June 2019—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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