Power of Global Diversification: Incorporating International Equity

Power of Global Diversification: Incorporating International Equity

Charles Roth
Thank you for joining us to today’s webcast, The Power of Global Diversification. My name is Charles Roth. I’m a portfolio specialist at Thornburg covering the international equity strategies. I’m joined today by portfolio manager Sean Sun in our Santa Fe, New Mexico bureau. And we’re also Sean is the portfolio manager for the International Growth Suite. And we’re joined as well by Matt Burdett, our head of equities and a portfolio manager of our international Equity Strategies, as well as our Growth global equity strategies.

He’s been on the road visiting with companies in Houston and is on his way to London. So, he’s zooming in. We welcome all of you attending this webcast. We see a lot going on in international markets, and we want to discuss the big themes that we see unfolding and in various parts of the world, the US, which is obviously experiencing some volatility and Japan as well emerging markets is shaky here and there, but not all corners are experiencing this volatility. Europe is having a pretty good run so far. But before we jump in to that, a few housekeeping items. If you have questions, you can email them to us at questions@thornburg.com that is questions@thornburg.com or you can simply type them into the webcast. We’ll be doing Q&A after the presentation. And so with that, let’s jump in to our first slide.

Matt, if you can speak to this. The US has had a terrific run over really the last 15 plus years. We’ve seen a tremendous performance out of the US. Can you explain to us why investors should think about allocating abroad?

Matt Burdett
Sure, yeah. Thanks. Thanks for the question, Charlie. I think this is a question honestly I’ve been getting for 15 years and I think, you know, there’s a lot of considerations for people to think about really how the coming out of the financial crisis and quantitative easing and how that really changed the dynamic of U.S. equity performance versus the international markets.

You can see on the chart on the left, which is a ratio of the forward p e of the S&P 500 divided by the ACWI-ex U.S., you know, as a broad proxy for the international markets. And we go back and we start, you know, in this end of December of 2009. Right. And what you can see here is the S&P 500 and the ACWI-ex U.S. back then were actually comparable multiples, you know, 14.2 times versus 13.9 times.

You fast forward to the end of last year and the U.S. multiple the S&P 500 expanded 52%. Okay. And the international multiple actually contracted half of a multiple point. Right. So so that’s that’s one thing. Right. And I think quantitative easing, you know, help the U.S. in the sense that you know, it’s a more growth oriented index. Right.

So lower interest rates means that, you know, future cash flows several years out when you discount them back at a low rate, can have a high value. And so that helped fuel some of the some of the U.S. outperformance. And if you it’s not on this slide, but if you if you look at the EPS CAGRs for the S&P 500 and the in the ACWI ex-U.S. over the same period, the S&P 500 CAGR’ed about 540 basis points per annum higher than that of the ACWI U.S. And I think there are some there are some reasons for that that relate to, you know, the quantity of easing impact on earnings.

Right. And the biggest the biggest one is just the construction of the index. So the ACWI ex-U.S., the biggest sector is financials, right? It’s about 23% of the index. And so when you remember it was 0% interest rates in the U.S., but negative interest rates in Europe and Japan, two of the main markets that comprise that index.

So when you remove an important revenue and earnings driver for the biggest sector in an index, you’re going to create an EPS growth headwind, which is, you know, basically that 540 basis point spread is reflective of that.

Charles Roth
And I suppose that too. So sorry to interrupt, but I just want to make sure we get to the companies. Matt, these are yeah, just in terms of you mentioned ZIRP, zero interest rate policy, in the US and Europe, negative rates in Japan and Europe. And I’m just wondering what impact that had on the dollar. If you can speak to that graph in the right hand side of the slide?

Matt Burdett
Yeah, sure. So look, I think the dollar. You know, being the reserve currency is going to always have buyer’s right and you know, more than it, more than it would if it were a country that did not have that reserve currency status. You know, over this period, the same period that I referenced, what you can see is that the DAX y has you know, it has appreciated about about 36% over this period.

And so when you think about an international stock portfolio, basically, not only did you have the growth and multiple headwinds described on another slide, but you also have the value of those currencies falling. Some of this is you know, this tends to be cyclical and the direction of the dollar from here will depend on a lot of things, policy, the fiscal position of the U.S. and importantly, what other countries do.

But generally speaking, this is, you know, an index that is seen strong appreciation. The new U.S. administration recognizes that the dollar is highly valued and if it even said it’s overvalued. So we’ll have to see what policies come to change that.

Charles Roth
So that brings up an interesting dynamic in the next slide, which is earnings growth out of the US earnings growth in Europe, earnings growth in Japan, both in terms of local currency. So the euro on the yen, as well as USD terms in Europe and in Japan. And one of the things that U.S. based investors may not quite appreciate is, is the fact that earnings in Europe have kept up with earnings in the US.

And really it’s the same in Japan, except that they’ve really exceeded their earnings growth in the US. Can you speak to what’s going on and why we’re seeing that dynamic?

Matt Burdett
Yeah sure. Look, I think it really boils down to you know, the comment that I that I made earlier about cost of capital normalization and the fact that you have interest rate policies that are more normal. Right. So, you know, the if you go back to, you know, 1982 to the end of 2008, the effective Fed funds rate averaged 531 basis points.

And the peak of this rate cycle was 500 and, you know, effective 533 basis points. So a much more normal Obviously, we’ve seen some interest rate cuts in the U.S., some in Europe. Japan is still on a hiking path. And really, you know, these two charts are highlighting and probably much as you said, to the surprise of many people, is that the earnings is actually very comparable.

And in the case of Japan, even better than the U.S. And I do believe I mean, there’s numerous drivers for it. For example, if you were to go back and look from January 20, 22 up until like the end of February, European banks actually outperformed the Faangs. Right. Or the Magnificent Seven, I should say. So in that super earnings driver.

Right. Equities tend to be driven by earnings, you know, progression. So I think this is just good evidence that when you have a more normal market in terms of policy rates, you know, there’s earnings drivers that can happen. And that’s what you’re seeing in a lot of the international markets.

Charles Roth
That’s very interesting. So discussing earnings, we see a quite a diversification and sources by geography of revenue from European companies. Can you discuss sort of the benefits of that diversification of revenue?

Matt Burdett
Sure. Yeah. Look, I think diversification benefits are kind of being brought to the front right now in the U.S. and how 2025 has so far started. But the good thing about, you know, when you go in the international markets, you can actually find companies, great companies that do have a very diverse revenue stream. Right. And when you think about not only do you want diversification and within a portfolio, but you’d also like your companies to have diversified sources of revenue.

And the chart up on the screen is showing the percentage of foreign revenue and domestic revenue for, you know, four major regions. The U.S., Europe, Japan and emerging markets. And what you can see is in Europe, you know, more than half of the revenue is actually coming from outside of Europe. So I think a lot of people, you know, associate buying a European company as buying the European economy.

And in many cases, that’s not really what you’re buying. You’re buying a global leader with a diversified revenue stream and oftentimes at a much better valuation. And so, you know, we have to remember that there’s a lot of, you know, unique companies outside of the U.S. that are operating globally and have very strong business models.

Charles Roth
Quite a lot of revenue diversification coming out of Japan too. Sean, I want to bring you into our next slide, which is essentially looking at health care. We have terrific companies in Europe that are involved in health care. And I wonder if you can’t talk about how we see so much in terms of the impact of AI, but we don’t hear as much in terms of biotech and health care more generally. Can you talk about how the innovation is taking place in health care?

Sean Sun
Yeah, Charlie, I think an area people really need to pay more attention to is the amount of innovation happening within the health care space. As we know, health care is a huge part of the global economy. Health care spending is about $10 trillion a year, according to the W.H.O. That’s roughly 10% of global GDP. And due to the non-discretionary nature of health care, spending on health care as part of the economy is much less cyclical, much more resilient.

And that’s great. We like to see steady, stable, resilient cash flows, but what is probably a little less under less appreciated is the degree of innovation happening. Highly innovative companies are doing things like developing the next blockbuster drug. They’re building next generation pipelines of drugs. The we have and have highly innovative companies developing who are addressing some of these structural megatrends within health care, such as obesity or heart disease.

And finally, we see that it’s increasingly becoming more and more complex to not only research and develop a drug, and there are very innovative companies out there. They’re helping other companies to navigate that increasingly complex landscape.

Charles Roth
So can you talk a little bit about how health care drives returns? I mean, I mentioned biotech. You also mentioned the resilience that we see in health care. What’s the end result of that resilience as well as, say, the capital appreciation, the performance that we see within that broader sector?

Sean Sun
Yeah, as I mentioned earlier, health care is a very large market within the global economy, $10 trillion. But what is also a little less appreciated is the fact that health care spending has outpaced global GDP growth over very long periods of time. So global health care spending has averaged about 4 to 5% a year. That’s faster than global GDP growth.

And when you take a steady, resilient 4 to 5% a year and you compound it over very long periods of time, you end up with a very nice growth profile point to point. And this slide kind of exemplifies that.

You see that health care. What we’ve done here at this slide is we’ve broken down returns within the index by sectors within the index, and we see that at the very top. The technology sector has outperformed point to point over the past 20 years, but not far behind is the health care sector. That’s been the second-best performing sector within this particular benchmark over the past 20 years.

And that is due to, again, like you mentioned, the very stable, resilient free cash flow generation of the sector. But what’s also very interesting empirically that we’ve seen over time is that health care has achieved these very attractive returns with much less volatility. So the health care sector has proven to be less volatile and actually defensive and crashes at times.

Charles Roth
Now you can see that in the chart. So, what are some of the major forces that are driving these trends within health care?

Sean Sun
Yeah, great question, Charlie. So health care, there aren’t just one or two megatrends driving growth in health care. There’s a variety of structural megatrends that are really driving growth. I mentioned some of them earlier. Some of them are really inevitable, like demographics and aging are really inevitable trends that are benefiting structural growth in health care. But you also have other structural trends such as diabetes, obesity, cardiovascular disease, eye disease. These are huge challenges for society to address that, I think we need a lot more innovation to address many of these structural challenges innovation in drug development, innovation and device development. And the great part of innovation here is I think society should really encourage innovation because innovation within health care will have downstream impacts that are quite positive to the health care system over time.

So, for instance, obesity is great. Example, obesity is a highly prevalent disease In the United States alone, about one third of adults suffer from obesity. We’re talking about 100 million adults in the U.S. not many people who suffer from obesity also suffer from what we call co-morbidities or additional diseases tied to that obesity, things like diabetes or higher risk of stroke or sleep apnea or joint pain that may lead to a get knee surgery down the line.
So to the extent that as a society, we can encourage innovation that addresses some of the root causes of many of these other diseases like obesity, we will save the health care system a lot of money over time.

Charlie Roth
Well, Sean, breaking down the spending on health care and therapeutics, you mentioned 10% of global GDP, 10 trillion a year. Can you walk us through and a little bit greater detail the spending on the areas, some of which you just mentioned?

Sean Sun
Yeah, great question. So this slide kind of breaks down on a more granular basis, spending by various therapeutic areas within health care. So we see that the largest area of spending is oncology where cancer and that’s because there is a huge unmet medical need there. A ton of people still suffer from cancer and there is real benefits to extending life there.

So we see that it’s the largest category at $440 billion. It’s growing quite nicely at about a mid-teens rate, so much faster than not only global GDP, but much faster than overall health care spending. So that is an interesting area for continued innovation. The fastest growing segment is about halfway down that list. You see obesity still relatively small today at about $74 billion, but growing the fastest at about a mid-teens rate.

And the reason it’s growing so fast is one, again, a lot of unmet medical need. We have 100 million obese patients here in the US, but over a billion globally. So there’s a huge amount of unmet need. And we’ve since seen the development of these kind of new drugs called GLP-ones which have been proven to be very safe and effective to treat obesity.

Charles Roth
So let’s get in to the question of how drugs are discovered and developed. It’s an increasingly complex process. Can you walk us through that process?

Sean Sun
Yeah. So the way we approach investing in health care to a degree is we want to be exposed to the extremely attractive growth prospects of innovation within the health care space. But at the same time, we want to limit or mitigate the binary risk of investing in parts of health care, the binary risk being that a drug has a clinical trial failure or isn’t approved by regulators or something like that.

So one way to avoid to mitigate some of that binary risk is to invest in what we call the picks and shovels of the health care industry. Companies that are helping other companies navigate this increased complexity out there. For instance, it’s the regulatory barriers to getting a drug approved by the FDA are increasing every year and becoming ever more complex.

And three critical steps to getting a drug approved are first, the research side, then running the clinical trials research side, the development side, and finally manufacturing. And what we’ve identified here on the slide are three, not only three critical key steps of taking a drug from research all the way to commercialization but three important companies within those segments.

So like an Icon is what we call a clinical research organization. And what they do is they help pharma companies navigate the very complex and difficult process of running and running clinical trials and their value add is finding patients. And if you can run a clinical trial quicker, then you have longer time on market. So that’s very important.

They’re a very valued partner. The farmers, pharmaceutical companies, Lonza and Sartorius are involved in the manufacturing of drugs. Sartorius makes highly specialized equipment that someone like Lonza would purchase in order to develop these very complicated biologic drugs. Historically, drugs are more simple. There are basically that little pills you take. These days drugs are more biological, so to speak, and are often in injectable form. And that’s just a more difficult, complex manufacturing process that someone like Lonza brings specialized knowledge and IP to the table.

Charles Roth
Okay, let’s delve a little bit deeper into that process. Talk to us about the pipelines and a product and how the pharma selectively invest behind those pipelines.

Sean Sun
Yeah. So one, heuristic for finding discovering companies that are creating value over time are companies that can leverage their innovation and maximize that innovation by creating value across multiple indications for an initial product we call pipelines. In a product, we take one product and you maximize value by getting it approved for other indications. So a company like AstraZeneca kind of exemplifies this approach.

You see on the left, this drug that they first developed called Farxiga. Farxiga was initially discovered and effective for diabetes. What AstraZeneca did over time to maximize the value of their innovation was they they saw that it was effective in other adjacent indications like heart disease and kidney. And they basically went through the process of approving it and kind of extending the market size of that drug over time.

Another great example is what Novo Nordisk has done with their GLP one drugs. Initially, their GLP one drugs were approved for just diabetes, but they’ve since extended that approval into obesity, an even larger market than diabetes. And you see the chart there shows the growth that that’s had in script count over time. And now Novo Nordisk is working to further extend the GOP franchise and make it a broad platform and extend it into other adjacent indications such as kidney, heart disease, even Alzheimer’s.

So I think this is a very these are these three companies are really great examples of leveraging innovation, but also maximizing that value by extending that pipe, that product into various pipeline products.

Charles Roth
Interesting. Well, thank you, Sean. And now we’d kind of like to turn to the suite of international products that Thornburg has actually had for a very long time. The Thornburg International Equity Fund has been around since 1998, more than a quarter century at is it’s a successful fund. And as a result, we have extended our expertise launching an ETF at the request of clients. It was launched in in January.

And we also have an international equity ADR, SMA, that also has a long track record across all three products. We use the same process, same philosophy and the same management team across those products. On the right hand column, we have the International Growth Equity Strategies and China and is that the PM along with Nick Anderson and they focus on international growth with the I should mention that the benchmarks and the international equity strategies are slightly different.

The International Equity strategy uses an ACWI ex-U.S., whereas the new ETF uses just the MSCI EAFE. So it does not invest in emerging markets. It it only invests in developed markets, whereas the International Equity and International ADR can invest and develop markets as well as emerging markets abroad. So back to the International Growth strategies, they in the International Growth Fund as well as the International Growth ADR, SMA, can invest in the ACWI ex-U.S. Growth Index and the International Growth ETF is also an easy growth ETF.

That means that it also invests in developed market, not emerging market ETFs, but same management team across all three products, same process, same philosophy and both these strategies invest in quality companies, bottom-up fundamental research, attractive valuations with catalysts to success. But the growth strategies obviously have a tilt toward quality growth moats that are growth oriented, durable or resilient.

So circling back to the initial slide on the US premium and for investors who are thinking about diversifying internationally, Matt, can you walk us through how the International Equity Fund diversifies not just by sector and geography, but we’ll get to this also by basket, But first, let’s just take a look at the sector diversification and then how it’s an actual diversifier versus the S&P.

Matt Burdett
Yeah, sure. I think, you know, a lot a lot of clients out there are are underweight and have been underweight international for a long time. And for the most part, frankly, it’s served them well. But it seems like things are changing now where international could be, could be a better performer and certainly a diversifier. And what we’re what we’re showing on the slide is on the left is the contribution to total return over five years for TGVIX, that’s the Thornburg International Equity Fund, versus the S&P 500.

And what you can see here so in orange is TGVIX and blue is the S&P 500. And what you can see here is that the return, the contribution is very, very different coming from TGVIX versus the S&P 500, which, you know, nearly half the return has come from one sector, right? So what we try and do in the international markets, we don’t have a dominant sector like tech, right?

It’s a much more diversified set of companies and industries so that it helps us be able to pick stocks actually in a in a better way, because there’s not as much concentration in the international markets as there is in the U.S. and as proof to the diversification benefits if you this slide on the right is basically this is showing you foreign large cap funds, which is the category Morningstar category that the Thornburg International Equity Fund is in.

It’s a core, a core strategy. And what we’re showing is we basket out by star rating right on the X axis and then the Y axis is the R squared to the edge. So the correlation to the S&P 500 and what you can see here in the orange is the, you know, per five star funds. We actually have one of the lowest correlations to the S&P 500.

And so when clients think about diversifying their existing portfolio, which is likely very, very U.S. centric, this is a is an important consideration.

Charles Roth
Okay. Yeah, very low correlation. So let’s get into the process of how equity is selected for our funds generally. And how we are the model of the investment research that that we employ. So I’m speaking specifically to a global generalist model. A lot of firms use a sector specialist model. But we do something we do that a little bit differently. What is the global generalist model and why is why is it important to us?

Matt Burdett
Yeah, I think that’s an important point, Charlie. It is. It’s really there’s a couple of major reasons to have a generalist model. One is alignment with client outcomes, right? So in a prior life I was a medicinal chemists and work in finance, first in the biotech world and you know, a biotech, you know, as is a biotech investor, you’re going to be gauged by a benchmark that’s specific to the industry you’re covering.

So the ACWI biotech index, let’s say. And so the incentive of a specialist is often to beat the sector specific benchmark, right? But at the end of the day, the client’s buying a diversified portfolio, not the sector specific benchmark. So the way we structure it is we want everyone to be incentivized by the contribution they make to the client portfolios, the funds we run and the accounts we run.

So that’s that’s one. The other one why the generalist model is important is one, all PMS are analysts too. So I’m an analyst, Sean’s an analyst. Everyone is an analyst and that’s important for us so that we can actually have a firm grasp of what’s of what’s going on the ground with companies. And again, we’re looking for companies, not countries.

So we want to go through and do the fundamental work around a business that we believe is mispriced. It could be that the growth is underpriced or there’s some other misunderstanding around that business. We’re running fairly concentrated portfolios so highly active. And that’s part of our culture.

Charles Roth
You know, I would imagine that quality control is also one of the benefits of having a global generalist model, simply because if a sector specialist suggests a stock and the various equity teams run with that stock and the specialists happens to get it wrong, get the call wrong, then it’s wrong in all those portfolios that acted on that recommendation.

So, Sean, you know what? Can you speak to the quality control of, say, generalists who say within the tech sector you cover certain stocks, other PMS or analysts at Thornburg covers certain stocks. There’s no sector specialist within tech that you know, only covers tech stocks. So there’s very lively debate and perhaps better quality control.

Sean Sun
Yeah, I think it’s important. Debate is very important. Intellectual honesty is very important in our process, and we’re very collaborative as a firm at Thornburg. So because we’re global generalists, we can collaborate on names within a sector. For instance, Matt talked about his a prior life within the pharmaceutical industry. So he has a lot of insight in health care.

But also I’ve covered various health care stocks in the portfolio. Other PMS or analysts have pitched and covered various other health care stocks, and health care is a pretty diverse field anyway. There’s biotech, there’s pharma, there’s medtech, etc. And so all that together creates, I think, ultimately better debate, better discussion, better risk mitigation, maybe some creativity on the upside and ultimately better client outcomes.

In other great examples, technology, I’ve you know, I’ve spent a lot of time researching technology stocks. I have computer science background, but I’m not the only one researching computer and tech stocks. There’s there’s a wide degree of firmwide knowledge in that space. And that’s great because no one person can know everything. It’s great to have that institutional knowledge within the firm to to help make better investment decisions.

Charles Roth
So another interesting aspect of the risk management at Thornburg, in addition to diversifying by sector, diversifying by geography is diversifying nation by style baskets. Matt, would you be able to speak to the baskets within the International Equity strategy and how you think about the baskets?

Matt Burdett
Yeah, sure. Yeah. This is, you know, a core part of Thornburg. This was a philosophy and process developed by Bill Freeze many years ago. All of us were trained around this and really equities as I mentioned earlier, is always about earnings and what’s, what’s the path of earnings. And so what the baskets do is they help you compartmentalize what type of earnings stream have in a business.

So for Thornburg International Equity Fund, we have basic values. These are cyclical businesses. So think of oil and gas, interest rate sensitive financials, things like that, where the where the earnings, you know, is going to follow some cycle. Now, they may not all be on the same cycle, but there’s a cyclical element to that earnings stream.

Consistent earners as the name implies, these are kind of you’re steady growers where the demand is fairly inelastic for that type of a business. You can think of, you know, some health care regulated utilities, some consumer staples fall into that camp and then emerging franchise is a these are companies we believe are going to grow at a faster rate than the basic value and consistent earners will, either because they’re disruptors or they’re in a market that’s just growing very fast.

And we think they’re going to there and well-placed within the value chain to participate in that growth. So it’s really a tool for us to have a sense, along with sector regional positioning, what type of earnings stream we have in the portfolio over time.

Sean Sun
And Sean, what are the differences, what are the similarities in the growth strategies? Use of baskets?

Sean Sun
Yes, I’d say it’s very, very similar. I fundamentally believe that over long periods of time, stocks follow business value creation, underlying earnings growth. So we want to, you know, capture of that business value creation over time, but also do it in a very diversified manner. So for us, the basket approach helps to ensure that we diversify our sources of growth.

And growth for us could be rate of growth, duration of growth. But different companies oftentimes may be growing at different times within the economic cycle and maybe growing at different durations. For instance, emerging growth franchises, that duration of growth tends to be maybe longer duration, further out in the future, but then a consistent grower has more steady near-term growth.

So they’re all growth stocks. But diversifying the types and durations of growth within the portfolio such that as different types, as different types of growth stocks are coming in and out of favor within the market cycle, this portfolio can still continue to deliver good risk adjusted returns.

Charles Roth
So different velocities of growth essentially. Yeah. So let’s turn to audience Q&A. We’ve had a few questions roll and I’ll look at the screen and see which ones. And of course, at the top is a question on tariffs. How are the tariffs affecting Thornburg’s view of markets and portfolio positioning? Matt do you want to take that?

Matt Burdett
Yeah, sure it is. It’s tough to say because every day there’s different news around what the tariffs are going to be or are not going to be. You know, I think what we try to do within the portfolio really try not to own really obvious victims or potential victims. And, you know, there’s a lot of a lot of noise that goes around about the tariffs.

But for example, there was a lot about the drug companies. You know, Sean talked about them earlier and the fact that a lot of the IP and manufacturing is in Ireland, you know, both of these portfolios have have meaningful exposure to that sector. But what we found out is, is there’s actually a 0% tax both ways from Ireland to the U.S. around pharmaceutical product.

So we try and do the work, find the details that we need, you know, to build conviction that we’re you know, we’re not going to have a meaningful negative impact from tariffs. But I think more broadly, just the geopolitical changes, you know, with the new U.S. administration, the fact that, you know, some of our European allies are going to have to spend more on defense and other things is probably an even bigger driver of potential, you know, earnings and revenue, because that spend is going to be someone’s revenue and earnings at some point.

Charles Roth
So a related question to that. Globalization, reshoring, the it seems that the efficient supply chains are not necessarily that resilient supply chains. Can you speak to the beneficiaries or perhaps companies that are resilient to these disruptions in supply chains?

Matt Burdett
Yeah, sure. I mean, we you know, we have a category of companies that we like called boring but beautiful companies. Right. And these are companies that really all of that, you know, the trade, the supply chain stuff is not necessarily going to change how they run their business. We own a company called Eon, its own, and actually both the International Equity Fund and the International Growth Fund, this is a German grid operator.

So they’re a distribution electricity distribution company. And in Germany, there’s just a long, long runway of investment that needs to be made. And you’ve seen evidence from the new the new government in Germany with the €500 billion infrastructure investment plan. That for sure will include some investment into businesses that would would, you know, be revenue to Eon. So we’d really like to find companies like that that are somewhat isolated from all of this and have a path of earnings that we can have confidence in.

Charles Roth
So another question just popped in. I think you should take this one, Sean. It’s on AI the drawdown that we’ve seen in tech and in I, I guess over concerns about overbuild. What is what is your take on what’s going on in AI both in terms of the current volatility but the long term runway.

Sean Sun
Yeah, great question, very topical. So I’d preface that by kind of giving you a bit about how we think about technology within our process. Like we’re very much bottom-up fundamental investors. And as part of that, we’re really trying to understand inflection points within companies or sectors or industries or whatever. And oftentimes these inflection points are technological.

And I believe AI is going to be this is going is a huge technology inflection point where the past or the future is going to look a lot different than the past. And if you have a view on the future, that is that is, you know, differentiated from the markets and correct versus the past, I think you can add a lot of value investing around these technology inflection points, such as AI.

You kind of look back historically and if you your viewpoint on like big technology transitions such as the Internet, smartphones, etc., was correct and actually there was a lot of value creation within each of those big technology inflection points. That’s what we’re trying to do here with artificial intelligence. And I think there’ll be fits and starts to it just like there were fits and starts to the Internet era.

You can have like periods where you kind of overinvest and under invest. But if you have a long enough time horizon, we’re talking like five, ten plus years. AI is going to infuse itself into enterprises, consumers, etc.. So tying into that, oftentimes when investors think about artificial intelligence that the best of artificial intelligence investments, they think about NVIDIA and NVIDIA is a great investment.

But you know, we’re global generalists here at Thornburg, so we’re also thinking about what are the best beneficiaries of artificial intelligence besides the obvious, like in video. And if you ask me, I think TSMC is as much a fundamental beneficiary of artificial intelligence as NVIDIA. When you think about every leading edge chip being produced today is produced at TSMC.

So all of Nvidia’s chips, all of AMD’s chips, either Broadcom chips, Hyperscalers So essentially all roads lead through TSMC when it comes to leading edge chips, leading edge chip production and A.I. chip production. And so you have this huge tailwind, the structural tailwind that’s benefiting both NVIDIA and TSMC. But when you look at, say, the valuation difference between NVIDIA and TSMC.

NVIDIA is trading at last I checked, mid to high twenties next 12 months P/E. TSMC is trading at like 18 times P/E, but they’re both structurally huge beneficiaries of this trend. But using a global general firm framework relative value framework, you can buy TSMC at almost ten multiple turns cheaper than NVIDIA.

Charles Roth
Wow. Do we have time for one more? Okay. Thank you. So last question on China. We’ve seen an interesting dynamic in China in which the Chinese tech companies listed in Hong Kong have started off gangbusters in 2025. But the share market, the onshore market has been kind of flat. What’s going on there? Sean?

Sean Sun
Yeah, I’ll keep this short since we’re kind of out of time, but you and we kind of touched on this within the presentation, but we really like resilient companies and resilient kind of cash flow streams, but we also really like innovation and optionality. So I like to look for resilience plus optionality. And when I think of like what companies in China offer, that one company is Tencent, the big kind of they operate WeChat in China and an advertising business and various online games.

00:54:52:16 – 00:55:17:13
Speaker 1
But Tencent is a great example of this resiliency plus optionality. Despite the macro challenges in China that we’ve seen over the past several years, Tencent has managed to grow its business top line more than 10% a year, and that’s because they have this diversified stream of revenues across gaming advertising, communications, fintech, etc.. So they’ve got a great resilient business despite macro challenges, but they also have really interesting optionality as well.

They’re starting to infuse A.I. into within that, which is WeChat, and that is starting to I think we’ll see benefits there in terms of time spent and as well as add monetization over time. And I think as they think about like who is best positioned to benefit from AI, it’s going to be a huge platform like Tencent that has over a billion users.

Charles Roth
Wow. Okay. Well, it is time. Thank you for joining us. Thank you, Sean. Thank you, Matt. And thank you to all the participants who tuned in. We’d love to hear from you. Please leave us a review if you get an opportunity to do so with a pop up window, we’ll make a replay available. And until the next podcast or webcast. Thank you so much.