4th Quarter 2018

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Thornburg Investment Income Builder paid an ordinary quarterly dividend of 29.6¢ per I share in the quarter ending December 31, 2018. This compares to a dividend of 31.6¢ for the comparable quarter of 2017. The fund paid $0.96 per I share in the 12-month period ending December 31, 2018, down 4% from $1.00 in calendar 2017. The dividend per share was lower for A and C shares, to account for varying class specific expenses.

More than 70% of the fund’s dividend is classified as qualified dividend income, which has a lower tax rate than ordinary dividend income. The trailing 12-month dividend yield was 4.8%, which exceeds the yield on most bonds and stocks.

The fund’s net asset value decreased by $0.77 per share ($20.96 to $20.19) during the December quarter. For the trailing 12 months ending December 31, 2017, the fund’s net asset value decreased by $1.91 per share ($22.10 to $20.19). With a portfolio of almost 90% stocks (shown in Chart 1), the fund (I share class) declined only half as much as the MSCI World Index during the fourth quarter. The fund also showed attractive downside protection against its blended index, with 70% downside capture during the fourth quarter.

Interest Bearing Investments as a Percentage of Total Portfolio

Specifically, Investment Income Builder’s I share returns of negative 6.80% for the December quarter exceeded its blended benchmark (75% MSCI World Index and 25% Bloomberg Barclays U.S. Aggregate Bond Index), which declined by negative 9.75% for the quarter. The fund’s negative 4.39% total return for calendar 2018 exceeded the blended benchmark by 2.03% for the 12-month period. Currency hedges utilized to protect the U.S. dollar value of the fund’s non-U.S. assets added approximately 1.2% to relative performance in 2018. The portfolio uses hedges to protect investor principal when we seek yield abroad, and these hedges added value as the trade-weighted value of the dollar increased 6.8% during 2018.

Performance comparisons of Investment Income Builder to its blended benchmark over various periods are on the fund performance page. over various periods are shown above. Reviewing these, you will see that the annualized performance of the fund compares well over one-, three-, and 10-year periods, though disappointing results in late 2015 weigh on comparisons over the trailing five-year period. We are optimistic about the return potential of the Investment Income Builder portfolio.

The quarter ending December 31, 2018, was the 64th full calendar quarter since the inception of Thornburg Investment Income Builder in December 2002. In 47 of these quarters the fund delivered a positive total return. The fund has delivered positive total returns in 13 of its 16 calendar years of existence. As of December 31, 2018, Thornburg Investment Income Builder has delivered tax efficient average annual total returns of 8.79% since its inception.

Dividend increases from a majority of your fund’s equity portfolio holdings did not quite offset the headwinds of (1) a stronger currency that reduced the U.S. dollar value of dividends paid in foreign currencies, and (2) year-over-year reductions in “special” dividends paid by the fund’s two largest holdings, China Mobile and CME Group. We cannot predict how currency fluctuations will impact your fund’s 2019 dividend, but we do expect annual dividend growth to resume in 2019 for China Mobile and CME if we continue to hold these investments. The list below shows the year-over-year percentage changes in trailing 12-month dividends paid by the 12 largest equity positions in the fund during calendar 2018:

Equity Holding Trailing 12-Month Dividend % Change (Reporting FX)
CME Group (ordinary dividend +6%; 2018 special dividend down 50% vs. 2017) -25.9%
China Mobile Ltd. (ordinary dividend +18.9%, no 2018 special dividend) -43.8%
Orange SA +7.7%
Royal Dutch Shell plc no change
Électricité de France -16.4%
JPMorgan Chase & Co. +21.6%
Walgreens Boots Alliance, Inc. +8.5%
Total SA +2%
Taiwan Semiconductor +8.5%
Qualcomm, Inc. +14.3%
Home Depot +15.7%
NN Group N.V. -4.8%

Source: Bloomberg

 

In assessing the fourth quarter 2018 performance of Thornburg Investment Income Builder, it is constructive to consider the performance in U.S. dollars of the sector components of the MSCI World Index over the three-month period. The MSCI World Index comprises 75% (which is the entire equity portion) of the fund’s global performance benchmark:

  1. During the fourth quarter, 10 of 11 index sectors showed negative total returns during the fourth quarter, with sector results ranging from approximately 0.50% (utilities) to negative 22% (energy). Stocks of firms in the information technology, industrials, consumer discretionary, financials, and materials sectors joined energy sector stocks in underperforming the index. Stocks of firms in the real estate, consumer staples, health care, and communications services sectors joined utility stocks in generally outperforming the index for the December quarter. In general, stocks in sectors that are most sensitive to fluctuations in economic activity performed worse, while stocks in sectors less sensitive to changes in economic growth held up better in both the December quarter and calendar 2018.
  2. Relative to the index, Thornburg Investment Income Builder’s portfolio was significantly overweight the higher-dividend-paying companies in the communications services, financial, and energy sectors, as it has been for most of its history.
  3. Income Builder Fund investments in firms in the following sectors comprised the largest average sector weightings in the fund portfolio during the fourth quarter:
    • Financial sector (23% average weighting in the fund’s equity portfolio, negative 2% change in sector weighting over the quarter)
    • Communications services sector (17% weighting in the fund’s equity portfolio; plus 1% over the quarter)
    • Energy sector (14% weighting in the fund’s equity portfolio; unchanged over the quarter)
    • Information technology sector (8% weighting in the fund’s equity portfolio, plus 1% over the quarter)
    • Health care sector (7% weighting in the fund’s equity portfolio; plus 1% over the quarter)
    • Consumer staples sector (6% weighting in the fund’s equity portfolio; unchanged over the quarter)
    • Industrials sector (5% weighting in the fund’s equity portfolio, negative 1% over the quarter)
    • Utilities sector (5% weighting in the fund’s equity portfolio; plus 1% over the quarter)
  4. The fund’s quarterly performance relative to the MSCI World Index in the fourth quarter of 2018 was helped by comparative outperformance from its holdings in the communications services, health care, financials, industrials, and information technology sectors, as well as currency hedges. The fund’s quarterly performance relative to the MSCI index was hindered by its large weighting in the energy and financials sectors.
  5. In the Income Builder portfolio, 18 and nine equity investments contributed positive returns of at least 0.05% (five basis points) to the portfolio during calendar 2018 and fourth quarter 2018, respectively. Forty-eight and 38 of the fund’s equity investments contributed negative returns of negative 0.05% or worse in calendar 2018 and in fourth quarter 2018, respectively.

Investment Income Builder’s bond holdings delivered positive returns during the quarter. Corporate bond prices were mixed during the quarter, while U.S. government bond prices rose, as we detail later in this note.

Your fund’s average return from its investments in the financial sector, though negative in the fourth quarter, significantly outperformed the equities in the finance sector of the MSCI World Index during the quarter and for calendar 2018. CME Group and Chimera Investment Corp. were among the strongest performers in the portfolio. JPMorgan Chase, Axa Equitable Holdings, UBS Group, NN Group, and BNP Paribas were weak performers in the quarter. We do not believe the competitive positions of these firms with weak performing stocks have been impaired. Heavy selling of most large banks and insurance companies around the world in late 2018 cut the share prices of many of these by more than 20% during the December quarter.

Your fund’s significant holdings in the communications services sector delivered a slightly negative performance during the quarter, significantly outperforming the equities in this sector of the MSCI World Index. England’s BT Group, France’s Orange, Netherlands KPN, and Deutsche Telekom each delivered modestly positive December quarter returns. U.S. network operator AT&T made a negative contribution to portfolio performance in the fourth quarter. For the year 2018, your fund’s communications services investments underperformed the overall portfolio, as investors earlier in the year favored more cyclical equities over the modest growth profiles of these telecommunications firms. Importantly for Thornburg Investment Income Builder, each of our telecommunications holdings mentioned in this paragraph (other than BT Group) increased their dividend in 2018.

The entire energy sector was influenced by the 35% drop in the Brent oil price, to $53.80, during the December quarter. Integrated oil companies Royal Dutch Shell, Total, and ENI, along with pipeline operator ONEOK, and U.S. refiner Valero each delivered significant negative returns in the quarter. For perspective on the $53.50 year-end 2018 price, the average Brent oil price fell from approximately $115/barrel in June 2014 to a January 2016 low of $28/barrel, before recovering to approximately $65/barrel at the end of 2017. We expect volatile oil prices to persist. Demand fundamentals appear positive for the sector, as consumption increased by more than one million barrels per day in 2018. Our investments in this sector are focused on resilient dividend payors with strong balance sheets.

Income Builder’s investments in the technology sector delivered negative returns in the December quarter, following strong overall performances in the first nine months of the year. Trade tensions created uncertainty around the near-term outlook for device sales and trade policy questions that may change geographic logistics for manufacturing networks. A positive contribution from Broadcom in the December quarter was insufficient to overcome negative returns from Qualcomm, Taiwan Semiconductor, Samsung, and ASE Technology Holding. We expect most of these firms to benefit from the ongoing proliferation of “connected” digital devices and associated data flows since these firms hold important positions in the value chain for producing the devices along with enabling data transmission and storage capability.

Investment Income Builder’s fourth quarter 2018 returns from its holdings in the health care sector significantly outperformed the return of this sector within the MSCI index during the quarter. Merck and Roche Holding each made positive contributions to portfolio performance as results from key clinical trials of new drugs were favorable.

Income Builder’s investments in the industrials and materials sectors delivered slightly negative returns in the December quarter, led by European toll-road operator Vinci, chemicals producer Lyondell Basell, and defense contractor BAE Systems. Norilsk Nickel and Korea’s LG Chem made positive contributions that allowed your portfolio’s holdings in this sector to significantly outperform the broader materials sector of the MSCI World Index.

Income Builder investments in the consumer staples sector delivered index-matching negative returns in fourth quarter 2018. Share prices of Korea Tobacco & Ginseng, Walgreens, and Nestle each declined modestly.

Among other portfolio holdings, notable contributors to December quarter and 2018 portfolio performance included Hong Kong conglomerate Hopewell Holdings, Chinese infrastructure operator NWS Holdings, and Italian electric utility Enel SpA. Hopewell Holdings received a buyout offer from its largest shareholder at a premium to its then depressed share price. Detractors from portfolio performance included Électricité de France, Home Depot, and mining conglomerate Glencore.

A stronger U.S. dollar decreased the value of our non-U.S. assets during 2018. We hedged a majority of the currency exposure of our asset positions denominated in the Australian dollar, the British pound, the euro, the Chinese Yuan, and the Swiss franc. These hedges added modestly to the relative performance of Thornburg Investment Income Builder during 2018, since benchmark indices are not hedged. Our hedging activity is used to manage risk in the portfolio, not to speculate on currency movements. However, we believe increasing U.S. government fiscal deficits could create conditions that would lead the dollar to weaken, and we would consider reducing foreign currency hedges if these deficits persist.

Within its bond portfolio, Investment Income Builder owned significantly fewer U.S. government and agency bonds than the Bloomberg Barclays U.S. Aggregate Bond Index. Bond prices were mixed in 2018, but generally lower for the year.

  • 10-year U.S. Treasury bond yields rose from 2.44% at December 31, 2017 to 3.05% at September 30, 2018 before settling back to 2.69% at December 31, 2018.
  • Corporate bond prices underperformed U.S. government bonds in 2018, as credit spreads increased late in 2018 and the FINRA-Bloomberg Active Investment Grade U.S. Corporate Bond Index increased from 3.25% to 4.20% over the year.
  • The spread widening seen in 2018 for sub-investment grade bonds was even more severe, with the FINRA-Bloomberg Active High Yield U.S. Corporate Bond Index increasing from 5.72% to 7.95% over the year. You can expect us to increase the portfolio’s allocation to bonds if rising yields lead to significantly lower bond prices. Readers of this commentary who are longtime shareholders of Income Builder will recall that the interest-bearing debt portion of the fund’s portfolio has varied over time, ranging from less than 9% in 2015 to 45% at June 30, 2009.

As of December 31, the fund portfolio included more than 80 bonds and hybrid securities. In recent years, the reduced yields available from bond investments have posed a meaningful headwind to delivering year-over-year dividend increases on Investment Income Builder shares.

Today, investors debate the future direction of the economies of China, Europe, various emerging markets, and the U.S. They consider potential policy actions by the U.S. Federal Reserve, Congress, the Trump administration, and foreign government regulatory and policy actions. Concerns about tariffs and trade policy changes continue to impact share price movements of global producers of tradeable goods, which are volatile day-today. We expect the volatility to continue until new trade policies are established. We believe that people around the world will continue to buy goods and services and trade with each other. Importantly, overall global consumer spending grew in 2018 and appears poised to grow in 2019, along with global population and industrial production. Following the largest annual price declines since 2008 for U.S. equity markets and many others, price-to-earnings multiples for most stocks have adjusted downward to account for uncertainty around macro-economic policies and expectations for slowing economic growth in 2019 and beyond.

Most firms held in Thornburg Investment Income Builder’s portfolio delivered positive year-over-year earnings in 2018, even as the U.S. Federal Reserve hiked the Federal funds target rate to 2.50%, which is roughly in line with inflation. Most major central banks around the world continue to pursue very easy monetary conditions, which artificially suppress interest rates and support prices of financial assets.

While low interest rates are good news for borrowers, they have negative consequences for conservative savers. Interest income as a percentage of the aggregate adjusted gross income of U.S. households fell from 4% in 2007 to less than 2% in 2016, according to Statistics of Income published by the Internal Revenue Service.

Investors must consider other options. Banks in the U.S. offer below-inflation yields on most deposits. A very large pool of investor dollars is looking for better returns elsewhere, but in sensible investments. We are optimistic that the types of income-producing investments owned by Thornburg Investment Income Builder Fund will experience sustainable popularity among investors as their intrinsic values for income production are recognized. A high percentage of investor funds belong to people over the age of 55, for whom income is an increasingly necessary and desirable attribute.

Performance data shown represents past performance and is no guarantee of future results. Investment return and principal value will fluctuate so shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than quoted. For performance current to the most recent month end, see the mutual funds performance page or call 877-215-1330. The maximum sales charge for the Fund’s A shares is 4.50%.

30-day SEC Yield as of 12/31/18 – A Shares: 3.22%; I Shares: 3.63%.

Important Information
Before investing, carefully consider the Fund’s investment goals, risks, charges, and expenses. For a prospectus or summary prospectus containing this and other information, contact your financial advisor or visit thornburg.com. Read them carefully before investing.

Unless otherwise noted, the source of all data, charts, tables and graphs is Thornburg Investment Management, Inc., as of 12/31/18.

Prior to inception of class I shares, performance is calculated from actual returns of the class A shares adjusted for the lower Institutional expenses.

Investments carry risks, including possible loss of principal. Additional risks may be associated with investments outside the United States, especially in emerging markets, including currency fluctuations, illiquidity, volatility, and political and economic risks. Investments in small- and mid-capitalization companies may increase the risk of greater price fluctuations. Investments in the Fund are not FDIC insured, nor are they bank deposits or guaranteed by a bank or any other entity.

The views expressed are subject to change and do not necessarily reflect the views of Thornburg Investment Management, Inc. This information should not be relied upon as a recommendation or investment advice and is not intended to predict the performance of any investment or market.

Any securities, sectors, or countries mentioned are for illustration purposes only. Holdings are subject to change. Under no circumstances does the information contained within represent a recommendation to buy or sell any security.

Dividends are not guaranteed.

The performance of any index is not indicative of the performance of any particular investment. Unless otherwise noted, index returns reflect the reinvestment of income dividends and capital gains, if any, but do not reflect fees, brokerage commissions or other expenses of investing. Investors may not make direct investments into any index.

There is no guarantee that the Fund will meet its investment objectives.

Please see our glossary for a definition of terms.

Thornburg mutual funds are distributed by Thornburg Securities Corporation.

Thornburg Investment Management, Inc. mutual funds are sold through investment professionals including investment advisors, brokerage firms, bank trust departments, trust companies and certain other financial intermediaries. Thornburg Securities Corporation (TSC) does not act as broker of record for investors.