1s Quarter 2019

Portfolio managers are supported by the entire Thornburg investment team.

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The Thornburg Limited Term Income Strategy returned 2.13% (net of fees) during the first quarter of 2019, slightly underperforming the Bloomberg Barclays Government/Credit Index, which advanced 2.32%. We maintain our focus on delivering superior returns over longer periods. Over the last three years, which is close to the portfolio’s current duration, Limited Term Income Strategy has returned 2.70% on an annualized basis versus 1.66% for the benchmark index. Since its February 1993 inception, the portfolio has returned an annualized 4.95% (net of fees). The index returned 4.78% over the same period.

Last year ended with the U.S. Federal Reserve withdrawing the punchbowl in a series of rate hikes and simultaneous balance sheet shrinkage, generating considerable market volatility. The Fed 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 later part of 2018, to then falling too far too fast more recently. Similar comments could be made with respect to equity and credit markets.

If we believe things may have gone too far too fast in the realm of credit, and we also believe that risk remains high in the marketplace, why then do our investors see BBB-rated credit as the largest allocation by rating? Simply put, credit ratings do not tell the full story for any given issuer, and investors need to take a deeper dive when determining which areas of the market are likely to offer superior relative value. Our allocations in BBB currently focus on companies with more stable, defensive cash flows, such as utilities and other organizations with government contracts. Generally, BBB-rated companies offer a more compelling risk-reward profile following a market rally led by higher-rated firms, as lower-rated firms have generally demonstrated a willingness and ability to adjust to preserve ratings at least one notch above the threshold separating high grade and high yield. We have already witnessed, for example, BBB companies cutting dividends, publicly committing to reducing leverage, and prioritizing deleveraging over mergers and buybacks. Meanwhile, over the last several years, the gross leverage ratios of single-A and BBB companies have begun to look more similar.

At this stage of the credit cycle, individual security selection across industries, credit quality, maturities and region is likely to be a key driver for investor results. Core to our approach is the consistent application of our investment philosophy, which compels taking incremental risk only when we believe that risk offers proper compensation. Over the last few months, as Treasury rates fell, we reduced duration in Limited Term Income to near 2.6 years at the end of the period. Our Limited Term U.S. Government Strategy followed the same path. As noted, we believe the market may have rallied a bit too far, so we’ve moved duration back toward the lower end of our range rather than in the middle, as it had been in recent times.

Outside of general market consensus, we remain positioned more for future rate hikes as opposed to future rate cuts, and portfolios remain defensive overall. 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. Generally, 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 believe there is value investing in consumer balance sheets, including senior tranches of non-agency mortgage-backed securities. Essentially, we continue to favor secured consumer loans (i.e. secured by houses). 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. There are other consumer-related securities that we find interesting, as well. Refinanced student loans, for example; the student loan pools that interest us represent borrowers who have graduated from top graduate programs, often from medical or law schools, 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.

In the Thornburg Limited Term Income Strategy, investors will notice a broad mix of government securities, corporate credit and a healthy amount of dry powder to take advantage of any volatility across the horizon. Our balanced approach has led to long-term outperformance for the strategy, and we believe our sound process will allow us to continue this trend for many years to come.

Thank you for investing in Thornburg Limited Term Income, Limited Term U.S. Government, and Low Duration Income Strategies.


Important Information

Performance data for the Limited Term Income Strategy is from the Limited Term Income Composite, inception date of February 1, 1993. The Limited Term Income Composite includes all non-wrap discretionary accounts invested in the Limited Term Income Strategy. Returns are calculated using a time-weighted and asset-weighted calculation. Returns reflect the reinvestment of income and capital gains. 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. For periods prior to 2011, net returns for some accounts in the composite also reflect the deduction of administrative expenses. 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.

Holdings may change daily and may vary among accounts.

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.

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.

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.

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.

Please see our glossary for a definition of terms.