International Equity Fund (UCITS) - Commentary

3rd Quarter 2021

Lei Wang, CFA
Lei Wang, CFA
Portfolio Manager and Managing Director
Matt Burdett
Matt Burdett
Portfolio Manager and Managing Director
Portfolio managers are supported by the entire Thornburg investment team.
1 October 2021
Market Review
  • In the 3rd quarter international equity markets posted their first losing quarter of the year and their first since the pandemic-driven correction in the 1st quarter of last year, with the MSCI ACWI ex USA Index down 2.99% and the MSCI EAFE Index losing 0.45%.
  • September was the weakest month of the quarter with markets dropping on a variety of concerns including persistent inflation and supply chain pressures, the potential for Fed tapering and of political gridlock in Washington leading to a U.S. debt default, and continued weakness in China markets and fears of contagion from financial problems at Evergrande, one of the country’s largest real estate developers.
  • U.S. interest rates rose, and the yield curve steepened in the last two months of the quarter with the 10-year U.S. Treasury rising from a low of under 1.20% in early August to a high of over 1.50% in late September. This contributed to an underperformance of Growth versus Value in the final weeks of the quarter. We expect the path of inflation, both near-term and long-term, to be a critical determinant of market performance influencing relative performance across style, sector and region.
  • Of particular note was the pronounced weakness of China markets during the quarter, driven by continuing regulatory actions by the Chinese government and instability in the real estate market, which accounts for as much as 15% of China’s GDP. The MSCI China Index was down more than 18% for the quarter, leading Emerging Markets to underperform and causing a performance dispersion of more than 2.5% between the MSCI ACWI ex USA Index, which is 30% Emerging Markets, and the developed markets EAFE Index.
Third-Quarter 2021 Performance Highlights
  • In the 3rd quarter Thornburg International Equity Fund (I accumulating) lost 2.72%, 27 basis points ahead of the ACWI ex USA Index but 227 basis points behind the EAFE, with most of the difference in performance versus the two indices due to the fund’s exposure to China. Year to date the fund has returned 5.87%.
  • China’s impact on the fund’s performance versus the ACWI ex USA Index was positive, with good stock selection offsetting the impact of a modest overweight during the quarter, but the fund’s China holdings accounted for about 90% of the fund’s underperformance versus the EAFE Index, which has no China exposure.
  • The fund’s zero weight in India and its underweight in the UK were negatives, but its overweight in the eurozone was a positive. Individual stock selection drove a lot of the fund’s 3rd quarter underperformance, however, with Chinese banks, liquor distillers, and materials companies among the biggest negative contributors. European utilities also underperformed on a surge in energy prices, but Japan was a bright spot as that market and a number of our holdings there outperformed.

Current Positioning and Outlook

Since the Chinese market’s peak in February we have more than halved our exposure there, allowing us to keep the lion’s share of market gains and leaving China as the top positive country contributor to year to date performance along with Japan and Switzerland, all on strong stock selection. In our view recent regulatory moves by the Chinese government are not an attack on the private sector but are mostly targeting behaviors and industry practices that work against the state’s goal of achieving sustainable and socially responsible growth. The current regulatory campaign may have a way to run and for the moment we are cautious and near market weight but believe that a market decline which is now more than 30% from the peak will inevitably create attractive opportunities, although likely not in the old market leaders.

The portfolio remains relatively balanced between Value and Growth in a market where leadership between the two has changed often so far this year. We are close to index weight in China but are overweight the eurozone, Switzerland, and Japan, the latter for the first time in a long time on attractive opportunities there. At 30 September our basket positioning was 49% Basic Value, 29% Consistent Earners, and 12% Emerging Franchise, with the remainder in Cash. We are overweight Information Technology, Industrials and Utilities, having added modestly to our European Utility positions in the recent market decline, and are underweight Health Care, Financials, and Consumer Staples.

While the factors which have created recent market volatility, particularly in China, may persist for a while, we believe that on the other side of that volatility the market backdrop still looks relatively positive. As bottom-up international stock pickers with a 23-year history, we know that market volatility always brings with it attractive businesses that are oversold and mispriced, and therefore opportunity in the months to come.

Important Information

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

Date of data: 30 September 2021—unless otherwise stated

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