International Equity Fund (UCITS) - Commentary

3rd Quarter 2020

Lei Wang, CFA
Lei Wang, CFA
Portfolio Manager and Managing Director
Di Zhou, CFA, FRM
Di Zhou, CFA, FRM
Portfolio Manager and Managing Director
Portfolio managers are supported by the entire Thornburg investment team.
1 October 2020
Market Review

The strong rebound in global markets, which began at the end of the first quarter, continued in the third quarter as the MSCI EAFE Index, which covers international developed markets, rose 4.8% and the MSCI ACWI ex-USA Index, which includes emerging markets, rose 6.25%. The difference was the strong performance of EM, which rose 9.56% as measured by the MSCI Emerging Markets Index.

Global markets continue to be optimistic about an economic recovery from COVID-19 and the record amount of monetary and fiscal stimulus pledged by global governments, which as of July 31 represented 29% of global GDP (44% in the U.S. and eurozone and 60% in Japan), and that optimism was reflected in stock prices.

While markets have seen a strong rebound since March 23 lows, with the ACWI ex-USA Index up 41.8% and the MSCI EAFE up 39.1%, they remain down for the year at negative 5.4% and negative 7.1%, respectively, after first quarter losses. While markets remain optimistic and we are still finding many attractive investment opportunities, a lot of uncertainty remains as reflected in the wide dispersion of performance between companies, sectors and markets depending on their outlook and the progress of the COVID-19 epidemic.

Third-Quarter 2020 Performance Highlights
  • In the third quarter, Thornburg International Equity Fund (I share class) returned 15.48%, 923 basis points ahead of the MSCI ACWI ex-USA’s 6.25% return and 1,068 basis points ahead of the MSCI EAFE’s 4.80% return. Year to date the fund is up 11.74%, 1,718 basis points ahead of the ACWI ex-USA’s 5.44% loss and 1,883 basis points ahead of the 7.09% loss of the MSCI EAFE.
  • As has been the case since the market bottom in late March, the majority of the fund’s outperformance during the quarter was led by bottom-up stock selection, consistent with the fund’s investment process. A zero weight in energy and an underweight in financials and health care, along with an overweight in information technology and industrials, were positive for relative performance.
  • During the quarter the fund was underweight emerging markets, which outperformed, but the combination of an overweight in China and strong stock selection there along with zero weights in Emerging Latin America and EMEA (Europe, Middle East and Africa) more than made up for that underweight. An underweight in the U.K. and a zero weight in Pacific ex-Japan, particularly Australia, also helped. The fund’s overweight in the eurozone was a negative, but strong stock selection there and the relative strength of the euro made the region a net positive for performance.
  • Stock selection was positive or neutral in 10 out of 11 sectors and in China, the UK, Japan, and in Europe and the Eurozone. A table of top and bottom contributors is attached, but among notable outperformers in the quarter were Ming Yuan Cloud Group, a provider of cloud-based software services to Chinese property developers, Nongfu Spring, a Chinese beverage company, Wuliangye Yibin, a high-end Chinese liquor distiller and Z Holdings Corp., a Japanese internet company which owns Yahoo! Japan. Among notable underperformers were Citigroup, Ferrovial, a European infrastructure operator, SK Hynix, the South Korean semiconductor maker, and Vinci, a French concessions and construction company.

Current Positioning and Outlook

The fund was a bit less active in the third quarter than during the first half of the year, when the market’s decline and bounce presented many compelling opportunities, but we continued to add to positions in quality cyclical value companies and to trim several outperformers. The net result was to add to the Basic Value basket and reduce Consistent Earners, moving to a more balanced portfolio of 43% Basic Value, 36% Consistent Earners, 15% Emerging Franchise and 6% cash at quarter end.

Sector, region and country positioning remained roughly unchanged, with a continued underweight in financials, health care and real estate and a zero weight in energy. Industrials and information technology remain overweight. We remain overweight the eurozone and Europe in general against an underweight in the U.K., and overweight Emerging Asia, primarily China, against an underweight in Japan with a zero weight in Pacific ex-Japan, Emerging Latin America and EMEA.

As noted above, we continue to find many attractive investment opportunities, but there is still a lot of uncertainty as reflected in the wide dispersion of performance between companies, sectors and markets, depending on their varying outlooks, leading to more of a “K-shaped” than “V-shaped” recovery. We also see the potential for a trend towards “deglobalization” rather than the globalization of recent years and are mindful of the potential for a volatile fourth quarter, which is one reason we are running a relatively balanced portfolio. In this environment Thornburg International Equity Fund (I share class) has been able to deliver a 11.74% return in 2020 year to date, more than 17% ahead of its benchmark indices, and we believe these conditions will continue to prove favorable for flexible, bottom-up active managers like us.

Important Information

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

Date of data: 30 September 2020—unless otherwise stated

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