1st Quarter 2019

Portfolio managers are supported by the entire Thornburg investment team.

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Global equity markets rebounded strongly in the first quarter of 2019, regaining almost all of the ground lost in the fourth quarter of 2018. One of investors’ biggest concerns and a big catalyst of the fourth quarter selloff was U.S. Federal Reserve monetary tightening, particularly a comment by Fed Chairman Jerome Powell that interest rate policy was “a long way from neutral.” Since then, the Fed has adopted a more dovish tone and in March indicated the likelihood of no more rate hikes in 2019.

The potential for a protracted U.S.–China trade war and its impact on Chinese and global growth also weighed on markets in the fourth quarter. But a more conciliatory tone early this year between the two countries and apparent progress in trade negotiations helped markets, particularly in China. The Shanghai Composite Index, which was down 26.9% in dollar terms in 2018, rebounded 27% in the first quarter of 2019. Macro measures taken by the Chinese government to support the economy and domestic consumption also helped market sentiment.

After a difficult 2018 in both absolute and relative performance, in the first quarter of 2019 Thornburg International ADR Strategy returned 15.7% (net of fees) versus returns of 10.3% for the MSCI ACWI ex-U.S. Index and 10% for the MSCI EAFE Index.

The strategy’s highest conviction and largest country overweight has been China. As China equity markets de-rated significantly last year, we believed the impact on our companies’ earnings would be limited. Therefore, we maintained a meaningful overweight through the turmoil and into the first quarter. China was the largest positive contributor to performance in the January-through-March quarter. Yet, stock selection contributed twice as much to relative performance as country allocation. As stock prices normalize, we continue to evaluate the attractiveness of and allocation to each stock from a fundamental bottom-up perspective.

Another factor supporting the strategy’s performance was the rebound in stocks that were the worst performers in 2018. When stocks don’t perform based on our expectations, we carefully re-examine the investment thesis for those holdings, exit names in which we see a deterioration in our thesis, and hold those we consider undervalued. Many of last year’s bottom performers that we continued to hold became top contributors to first-quarter performance. New names we added in the fourth quarter because of valuation dislocation also contributed positively to the performance this past quarter.

Past performance does not guarantee future results. To obtain the calculation methodology and a list showing the contribution of each holding in the representative account to the overall account's performance during the reporting period, please email a request to bdg@thornburg.com. The holdings identified do not represent all of the securities purchased, sold or recommended for advisory clients.

Top Contributors

  • SoftBank Group Corp.
    SoftBank is a holding company with businesses in the information and technology industry within Japan and internationally. Its major assets include the third-largest wireless operator in Japan, the fourth-largest wireless operator in the U.S., the largest e-commerce platform in China, a global microprocessor company and a soon-to-be $100 billion technology-focused private equity fund. The company, which underperformed in the fourth quarter, was a top performer in the first quarter of 2019 as quarterly profits beat estimates and the company announced a $5.5 billion share repurchase program. We believe the company still trades at a significant discount to its sum-of-the-parts valuation.
  • Omron Corporation
    OMRON is a Japanese producer of electronic components used in factory automation. The largest and fastest-growing segment in OMRON is its industrial automation division, which sells electronic controllers, motors, precision measuring equipment and other key components used in the development of modern factory and warehouse automation. Given its long corporate history and the depth of its products, it has benefited from broad investment in factory automation in China and Europe, particularly. Worries about a slowing global economy, especially a slowdown in China capex, negatively impacted the stock last year. The stock has seen a significant rebound in 2019 as sentiment reversed.
  • TAL Education Group
    TAL Education Group provides after-school tutoring services in China. With rising urbanization, favorable demographics and intense competition for admission into top schools in China, TAL benefits from a supply-demand imbalance, coupled with a growing market share on favorable brand recognition. During the first quarter, the stock rose more than 35% as China’s markets recovered, revenues rose 35% and margins improved.
  • Ping An Insurance Group Co.
    Ping An Insurance is a leading Chinese financial conglomerate involved in insurance, pensions, banking, brokerage, trust, and other financial services businesses. Currently, Ping An is the second-largest life insurer and the second-largest property and casualty insurer in China in terms of premiums. In the first quarter, Ping An posted a strong recovery in assets under management from 2018 as stronger China equity markets supported portfolio values and helped draw investment inflows, and as earnings expectations increased. We continue to expect positive business momentum and the potential to list and unlock the value in Ping An’s fintech businesses.
  • Alibaba Group Holding Ltd.
    Alibaba provides online retail marketplace services to over 700 million active monthly users in China. It also provides e-commerce services outside China, fintech, cloud computing, logistics platform service and online video services. As the most dominant player in its market, Alibaba benefits from the fast-growing e-commerce industry in China. Alibaba’s investment in R&D will lead to continued take rate expansion. Leveraging its data intelligence Alibaba is well positioned to cross-sell other services to its large user base. In the first quarter the stock rebounded strongly, due to better-than-expected earnings and a re-rating back to third quarter 2018 levels.

Top Detractors

  • Prysmian SpA
    Prysmian is an Italian multinational firm that manufactures electric power transmission and telecommunications cables and systems. It is the largest manufacturer of cables in the world measured by revenues. Prysmian is the largest beneficiary of structural growth in grid interconnections, renewables build out and fiber investments. Prysmian bought the third-largest cable play and is already delivering synergies ahead of targets. The stock was down modestly and underperformed in the first quarter as problems re-emerged with its Western Link Interconnection project in the U.K., which led to an additional 25 million euros in provisions. Full-year guidance was also slightly below expectation.
  • ING Groep NV
    ING Groep is one of the world’s largest financial service companies, based in the Netherlands but operating in more than 40 countries. The stock price declined in 2018 and valuations contracted along with other European financials amid concerns about the impact of European interest rates on net interest margins, exposure to Turkey and lack of excess capital for shareholder return. The stock recovered in early 2019, along with global markets and on the back of a strong earnings report. Our position lost modest ground as money laundering allegations, for which the company had paid a fine in 2018, re-emerged in March.
  • Wirecard AG
    Wirecard is a global internet technology and financial services provider. The company offers electronic payment solutions and risk management, as well as the issuing and processing of physical and virtual cards. The company, which had experienced several years of strong growth and returns, was down 30% in the fourth quarter’s market decline and a further 28% in the first two months of 2019 after allegations of questionable accounting methods and other financial irregularities surfaced against the company’s Asian headquarters in Singapore. While the stock is up modestly since then as an internal investigation found no material wrongdoing, its small contribution to portfolio returns in an up quarter makes it a bottom performer.
  • UBS Group AG
    Switzerland’s UBS is a large diversified international financial institution. Its business strategy is centered on the company’s global wealth management business and universal bank. The stock was weak last year because of the market’s weak performance and headlines regarding litigation with the U.S. Department of Justice in a case involving residential mortgage-backed securities and litigation in France in a tax avoidance case. We initiated a position in the fourth quarter because we believe UBS is a premium franchise benefiting from the structural growth of the wealth management industry globally.
  • Électricité de France (EDF)
    EDF produces, transmits, distributes, imports and exports electricity. EDF owns the largest nuclear power generation capacity in France and is vital for the reliability of electricity across Europe. Given its generation business model, EDF is sensitive to power prices. During the first quarter, spot power price and forward power price were weaker than expected. Company guidance for 2019 was also below expectations, and anticipated government-led reform of the power sector was slow to materialize. Even with its outperformance and rerating over the past several years, we believe EDF’s assets are still considerably undervalued.

While more macro concerns will no doubt come and spark episodes of market volatility, we continue to believe the best way to outperform is by being long-term, focused, bottom-up active investors.

Thank you for investing in the Thornburg International ADR Strategy.

Important Information

Performance data for the International ADR Strategy is from the International ADR Composite, inception date of August 1, 2003. The International ADR Composite includes discretionary institutional and high net worth accounts that are not part of a broker-sponsored or wrap program. Effective January 1, 2014, the composite includes separately managed institutional and high net worth accounts. Prior to January 1, 2014, the composite also included broker-sponsored accounts that paid transaction costs. The composite was redefined to include broker-sponsored accounts in the same composite. Returns are calculated using a time-weighted and asset-weighted calculation including reinvestment of dividends and income. Periods less than one year are not annualized. Individual account performance will vary. The performance data quoted represents past performance; it does not guarantee future results. Gross of fee returns are net of transaction costs. Net of fee returns are net of transaction costs and investment advisory fees. Thornburg Investment Management Inc.’s fee schedule is detailed in Part 2A of its ADV brochure. Performance results of the firm's clients will be reduced by the firm's management fees. For example, an account with a compounded annual total return of 10% would have increased by 159% over ten years. Assuming an annual management fee of 0.75%, this increase would be 142%.

Unless otherwise noted, the source of all data, charts, tables and graphs is Thornburg Investment Management, Inc., as of 3/31/19.

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.

The Strategy may invest in shares of companies through initial public offerings (IPOs). IPOs have the potential to produce substantial gains and there is no assurance that the Strategy will have continued access to profitable IPOs. As Strategy assets grow, the impact of IPO investments on performance may decline.

The information provided in this report should not be considered a recommendation to purchase or sell any particular security. There is no assurance that any securities discussed herein will remain in an account's portfolio at the time you receive this report or that securities sold have not been repurchased. The securities discussed may not represent an account's entire portfolio and in the aggregate may represent only a small percentage of an account's portfolio holdings. It should not be assumed that any of the securities transactions or holdings discussed were or will prove to be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein.

Portfolio holdings and characteristics shown herein are from a representative account managed within the investment composite. The representative account is selected based on account characteristics that Thornburg believes accurately represent the investment strategy as a whole. Should these characteristics change materially, Thornburg may select a different representative account. Holdings may change daily and may vary among accounts, which may contribute to different investment results. The representative account information is supplemental to the strategy’s composite and GIPS compliant presentation.

Holdings may change daily and may vary among accounts.

Portfolio construction will have significant differences from that of a benchmark index in terms of security holdings, industry weightings, asset allocations and number of positions held, all of which may contribute to performance, characteristics and volatility differences. Investors may not make direct investments into any index.

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