Thornburg Investment Income Builder Fund – 3rd Quarter Update 2025

Thornburg Investment Income Builder Fund – 3rd 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, you can ask a question at any time by submitting them through WebEx or 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 www.thornburg.com/TIBIX-quarterly. Just to remind you, today’s presentations 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 $52 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, vice chairman and chief investment strategist for Thornburg, along with our head of equities, Matt Burdett, and our head of fixed income, Christian Hoffmann. With that, Brian, I’ll kick it over to you to jump in.

Brian McMahon: Okay. Thank you, Adam, and thanks to everybody listening to this quarterly review for Thornburg Investment Income Builder. We have slides and I’m going to start off just, with slide number two, which, summarizes some key macroeconomic issues at the moment. I won’t walk through all of these, but I will just, summarize by saying investor optimism is clearly strong, even as, we all struggled to assess, pretty high degree of policy uncertainty.

And that investor optimism is reflected in tight credit spreads, which is the market’s way of saying with real money that we’re not looking for a recession anytime soon. And also, multiples, equity valuation multiples that are, well above average. I will mention that we did not see, guidance cuts from a wide spectrum of firms that were a few.

But, for the most part, so far in the, earnings season, we’ve seen, positive momentum for earnings. One other thing that I’ll mention, just this summer, US banking systems deposits regained, the all-time high, that they had, in the middle of, 2022 before the fed got into quantitative tightening.

So, we’re back up to, about 18.5 trillion of, deposits at US banks. Just for point of reference, the Russell 3000 index, 69 trillion, market cap of gold is 29 trillion. And market cap crypto is 4.2 trillion. That the latter two growing a lot, recently. I just want to remind you that Thornburg Investment Income Builder, consistently seeks to provide attractive income.

We want to pay an attractive yield, today. That objective has not changed. Trailing 12-month dividend yield is 4.5%. We also hope to grow the dividend over time. There will be some fluctuations in that. But, the 22-year compound average growth rate is 4.2%. That’s taken us from $0.53 a share to $1.27 for the trailing 12 months.

And, we expect that if we have that growing income, that we’ll have long term capital appreciation as well. And we’ve had that through the end of September. Again, just over 4%, compound annual growth for the capital appreciation from $11.93 to $31.91 per share. The next slide just shows you our, portfolio allocation shifts, over the last, eight quarters for, Thornburg Investment Income Builder. What you see is a combination of relative appreciation and, some trades that we’ve done. So we’ve increased our weightings in financials, communications services and industrials and, have paid for that, to some extent by, cutting our allocations to, the energy sector to health care and, to materials.

And again, some of that is, is performance based. The next slide is just a summary of our portfolio characteristics. Equity portfolio characteristics for, the income builder fund. I’ll just summarize by saying the trailing, one year PE 14.6 times dollar weighted, and the forward estimate is, 13.6 times, again, dollar weighted.

That compares to, the MSCI ACWI index with at 21.4 times P/E and the S&P 500. That’s closer to 25 times earnings valuation right now. So, so our P/E is a bit higher than it was, nine months ago, but certainly, much, much lower than, many equity indices. The next two slide to summarize our top 20 equity holdings.

So, the first slide is the top ten. And these accounted for 39% of, the portfolio assets as of September 30th. And then the following page is the next ten. And those accounted for 18%. Not a lot of change here. Quarter to quarter. So, these are look familiar, although the, the standings change a bit.

Maybe I’ll just summarize here. If I look at 2024, seven of these 20 had total returns of more than 20% last year, price changes more than 20%. And those are all up again this year. Last year, we had eight of our portfolio holdings that had negative price for the year. And seven of those eight are up this year. Several of them quite strongly up. You’ll see that top up holding, Orande, up 63% this year after being down last year. So, that’s a good indication of recovery. The next few slides, the next ten, actually, slides, seven through 16. Just, highlights some features of each of our top ten equity holdings.

I’m not going to go through those in, detail. They’re there for, you to review, to the extent that you care about, the individual ingredients in, some big investment income builder portfolio. So, we highlight those as usual, and, you’ll see that, we do get chances, from time to time to either trim, these positions or, add to them.

And then we’ve taken advantage of that over time. And with that, I’ll hand off to, to Matt Burdett.

Matt Burdett: Okay, great. Thanks, Brian. Thanks, everybody, for tuning in here. I will start off on slide 17. Brian mentioned one of our goals is to grow the distribution over time. We have done that. But the best way to do it is to have companies, you know, own companies that are growing their dividends, organically.

And that’s what this slide is highlighting here. What you can see here is the percentage breakdown of the equity holdings, by band of dividend growth. So, 82% of the portfolio is growing. The dividends. And you can see more detail on 0 to 5%, 5 to 10% and then 10% or more. Which is about 29% of the equity portfolio.

And this is all taken from the actual dividend growth, in calendar year 2024. And then over off on the right side, you can see what the yield was for each of those individual buckets. I will say for the companies that are lowering their dividends, it’s not something we like, but there are cases where, a company may have some strategic, moves where they spin off a business or sell a business.

And so therefore the dividend gets rebased, and, in some cases, a dividend can, can be cut for fundamental reasons. But overall, 82% of the portfolio, growing the dividend is a pretty good starting point. Advancing to the next slide. This is really just showing you the historic performance, the investment income builder, versus our blended index, as well as versus the MSCI World is a proxy for the global portfolio and different bands of fed funds rate. And, most people know this, but today the effective fed funds rate is 4.1%. The 50-year average is 4.66. And if I go back to just the end of 1985, the average is 3.35. Interest rate futures, at the end as of end of 26, expect a 3% fed funds rate.

That’s you know, that varies. And changes all the time. But that’s what it is currently. And what you can see here is we’ve got 91 quarters that we’ve completed. And 23 of those quarters, the fed funds rate was 3% or higher. That’s tended to be supportive for our relative performance versus the blended index, outperforming 531 basis points here, and then, almost 200 basis points versus the MSCI world.

And then you can see that that outperformance has tended to decline in lower fed funds rate environment. So, this is the historic evidence, what the future holds we shall see. But on average, this gives you just a sense for how, return expectations can be said relative to a Fed funds rate band. Advancing to the next slide, this is just highlighting selected world market returns. It has been, another strong year for equity returns and pretty respectable returns and bonds as well. You could see all of these are very strong returns I would highlight. The Euro Stoxx 50 index, which is up roughly 32% year to date. These are all these returns are in dollars.

If you a euro denominated that return would be 16.2%. So, it really kind of highlights the dollar depreciation. That’s happened in 2025. And the result of non-dollar returns being, you know, materially higher. Last thing I will say on this slide is if you know again the S&P 500 is off to a great start for the year after having a couple strong years.

The return since the end of 2022 for the S&P 500. It’s up 81.2% or 24% annualized, which is which is a pretty strong return. Advancing to the next slide. This is the investment performance for the, Thornburg Investment Income Builder Fund. I guess what I would highlight, just a couple numbers on the page, year to date, the iShares total return is, 28.3%.

That’s about 13.7% ahead of our blended benchmark. And I think importantly, the iShares since inception, have delivered, ten, 10.2%, basically. And, you know, we’re almost finishing our 23rd year, at the end of the calendar year, 2025. Advancing, to the next slide. This is just highlighting quarterly total returns. What you can see here is we’ve completed a 91st quarter, 67 of the historic quarters were positive. That’s 74% of the time. 17 of the 22 completed calendar years were also positive. Advancing to slide 22, this is a slide we like to show. remind people that this is a strategy. That is dynamic with respect to how we utilize fixed income. It’s a pretty unique way of, you know, creating and managing an income solution here.

What you can see is the dark blue line is the allocation of cash and fixed income over time. The dashed lines are U.S., high yield towards and European high yield, yield-to-worst. As a proxy, you know, for the market yields at that time. And what you can see here is that the, you know, that allocation goes up when the yields go up.

And it’s really, we think about this on a risk adjusted return basis. And we’re making a comparison of equity returns versus fixed income returns. And when you when you tend to buy bonds, when there’s dislocation you can get very attractive returns that are equity like in nature. And this this slide is kind of highlighting, how we’ve managed it over time.

And, you know, listeners should expect that that to continue. Next slide is quarterly distribution history here. I would just highlight that we, the last quarter, the third quarter, we paid, 33.5 cents for the iShares. That’s 8.8% higher year-on-year. The trailing 12-month dividend for iShares is 127, and that’s 5.5% higher year-on-year. Advancing to the next slide. This is just giving everyone a snapshot of the calendar year different yield levels for the investment income builder versus our blended index. Also, versus the U.S corporate bond index in orange. And then the dark line is CPI. What you can see over time is that the yield is has always been north of 4%. Over time, the dividend has grown at a CAGR through 2024, at a CAGR of 4.2%, and the Nav has grown close to 4% over time. So roughly, roughly equally split and total return terms. Okay, advancing to slide 25. This is this is our first report card slide. This is the hypothetical $100,000 investment, in in shares of the investment income builder. This is an individual who chooses to, collect the dividends, over time. They don’t reinvest them. They spend them; however, they choose. And what you can see here is that number one can limit cumulative dividends over time, or $192,485. So, on the original $100,000 investment, this person has collected, you know, 1.9 times that in dividends and spent that on whatever they wanted to. Also, the capital has appreciated over time. So the original $100,000 investment is now worth $289,652. So, it’s it’s this is basically the evidence of what we’ve produced over time with someone who’s used that income, for, for whatever purposes they need to. So if you think about, the dividends over the trailing 12-month period, right, which they’ve grown over time. That’s $10,780, right. And if you think about yield on original cost, that’s a 10.8% yield on original cost. And we like to highlight that because it just highlights the power of growing dividends. Over time. The next slide, slide 26 looks at same hypothetical $100,000 investment at inception in the a-shares. Except this individual is reinvesting the dividends, over time.

So perhaps a client that that is, you know, still working and does not need the income and would rather just build wealth over time. Basically, what you see is the growth in income is, total income received over this time is $359,018. And this person was able to take the beginning, 8,375 shares and buy to an ending share account of $26,564.

So, tripling of the number of shares owned, over time, the capital went from the original $100,000, investment to 487,564. Total account value is $846,582. Now, if this person at the end of this period decides, look, I want to now collect the income, right? They’re going to have a much larger share account than the original, share account, that they started with, as I mentioned. And so, if you take that those number of shares, so the 26,564 times the $1.19 of a trailing dividend for the shares, you end up with, a little over $31,000 or a yield on original cost of 31.6%. So really, this is just, again, highlighting the power of growing dividends and reinvestment. Over time, advancing to the next slide, this to be the last one. Again, just as a reminder, for people to think about where your total returns are likely to come from. You know, we think it’s important to just highlight where they’ve come from historically and to look at it over very long periods of time. That’s what this table is highlighting. This is just the S&P 500 broken out by decade where we take the average price component during that decade. The average income component to some of the two is the total return. And in in the far right column, we calculate income as a percentage of that total return. The big takeaways are one, roughly half of your total return historically comes from dividends.

However, it can vary dramatically, over time and in any given decade on average. And that’s what the column to the far right is highlighting. And in fact, the current decade that we are in, so 2021 through Q3 of 25, dividends are the lowest share of total return on average each year, over this entire period going back to, 1871, you know, when people were riding horses, I guess, to get around. So it’s really kind of highlighting, the fact that you know, it’s a very low portion of the total return in the S&P 500. And I would also say during that this current decade, the top ten, contributors to total return over this time frame in the S&P 500 made up 52% of the total return, right. The top 20 made up 63% of the total return. So not only do you have a market where, you know, price return has been a dominant portion of your overall total return, but you’ve had a very, very concentrated breakdown of that. And for comparison, if you look at the prior decade, 2011 to 2020, the top ten contributors to total Return comprised 28% of the total return and then the top 20 with 38%.

So, it’s dramatically different, over those periods. So just some things to think about as, as you think about where total returns might come from going forward. With that, I will pass it back to Adam for any questions.

Adam Sparkman: All right. Well, Brian and Matt, thanks so much for the color on the portfolio. We have had, a few questions come in from the audience. Christian, I’ll start with one that’s a little bit more, just macro generally. But I think you may be good for, with the current government shutdown. How has the team broadly managed without some of the timely economic data that you’re used to getting, in the past?

Christian Hoffmann: Well, I’d say just fine, thank you very much. And, I appreciate the concern. Appreciate being asked. Look, I think we’ve often said that access to information in the past was a challenge and was a competitive advantage. And then in the world that we live today, there is an abundance of information, far more than you could ever hope to read through or analyze. And it’s really synthesizing, accessing and processing that information, in a valuable way.

That is really the competitive advantage. So, we’re missing some higher frequency data, you know, that we were getting from the government. There are certainly private sources which, you know, continue to fill in the gaps. But broadly, this is an interesting intellectual question, right? Like how valuable is that data. And how reliant are markets truly, you know, on getting that data, if it was accurate data. I would say it would be incredibly valuable. But we saw with the massive jobs revisions was that, look, we get this data, and it can often cause markets to move, you know, in major ways. But often those movements are, you know, actually ill-conceived because the underlying data is revised. And, you know, the initial reaction was, was wrong.

I know Trump has talked about, you know, maybe moving from, from quarterly to semiannual reports. Again, if I had my preference, it would actually be less frequent data, but more accurate data. Because again, you provide noise and that just creates volatility. And it isn’t particularly helpful, tangentially around the topic. Economists do estimate that, you know, for every week that we are shut down, that that does cause a real drag on the economy, something like, an eighth of a percent or so to, you know, off of GDP, you know, every single week that we are shut down.

You know, certainly it can impact confidence. And certainly the rating agencies do not take the degree kind view to, to some of the shenanigans and grandstanding and, you know, excess that has become, more normal than, you know, abnormal, you know, in recent years. You know, if you look at volatility overall, particularly in the fixed income world, you know, the move index which looks at, you know, underlying interest rate volatility, if you pull up that chart and I advise people to do so. Again, move the volatility spiked into 2022. Obviously we had you know interest rates reset from you know, ostensibly zero two to something pretty high. And it has been elevated over the past three plus years. And while elevated it has been coming down, particularly, you know, over the past couple of weeks, you know, the ten year been hovering around, you know, 4.1% or so and, look, as we got, you know, to the 350 area that, you know, that felt a bit rich and, you know, were approaching 5%, you know, that that felt a bit cheap.

Certainly, there’s a lot of arguments that you could make that, you know, looking at the data and where we are on the cycle and where we are, secularly an economy that getting this this feels maybe you know, about, right? But it is interesting the volatility, you know, has been drifting down. And I don’t know if we’re settling into an area where again, maybe we can approach, you know, something that looks like a neutral rate, you know, on the front end and a yield curve that looks, you know, somewhat normal. It’s not a prediction or a promise, but, you know, certainly we’re moving in that direction.

Adam Sparkman: All right. Thanks for thanks for that, Christian. Brian, I’ll come around to you with this next question on tariffs. I think a lot of prognosticators had expected that tariffs would weigh much more heavily on company earnings and market returns broadly in 2025 than what we’ve seen so far.

How are you thinking about that moving forward? Do you think that it’s just a long a longer lag, than many expected? What’s kind of your thoughts on, companies in the portfolio and tariff impact?

Brian McMahon: Yeah, I do think it’s a longer lag than, than many expected. So, we went from hearing, when people were reporting their March quarter, which is, right after the tariffs had been announced in very early April, that, oh, we’re going to hold the line on pricing and, and that rhetoric is changed, a fair amount from many retailers.

So, I think we will see more evidence of, of goods costing more. But I also will say that consumers will adjust, businesses will adjust, locations, for, sourcing and production will adjust. And, importantly, I think most economists looking at tariffs from the outside and they’re looking at customs collections, from tariffs are spotting the tariff annual take as being somewhere between 300 and $400 billion.

So, that’s, that’s we’re not there yet, but that’s annualizing, the, the existing tariff rates. So, it’s, it’s a fair amount of money. But, in the 30 trillion, GDP economy, it’s, it’s barely 1%. So, I think that perspective is, important to, to keep in mind it’s material, but it’s not decisive, in, in determining the overall direction of the US economy, even though it will be quite material for certain companies and certain supply chains that are used to, to cheap imports.

Alright, thanks, Brian. Matt, I’ll come to you with this, this next one. And I’m going to kind of combine two questions here that are related around, the impact of the declining dollar. The first part, how big of a tailwind has that declining dollar been to, year to date returns? And then secondly, the client mentions that they’re aware of your currency hedging program that we’ve utilized over the last 15 years.

That’s been primarily through, a lot of kind of US dollar strength over that period. Do you think that currency hedging program still makes sense for income builder? If we are kind of getting a change here?

Matt Burdett: That’s a good, good questions. Yeah. Obviously, the dollar weakening has been beneficial to our returns year to date.

I would say it’s roughly about 450 basis points. You know, as I pointed out in the euro, stocks returns are, you know, dramatically different in euro versus dollars. As, as most listeners know, given the income mandate of this portfolio, we tend to skew, ex-U.S. stocks. So, there’s going to be more, currency risk in the portfolio versus, you know, at least our benchmark, which is, is highly, highly dollar denominated.

Right. The MSCI world is roughly two thirds dollar. And then the AGG of course is all dollars. So, you know whether it makes sense to continue hedging, you know, we did reduce our hedges earlier in the year, but those hedges are in place to dampen the FX volatility that hits the net asset value over time.

And what our returns be higher had we not had the currency hedges. Yeah they would. But this is a way to help dampen the volatility of our portfolio versus, you know, the global portfolio, which is highly dollar denominated. So, you know, we take the considerations about direction of the dollar from here. But again, this is a risk mitigation, process that we’re using. And in periods of exogenous shock, which means you don’t know when they happen or what will cause them. The dollar content can tend to move higher. And so, the hedge is there to, to help with that as well.

Adam Sparkman: All right. Christian, another fixed income related question. Can you comment on any cracks that you may be seeing in the credit market or if you are seeing any?

Christian Hoffmann: You know, there has been some tick up in defaults broadly. You know, corporate balance sheets are showing some worsening now that’s from very, very strong levels. So I, I don’t want people to get the wrong idea there. But one interesting thing that we’ve been watching is actually the, the BDC space. So BDCs, our business development companies, they can be both private and public. There are certainly, a large number of publicly listed vehicles. And if you look at a BDC indices, it’s down almost 20% from the summer. Now, if you think about this space, again, it skews towards private credit, and you could probably think of those as having an equivalent rating somewhere between the single B and, you know, triple C space.

So certainly, credit risk and levered credit. And that’s interesting because that is happening in sympathy with spreads in public markets. They continue to be exceptionally tight. If we use Triple C’s as the analog triple C spreads today are at 608, ten-year average is closer to 800, and we are actually even wide of 850, just, as recently as April of this year.

And they’ve barely budged. So that feels like an interesting disconnect. I think some of that is flow of capital. I think some of that, is related to concerns. There was recently an automotive, automotive company called First Brands. It seems like there’s some allegations of fraud, in broadly exposures in the private world to that credit.

And I think, again, in and of themselves, it’s probably also raising questions on, you know, is this just one cockroach, you know, are there are there more are there more shoes to drop? You know, a colleague on my desk brought up an interesting point today as we were discussing this, you know, the financing in question actually related to, to trade financing and factoring receivables. And if that is causing ripples in that world, which tends to be, you know, more opaque and happening behind the scenes, even behind the scenes from a lot of balance sheets, the companies don’t necessarily have to report that, and you might not even be aware that they’re doing it. So, if capital is being constrained, if there are markdowns happening for providers of that financing, does that actually cut off access to other companies that are using that?

And certainly plenty of companies use that, in a totally legitimate way. So, using it in and of itself, there’s nothing wrong with that. But if capital becomes constrained, there, if lines are pulled, does that cause, a liquidity draw that none of us really have good visibility on? And how does that, you know, potentially ripple through markets?

Certainly I don’t have the answer to that today, but it’s something, that’s interesting and new and something that we’re paying close attention to.

Adam Sparkman: All right. Brian, I’ll come to you with this next one. Client notes that compared to recent history, the fund has carried a bit higher cash position. And this has been okay for the dividend, I think, because of where short-term rates are, kind of in line with, with an attractive dividend as short term rates likely continue to fall from here. Do you expect to deploy more of this cash into either equities or fixed income?

Brian McMahon: Yes, probably. We’re about 20% interest bearing debt now. In, at the beginning of time for this fund, we thought we’d be about 25% interest bearing debt at 75% equities. Matt, covered on the slide, kind of the peaks and valleys of our exposure to, interest bearing debt and, and equities over the last 23 years. But I’ll just say this, just because short term rates go down, which, is, almost certain, in the United States, we have to ask, why are short term rates going down and if, if short term rates go down and it’s because the economy is slowing, then I think, probability is pretty high that we’re going to get some pretty good buys both in equities and credit, versus how those are priced today.

And if, short term rates go down and it’s just fuel on the fire and we get another, percent or a percent and a half of, GDP growth, i.e. the economy doesn’t slow down. Then I, would expect that the bond market will give us some opportunities farther out the yield curve.

So, right now, we’re, we’re kind of hugging the front of the yield curve with our interest-bearing debt exposure. So, and in the meantime, it just kind of damps the volatility, in a market that, both, both credit markets and equity markets that nobody is, saying it’s particularly cheap, although there are some cheap, individual securities out there.

So, I hope that answers the question.

Adam Sparkman: Yeah. Thanks for that color, Brian. Matt, maybe we’ll wrap up with one final question, primarily on the equity side, there’s obviously been, you know, plenty of news about the fiscal situation and concern here in the US. But this portfolio is overweight, pockets of Europe. And if you look at a country like France, the UK, Italy, there’s also some fiscal concerns and, some apparent government dysfunction.

How does some of these more macro geopolitical things, play into the investment decisions that you’re, you’re making in these countries?

Matt Burdett: Yeah, sure. Well, I mean, we’re bottom-up focused, right? So, we’re looking, we’re analyzing companies and we’re analyzing the industries they compete in. And we want to buy them at a mispriced, you know, level, a level below what we think they’re really worth. So, that’s really the guiding light. Now, obviously macro situations and political situations can have an impact on certainly on multiples. But also, on the business itself and, you know, revenue and things like that. Oftentimes it’s certain types of companies that get exposed there. So, you know, look, there’s going to be political, things going on kind of everywhere. There’s just like there is here in the US. And I think what we try to do is make sure that we’re, we’re buying, you know, at a price where there’s a margin of safety. But also, the business, that we own, is, is relatively shielded from a lot of that political noise that goes on, right. Orange is our largest holding, which is a French company, telecommunications business, digital infrastructure. You know, all this stuff that’s going on in France is unlikely to impact the demand for their services. So, it could impact the multiple, you know, if they if people view the French market generally as being, a less desirable place, but over time, that tends to, to pass, and we want to focus on, you know, analyzing the business and, the cash flow streams based on, you know, how the business competes within its value chain. So it’s a consideration, but it’s not the main, main driving point for us.

Adam Sparkman: All right. Well, thanks for that, Matt. And, Christian, Brian, thanks so much for joining us and, for highlighting the portfolio as well. We’d also like to thank everybody who joined the call today and making it, interactive in the Q&A session. As always, please feel free to reach out with any follow up questions you have.

Myself, Brian, Christian, Matt. We’re all happy to make ourselves available, to answer your questions about the portfolio. Thanks so much.