Thornburg Investment Income Builder Fund

4th Quarter 2019

Jason Brady, CFA
Jason Brady, CFA
President and CEO
Matt Burdett
Matt Burdett
Portfolio Manager and Managing Director
Ben Kirby, CFA
Ben Kirby, CFA
Co-Head of Investments and Managing Director
Brian McMahon
Brian McMahon
Vice Chairman and Chief Investment Strategist
Portfolio managers are supported by the entire Thornburg investment team.
31 December 2019

The Thornburg Investment Income Builder paid an ordinary quarterly dividend of $0.051 per I USD Distributing share in the quarter ending 31 December 2019. This compares to a dividend of $0.048 for the comparable quarter of 2018. The Fund paid $0.342 per share in calendar 2019.

The Fund’s net asset value of the class I USD Distributing shares increased by $0.65 per share ($10.84 to $11.49) during the December quarter. For calendar 2019 the Fund’s net asset value increased by $1.48 per share ($10.01 to $11.49).

Investment Income Builder’s return of 6.49% for the December quarter was slightly ahead of its blended benchmark (75% MSCI World Index and 25% Bloomberg Barclays U.S. Aggregate Bond Index), which returned 6.42%. Performance comparisons of the Fund to its blended benchmark over various periods are shown at right. We are optimistic about the return potential of the Investment Income Builder portfolio and encourage you to read on for more details.

Dividend increases from most of the Fund’s portfolio holdings offset the headwind of a stronger currency that reduced the year-over-year U.S. dollar value of dividends paid in foreign currencies during the first nine months of 2019. We cannot predict how currency fluctuations or special dividends will impact your Fund’s future dividends. We do expect annual growth of regular periodic dividends in local currencies in 2020 for a majority of the Fund’s investments.

In assessing the fourth-quarter 2019 performance of the Thornburg Investment Income Builder Fund, it is constructive to consider the performance in U.S. dollars of the sector components of the MSCI World Index over the threemonth period. The MSCI World Index comprises 75%, and the entire equity portion, of the Fund’s global performance benchmark:

  1. All 11 index sectors showed positive total returns during the fourth quarter, with sector results ranging from approximately 2% (utilities) to 14% (information technology). Stocks of firms in the health care, materials and financials sectors joined information technology stocks in generally outperforming the returns of the index. Stocks of firms in the real estate, consumer staples, industrials, communication services, energy and consumer discretionary sectors joined utilities sector stocks in underperforming the index. In general, stocks of firms in sectors that are most sensitive to fluctuations in economic activity performed better. Stocks of firms in sectors less sensitive to expected changes in economic activity lagged in the December quarter.
  2. Relative to the MSCI index, Thornburg Investment Income Builder’s portfolio was significantly overweight the higher-dividend-paying telecommunications, financial and energy sectors, as it has been for most of its history.
  3. Fund investments in firms in the following sectors comprised the largest average sector weightings in the portfolio during the fourth quarter:
    • Financial sector (20% average weight, minus 2% weighting over the quarter)
    • Communication services sector (12% average weight, minus 1% weighting over the quarter)
    • Energy sector (9% average weight, unchanged weighting over the quarter)
    • Information technology sector (10% average weight, plus 2% weighting over the quarter)
    • Health care sector (13% average weight, plus 1% weighting over the quarter)
    • Consumer discretionary sector (6% average weight, minus 1% weighting over the quarter)
    • Materials sector (3% average weight, unchanged weighting over the quarter)
    • Utilities sector (6% average weight, unchanged weighting over the quarter)
    • Industrials sector (8% average weight, unchanged weighting over the quarter)
  4. Forty-one Fund investments contributed positive returns of at least 0.05% (five basis points) to performance during the quarter. Six investments contributed negative returns of 0.05% or worse.

The Fund’s average return from its investments in the financial sector was positive for the quarter. JPMorgan Chase, Axa Equitable Holdings, ING Group, NN Group, MFA Financial and BNP Paribas were strong performers. Exchange operator CME Group detracted from portfolio performance as expectations for controlled interest rates and consequent expectations for limited volatility of future financial asset and commodity prices led to selling pressure. In general, earnings and portfolio credit quality for these firms held up well in 2019.

The Fund’s significant holdings in the communication services sector delivered disappointing performances, lagging the performance of the equities in this sector of the MSCI World Index. China Mobile made a slight positive contribution to portfolio performance, reversing some of its share price decline earlier in 2019. France-based multi- national network operator Orange S.A. delivered a negative December quarter return despite a backdrop of improving business conditions in its home French market. Deutsche Telekom also delivered a modestly negative return. Deutsche Telekom is the controlling shareholder of the third-largest U.S. mobile network operator, T- Mobile, which contributes approximately half of the group operating profit. T-Mobile has made frequent headlines in recent quarters due to its pending merger with Sprint, the fourth-largest U.S. mobile communications network operator.

Investor interest in the entire energy sector was reduced in 2019 by the 35% drop in the Brent oil price to $53.80 during the December 2018 quarter. The Brent oil price rallied 22.7% to $66.00 per barrel in 2019. Investment Income Builder’s energy holdings appreciated approximately half this amount for the year, reflecting investor caution regarding the sector. Refiner Valero joined international integrated oil and gas producer Total S.A. in making positive contributions to fourth quarter portfolio performance. In general, Fund holdings in the energy sector are generating strong cash flow and capital spending discipline that should support current dividends and offer the potential for future dividend growth.

Our investments in the technology sector delivered positive returns in the December quarter, led by strong contributions from integrated circuit producer Taiwan Semiconductor Manufacturing, integrated circuit designer Qualcomm, Korean device manufacturer Samsung Electronics and diversified semiconductor designer Broadcom. Trade issues, patent disputes and evolving consumer preferences create uncertainty around how to optimize the geographic spread of component manufacturing networks and the near-term outlook for device sales. That noted, we expect most of our technology sector firms to benefit from the ongoing proliferation of “connected” digital devices and associated data flows. These firms hold important positions in the value chain for producing the devices as well as data transmission and storage capability.

Investment Income Builder saw positive fourth quarter returns from its holdings in the health care sector. AbbVie, Roche, Merck, AstraZeneca, Novartis and Pfizer each made positive contributions to portfolio performance, overcoming uncertainty about future health care policy. We expect the debate around health care costs to intensify in the coming quarters, so new product innovation will be an increasingly important driver of financial progress in the for-profit health care sector.

Income Builder’s investments in the consumer discretionary sector showed mixed, but positive, results for the quarter. Casino operator Las Vegas Sands and automobile manufacturer Fiat Chrysler each made positive contributions to portfolio performance, while a share price decline for Home Depot detracted despite a positive backdrop for U.S. home building and home improvement activity.

Norilsk Nickel made a strong positive contribution in the fourth quarter, leading the overall positive contribution from the Fund’s holdings in the materials sector. We expect investor demand for materials sector equities to increase if the global economy strengthens in 2020, and vice-versa. Nickel demand growth above global GDP growth is being driven by growth of lithium ion batteries, particularly for the electric vehicle market.

Among other portfolio holdings, notable contributors to performance included drugstore operator Walgreens Boots Alliance and multi-national electric utility Enel. Detractors from portfolio performance included Italy-based infrastructure operator Atlantia and Korea Tobacco & Ginseng.

A stronger U.S. dollar decreased the year-over-year dollar value of our non- U.S. assets and dividends during the first nine months of 2019 by approximately negative 3%. This trend reversed in the fourth quarter, as the tradeweighted U.S. dollar declined in value by 3%. We hedged a significant portion of the currency exposure of our asset positions denominated in the euro, the British pound, Chinese yuan, the Swiss franc and the Australian dollar. These hedges detracted from the relative portfolio performance of Thornburg Investment Income Builder Fund during the fourth quarter, since benchmark indices are not hedged and the U.S. dollar weakened. We believe increasing U.S. government fiscal and trade deficits could create conditions that would lead us to reduce currency hedges.

Today, investors debate the future direction of the economies of China, Europe, various emerging markets and the U.S. They consider potential policy actions by the U.S. Federal Reserve, Congress, the Trump administration and foreign government regulatory and policy actions. Concerns about tariffs and trade policy changes continue to impact share price movements of global producers of tradeable goods, which are volatile day to day. Economic data tracking business expectations of manufacturers around the world are mixed, but show a modest improving trend.

We believe people around the world will continue to buy goods and services and trade with each other. Importantly, overall global consumer spending appears poised to grow in 2020, along with global population, industrial production, energy consumption, loans, bank deposits and digital communications volumes. Despite uncertainty around macroeconomic policies, employment and wage growth trends remain positive, consumer debt is under control and many governments around the world have room to implement expansionary fiscal policies.

Most firms held in Thornburg Investment Income Builder’s portfolio should deliver positive year-over-year operating earnings growth in 2019 and are expected to deliver earnings growth in 2020. Major central banks around the world continue to pursue very easy monetary conditions, which artificially suppress interest rates and support prices of financial assets. While low interest rates are good news for borrowers, they have negative consequences for conservative savers. Interest income as a percentage of aggregate adjusted gross income of U.S. households fell from 4% in 2007 to 1.5% in 2017, citing the Statistics of Income published by the Internal Revenue Service.

Investors must consider other options. Banks in the U.S. offer below-inflation yields on most deposits. A very large pool of investor dollars seeks better returns elsewhere, but in sensible investments. We are optimistic that the types of income-producing investments owned by the Thornburg Investment Income Builder Fund will experience sustainable popularity among investors as their intrinsic values for income production are recognized. A high percentage of investor funds belong to people over the age of 55, for whom income is an increasingly necessary and desirable attribute.

Important Information

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

Date of data: 31 December 2019—unless otherwise stated

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