Thornburg International Equity Fund

2nd Quarter 2019

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.
25 July 2019

Global equity markets continued their 2019 advance in the second quarter but May witnessed the first material market drawdown of the year, triggered by collapsing trade talks between the U.S. and China. Markets had assumed that the talks were progressing well and nearing a successful conclusion, based on comments coming out of negotiations, but on May 5th President Trump threatened to raise tariffs on $200 billion of Chinese goods, from 10% to 25%, and to place new tariffs of 25% on the remaining $325 billion of Chinese products, claiming that China had reneged on previous commitments. Along with increasing political tension, investors also saw macroeconomic data that pointed to a further loss of momentum across the global economy. The market was firmly in “risk off” mode and the MSCI All Country World Index (ACWI) was down 5.93% in May, with emerging market equities underperforming developed market equities. Global government bond yields fell in May and June with expectations of earlier and more aggressive rate cuts from the U.S. Federal Reserve. With the promise of a resumption of trade negotiations between China and the U.S. after the G-20 Summit, markets rebounded in June and finished positively for the quarter.

For the quarter, the Thornburg International Equity Fund returned 4.65% (Class I shares), versus 2.98% for the MSCI ACWI ex-U.S. Index and 3.68% for the MSCI EAFE Index. Year to date, the Fund has returned 20.97% (Class I shares) versus 13.60% for the MSCI ACWI ex-U.S. Index and 14.03% for the MSCI EAFE Index.

For the quarter and year to date, the Fund’s outperformance versus its benchmark indices has been driven almost entirely by bottom-up stock selection, which is central to the Fund’s investment process. As a result, the portfolio has recouped most of its underperformance versus its benchmark indices in 2018, a down year for global markets.

Top Performers

  • adidas AG
    Adidas designs, manufactures and sells athletic footwear, sports apparel, sports equipment and accessories. It is the largest sportswear manufacturer in Europe and the second largest worldwide after Nike. Adidas also owns Reebok and is a shareholder in the German football club Bayern Munich. The stock performed well due to strong execution from the management team. Going forward, we continue to believe adidas is well positioned to capture the large and growing global sportswear market.
  • Nintendo Co., Ltd.
    Nintendo is one of the world’s largest makers of video games and hardware. Nintendo announced a partnership with Tencent to distribute its Switch console in China, sending its stock up more than 14% in one day. We continue to like Nintendo as Switch is still a few years away from the end of its product cycle and because of the company’s strategy to drive mobile gaming revenue.
  • SAP SE
    SAP is the leader in enterprise application software, which is applicable for nearly all types of industries and for every major market. The company is one of the largest global software companies with more than 400,000 customers in over 180 countries. During the quarter, SAP revised 2023 margin guidance upwards and announced it was evaluating a multi-year share buyback. The surprise margin guidance upgrade and potential capital allocation discipline, combined with an investment from an activist investor, drove up the stock price.
  • Inner Mongolia Yili Industrial Group Co., Ltd.
    Yili is the largest producer of dairy products in China, which is set to overtake the U.S. as the world’s largest market for dairy products over the next several years. As one of the most valuable food brands in the world, Yili should benefit from growing per- capita dairy consumption and an upgrade in the quality of that consumption. Yili rose in the second quarter as most China stocks fell as the company announced a buyback of 2.5% to 5% of its shares, and sales growth in the first half of 2019 was solid.
  • Recruit Holdings Ltd.
    Recruit provides HR technology (online job search with Indeed.com and Glassdoor.com), staffing services, and Japanese websites and services for small- and medium-sized businesses. Indeed.com continues to grow rapidly and is on track integrating its Glassdoor. com acquisition. Staffing services benefit from a strong job market in Japan, and they have been developing websites and services that help small- and medium-sized enterprises to operate more effectively.

Bottom Performers

  • Kose Corp.
    Kose is a Japanese cosmetics and skincare company. Kose’s shares underperformed on concerns over slower China growth, an ongoing crackdown on daigou—intermediaries who purchase overseas goods for Chinese consumers for a fee in order to evade import taxes and duties—and quarterly profits and company forward guidance that came in below expectations. Despite the earnings miss, we still believe Kose will compound at an attractive rate, given the secular growth outlook for skincare and cosmetics in China.
  • Ubisoft Entertainment
    Ubisoft is one of the largest video game publishers in the world, with well known titles such as Assassin’s Creed, Far Cry, Just Dance, Prince of Persia and others, on gaming devices and consoles from Sony, Microsoft and Nintendo as well as on PCs. The U.S. accounts for more than 45% of Ubisoft’s revenue. Ubisoft’s share price was down as quarterly revenues missed company guidance and competition remains tough for traditional video game makers with the popularity of free online games such as Fortnite. Longer term, we believe Ubisoft is attractively valued versus its peers.
  • Reliance Industries Ltd.
    Reliance Industries is India’s largest petrochemical and second-largest refining company. Reliance underperformed due to concerns about its refining and petrochemical margins. We believe Reliance’s continued expansion in telco and the digital economy and the option to list its JIO subsidiary or other developing businesses could continue to provide value for shareholders in coming years.
  • Alibaba Group Holding Ltd.
    Alibaba provides online retail marketplace services to over 700 million active monthly users in China. Outside China, the company also provides e-commerce services, fintech, cloud computing, logistics platform services and online video services. The stock sold off in May, along with other Chinese companies, on trade and economic concerns. The liquidation of Altaba’s stake in Alibaba also added to the selling pressure.
  • Barclays plc
    Barclays is a global financial services company based in the U.K., offering retail and wholesale banking, wealth management and investment management services globally. In the second quarter U.K. banks underperformed the U.K. market in general and Barclays underperformed both on continued Brexit concerns, weakness in its U.K. operations and a mixed set of first quarter results.

Thank you for investing in the Thornburg International Equity 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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