Thornburg Investment Income Builder Fund – 1st Quarter Update 2024

Thornburg Investment Income Builder Fund – 1st Quarter Update 2024

Adam Sparkman

Good afternoon and welcome to the Thornburg Investment Income Builder Quarterly Update Call. My name is Adam Sparkman and I am a client portfolio manager with Thornburg Investment Management. A few housekeeping items before we get started. At this time, all participants are in a listen only mode. However, you can ask questions at any time by submitting them through WebEx or emailing us at questions at Thornburg dot com.

This webcast being recorded and a replay will be available in a few days. Also, you can access today’s presentation slides by going to W.W. Thornburg dot com slash t ibex dash quarterly. Just to remind you, today’s presentation may contain forward looking statements based on management’s current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these statements due to a variety factors, including those described in our SEC filings.

For those of you on the call who may be less familiar with Thornburg, we are an investment manager based in Santa Fe, New Mexico, overseeing approximately $44 billion of assets across a suite of actively managed equity, fixed income and multi-asset solutions. I’d like to quickly introduce our speakers today Brian McMahon, portfolio Manager and vice President and chief investment strategist for Thornburg, along with Ben Kirby and Matt Burdette, portfolio managers and Christian Hofmann, also portfolio manager.

So, with that, let me turn it over to you, Brian, who will kick us off.

Brian McMahon

Okay. Thank you, Adam. And thanks to everybody on the call today to hear about Thornburg Investment income Builder. This 85th of these quarterly calls. And we’ll start by going through some slides and then we’ll have time for your for your questions. I’m going to start on slide three where we have some key macroeconomic issues.

I won’t read through all these, but I’d just like to make a few points of emphasis. Number one. The unemployment rate at 3.8% is well below trailing 30 or 40 year average in the U.S.. Secondly, the number of unfilled jobs exceeds the of unemployed people claiming unemployment benefits by less than it was a few months ago. But over most of my career, the number of unemployed has exceeded the number of unfilled jobs.

And that just has not been the case in recent quarters. We have real GDP growth around 3%. That’s real GDP growth, and we’ll get a new number on that soon. But this is above the long-term trend, and that’s what Fed funds having been at 5.33% for the last eight months. The last time Fed funds moved was July 28th, and since July 28th, when Fed funds were raised to the target range of five and a quarter to five and three eight, the S&P 500 equity index is up 15%.

And the ten-year U.S. Treasury yield is up from four to today. 455 4.55. Deficits are a big issue and they are adding to the supply of Treasury securities here and elsewhere, which is providing some competition for funds. Fortunately, there’s plenty of liquidity around thanks to a huge expansion of the money supply, which is now beginning to contract a bit.

And the last thing that I’ll point out is that most equity index portfolios expect EPS growth around 10% this year and we’ll have earnings begin to roll in for Q1 24 in the U.S. starting tomorrow. Bond yields were expected to be lower this year, but so far they are higher this year. With that, we’ll go to the next slide.

Number four, where we just review the mission of Thornburg Investment Income Builder Fund. Our objective, of course, to pay an attractive yield today. And if I would just give you a summary on that trailing 12-month dividend is a dollar 19. That’s a 4.78% yield on last closing price. We aspire to grow the dividend over time subject to periodic fluctuations, and we have grown the dividend from $0.53 per share in our first to a dollar 19 for the trailing 12-month period.

We also expect that we’ll have long term capital appreciation along with the dividend growth. And there I can report that the net asset value of the fund is up more than two times the last 21 years. So an initial $100,000 investment for an investor who took all the dividends in cash and reinvested, none of them would be worth $223,400 as of March 31st.

And on top of, that that hypothetical shareholder would have taken out cumulative cash dividends of $176,832 or an annual average of 8300 per year. Matt will we’ll get more specific on that later in the in the deck. But I just want to reiterate that we’re on track with our objectives and we are achieving those objectives by investing our client assets in global dividend paying stocks, bonds and hybrid securities with the majority being and in stocks.

And we are very focused on the ability and willingness of the firms that we invest in to do pay dividends. So, I think that that outcome is quite respectable in the universe of income producing assets, whether the real assets or financial assets. Slide number five looks at our equity portfolio allocation shifts and these are not huge. Over time we go back two years by quarter.

What you’ll see if you look year over year is a 4.4% increase in the weighting in communications services, and that is mostly the addition of AT&T and a smaller European telecom called the Gona to the portfolio, both in the fourth quarter of last year and then some appreciation and you see some decrease in allocations to utilities and and materials.

That’s mostly cutting some European utilities and and miners from the portfolio. And with that, I’ll go to the next slide number six, where we have some summary portfolio characteristic. That portfolio composition is quite stable over recent quarters. The split between foreign equities, domestic equities and and bonds. What is always interesting is the equity characteristics. And again, these are some recharacterize stocks, but the trailing one-year PE of 10.9 times.

Three months ago, that was 11.3 times. So, the PE came down because even though prices overall have gone up and it has gone up a bit because earnings came in pretty good for us, for our portfolio for calendar 2023. And I’ll just point out that that 10.9 trailing year P compares to the MSCI World Index trailing a PE of 19.1 times.

So, a substantial discount. Our dividend yield 4.9% versus 1.9% for the MSCI. And you see the breakout of regional exposures at the bottom of that right hand table. On slide number six, which brings us to slide seven and eight, which show our top ten, and that’s second ten. So top 20 equity holdings. Name by name. Along with price changes in Q1 and price change last year in in calendar 2023.

And what I like to focus on, and we like to focus on is in the quarter and in the March quarter, we had 21 of our equity investments that contributed at least ten basis points to portfolio performance for the quarter and six that detracted at least ten basis points from portfolio performance. So we like to have that favorable, very favorable balance of stronger contributors versus detractors.

I’ll just point out that, if we look at the first quarter, five of the top 20 holdings actually had share price declines. And last year, even though we put up good numbers for the year, seven of 28 had price declines. So we do think we have some sort of energy there. You can see the dividend yields are pretty good and the five year dividend growth rates, which is something that we are focused on, are also pretty good.

I guess I could summarize these top 20 by saying anything that had a whiff of the high is those are the ones that were up the most and some of the some of the boring stocks are, are ones that are kind of overlooked in the current market, as I think most people listening to this call know. Which then brings us to slides number 9 to 18, where we have somewhat detailed descriptions of each of our top ten holdings.

And I think if you if you spend a little time looking at those, you’ll see why we own what we own. Again, with our focus on ability to pay and willingness to pay attractive dividends today and dividends that can grow over time. I’m not going to go through each one of these, but I will focus on one and that’ll be slide number 14 and end group, which we haven’t really talked about in recent quarters.

But this is one that we’ve owned for seven years in in your Income Builder fund portfolio. And if you look at slide number 14, a couple of things that I’ll point out. Number one, that the market capitalization currently is €12.3 billion and has a 7.4% dividend yield. And then just below, you’ll see that the tangible book value is 18.3 billion as of the end of last year.

So, suffice it to say that it’s selling at a discount to its tangible book value. And this is the largest life and pensions and property casualty insurer in the Netherlands. They have about 18 million customers across their various geographies. The dividend has grown an annual rate of 9.8% since it was spun out of by and G group in 2015.

Last year it had a tough first half of the year. People were worried about them having to make some financial settlements for annuities that were sold back in the 1990s. And they did arrive at a settlement, but it was far, far, far below what was expected. And the share price has subsequently recovered. And things like that give us an opportunity to add to investments that we know pretty well and in fact some dividend income for the fund.

And so, with that, I’ll go to slide number 19, which is the last slide I’ll comment on. We do seek to grow the dividend over time for the fund and our main tool for doing that has always been to own investments where the dividend is increasing. And this gives you some caps or look about 73% of our equity portfolio by weight increased their dividends last year and you see the breakdown relatively even between 0 to 5, 5 to 10 and 10% or more.

We generally have a segment of the portfolio that has flat dividends and we also almost always have some that have lower dividends. And the main reason for that is special nonrecurring dividends, for example, that we do try to get in front of. And so, what we saw in 2023 was that the non-recurring special dividends that we got from companies in the energy sector in 2022 did not recur.

Same with companies in the in the mining sector and then of course I the previously mentioned AT&T cut their dividend in 2022 and so that was lower in 2023 as well. But we think they have the potential to grow it from here. And with that I will pass to Matt Burdett to continue the presentation.

Matt Burdett

Thanks, Brian. Moving on to Slide 20, the next couple of slides, we show our relative performance in in different rising interest rate environments.

And we do this because, you know, as Brian mentioned, this is an income solution, and we get compared often to two other income products and primarily bonds. So, what we’re showing you here on Slide 20, we look at the number of periods where the U.S. ten-year Treasury yield rose 40 basis points or more. It was 36 periods over the history of the Investment Income Builder Fund.

And then we showed down below that our relative performance versus other income portfolios, including the U.S. and the US corporate bond index, high yield index, and then of course our blended index. And the take home here is that our frequency of outperformance is pretty respectable, anywhere from 69% all the time, outperforming versus high yield up to 83% for the other bond indices and 75% of the time versus the blended index.

And we do this all the while having a yield that averaged almost 200 basis points higher than the Bloomberg aggregate bond index. And I would also say that the income character of our yield is more favorable than that of bonds, given the high kudos percentage advancing to Slide 21. This is a further analysis of our returns for the Thornburg Investment income builder relative to the blended index and the Bloomberg U.S. Corporate Bond index.

Looking at this time in the chart at different trough to peak rises in the ten-year Treasury yield, these are the ten biggest increases and the ten year Treasury yield over the 21 years of the investment income builders existence. You can find the details of these periods in the back of the slides, but really the take home here is the income builders, the dark blue bar, the blended index is in orange, and then in yellow is the bond index comparator.

And the take home here is in all of these periods, whether it’s up or down markets, we we’ve tended to fare better than those other income proxy portfolios. And over this time, our yield has been about 250 basis points higher than that of our blended index. Moving to Slide 22, this is just showing you various market portfolio index returns.

Looking back a number of years, but also the most recent quarter. And that’s what I’ll focus on here. Even after having a strong 2023 across most markets, Q1 24 was pretty good. The S&P 500 delivered a little over ten and a half percent return, but I would say the top ten contributors comprised 61% of that of that total return.

So still a pretty a pretty concentrated market which I’ll touch on a little bit later. The only other thing I would highlight here, the Russell Growth outpaced the S&P 500 a little bit. Emerging markets were the lowest returning equity portfolio and then the Bloomberg bond index returned a modestly negative return for the first quarter. Turning to slide 23, looking at the investment performance and the Income Builder fund.

Look, I guess I think the take home here is since inception, return has been a little over 8.9% return over the 21 plus years that we’ve been running this strategy. And that’s split pretty much evenly between income and capital appreciation. And in 16 of the 21 calendar years, we have delivered a positive total return. You can look at the other numbers at your leisure.

Turning to Slide 24, this is just showing the quarterly returns for the iShares for the investment income builders. Brian said We have completed the 85th quarter and 62 of those. We had positive total return for roughly 73% of the time. Advancing to Slide 25. Just a reminder for everyone, this is this is a dynamic income solution that we’re running here.

We use we use bonds when we feel like we’re being compensated more for buying them relative to what we can find in the global dividend landscape. And what this slide is highlighting here is how that asset allocation of the Thornburg Investment Income Builder has changed over time. It’s a very simple picture. What you can see here is the dark blue line is the income builder, cash and fixed income weights, right?

It got up to about 45% in the financial crisis. Today it sits more like 12 or so percent. And then the dashed lines are simply U.S. high yield and European high yield the worst. And so when yields go up, we tend to add more into bonds. And even though we’ve had higher yields of late, you know, I’m sure Christine will touch on this spreads have actually been really, really tight.

So the relative value still remains and global dividend payers at this point. But we have the flexibility to move when given the opportunity. Turning to the next slide, Slide 26, just looking at the quarterly distributions for an investment income builder, we just paid you one dividend $0.24 and that is about 7.8% year over year relative to last year’s first quarter dividend advancing to two.

The next slide, just showing a longer history here about what kind of income solution we we’ve delivered and what you should expect over the history. We’ve consistently had a 4% or higher dividend yield. That’s what the bars are showing there in the chart. And then we compare it versus the yield of our blended index and also the US corporate bond index and then versus CDI.

And we’ll you know; the picture is pretty simple. Throughout most of that time we have had a higher yield than any of the comparator income portfolios on the chart. And over that time the dividend has grown at a 4.1% kegger and the NAV at about a 3.4% kegger. So pretty, pretty respectable performance for this income solution portfolio. Advancing to the next slide, this is a slide we present every quarter.

It’s what we call our report card slide. And it’s really to try and bring home the point about how this type of income investing can fit inside a different client portfolio. So, in this case, this is a hypothetical $100,000 investment where the individual bought the investment income builder A shares back at inception. So, end of end of 2002 and they spent the money, all the dividends that they received over time, they spent on whatever, whatever they wanted.

So maybe they’re using this to, to supplement their living expenses. And so, this is this is what they what they delivered here. So, they were delivered over that time to cumulative dividends of $176,832 or roughly, as Brian mentioned earlier, about $8,322 on average per year over that time. And so that’s if you just do the simple math on their original $100,000 investment, that’s about 8.3% per year.

Right. And the trailing 12-month dividend they received is a little over $10,000. So, the yield on original costs now for this, this individual who, remember is not reinvested any of the dividends they’ve spent them and now they have a yield on cost of about of about 10%. And to top it off, the capital here is $100,000 has more than doubled to $223,400.

Advancing to the next slide, the second hypothetical example that we have here, this is for an individual who who’s likely still working and doesn’t necessarily need the money or the income, but they’re happy to reinvest the dividends. And this is where it can get very, very powerful. So again, the same the same hundred thousand dollars, the same entry point at the inception of the Investment Income Builder Fund.

And this individual started off with 8,375 shares. And because they were reinvesting over this time frame, their new their ending shares is 24,734 shares. Right. So, you basically almost tripled your shares. Cumulative dividends are 300 $314,522. So, it’s more than three x the original investment. Right. And the capital appreciated from 100,000 to over $300,000. Right. And if you were if this individual were to then say, okay, you know what, now I’m ready to start taking the cash, right?

So. Well, what you would do is you would take the $1.19 that Brian mentioned earlier, that was the trailing 12-month dividend. And you multiply it by the total, you end up with about $29,532 or 29 and a half percent yield on original cost. Should you this person want to actually turn on the cash flow stream?

So, this is a pretty powerful and I think often forgotten way of investing. But this is this is what we’re trying to achieve. This this really is the mission. The next slide, I just want to remind everyone, I think it’s important when we’ve had we’ve experienced a market where price appreciation has been very, very strong. And it’s just important to put things into historic context.

So, this is a table showing you a breakdown on a price appreciation, an income component. The sum of the two is the total return. And what we did is we looked at the average annual component of price and income in a given decade, and then we calculated in the far right the income as a percentage of that total return.

Right. And the biggest takeaway is, number one, it’s roughly about 50%, right? So, 50% price return and 50% income return comprising your total return on average over this long period of time. But if you look at that column on the far right, what you see is there’s tremendous volatility and the income percentage of the total return, right and it goes it’s as low as 14.9% for an entire decade, which would be the buildup to the dot com.

And it’s as high as 233% back in the thirties after a steep stock market correction where basically dividends were all of your return and then some because price was negative. So, we’ve had a couple really strong coming out of the financial crisis periods where incomes really haven’t mattered that much. Right. And you can see it’s 16.7% from 2011 to 2020.

And so far we’re about a third of the way through the next decade. And it’s tracking lower at 13.7%. So just keep in mind, dividends do matter, but how much they matter can be volatile over time, depending on where price is going. And the last slide here before I turn it back over to Adam for Q&A, just on the point of where your future returns going to come from, one of the things that we like to do is just have a sanity check, right?

And so what you see here, some analysis by Ned Davis, this is as a ratio of stock market capitalization, as a percentage of nominal gross domestic income, which is similar to GDP. Right. And so it’s basically a measure of how much is the stock market value relative to the size of the economy. It’s called the Buffett Indicator for those two who know it.

And let me just describe what what’s in the top graph, the one with the yellow, the yellow line, that is the percent of the market cap as a percentage of GDP. So, it’s GDP divided by gross domestic income or GDP. And what you can see here is its current value is 189%. That’s what that number and the top bolded middle of the graph is telling you.

The trend line, which is the dashed upward sloping line, is telling you where it’s terminating. Now, is it about 120%? Right. And so, we’re well above the trend line and we could debate the slope of the line should it be upward sloping? I would argue, yes. It’s the degree of slope. We can debate more.

But it’s clearly above the trend line right now. Look at the middle graph, what this is showing you, the blue line, it’s the same ratio, but it’s showing you when the ratio is above that trend line right in the to the two dashed horizontal lines are separating bottom quintile and top quintile. And so, what it’s a good indicator to look at what at least historically whenever this ratio is above trend line or below trend line, what the future returns in the S&P 500 are.

And that’s what the table is telling you. So, when it’s above 30.14%, which is the top dashed line and in the middle table, your return years later in the S&P 500 is the number in the table. So, for example, five years, the return is -14%. Right. And it’s simply because the stock market got ahead of the economy. Right.

And this is again, this is historical reference to what has happened before. Now, when the trend line is below -30 point and a quarter, that would be below the bottom horizontal dashed line, the returns are actually quite good. Right? So, five years later, the S&P 500 would deliver 75% higher returns. Okay. So, this is just something to kind of basically a sanity check and kind of get you back to the center of gravity.

Right. And just say, okay, how much further can the market go given where we are relative to the size of the economy. So, dividends sound like a pretty good place to be at this point, given where we are and have come from, from a price return. So, with that, I will turn it over to Adam for the Q&A session.

Adam Sparkman

All right. Well, thanks to Matt and Brian for walking us through the strategy and a little bit about the macro environment there. We’ve got a few questions coming in while we wait on that. I might start with one of my own. And Ben, I’ll throw this one to you. You know, globally, we saw stocks continue, a really impressive run that began in 2023 through the first quarter.

I think when I think about the rally, it seemed quite a bit different in the first quarter just from the standpoint that during the fourth quarter it seemed like markets were excited because we were anticipating this sooner than expected rate pivot during the first quarter. We actually got some pushback from the Fed kind of tempering expectations and pushing out, you know, maybe when those rate cuts actually happen.

But nonetheless, we still got still got that excitement for markets. So, do you think with that as a setup, that the soft landing or maybe a no landing scenario seems inevitable, at least at this point, or are we maybe ahead of ourselves?

Ben Kirby

Yeah, Well, thanks for the question, Adam. So, look, I can start, but the other opinions may have thoughts on this as well.

So, you know, I think if you’re rewind the clock a little bit in August of 2023, expectations for GDP growth in 2024 were for about 0.6%. So essentially, you know, calling for a slower economy in 2024. And now expectations have been increasing kind of monotonically since August of last year. And now we’re kind of in the, you know, 2.3, 2.4% growth for 2024. So, I think that a lot of the enthusiasm in stocks has coincided with improving growth expectations. And, you know, I think I think the input of interest rates and of the Fed on equity valuations and stock prices well, like guess important, but it’s not the only thing. The other thing that matters is growth in it, you know, and earnings growth.

And on that front, you know, in the last 12 months, earnings growth has been about zero. And for the next 12 months, forecast is about ten or 11%. So I could argue that we’ve already seen the earnings recession or the earnings soft landing, and we’re now in the phase where earnings are re accelerating, having been slow for the past actually 24 months.

Maybe One other thing to point out is we do have a bit of a k-shaped economy right now, and that could continue to develop further as we go. So on the higher end, consumer net worth is up a lot. It was up like $10 trillion last year and that’s from higher stock prices and higher property prices. So higher end consumers have a lot more net worth and ability to spend that down to some extent.

On the other side, lower end consumers, lower income consumers are grappling with higher prices. Even as inflation slows. Prices are up a lot versus where they were a couple of years ago. And we’re seeing, you know, a rise in credit card delinquencies. We’re seeing a rise in auto credit delinquencies, and we’re seeing lower consumers spend their savings down.

So they’re their deposits in their checking accounts. Their saving accounts are falling. So, you know, I can’t put all those things together. I think I think that, you know, the higher end consumer still is doing pretty well. And because that accounts for such a big part of the economy, I think it leaves us relatively positive that we’re going to be able to achieve a moderate slowdown without a significant correction.

Adam Sparkman

All right, Thanks. Thanks, Ben. Thanks for that color. Christian, we’ve got a couple of questions on fixed income in particular. One of our viewers highlights the volatility that we saw in bond markets over the past couple of quarters now and where you’re seeing opportunities within fixed income as a result of that volatility?

Christian Hoffmann

Sure, appreciate the question. You know, I think as we’ve noted, you know, some of the biggest opportunities for this fund and fixed income, you know, in recent years were actually in the fall of 22.

So, the fall of 23, we had more interest rate volatility and higher interest rates, but in a much more tempered spread environment. And again, those adds we did in 22, like for the most part, say 95% of those bonds have not retreated to those levels, despite lots of volatility definitely in spreads. But, you know, certainly encore rates.

So, look, I think, you know, real yields are more interesting than they’ve been in a long time. You know, I am much more excited about buying ten-year Treasury at 4.5% than, you know, 0.5%. You know. Absolutely. You know, I will say that, you know, buying a ten-year treasury at 4.5%, you know is not accretive to our to our dividend and income builder.

And that’s also something that is unlikely and frankly, impossible to grow over time. You know, unlike the dividends we get, you know, from the vast, you know, vast majority of the portfolio of our stocks. All right. Thanks, Christian.

Adam Sparkman

Brian, maybe I’ll combine these two questions here. Here for you. One of our viewers wants to know how you how you avoid value traps within the portfolio, especially given that you own a lot of cyclicals.

And then coupling on second part of their question, if you could give some color on your thoughts on buybacks, do you ever consider buybacks as part of total shareholder yield or are you predominantly focus just on the dividends? Yeah. Okay. Those are really good, timeless questions regarding the value traps. First of all, I might dispute that we own a lot of cyclicals. We own some cyclicals, but what we like with cyclical businesses is to see a secular overlay where there’s secular growth. For example, if you look at, say, the semiconductor companies that we are, yeah, they are cyclical. And if you look at the individual stock, describe options for, say, Taiwan Semi and Samsung that are included in the slides 9 to 18, you’ll see that they traded off quite a bit in calendar 2022 in anticipation of some volume drop off in 2023.

But as the volume drop off began to materialize, those stocks began to perform pretty well in calendar 2023 and into 2024 because people saw the inventories going down. And meanwhile, there are ever more connected devices out there and more and more demand for these semiconductors. And I kind of feel the same way about some of the other maybe cyclical stocks they would consider cyclical that we own, for example, a lot of people think of financials as being cyclical.

But when I look at the banks that we look at JP Morgan, a of regions financial, a BNP, even a city, we look at deposit growth and if we see in deposit growth, that’s really the lifeblood of a bank, just like maybe the lifeblood of a financial planning practice is the client assets under management. So yes, you do have some cycles with interest rates, you have some cycles with credit and credit risk, and we watch that pretty carefully.

But you do see secular growth there. And if I would think of maybe a non-bank financial a CME, that’s one of our important positions and has been for years. Chicago Mercantile Exchange, there’s just ever, ever more growth of debt outstanding and of hedges on that debt outstanding and hedges on are on financials. So, whether it’s the S&P or Hackney even now, you can hedge crypto.

So, there’s all kinds of stuff that that comes up. But we and maybe the last thing I’ll mention some cheaper stocks that we that you might consider a value trap because the p e is low like we mentioned NN Group but we look at customers and, and we look at the growth of paying customers for these businesses and are they profitable?

And I’d rather own a non-glamorous business that’s growing profits, dividends and paying customers then on a non-profitable food delivery business or something that has spectacular top line growth because they’re giving away the product below cost, those things are going to contribute to the mission that we’re trying to accomplish. So anyway, I hope that answers the question on, on value traps.

I want to say we’ve never gotten into a value trap, but we try to get out of them pretty quickly. And, and maybe in that light I’ll mention one that we did get out of, and that would be AT&T, which we aren’t for many years. And we tended to buy it when it was around 30 and sell it when it got closer to 40.

So, we were trading around the position a bit and the yield was over $2 a share in the years that we owned it. But we got out of it when they started making these silly acquisitions and then it did turn into a real value trap. So again, just paying close attention to the business and the prospects for the business.

And we more recently got into it just a few months ago, again, because they have become, we focused and I understand anybody who would say, I’m not even going to look at this business because there are a bunch of dunderheads. But and that would have been true, I think, and possibly would still be true. But again, they’re growing customers, so and they’re growing paying customers.

And so that’s really what we look at. And they’ve gone back to their roots. The other question was on share buybacks and how you think about yeah, about that relative to just, you know, share buybacks are important. And I’ll give you some examples in in the portfolio, if you look at had one of our top holdings total, they decreased their share count by about 6% last year.

So that’s on top of the dividend, which was close to 5%, which basically means there’s fewer straws in the drink as we go forward. And we think they can grow earnings. And when I look at some other businesses that we own, Home Depot, we’ve owned for, probably close to 20 years bad and they’ve been decreasing their share count at a rate of close to 3% per year for many, many years.

So, the cash dividend looks low, but the percentage growth in the cash dividend has generally been at double digit percent, and that’s definitely aided by share buybacks. So, another one that I’ll mention that’s in our top group has BNP that also bought back about 6% of their shares last year and they’re buying back more shares this year.

So, we like share buybacks, but we do need some cash dividends as well. And hopefully for cash generative business, we get both and if we get both, then in the long run well for the cash dividend will probably be better.

Adam Sparkman

Well, thanks for that, Brian Christian, one more on fixed income markets here are just rates very broadly.

Do you think that the is going to cut interest rates this year kind of given what we’ve seen so far?

Christian Hoffmann

Yeah, expectations have gone all over the map. We went from 6 to 7 cuts as priced by the market for a period of time. Today I think we’re looking at 0 to 2 and some are went from a foregone conclusion, you know, maybe more like September, December.

Look, you’ve seen you know, for folks that look closely at the bond market, you’re really seeing a step change function. You know, since yesterday it was really driven by CPI. But I think you have to zoom out from that a bit. You’ve had just a series hot data prints the Fed yearns to cut. But you know, in the face of hot data, really pretty much, you know, every indicator and inflation that’s being a bit more stubborn and persistent.

And folks would like the optics around that become very tough. So, I think one of the things we talked about when the market was saying, hey, maybe, you know, 3 to 4 cuts this year, I think we said that was probably unlikely and that was probably a median expectation. But more likely, things feel pretty bad. The economy starts to turn down and you do 5 to 6 or things stay pretty hot and it’s pretty hard to cut.

And that’s what we’re looking at right now, which is again, why the market is looking at, you know, maybe zero or one or maybe even two. I think I think the sneaky thing and maybe what people aren’t talking about enough is there’s perhaps another way the Fed can, you know, take some pressure off of their hawkish posture and kind of avoid some of these horrible optics that I’m talking about.

And that was really came out in the Fed minutes yesterday where they’re talking about really, you know, decreasing some of the some of the balance sheet activity, which again, is another tool they can use, you know, to impose hawkish policy. I think they’re going to warm to this a lot again, especially as the optics around cutting are tough.

You know, people don’t understand the balance sheet as much is certainly something that journalists don’t talk about as much. The economy, the impact on the economy is not well understood. You know, by the Fed. But this is a way and again, it’s this isn’t brand new. It’s something they’ve been thinking about a lot. But I think this will be an avenue for them to take some pressure off of rates and in a less direct and, you know, less offensive way.

Adam Sparkman

All right. Thanks for that, Christian.  Matt, we’ve got a follow up question to your commentary on the Buffett index of your is curious if you’ve looked at it versus non-U.S. markets and any thoughts on that. And then as well, any thoughts on kind of how the Magnificent Seven is influencing on the Buffett index and maybe what it looks like without it?

Matt Burdett

Yeah, sure. It’s a good question. I don’t have precise figures. I can say some dated information. I think I think this goes back to the end of November 2023. So the ACWI ex-U.S. so the MSCI all country world index, excluding the U.S., that looks nothing like the U.S. the number one the time series is much shorter.

So, it only goes back to 1996 versus back to the 1920s for the U.S. the best based on where it is, it’s basically right in the middle of the of the two of the trendline. Right. So, it’s kind of right where you would expect it to be. And actually, what you see is whereas the U.S. market has an upward sloping line, meaning that market stock market as a percentage of GDP has increased over time.

It’s modestly decreased over time in the international. The second question about what would it look like? What would the US look like excluding the Max seven? And I don’t have the analysis. I haven’t seen it, but if you just think about the concentration of the Mag seven within the stock market in the US, you would you would expect you pulled them out that that that the trend it would look less bad as it is right now it would be closer to trend line although I don’t I don’t know if that would be still above it or not, but it would look slightly better.

Adam Sparkman

All right, thanks. Thanks, Matt. Ben, maybe I’ll give this one to you. This is a question in wanting to know about opportunities that you see in REITs and MLPs as well as preferred stock, given their yields with the weakness that we’ve seen in in real estate and energy over the last year.

Ben Kirby

Sure. So, we don’t have a lot of exposure to rigs. We have a small position in a recalled Elmi communities. You know, that’s less than 50 basis points of the portfolio. And on the MLP side, we don’t have exposure in the equity part of the book. We have we own some exposure to some of the U.S. MLPs fixed income positions that we have for quite a few years.

We do on a couple midstream assets that are Canadian listed. They’re not MLPs, but that would be Enbridge and TSI. So, these two companies, you know, fit in the portfolio as are relatively regulated assets. So not lot of commodity price exposure, but they do generate a lot of income. So, you know, yields north of 7% and that ability to grow over time.

So, where we’ve gotten more of our energy exposure is in the integrated companies. So total shell, our significant positions in the portfolio and those of you know, they have exposure in midstream, but really, they’ve been overall how we played exposure to the energy markets.

Adam Sparkman

All right, Thanks for that, Ben. Brian, maybe I’ll throw it to you for one final question before we sign off here. I think Matt mentioned qualified income. Qualified dividend income as he was shown in one of those charts. And this question about kind of the qualified dividend character of this portfolio and what our distribution has kind of historically looked like. And last from a Cuddy perspective.

Brian McMahon

Yeah, great question. Probably something we don’t talk about enough last year 94% of the cash dividend that we paid in Thornburg investment income, well, there was qualified dividend qualified for the lower tax rate, which is higher than it’s usually been.

It’s usually been closer to two somewhere in the eighties as a percent, but it’s always been high. It’s a very, very tax efficient fund that we have been able to run for 20 plus years. And I think some of the financial planners who know us the best appreciate that and give us some good feedback on that at tax time after receiving some positive feedback on that at tax time from their clients.

So, we’re proud of that. It’s just that an element of craftsmanship that’s not super visible, not something that say, Morningstar would talk about, but it’s there and I think the highest net worth shareholders appreciate it a whole lot. And so we’ll continue to emphasize that and I’ll just tack on to Ben’s answer from the previous question.

One reason we have not owned the shares of MLPs is because a portion number one, the dividends aren’t qualified. But number two, a portion of that dividend is return of capital, which gets taxed at ordinary tax rates at the time that you sell. So, it’s or if it’s taken out. So, it’s less tax efficient and it’s kind of tough to account for in a in a 40-act entity where we have to pay out a high 90% of our taxable income each year.

In order to do that, we need to know what the taxable income is and for those of you that are on a lot of our LPs, you start to find out what the what the taxable income is. On the distribution you got last year about the 1st of April and sometimes it’s later than that. So those are technically operationally difficult for us down in in this fund.

So, with that, if there any more questions, we’d be happy to sit here, and answer are all right?

Adam Sparkman

Well, I think I think we’ve covered kind of everything that’s come in, and I think that was some great color on the qualified dividend income and the tax efficiency that you all have been able to provide investors. So, we’re getting close to the top of the hour, so we’ll cut it off there for today.

But I’d like to thank everybody for being on the call today and we appreciate the questions and making it so interactive. As always, please feel free to reach out to us with any follow up questions. So, we’re happy to make ourselves available to clients and prospects. And we love talking about this portfolio. So, thanks so much for joining us today.