This portfolio manager commentary on the Thornburg Investment Income Builder Fund is published amidst the ongoing developments associated with the global pandemic, COVID-19. Government bodies around the world have taken unusual steps to control the disease and mitigate the consequences of related economic disruption in order to keep the basic structure of the global economy in place to resume normal economic activity when the pandemic is better controlled.
Thornburg Investment Income Builder Fund (I shares, Distributing) delivered a 1.17% total return in the September quarter. This followed the worst quarterly return in the fund’s history in the March 2020 quarter and one of the best quarterly returns in the fund’s history in the June quarter. Share prices of a majority of the dividend-paying equities in the fund were lower in the first nine months of 2020, leading to what we believe is a bargain-priced portfolio of income-producing assets. Listed on the following page in descending order are the 25 largest equity holdings in the fund at quarter end, along with 2020 year-to-date and September quarter share price changes as of 30 September 2020. Also noted are dividend yields at closing 30 September stock prices. Eleven of these 25 firms have seen share price declines in 2020 to date. Eleven also posted share price declines in the September quarter. Individual position sizes range from 4.5% (Roche Holding) to approximately 1.7% for those shown near the bottom of the list.
These are not trivial businesses. These firms occupy important positions in their respective markets, and they tend to be well capitalized.
|Name of Company||2020 YTD Price Change & Q3 2020 Price Change (+/-) at 30/9/2020 ($US)||Last 12 Month Dividend Yield at 30/9/20 Price|
|Roche Holding AG||+5.4%/-1.3%||2.9%|
|Global health care company develops and sells medicines and diagnostic tools|
|Generates, distributes, and sells electricity and gas in Southern Europe & Latam|
|Samsung Electronics Co., Ltd.||+3.2%/+13.2%||2.4%|
|Manufactures consumer & industrial electronic products; leading semiconductor producer|
|Taiwan Semiconductor Manufacturing Co., Ltd.||+34.8%/+40.9%||2.3%|
|Leading semiconductor chip foundry in the world, fabricating chips used in many digital devices|
|NN Group NV||-1.1%/+11.8%||7.0%|
|Netherlands-based life and casualty insurer, with market leading positions in Netherlands|
|Italian infrastructure holding company|
|Develops and markets digital and analogue semiconductors|
|CME Group, Inc.||+16.6%/+2.9%||3.4%|
|Operates exchanges that trade futures contracts & options on rates, F/X, equities, commodities|
|Multi-national telecommunications network operator, home market is France|
|Develops and delivers key components for digital wireless communications products|
|China Mobile Ltd.||-24.1%/-5.4%||6.6%|
|World’s largest mobile telecommunications network operator, net cash balance sheet|
|Merck & Co., Inc.||-8.8%/+7.3%||3.0%|
|Global health care company develops and sells medicines, vaccines, biologic therapies|
|The Home Depot, Inc.||+27.2%/+10.9%||2.4%|
|Largest U.S. home improvement retailer, sells hardware & building materials|
|Global health care company develops and sells medicines, vaccines, biologic therapies|
|Develops and sells pharmaceutical products|
|Fiat Chrysler Automobiles NV||-17.0%/+19.1%||0.0%|
|Italian-American multinational auto company|
|Major research-driven pharmaceuticals firm, selling products in > 100 countries|
|Électricité de France SA||-5.0%/+9.5%||1.6%|
|French electric utility company|
|Deutsche Telekom AG||+6.7%/-0.3%||4.2%|
|Multi-national telecommunications network operator, majority owner of T-Mobile USA|
|Produces, refines, transports, and markets oil and natural gas products globally|
|European electric utility company|
|German multinational industrial conglomerate|
|Cisco Systems, Inc.||-17.9%/-14.5%||4.5%|
|U.S. multinational technology conglomerate|
|JPMorgan Chase & Co.||-30.6%/+2.3%||3.7%|
|U.S.-based global financial services conglomerate serving businesses & individuals|
|Walgreens Boots Alliance, Inc.||-39.1%/-15.3%||5.1%|
|Operates retail drugstores in USA and UK and wholesale pharmaceuticals distributor in EU|
The reader will notice a significant number of telecommunications, communications infrastructure, financial and health-care firms among these top 25 holdings, as well as other providers of various ingredients important to modern life. Aside from the fact that they have paid attractive dividends, the current crisis reinforces the essential nature of the products and services they provide.
The fund paid an ordinary quarterly dividend of $0.058 per I share in the quarter ending 30 September 2020. This compares to a dividend of $0.049 per I share for the comparable quarter of 2019. The fund paid $0.255 per I share for the trailing four quarters.
Investment Income Builder’s I share (Distributing) return of 1.17% for the September 2020 quarter trailed its blended benchmark (75% MSCI World Index and 25% Bloomberg Barclays U.S. Aggregate Bond Index), which returned 6.13%. Our blended benchmark benefited significantly from central bank support for the bond component of the blended index and the significant presence of popular technology stocks with high weightings and low or zero percent dividends in the MSCI World Index (Apple, Microsoft, Amazon, Facebook, and Alphabet are the five highest weighted stocks in this index). Performance comparisons of the fund to its blended benchmark over various periods are shown on the previous page.
The net asset value of Investment Income Builder’s I shares increased by $0.03 per share ($9.72 to $9.75) during the September quarter. The fund has only partially recovered a $1.76 share price decline that occurred during the month of March alone as the COVID- 19 pandemic gained momentum globally and set off a chain reaction of selling across a range of financial assets. That selling wave has been significantly reversed since the final week of March with respect to government bonds and corporate bonds due to a combination of Federal Reserve (and other central bank) buying of these instruments with newly printed money, augmented by private investor buying.
Equities of certain large firms with “growth” narratives have also been bid higher over the last six months. Most dividend-paying stocks have been left behind in the recent rotation of investor dollars into bank deposits, bonds, and growth stocks. We believe this will change, though it is difficult to predict timing. We have increased your portfolio’s exposure to dividend-paying firms that we believe have resilient businesses with strong capital structures. We have reduced or eliminated exposures to less resilient businesses. Compare the sector allocations of the equities in the Income Builder portfolio from 14 February (date of the fund’s highest closing share price this year) and 30 September (see table below).
|Sector||Sector Weight, 14 February||Sector Weight, 30 June||Sector Weight, 30 Sep||+/-|
We are optimistic about the future return potential of Thornburg Investment Income Builder’s assets. Why?
Virtually all the businesses in the portfolio retain their market positions, providing important products and services that generate cash flows to pay attractive dividends. In addition, we believe they are valued very attractively in relation to their own histories and relative to other assets. Bond yields and money market yields have declined below pre-COVID levels. We believe investors will direct capital in the coming quarters into dividend-paying stocks, supporting prices of these.
Ten of 11 sectors of the MSCI World Index delivered positive returns for the September quarter, ranging from 16% for the consumer discretionary sector to negative 16% for the energy sector. The MSCI World Index comprises 75%, and the entire equity portion, of the Thornburg Investment Income Builder’s global performance benchmark. During the quarter, 10 equity investments contributed positive returns of at least 0.25% to overall portfolio performance. (These most positive contributors included Taiwan Semiconductor, Qualcomm, Broadcom, Pfizer and NN Group). Five equity investments contributed a negative return of below negative 0.25%. (These most negative contributors included AbbVie, Royal Dutch Shell, Walgreens Boots Alliance and Orange).
We believe the extreme dislocation caused by the COVID-19 pandemic will be temporary. As we write these words, a portion of the global population remains under some type of “restricted activity” order that reduces normal economic activity. When the pandemic passes, we believe people around the world will continue to buy goods and services and trade with each other. The global economy will gradually repair, albeit with important differences. In the meantime, most governments will make reasonable attempts to bridge the material dislocations we currently witness.