For the second quarter of 2019, the Thornburg Global Quality Dividend Fund produced a total return of 0.80% (Class I shares, accumulating), while the benchmark MSCI World Index returned 4.00% for the quarter. This brings the Fund’s first half result to 12.28% versus the index at 16.98%. For purposes of comparison with our dividend-oriented peer group (and the Fund’s investment style), our portfolio underperformed the MSCI ACWI High Dividend Yield Index result of 3.58% for the quarter. As at 30 June 2019, the portfolio’s gross dividend yield was 3.90% compared to 2.39% for the MSCI World Index.
Recall that our Global Quality Dividend portfolio is designed to deliver an attractive total return using a focused, yet diverse, portfolio of dividend-paying stocks from around the world. A foundational element of the Fund is that a differentiated total return can be achieved by investing in companies exhibiting the capital allocation discipline required to pay substantial dividends.
The Fund pursues capital appreciation and income via a portfolio of companies that have solid future prospects, trade at an attractive valuation to their intrinsic value and have both the ability and willingness to pay dividends. We believe the portfolio’s structure—built on our core investment principles of flexibility, focus and value—gives us a durable framework for value-added investing.
Dividend income has historically been a critical component of equity returns and can offer a tangible measure of corporate health. However, instead of focusing on companies with the highest absolute dividend yields, our strategy seeks companies that offer value on a total risk/reward basis. Throughout the Fund’s history, our dividend yield has comfortably exceeded those of global equity benchmarks.
Global financial markets saw substantial volatility in the June quarter, with U.S. equities again performing well. After a strong first four months of 2019, May featured a sharp decline with U.S.- China trade negotiations abruptly deteriorating and the U.K. prime minister’s resignation adding to Brexit uncertainty. Equity markets rebounded amid greater optimism regarding trade disputes and more signals of accommodative central bank policies. Notably, the U.S. Federal Reserve reversed prior communications of increasing the Fed funds rate to reducing it.
From an industry perspective, ten of 11 sectors of the MSCI World Index turned in a positive return in the second quarter. Sector returns varied from negative 1.55% (energy) to 6.16% (financials). For the Fund, the weakest performance came from utilities and consumer discretionary, while materials and information technology provided the highest returns.
Tradeweb, the leading electronic platform for trading government-issued securities, was our top performer. Tradeweb is well positioned, as an increasing number of traded securities markets transition to electronic exchanges.
Seaspan was a strong performer in the quarter as fears of a U.S.-China trade war abated and expectations of short-term freight rates increased. Seaspan has also made significant progress towards deleveraging and improving its capital structure, which we believe is beginning to be understood by the market.
Microsoft shares performed well in the quarter as the market continues to gain appreciation for its transition from a legacy on-premise software provider to a global leader in cloud computing. We continue to believe the shares are attractively valued.
CF Industries shares performed well due to an improving fundamental outlook for nitrogen fertilizer supply and demand. Extremely wet weather across the farm belt has resulted in an improved pricing corn outlook which should support greater fertilizer usage in the second half of 2019 and into 2020.
Aena has benefited from Spain’s attractiveness as a destination for international tourists, especially from Northern Europe. Aena’s share price rallied due to falling Spanish bond yields. Lower bond rates increase the present value of Aena’s long-duration cash flow stream.
MGM China was our worst performer during the quarter due to concerns about the U.S.-China trade war and its impact on Chinese discretionary spending. We believe MGM’s long-term opportunity in Macau remains promising.
EasyJet, underperformed in the quarter and has been a notable detractor this year. Several factors, including weakening economic forecasts in Europe and Brexit concerns, have conspired to dampen the travel outlook. We are still constructive about the long-term opportunities for the low-cost carriers in the relatively fragmented European aviation market.
Bellway, the U.K. homebuilder, underperformed, driven by increased BREXIT risks and the associated impact on house prices and demand. We continue to find the business attractive despite the political news flow. Lloyds fell during the quarter as concerns surrounding the ongoing BREXIT negotiations and the transition in governmental leadership in the U.K. have weighed on U.K. equities. We remain constructive on the outlook for the bank and continue to hold the shares.
Teekay LNG Partners underperformed in the quarter, after being one of the largest contributors in the first quarter. Teekay LNG Partners shares suffered with the lower oil price in the quarter. Despite having long-term contracts for its fleet of tankers, TGP shares tend to trade with a high beta to Brent oil price. As TGP continues to delever, we expect strong earnings, cash flow and dividend growth to follow.
Relative to the index, the portfolio exited the quarter particularly overweight the industrials and consumer discretionary sectors and notably underweight in information technology, health care and consumer staples. Geographically, the portfolio remains overweight Europe and Asia, although it has no direct exposure to Japan, and is materially underweight the U.S. Emerging markets investments comprise roughly 8% of the portfolio.
Although investors are coming to grips with the potential impacts of macroeconomic issues stated above, we continue to believe the portfolio is well positioned, given valuations and the recognition of the income generation potential in a low yield world. As markets continue to be driven more by headlines and less by fundamentals, we do expect there to be more volatility in the near term. It’s important to reiterate, however, that the Thornburg Global Quality Dividend Fund is founded on fundamental analysis of individual businesses, not heavy reliance on macroeconomic forecasts. We construct the portfolio, as always, on a diversified basis with risk mitigation in mind. We have managed the Fund this way since its inception.