1st Quarter 2019

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Thornburg Strategic Income Fund returned 3.21% (I shares) in the quarter ended March 31, 2019, slightly underperforming the Bloomberg Barclays U.S. Universal Index benchmark return of 3.32%. We maintain our focus on delivering superior returns over longer periods. Over the last three years, which is close to the fund’s current duration, Strategic Income has returned 5.42% on an annualized basis versus 2.65% for the benchmark index. Since its 2007 inception, the fund has returned an annualized 6.22%. The index returned 4.14% over the same period.

Markets & Economics

Rising market volatility in the fourth quarter of 2018 largely suggested that investors feared a tilt away from global monetary policy coordination and the less predictable, and potentially uneven, economic results that were likely to follow. Despite investor anxiety, rising global frictions and waning business confidence, central banks continued to adjust policy away from accommodation. The Fed led the punchbowl withdrawal with a series of rate hikes and simultaneous balance sheet shrinkage. It ultimately stayed the course and hiked rates in December, setting the stage for a potentially tumultuous first quarter 2019 for risk assets. But in early January, Fed Chairman Jerome Powell retreated from further planned interest rate hikes in the months ahead, creating downside pressure for rates, and reinvigorating risk assets across the globe. Additionally, the Federal Open Markets Committee’s decision to end balance sheet normalization toward the end of 2019 accelerated the downward move in rates, further buoying markets. The apparent retreat allowed other central banks around the globe to abandon rate hike plans, though most cited weakening global growth as their rationale.

On a global basis, general underlying economic fundamentals did not materially deteriorate during the quarter. This fact, combined with more accommodative central banks, has resulted in one of the strongest quarters for risk assets on record. As is often the case, short-term market reactions appear to have moved far beyond what fundamentals dictate. We believe this time is no different with rates having first moved too high too quickly in the latter part of 2018, and then falling too far too fast more recently. Similar comments could be made with respect to equity and credit markets.

Credit & Portfolio

As the quarter began, we welcomed the volatility, which presented an opportunity in select names that we have been following but had generally passed on or remained light on, due to the tightness of spreads. As volatility increased, we were able to pick up more attractively priced bonds on sale across multiple sectors and credit profiles. We did not make a wholesale shift in the portfolio toward risk, though, and largely remain defensive today, with a lower allocation to high yield than in the recent past. In our view, the key to a successful credit portfolio is balancing competing variables into an optimal combination that meets overall objectives. At times, this means reducing risk in portfolios when not properly compensated. This can mean underperformance during periods when investors jump head first into risk assets despite increasing perils.

U.S High Yield bonds, as measured by the Bloomberg Barclays U.S. Corporate High Yield Index, had the best first quarter since 2003, jumping 7.3%. While high yield clearly benefited from the Fed’s dovish pivot and its decision to end balance sheet normalization earlier than previously indicated, a demand-supply imbalance also appeared to play a significant role in boosting performance during the quarter. Issuance fell to the least since 2016 and March issuance alone came in at $20.4 billion, down 21% from March 2018. In fact, it was the slowest March since 2009. The Bloomberg Barclays U.S. Corporate High Yield Index spreads closed March at 391 versus a 16-week low of 379 in February. With yields and spreads compressed, investors aren’t likely to experience a repeat of first-quarter performance in high yield. We’ve also observed continued weakness in flows to the leveraged loan space in the first quarter. In our estimation, current collateralized loan obligation creation has kept things from getting ugly, but this too can turn on a dime.

Outside of general market consensus, we remain positioned more for future rate hikes as opposed to future cuts. We believe further volatility is likely, with market swings particularly asymmetric for high-quality, longer-duration assets. If the economic environment remains stable or improves, we believe the Fed will once again turn a bit more hawkish and rates will have room to rise while credit doesn’t have much room to compress. In the event the environment worsens, credit has lots of room to move wider while rates are already subdued. Again, taking potential volatility out of portfolios in both credit and rates makes sense while the cost of doing so is currently minimal.

The market is not without opportunity, however. We still find value in consumer balance sheets. From senior tranches of non-agency mortgage-backed securities to select secured consumer loans (i.e. secured by houses), attractive investment options can be found. In our view, our place in the capital structure reduces our credit risk. It also lowers the underlying borrowers’ incentives and ability to refinance, lessening prepayment activity. Other consumer-related securities interest us as well. Refinanced student loans serve as an example; the student loan pools that interest us represent borrowers who graduated from top graduate programs, often from medical or law programs, occupations that exhibit lower volatility during downturns. These borrowers have been making payments on prior student loans for several years before refinancing and on average earn $150,000–$200,000 per year. These young adults are employable and have sufficient income to service debt, representing a less risky proposition in a market that has recently shown fragility.

We continue to believe caution in the corporate sector, both within investment grade and high yield, is warranted. At this stage of the credit cycle, individual security selection across industries, credit quality, maturities and region are likely to be key drivers of investor future results. We believe our unique approach and structure offers our investors an edge in this strange and tumultuous environment. Over time, we think our results bear this out. On a three-year rolling basis over the life of the fund we’ve managed to outperform both the Morningstar Multisector Bond category and Non-Traditional Bond category 100% of the time, a period that included several different market episodes, both risk on and risk off.

Thank you for investing alongside us in Thornburg Strategic Income Fund.

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%.

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 3/31/19

Investments carry risks, including possible loss of principal. Portfolios investing in bonds have the same interest rate, inflation, and credit risks that are associated with the underlying bonds. The value of bonds will fluctuate relative to changes in interest rates, decreasing when interest rates rise. This effect is more pronounced for longer-term bonds. Unlike bonds, bond funds have ongoing fees and expenses. Investments in lower rated and unrated bonds may be more sensitive to default, downgrades, and market volatility; these investments may also be less liquid than higher rated bonds. Investments in derivatives are subject to the risks associated with the securities or other assets underlying the pool of securities, including illiquidity and difficulty in valuation. Investments in equity securities are subject to additional risks, such as greater market fluctuations. 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 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.

Morningstar Multisector Bond category portfolios seek income by diversifying their assets among several fixed income sectors, usually U.S. government obligations, U.S. corporate bonds, foreign bonds, and high-yield U.S. debt securities. These portfolios typically hold 35% to 65% of bond assets in securities that are not rated or are rated by a major agency such as Standard & Poor’s or Moody’s at the level of BB (considered speculative for taxable bonds) and below.

The Morningstar Non-traditional Bond category contains funds that pursue strategies divergent in one or more ways from conventional practice in the broader bond-fund universe. Many funds in this group describe themselves as “absolute return” portfolios, which seek to avoid losses and produce returns uncorrelated with the overall bond market; they employ a variety of methods to achieve those aims. Another large subset are self-described “unconstrained” portfolios that have more flexibility to invest tactically across a wide swath of individual sectors, including high-yield and foreign debt, and typically with very large allocations. Funds in the latter group typically have broad freedom to manage interest-rate sensitivity, but attempt to tactically manage those exposures in order to minimize volatility. The category is also home to a subset of portfolios that attempt to minimize volatility by maintaining short or ultra-short duration portfolios, but explicitly court significant credit and foreign bond market risk in order to generate high returns. Funds within this category often will use credit default swaps and other fixed income derivatives to a significant level within their portfolios.

U.S. Treasury securities, such as bills, notes and bonds, are negotiable debt obligations of the U.S. government. These debt obligations are backed by the “full faith and credit” of the government and issued at various schedules and maturities. Income from Treasury securities is exempt from state and local, but not federal, taxes.

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.

High yield bonds may offer higher yields in return for more risk exposure.

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

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