Investment Income Builder Fund (UCITS) - Commentary

3rd Quarter 2021

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.
1 October 2021

This Portfolio Manager Commentary on Thornburg Investment Income Builder is published amidst the ongoing developments associated with the global Coronavirus 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 as we resume normal economic activity now that the pandemic appears to be better controlled.

The fund paid an ordinary quarterly dividend of $0.04 per I share in the quarter ending 30 September 2021, down modestly from $0.05 dividend in the year ago quarter. The fund paid $0.393 per I share for the trailing four quarters, up slightly versus the prior year comparable period.

The net asset value of Investment Income Builder’s I shares decreased by $0.28 per share ($20.07 to $19.79) during the September quarter. Your fund has recovered more than all of the share price decline that occurred from 14 February 2020 to 31 March 2020 as the Covid-19 pandemic gained momentum globally and set off a chain reaction of selling across a range of financial assets.

Investment Income Builder’s total return of -1.36% (I shares, Distributing) for the September quarter trailed its blended benchmark (75% MSCI World Index and 25% Bloomberg U.S. Aggregate Bond Index), which returned 0.03% for the quarter. For the 12 months ending 30 September 2021, Investment Income Builder’s I share return of 28.28% slightly underperformed the blended benchmark return of 20.89%. Performance comparisons of Investment Income Builder to its blended benchmark over various periods are shown elsewhere on this web site.

Listed on the following page in descending order are the 25 largest equity holdings in the fund at quarter end, along with their 2020 calendar year and 2021 share price changes in $US through 30 September. Also noted are dividend yields at closing 30 September 2021 stock prices. Together, these 25 firms comprise 65% of the fund’s total assets. Cash comprise around 9% of fund assets, and 25 other common equities comprise a total of approximately 26% of fund assets. Individual position sizes of the 25 equities listed range from 3.7% (Roche Holding) of fund assets to approximately 1.7% (BNP Paribas) for those shown near the bottom of the list.

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 Covid crisis reinforced the essential nature of the products and services they provide.

Table 1 | Investment Income Builder Fund—Top 25 Equity Holdings (as of 30/9/21)

(Together, these 25 investments account for approximately 65% of fund assets as of 30 September 2021; cash, comprise 9% of assets, and 25 other equity investments accounted for 26% of fund assets.)

Name of Company 2020 Year Price Change YTD 2021 Price Change +/- at 30 Sep. 2021 Dividend Yield at 30Sep. 2021, Price
Roche Holding AG. 7.9% 4.6 2.60%
Global health care company develops and sells medicines and diagnostic tools
NN Group N.V. 15.8% 20.6 5.30%
Netherlands-based life and casualty insurer, with market leading positions in Netherlands
Taiwan Semiconductor Manufacturing Co. Ltd 70.5% 10.5 1.90%
Leading semiconductor chip foundry in the world, fabricating chips used in many digital devices
AstraZeneca plc -0.90% 19.8 2.28%
Major research-driven pharmaceuticals firm, selling products in more than 100 countries
Atlantia SpA -19.7% 7.57 0.00%
Italian infrastructure holding company
CME Group, Inc. -8.6% 6.2 3.13%
Operates exchanges that trade futures contracts & options on rates, F/X, equities, commodities
Samsung Electronics Co. Ltd. 54.2% -15.9 4.06%
Manufactures consumer & industrial electronic products; leading semiconductor producer
Stellantis NV 20.8% 10.5 0.00%
Italian-American multi-national auto company
Broadcom, Inc. 38.5% 10.7 2.97%
Develops and markets digital and analogue semiconductors
Enel SpA -28.3% -24.3 5.50%
Generates, distributes, and sells electricity and gas in Southern Europe & Latin America
Orange S.A. -19.2% -9.1 7.49%
Multi-national telecommunications network operator, home market is France
AbbVie, Inc.. 21.0% 0.7 4.82%
Develops and sells pharmaceutical products
Pfizer, Inc. -0.9% 16.8 3.60%
Global health care company develops and sells medicines, vaccines, biologic therapies
JPMorgan Chase & Co. -0.9% 28.8% 2.44%
U.S.-based global financial services conglomerate serving business & individuals
TotalEnergies SE -21.9% 10.8% 6.40%
Produces, refines, transports, and markets oil and natural gas products globally
QUALCOMM, Inc. 72.7% -15.3% 2.11%
Develops and delivers key components for digital wireless communications products
Merck & Co., Inc. -10.1% -3.7% 3.46%
Global health care company develops and sells medicines, vaccines, biologic therapies
The Home Depot, Inc. 21.6% 23.6% 2.01%
Largest U.S. home improvement retailer, sells hardware & building materials
Royal Dutch Shell plc -40.4% 26.0% 3.20%
British-Dutch multinational oil and gas company
Deutsche Telekom AG -12.5% 9.5% 3.46%
Multi-national telecommunications network operator, majority owner of T-Mobile USA
E.ON SE -4.8% 9.6% 4.26%
European electric utility company based in Germany
China Mobile Ltd. -32.5% 6.6% 7.22%
World’s largest mobile telecommunications network operator, net cash balance sheet
Assicurazioni Generali SpA -15.0% 21.4% 5.49%
Italy-based multinational life & property/casualty insurers
Electricite de France SA 29.9% -21.8% 1.71%
French electric utility company
BNP Paribas -10.3% 21.7% 2/76%
French international banking group

These are not trivial businesses. These firms occupy important positions in their respective markets, and they tend to be well capitalized.

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 31 March 2020 to 30 September 2021:

Table 2 | Sector Weights (%)

Sector 31/3/20 30/6/20 30/9/20 31/12/20 31/3/21 30/6/21 30/9/21 From 31/3/20 to 30/9/21 +/- Weighting
Financials 19.47 20.18 19.96 19.96 19.94 19.29 18.66 -0.81
Health Care 17.30 15.72 16.18 15.68 15.71 16.79 15.86 -1.44
Information Technology 11.12 13.80 16.22 16.82 14.79 14.60 13.07 1.95
Industrials 7.44 7.77 8.16 8.48 9.40 8.79 8.44 1.01
Communication Services 13.01 11.48 10.20 9.00 9.38 8.67 7.84 -5.16
Utilities 7.82 7.92 8.34 8.97 8.00 8.39 7.27 -0.55
Energy 8.00 6.09 5.08 6.04 6.53 6.34 6.39 -1.61
Consumer Discretionary 4.27 4.90 5.34 4.98 5.16 5.35 5.09 0.82
Consumer Staples 5.27 2.84 2.63 4.63 4.50 4.29 4.04 -1.23
Materials 2.58 2.54 2.50 3.03 3.04 3.08 2.62 0.04
Real Estate 1.52 1.51 1.51 1.48 1.15 1.23 1.17 -0.35

Five of 11 sectors of the MSCI World Index delivered positive returns for the September quarter, ranging from +3% for the information technology sector to approximately 0.5% for the utilities sector. The six negative sector returns within the Index portfolio ranged from -1% for industrials to -5% for materials businesses. The MSCI World Index comprises 75%, and the entire equity portion, of the Thornburg Investment Income Builder’s global performance benchmark. In the Income Builder portfolio, 11 equity investments contributed positive returns of at least 0.10% to overall portfolio performance during Q3 2021. (These most positive contributors included Dutch insurer NN Group, JPMorgan Chase, UK retailer Tesco, gas & oil producer and processor TotalEnergies, and Pfizer). 10 of the fund’s equity investments made negative September quarter contributions to portfolio performance of below -0.15%. These detractors from fund performance included Samsung Electronics, semiconductor provider Qualcomm, exchange operator CME Group, and European utilities Enel and Endesa.

We are optimistic about the future return potential of Thornburg Investment Income Builder’s assets. Why? Virtually all the businesses in your 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. The weighted average price/operating cash flow ratio for Thornburg Investment Income Builder’s equity portfolio tabulated using Bloomberg reported trailing year results was approximately 7.2x as of 30 September, significantly below the 12.6x price/cash flow ratio of the MSCI All Country World Index. Income Builder’s 5.4% weighted average equity portfolio dividend yield was more than twice the 1.97% dividend yield of the MSCI Index. We believe investors will direct capital in the coming quarters into dividend paying stocks, supporting prices of these.

Important Information

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

Date of data: 30 October 2021—unless otherwise stated

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