Thornburg Investment Income Builder Fund – 1st Quarter Update 2025

Thornburg Investment Income Builder Fund – 1st Quarter Update 2025

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, if you have questions at any time, you can submit them through WebEx or by emailing us at questions@thornburg.com.
This webcast is being recorded and a replay will be available in a few days. You can access today’s presentation slides by going to thornburg.com/tibix 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 various factors, including those described in our SEC filings.
For those in the call today who may be less familiar with Thornburg, we are an investment manager based in Santa Fe, New Mexico, overseeing approximately $45 billion of assets across the suite of actively managed equity, fixed income and multi-asset solutions. I’d like to quickly introduce our speakers today, Brian McMahon, portfolio manager, Vice Chairman and our chief investment strategist, along with our head of equities, Matt Burdett, and our head of fixed income, Christian Hoffmann. So with that, let me turn it over to you, Brian, to kick us off.

Brian McMahon
Okay. Thank you, Adam, and thanks to everybody on the call. We’re going to go through the slide deck. Matt and Christian and myself, and, hopefully you have access to that. And I’ll start with, slide two, where we outlined some key macroeconomic issues of the moment.
That starts with the challenge that, markets have trying to price in the impacts of the newly announced Trump administration tariff framework, which, is changing, literally by the hour. But it has big impacts on various businesses, on borrowers and on the performance of the overall economy. We do expect guidance cuts, earnings guidance cuts from a wide spectrum of firms when they report their Q1 25 earnings, which will start tomorrow for, some big U.S. banks.
Why? Well, it’s the double whammy of the tariff impacts on the cost of inputs, possible retaliation by affected countries and, the increasing potential for a macro slowdown. And so, just to put some numbers around that, consensus published forecasts of, equity market analysts. I just pulled this from Bloomberg before this call, call for, earnings to go for the S&P 500 portfolio up to $268, up from 237 last year.

Now, those are those are being revised down. But, I think maybe not fast enough. So, the 237, the multiple on that is 22.4 times. Inflationary pressures have moderated. But, we do expect prices of many tradable goods will increase in the wake of these, tariffs on, most imports.
We don’t see that yet, but, I expect we will see that, by, by the summer. Federal funds rate now, 533 probably comes down right now, I think it sets up this pricing in three cuts, which would get us down, from. I’m sorry, get us down to 433 is where we are now.
We get us down into the threes. 533 is where we were last year, but, there are there are some analysts that are calling for it to drop down into the twos. So let’s see where that goes.
The ten-year U.S. Treasury yield, that has been a bit of a surprise. But it was 462 at the end of last year. Now for 40. So it’s -22 bps year-to-date, through this afternoon. The high yield index Bloomberg U.S. corporate high yield index, which was 749 at the end of 2024, is now 858. So plus 109 basis points, ten year Treasury -22 basis points. So that spread widening of about 1.3% which is indicative of optimism about credit performance fading.
So next slide just a review of, Investment Income Builder. Our objective, hasn’t changed at all. Pay attractive yield today. And the yield, our trailing 12 month dividend over last night’s NAV is 4.68%. We expect to grow the dividend over time. Which we have done at, just over a 4% annual kegger over 22 years.
And we expect, that if we have growing income that we will get capital appreciation along with that, which we have gotten as, our Nav has increased from 1190 at inception to, 2649 per share last night. So, just an overview of the portfolio allocation shifts by sector on the next page. That’s, slide number four.
And, what you see, in the far right, column is that, our waiting in communication services has increased year-over-year by just over 5%. And, we’ve basically funded that with, decrease in the weighting of, financials and materials and, to some extent, information technology, because we’ve also increased our weighting in utilities.
So, so generally speaking, if you want to look from a top down standpoint, the portfolio has gotten, more defensive, over the last year. The next slide number five, just looks at, very summary characteristics on, on our equity portfolio trailing, one year PE 13.7 times. So, this is not very much different from what we reported to you last time.

And again, a touch below what it was ten years ago at this time. And far below, the market portfolio, the US market portfolio or the global market portfolio. Interestingly, earnings, in our portfolio are still expected to grow, actually by quite a bit. They may not grow that much, but, the way you get from 13.7 trailing PE to 11.6 forward P is earnings growth.
Looking at the portfolio composition, 59.8%. Foreign equity 26.1% Domestic equity. And what we’re doing there is just going where the value is and, where the income is and where the income growth is. And that has been, a productive, way to, to, organize things so far this year.
Next slide is just, next two slides, actually a review of our top 20 equity holdings. And, collectively, these account for 56% of portfolio assets as of the end of March, the end of the quarter. Orange is, is our top, holding top weighted holding, followed by AT&T. Basically you see, for telcos in our top 20, three pharma companies, a couple of utilities, a couple of insurers, a couple of banks, one each energy, food, retail and and an exchange CRM.
So we think our portfolio is, diversified, nicely diversified. If you look at the, dividend yield, I think you see a very nice mix of high yield today and, some growth with, lower yield today and, much more robust, dividend growth, which is pretty much been our recipe all along. The other thing I’ll notice is, for you, if you look at one of the middle columns, you see the 2024, price change.
And for most of those stocks, all but one that had negative price change last year, they were pretty positive this year. So, they got they got cheap last year. Not because their businesses fell out of bad, but just because they were, they were not the glamor stocks that people were interested in 2024.
So with that, we’ll go slides 8 to 17, which summarize, a bit of a story about each of our top ten holdings, some, summary information. Our rationale here is that, as our longtime colleague Bill Freese used to say, knowledge is comfort. And, if you have more knowledge about, what the ingredients are in the Income Builder portfolio, we think maybe you’ll be, comfortable, more comfortable.
And, we want you to have, knowledge of, what the ingredients are. Just looking at, any one of these or any of them. Notice that we start in December of 2019 with the stock price chart for each one of these. I’ll just, refer you to the orange chart on, page eight. So, this is a multinational telco with 253 million mobile customers that get billed every month and, just under 22 million terrestrial broadband customers mostly on fiber connections. That stock price has been somewhat volatile, which gives us, really, opportunities to add to the position, low, the dividend, 6.3%. Very attractive. And we see it, growing. But notice, notice what happened, at the onset of Covid with almost any one of these, stocks.

And, I think what you’ll take away is that, we really had buying opportunities on the stock, because the businesses, did quite fine. So, right now we have some price volatility in, many of these names. And, I feel kind of the same way, especially the ones that, really are not subject to U.S. tariff implications at all.
And that would pretty much include most of our non-U.S. stocks, but also, many of our U.S. stocks in the portfolio. There are some, so there we can look at, at a Broadcom or a TSMC, or Samsung and wonder if they will get caught up in the, in the tariff net. So far, no, with these, large semiconductor stocks.
But, it’s possible, that it could happen. So, with that, I’d like to, turn it over to Matt to, go into, the rest of the presentation and we’ll come back and talk about individual stocks. If you would like to.

Matt Burdett
Great. Thanks. So, let’s see, I’ll be starting on slide number 18. So number 18, this is basically showing you, how the underlying equity positions dividends have, have grown over, over this, in the portfolio.
So what you can see here is 82% of the portfolio has its dividends growing on a, on an organic basis. And then if you look, below that you can see the, the different subcategories of growth, 0 to 5%. That’s about 34%, 5 to 10, 19 growing ten plus 29%. Some dividends were held flat. 9% lower dividend.
Some of these are really due to, some special situations where like in the case of Vodafone, where, some businesses were sold or merged into a joint ventures. And so therefore, you know, the consolidated EBITDA is less. And that’s, that’s a natural thing for the dividend, to be decrease in that way. But it’s big picture.
The bulk of the portfolio is growing dividends on an organic basis. Moving to slide 19. Just kind of reviewing, how the investment income builder has performed over a variety of different, Fed funds rate environments. You know, as Brian mentioned earlier today to the effect of fed funds is 433 basis points, about 100 basis points lower year on year.
The average since the end of 1982 is 378 basis points. And I look to start walking, before walking into this this room. The Fed funds futures are implying 3.7 cuts by the end of January 2026, with an implied rate of 3.38. This this will be highly dependent on the impact of the tariffs, which will impact growth, prices and jobs.

So but if you look at the table here, the take home here 89 quarters that we have have completed here. And what you can see is anything above a 1%, Fed funds. We tend to perform relatively well versus our blended index. And when it’s 3% or higher, which it has been 21 quarters, we’ve outperformed 537 basis points over the blended index on average annualized over that time.
And then you can see the comparisons, for different, different levels. I think, you know, roughly half the time it was less than 1%. And that’s where we underperformed. And I would, you know, again, that’s the quantitative easing period, which I would consider to be a relatively distorted period, for, with respect, to policy rates advancing to slide 20, this is showing you selected market returns for various portfolios.
This is a dramatically different quarter than we’ve experienced over the last, certainly the last calendar year. There were a lot of I guess, if I could just say some big things that were being digested by the market in Q1. All of the Trump tariff talk, which, you know, we kind of have some visibility on that, but it’s as Brian said, it’s changing rapidly.
Deep seek the AI company out of China had disrupted a lot of the AI names that were very, very dearly valued. And in 2024 and then you also had a, as a result of the Trump administration’s change in stance with respect to, funding commitments for NATO. You saw European fiscal stimulus pulse, happened, particularly in Germany, and that that did impact equity prices.
So what you can see here is the S&P 500, declined 4.3% in the quarter, and the growth of your, benchmark portfolios declined even more with the Russell 2500 growth down 10.8%. Then you look in Europe and you can see the Euro Stoxx index was about 12.5% positive. And within the Euro Stoxx 600, if you were to look at European banks, they were up about 30% in Q1.
Some of that has reversed since since the present day. But but you get a general sense that there’s a lot of, of, big drivers impacting prices here. Moving on to slide 21. This is the Thornburg Investment Income Builder investment performance here. Strong quarter for us in in Q1. As well as the trailing one year, three year and five year relative to our blended index.
You know, I think, as, as Brian mentioned, we want to focus on companies that are helping to meet our objectives of providing, a high and growing income stream, as well as is, is price appreciation. We’re able to buy companies at discounted prices. And that has served us well in recent periods, since inception.

In the iShares, it’s been an annualized return of, of 9.6% per annum. And then at the bottom you can see the different calendar year returns over over various periods.
Advancing to the next slide, we look at quarterly total returns, since inception. So there’s 89 quarters completed, of which 65 were positive. So that’s a 70 to 73%, positive frequency rate.
Advancing to the next slide. Just as a reminder, this kind of tells you a little bit of the uniqueness of the Thornburg Investment Income Builder strategy, in which we will flex into bonds when we feel as though bonds are compensating us relative to what we could get in the equity market. And this is a very simple chart.
The dark blue line is the Income Builder, cash and fixed income allocation. You can see the left y-axis is the percent fixed income in the portfolio. Back in 2009 it got as high as 45%. It’s currently, sitting much lower than that. Now, it has been, you know, since, interest rates had rolled off.
And then on the, the right y-axis, you can see the yield to worst for us and dashed blue and for Europe in dashed orange. High yield today is, is 8.58 yield to worst. So still well below, you know that 10% threshold, on the on the chart here.
Advancing to the next slide, we see the quarterly distributions throughout history. We pay 24.1 cents in Q1. That was basically flat year on year. If you take the trailing 12 months, it was $1.24, which was about 3.9% higher on a year over year basis.
Slide 25 is showing just, a historic and calendar year here. The bars are the Investment Income Builder yield compared to our blended index in the blue line. The Bloomberg US corporate Bond Index and Orange and CPI, in the, in the black line. And basically the take home here is, you know, we’ve comfortably exceeded, the yield on our blended benchmark over, over the period.
And we’ve been higher than inflation in all periods other than 2022, inflation shock. So if you go back and look over these calendar years, the dividend had a kegger of 4.2%. And then the net asset value grew by 3.6%, per annum over that time.
Advancing now to our report card slide. The first one I think this is this is the important message that everyone should really hone in on. This is this is what the mission is. This is a hypothetical $100,000 investment. This particular individual collects the dividends and does not reinvest them. So they use the dividends for whatever they want. And what you can see here is that over this, this period of time, you can see that they receive total dividends of $187,343.

So that’s 1.87 times the original investment. And the capital more than doubled to $248,789. So the dividends grew over time. And if you were to now calculate what the yield on original cost is, right. Because we paid 124, and trailing 12 month dividend, that total amount of income is $10,512. So the math is easy. It’s 10.5% yield on original cost.
The next report card slide I’d like to discuss this is this is, an individual who’s perhaps younger does not need the income yet. So they are reinvesting the dividends. Same hypothetical $100,000, in the investment income builder. And what you can see here is the cumulative dividends over that time, with reinvestment amounts to $344,083. And the number of shares went from 8,375 to 26,076. So it’s about 3.1 times the number of shares over that period. The capital grew from $100,000 to $375,104. Total account value $719,187. Now, if this individual decides at the end of at the end, or at the end of this quarter, let’s say, or Q1 that they wanted to turn on the dividends, right?
They would then have their 26,076 shares, times the 124 that gets you to $32,360. So you do the math on yield, on original costs, that’s 32.4%. So that’s a good option for people to be able to think about over time, letting dividends, do the work for you and picking good companies that that we, we find out there because the value is there.
One more slide for me. Just a reminder about dividends and their importance on slide 28. This is a slide we show every quarter. It’s pretty simple, but I think instructive to kind of just put things into perspective for people. As you think about where your returns are going to come from. Everybody spends a lot of time talking about what happened.
I think what’s what’s probably more important is going to happen. And the take home here, what we did is we we looked by decade and we calculated the average annual price, component, income component. The sum of the two is the average total return in that decade. And in the far right, we calculate the income as a percentage of that total return on average in that in that given decade. Take home #1 is dividends are roughly half your return on average over the whole time frame.
Take home #2 would be that that percentage varies a lot depending on period, right? And you can see that in the far right where, you know, you have periods of the.com boom, 1991 to 2000, where the average annual price increase was 14.9%, and the income component was 2.6% or, 17.5% of your total return.
So not that important, right? But then you go and look at the following decade where the on average price return was -50 basis points for ten years, and dividends ended up being 136% of your total return. So just important reminder, that dividends do matter over time. We’ve had, you know, the more recent period, 2011 through 2020 and the current decade where in dividends have not mattered as much.
And that’s why I think we’re relatively optimistic and optimistic about the portfolio in the sense of, the income generation, which is what we spend a lot of our time on, focusing on that durability and, and, you know, as an attractive investment out there, we’re, you know, relative to other income producing assets. So with that, I will pass it to, Adam to see if we have any questions.

Adam Sparkman
All right. Well, thanks, Brian and Matt, for the color on the portfolio. We do have several questions coming in from the audience. Christian, I think I’ll kick it to you for our first question, around the fixed income, market. Are there any particular economic indicators that that you’re really paying attention to right now, given the volatility?

Christian Hoffmann
You know, we’re looking at all the normal economic indicators, but they’ve become much less relevant and have really taken a backseat to, I would say, both political rhetoric as well as flows and market reactions. And the reason for that is, frankly, anything coming out on the economic side can pretty much be dismissed, given how it feels like the world has markedly changed and in a relatively recent short order, and continues to change on an intraday basis.
So looking at what happened last month really doesn’t tell us much unless it’s wildly better or worse than maybe what we thought. But even that it can be largely dismissed. So it’s the economic data is largely weighted to the downside. If the past was worse than we thought, that can lead to a negative reaction.
But broadly, it’s, it’s tweets that are driving the market political rhetoric. And we’re having obviously pretty, pretty wild flows in the marketplace as well, which can have secondary and tertiary effects, related to all asset pricing.

Adam Sparkman
Christian, maybe one more, within the fixed income market. What are your thoughts about the Fed and, and the potential for a cut in May?

Christian Hoffmann
Yeah, I think it’s, a similar but different answer. And it’s. Look, when I think when I stepped up from the desk, and this is also changing wildly from from moment to moment, I think the market was pricing in roughly a 30% chance of, a may cut, and I think over 100% chance of, a cut the following meeting.

30 seems low to me, especially given how much, you know, near-term uncertainty that we have. By the same token, I think an important thing to think about here is I’m not sure that Fed cuts are going to save us and be the market savior that they were, you know, that we saw in previous sell-offs. And I would ask, frankly, a leading question, which is, you know, if the Fed jacking rates 500 basis points, you know, didn’t destroy the world economy, you know, why will cutting 200 or even 300 save it?
You know, I think the corollary has to, has to tie up, you know, and the reasons for, you know, the, the resilience into that hiking cycle. I think, you know, we’ve talked about, you know, a couple times on these calls, you know, one is that living in a zero interest rate world for so long let a lot of people term out debt, you know, at ostensibly zero or very low rates.
So if you have a 2% or 3% mortgage, you know, in the mortgage rate goes from 7% to 6% to 5%, you really don’t care, right? And if you have a 4% high yield bond, you know, being able to refinance it from, you know, seven and a half to six and a half, you know, you also you also don’t care.
So I don’t want to say it’s irrelevant. Also, some of the shock and awe programs that we saw in the past, you know, led to many of these dislocations that we saw in the previous several years. And I would think and probably hope that central banks take a little bit more of a cautious approach to, to, you know, intense, market interference, because I think a lot of the unintended consequence of that, you know, we’re still paying for to this day.

Adam Sparkman
All right. Well, thank you, Christian. Matt, maybe we’ll come to you with this next one. With the tariffs, the tariff, regime and what kind of announcements coming out right now, have you all been re underwriting the holdings in the portfolio with reduced revenues, margins, earnings, and can you talk a little bit about, how the outlook has changed?

Matt Burdett
Yeah, sure. Look, it’s obviously something we, we spend have spent a lot of time on, but we’ve, we’ve spent time on this for a while. Right. Because we kind of, we’ve kind of this has been telegraphed for some time. And, you know, it’s tough, it’s tough to know with great detail at this point since, since things are not finalized, what we’ve tried to do is just really hone in on what’s analyzable with our companies.
And I would say, you know, for most of our companies, we feel reasonably good about where they are. That doesn’t mean that all of the movements that that we’ve seen, isn’t going to impact some of our companies. Obviously, oil prices are down a lot. So that means, you know, you’re going to get downgrades to oil and gas names.

So we, you know, we kind of know that. And most people know that, I think what we’ve really tried to hone in on is where, where there might be, you know, victims that are, that are less clear. And we continue to assess that, you know, right now, I think we feel pretty good about a lot of the companies we own.
Many of them will not have a real tariff impact because they’re more, you know, for example, Orange that Brian mentioned, our top holding is maybe there’s a bit of an impact on some of their equipment costs. But largely it’s not going to change the demand profile very much for, for the services that they’re providing. So, this is going to be a moving target.
And a lot of I think we’ll get a lot of information with earnings. But yet again, things are not finalized. So the real, you know, the final numbers is not known yet. We just want to make sure we have enough margin of safety in the stocks we hold, that can withstand, you know, some downside pressure as well as have a credible path, you know, to upside all right.

Adam Sparkman
Thanks, Matt. Brian, we got two different questions on Orange. And then I kind of, try to throw both at you. And the first is, you know, looking at the, the chart and as a, as you mentioned, the price has been a little bit flattish, but paying a really nice dividend today, a little bit of growth. Maybe just a little bit more color on, on the thesis around Orange. And then tagging on to that, you know, in comments that you’ve made in past, past webcasts, you’ve talked about the investment in fiber that they’ve been making over the past decade. And then the potential for really strong free cash flow, given that CapEx, that they’ve done in the past, outside of Orange, any other kind of unique examples in the portfolio of a company, with, with maybe similar dynamics, where they have a kind of unique competitive advantage going to go forward basis?

Brian McMahon
Well, to answer the second question, yeah, there are a lot of unique examples. For example, just, last night, Taiwan Semiconductor reported their first quarter revenues up 42% year over year. So, it is, kind of a unique advantage, I think, to have technology and leadership and to be able to, to have a business that’s so cash flow generative that, you can throw tens of billions, even hundreds of billions of dollars at, leading edge R&D and CapEx to, to maintain that, position.
So that’s the second question. And I think, I think you’ll see a lot of, of interesting stories actually just looking through these, these, these top ten, but, on orange specific. Lee. So, okay, it’s a multinational, telecom. Their home market is France. It’s the old France Telecom. But let’s just go through some numbers.
So if I add the, the market cap, the debt and, the minorities, its, economic value via the firm is 58 billion, dollars, €58 billion. I’m sorry. And, if I, if I think. Okay, so what does that mean? The, the EBITDA is, 12 billion plus. So 12.1 billion last year grew a little under 3%.
So let’s divide 12 into 58. And you see, you come out with a number less than five. So, we like that. Because it’s, it’s not expensive. The, that they advertise, less than two times, the dividend is, between 6 and 7 and growing. But, the other thing that we like is the, the revenue is, is, just over €40 billion.
And they have been spending and we, we know that this, high teens percent of revenue on CapEx. So in order to build out the fiber infrastructure and acquire spectrum and build out, the tower infrastructure for 5G, that’s mostly behind them now. And so for each 1% of, revenue that, they can have that CapEx decline.
So say, go from, from 16% to 15%, that’s, €400 million of cash flow per year. And that, for a company that, has cash flow of, 3.5 billion, if you can, if you can be growing that cash flow, free cash flow at a high single digit or even double digit annual rate, that’s good for dividends.
And so, that’s really why it’s a, it’s a top position. I’ll be surprised if the share price, which has been pretty resilient this year. Is it, continuing to be resilient. And by the way, there’s zero exposure to US tariffs. And maybe for some icing on the cake, we’ve, we’ve long believed that, that the euro was, certainly not overvalued, maybe undervalued.
And, so the euro gone from a $1.04 to buy a euro, to today it’s a $1.12 to buy a euro. So we’ve got some currency appreciation as well, in that, in that position, which we feel pretty good about. So, I hope that answers the question. I could probably talk all day about, all of our holdings, actually, but I, I won’t bore you, but if you have specific questions, would be happy to, to take them on, on any holdings.
So, that’s Orange.
Adam Sparkman
All right. Well, thanks, Brian. Maybe, pivoting back to, fixed income, we have a question on how yields, with yields roughly in the 8 to 9% range and spreads widening out a bit. Christian, what would you need to see in this environment with high yield? Make it make it something you’d be looking to add to the portfolio.

Christian Hoffmann
So I tell you, the team’s been extremely busy. You know, in the secondary, we haven’t actually traded much for, for this portfolio, you know, over the last quarter besides getting some, some names that were a little bit rich and, you know, some, some selective opportunities, but broadly not changing the weight or the, the characteristics of the portfolio, I would just say some opportunistic changes.
Broadly, we’ve been out back bidding stuff in the marketplace. We haven’t really been getting hit. You know, generally, you know, this isn’t our first rodeo. You know, in the early stages of a sell off, you have a little bit of weakness and then you start to see front end paper coming out. It generally comes out at pretty attractive levels in terms of yield.
But the total opportune and total return opportunity is fairly low as you’re looking at, you know, call it, you know, 6 to 18 month, you know, type paper. I’d also say that it’s important to look at the underlying components of an indices like high yield. You know, a lot of the double B’s today are still, you know, with a six handle type yield.
And really Triple C’s have gapped out, you know, many, many points as I think some people are holding those bonds just hoping that, you know, they’d be supported by the market and they could get out before there was a turn. Not surprisingly, the market turns, and people do not expect it. And, people panic and sell.
You know, that said, a lot of those companies aren’t particularly resilient. And, you know, they’re only 9 or 10% if they’re able to pay you back and many of them will not be able to, you know, pay their pay their borrowers back. So, look, we’ve seen higher return situations, you know, certainly in 2023, we’re more active. And I would characterize that market as more opportunistic than today.
That said, things are fluid, you know, and moving fast. And we’re extremely active in the secondary marketplace. I would also say that, you know, given the flexibility of this portfolio, you know, if equities become wildly cheaper, that could become a source of cash if we want to, to lean in there. And those are the conversations that, you know, I have with, you know, Matt and Brian and the team.

Adam Sparkman
All right. Thanks, Christian. Coming to you, Matt, we have a question here. Obviously, this is, a global portfolio, various currency exposure. Do you have an assessment of the, the dollar right now relative to, other currencies? And then just any thoughts on kind of hedging, activity in the portfolio?

Matt Burdett
Yeah. Look, I think that’s, it’s actually probably one of the central, questions to be to be asking, I think, given the environment, you know, the dollar, the DXY, I think when I came in here was about 101, we came into this room, and the last time we presented it was 109.
And so you have to remember the new U.S. administration has is basically said that they want a weaker dollar. Right. And, you know, when they say that other countries have been doing currency manipulation, what that means is they want the other currency to appreciate. And by definition, the dollar has to depreciate right? In a, in a single currency pair.
So it’s something we think about, you know, we tend to, to just think about over a very long, you know, a very long term period. With respect to Hedges, we do we do have some odd they were reduced a little bit several weeks or a month ago or so, really just driven by, some of the smoke signals that we were getting from, from this administration.
But as a reminder, the hedges are there, to be a hedge, right? And sometimes exogenous shocks can come that you don’t know about. And having the hedge there can, can help protect the net asset value. I don’t know if you’d have anything else, Brian.

Brian McMahon
No, I think you summed it up pretty well.

Adam Sparkman
All right. Well, Brian, coming to you, with this next one, given the volatility over the past week or so, have you been leaning in to the sell off and adding to risk assets in the portfolio, or have you been maybe doing the opposite and taking some risk off?

Brian McMahon
Yeah, that’s a very good question. Maybe I’d go back to slide four in the presentation to, to begin to answer that question. We’ve been leaning into dividends, really. And, this break in the market has given us a little bit of an opportunity to, to lean into some dividend payers. But, looking at slide four, if you, if you look year over year increasing our weighting in communications services and utilities, by, close to 9%, year over year, we’ll tell you that that we’re kind of leaning into dividends, and getting a little more defensive within the equity portfolio, but also leaning into what we think is durable, dividend growth, in the, in the portfolio.
So, that’s, that’s what we’re doing. And this latest, route in the market where they really kind of take no prisoners, everything, everything has gone down some, some more than others. But I think our relative, resilience, both in the first quarter.
But even as of last night, the Income Builder, total return year to date was, 3.85% positive on the shares. So, we are getting some opportunities to, to lean into dividends here, but, we have kind of been moving in that direction for the last year. So this is not a knee jerk thing. We just have maybe a little a little bit of, of new opportunity to do that given where we are. Hope that answers the question.

Adam Sparkman
Thanks, Brian. Christian. Any thoughts on CLOs? Another that we’ve been seeing kind of a lot, in the headlines over the past week.

Christian Hoffman
I don’t think we’ve got that question on this call. And, I think it’s a timely one. You know, I saw a pretty sobering statistic the other day that CLO ETFs are actually bigger in terms of size than levered loan ETFs.
I know we’re getting a little wonky here, but a close a structured product that holds leveraged loans. So the derivative of the underlying market in the ETF world has become bigger than the underlying market in the ETF world. We’ve been seeing actually a lot of outflows in that asset class when they go on to be clear about is this fund has zero CLO exposure, even more broadly that some big portfolios have zero CLO exposure today.
Now that could be an opportunity in the future, actually worry about the amount of cash going out of that asset class. It tends to be less liquid. And given the amount of capital that’s rushed in there, you know, I worry about the market’s ability to, to deal with that, you know, in a choppy environment.
And I think it’s fair to say that we’re in a choppy environment today. You know, not only does that impact CLOs in and of themselves, but it also impacts the underlying assets which are leveraged loans. And remember that both levered loans and CLOs are floating rate product. And given that we’ve had a pretty big sea change in terms of expectation for short term rates, that means the market is expecting that those products, both will provide a lower yield going forward if we do see those rate cuts come through. And also not get any pricing appreciation potential because the duration of those products is zero.
So that to me, makes me pretty happy that we have no exposure today. It is something we’re watching closely, and it is something I think we’re the potential that we might be able to buy it at extremely cheap prices is certainly in the cards.

Adam Sparkman
All right. Thanks, Christian. Maybe one last question here, and I’ll come to you with it. Matt, you had a comment on Orange being pretty insulated from direct tariff risk outside of maybe some of the, the equipment. How do you think about kind of the overall insulation of the portfolio from tariff risk and what segments of the portfolio do you think are at most risk of being impacted by tariffs?

Matt Burdett
Yeah, I mean, it’s going to depend on the, the type, type of company. You know, I think, I think the tariffs, before I forget to get you, I think you have to also think about the impact of the tariffs and what they have, because they are not known and what they’ll have on actual investment decisions being made, right?
And so here’s a good example. The portfolio management team had a call earlier this week with a German utility, which I won’t name, that has large investments in the United States, in renewable assets. So, so wind and solar assets, and they’re a material player. In the U.S, ten gigawatts or so of assets, some of which has been constructed.
The rest is in, being constructed. So, you know, we ask them, how do they think about the tariffs and how will that influence their decision? The answer was, we’re not really going to invest any more because we don’t know what our costs are going to be, because we don’t know what our costs are going to be, we can’t price the power we intend to sell to an off taker who would buy it, like, let’s say, an Amazon or someone who has a data center who wants to have clean power. So, you know, it’s not just the impact of a tariff per se on a company, it’s the impact that it will have on decisions about investments in the future, which is, you know, future revenue and earnings.
So so we’re thinking about it from that angle also, which, which is important. You know, you’ve already heard of the few companies that have reported, you know Delta Airlines, we don’t we don’t own any airlines in this portfolio. But they withdrew their guidance because they really don’t know. Right. And I think you’ll probably hear a lot more of that.
So within the portfolio, the, you know, the area we’re waiting to hear, what the pharmaceutical tariffs will be, there’s been some telegraphing from, from President Trump on that. We did do some work on that when we analyzed Q4 results. And I think it’s a mixed and not as understood picture right now, in the sense that some of the high value products are made in the U.S., but you don’t know exactly what the mix is between US Ex-US manufacturing.

So, the saving grace with that group is they have those these are very high gross margins. So 85 percentage gross margin. So that means 15%, is kind of your risk of tariff. So not very much. But who knows what else could get thrown in there. So these are just two examples. But I think I think really the way we’re looking at it is just the broader framework of how this will impact, business decisions overall.
And, you know, Brian, you mentioned, you know, an increase in utilities. This is something where we thought, okay, the earnings, which is really what we’re what we care about, are still going to be there, well insulated. There’s good investment programs in Europe that really don’t matter what happens in the US. I think it’s going to happen.
So we tried to lean into those areas where there’s just not the vulnerability there. So sorry for the long answer.

Brian McMahon
No. Yeah. And if they get active, if the utility has to pay more for equipment, whatever it is that that goes into the rate base and the, the, the ratepayer ends up paying for it in their, monthly bill.
So in a regulated utility, and just to, to clarify what Matt said, in case you didn’t process that fully, but what he said was the gross margin 85%, which means your cost of goods sold is 15%. And a 20% tariff on 50% cost of goods sold is 3%. So, so that’s not a huge increase.
Maybe they pull back on advertising a little bit. Or, other sales and marketing expense or even R&D expense, which is what a couple of them have telegraphed. But I, I think in pharma in particular that, they can probably deal with, 20% ish tariffs, with maybe some gradual changes over time to where they produce things.
But, that’s, that’s something they can, they can deal with. And, I throw out one example of a company that’s no longer in our top 20, like a Home Depot. And if you go on Home Depot, as I do a lot, it buy a lot of stuff. It’s made in China. They’re, and so they’re going to pay these tariffs or they’re going to find some somewhere else to buy.
But where else are you going to go? It’s the same at Ace Hardware and, it’s the same at Lowe’s. So, if you need, a hammer or a screwdriver or, some, building materials, chances are, yeah, you are going to pay the tariff and their margins are skinny anyway. So they’re not going to eat it.
They’re just going to pass it along to, to to me and to you, the consumer, you know, probably flatter their same store sales numbers, but, probably not their profits. And, and probably not the, the number of units that they sell. So it’s kind of mixed, but we don’t have a lot of exposure to direct exposure to tariff.
I think if you look at banks, maybe banks have indirect because some of their borrowers will have direct exposure to it. We’ve reduced our weightings in US banks, gradually. And that has continued in the in recent weeks. So, we’ll kind of see what comes out of that. Maybe we’ll get some buying opportunities, but for now, we’ve cut that exposure a bit. So I hope that answers the question.

Adam Sparkman
All right. Well thanks, Matt. Brian Christian for all the great color on the portfolio today as well as the macro environment. We recognize that, you know, there’s a lot of uncertainty. And things are moving quickly. Right now, any way that we can help, you know, communicating about the portfolio, our views on the macro, definitely feel free to, to reach out. We’re here to, to help and provide guidance. On what we’re seeing in the market. Thanks again for joining.