1st Quarter 2019

Portfolio managers are supported by the entire Thornburg investment team.

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What a Difference a Quarter Makes

After declining almost 14% last quarter, the S&P 500 Index regained almost all of that loss in the first quarter of 2019. The Thornburg U.S. Equity Strategy returned 14.4% for the quarter (net of fees), ahead of the 13.7% return of the S&P 500 Index. Value stocks continued to underperform growth stocks during the period, though small caps (as measured by the Russell 2000 Index) outpaced large caps (the S&P 500 Index).

Over the last five years, growth stocks have produced roughly double the performance of value stocks. Large caps have dramatically outperformed small caps. U.S. stocks have trounced international stocks (see Chart 1). We find it interesting that active managers in the U.S. tend to have some exposure to international and small-cap companies, especially versus the mega-cap S&P 500 Index. Perhaps it’s not so surprising, then, that this has been a particularly tough environment for active managers up against the mightiest of stock indices, the S&P 500 Index.

While active managers generally underperform, other research shows that if we exclude “closet indexers” from the data set, there is a core of highly active, high conviction, benchmark agnostic managers that do outperform, net of fees, over the long term (as nearly all of Thornburg’s equity portfolios have since inception.)1

The last number of years represents the longest drought in the data since the lead up to the internet bubble. In our experience, over the long term, it usually isn’t the case that the thing that has performed the best over the last five years is most likely to perform the best over the next five. This is what creates cycles, even bubbles, in our business. We wonder if drawing conclusions about the future of active management, especially in large-cap U.S. stocks, is just an extrapolation of the trend. We, certainly, are seeing opportunity in investments that have helped us to create a portfolio that, while it has balance, also looks different and more attractive than the index we are compared to.

In part, this is due to the big disparity we see today between the valuation of value stocks and growth stocks (see Chart 2).

But also, from Bloomberg, “U.S. firms with solid financials now trade close to the highest valuation relative to their fragile peers since the dot-com era of 2003, according to Goldman Sachs Group Inc. indexes.”

Even in a market that has ripped higher, we see dramatic relative valuation opportunities that we believe will set our next five years’ performance well apart from that reported by the S&P 500 Index (see Chart 3).

How a Genius Thinks, Works and Lives

A former colleague, Alex Motola, passed along a great read. A medium essay, “10,000 Hours with Claude Shannon: How a Genius Thinks, Works, and Lives” covers highlights from the book A Mind at Play, published in 2017 by Jimmy Soni and Rob Goodman.2

While you may not have heard of Claude Shannon, you certainly benefit from his work. His groundbreaking publications in the 1930s and 1940s laid the foundation for the information age. He both explained how binary switches could do logic and invented the bit, each indispensable to the operation of whatever device you’re reading this quarterly report on.

We couldn’t help but notice some parallels between how he chose to work and how we have organized our investment team at Thornburg.

Generalist vs. Specialist

This quote from Vannevar Bush, Shannon’s graduate adviser is instructive:

“In these days, when there is a tendency to specialize so closely, it is well for us to be reminded that the possibilities of being at once broad and deep did not pass with Leonardo da Vinci or even Benjamin Franklin. Men of our profession — we teachers — are bound to be impressed with the tendency of youths of strikingly capable minds to become interested in one small corner of science and uninterested in the rest of the world. . . . It is unfortunate when a brilliant and creative mind insists upon living in a modern monastic cell.”


In fact, it was Shannon’s lack of specialization that allowed him to bring together his work on Boolean logic and computer-building in his master’s thesis, two previously unrelated fields of scientific research. That was a good idea, it turned out. Similarly, the investors on our team are better for their exposure to different types of companies in different sectors and geographies. We love that, from your earliest days on our investment team, analysts at Thornburg are challenged to think about very different sorts of businesses and compare them to one another. This is different than how many of our competitors our organized, and it works really well for us.

Big Picture First. Details Later.

We have been thinking more and more about equity investment research as a creative process. Creative processes require the right environment. We have long focused on building a culture that supports great stock pickers in their pursuit of undervalued investment opportunities. This also gets to the heart of something Bill Fries preached internally—focus on the key issues. Get those right, and the rest will take care of itself. That’s not to say we don’t do detailed work here. We do incredibly detailed work. The key, however, is to organize and synthesize the detailed work behind a simple investment thesis that we believe to be right. The thesis comes first, and the details serve to support or refute the thesis.

Shannon took a similar approach to his mathematical work. He’d leap right to the central insight first, then fill in the details later. As the authors suggest, “It was if he saw solutions before he could explain they were correct.” Further, they suggest, “Expecting our big ideas to unfold logically from premise to conclusion is a misunderstanding of the way creativity usually works in practice.” We have built a culture and process that repeatably generates investment ideas for each of our strategies. But part of the magic is the flexibility allowed within each team member’s pursuit of investment ideas.

The Quarter

On a sector attribution basis, our good results for the quarter were driven entirely by stock selection within sectors, rather than our allocation amongst them. Our sector allocation was a reasonably significant drag on performance, primarily driven by our cash position. Our underweight to information technology and our overweight to financials were also relative drags. Stock selection effect was significant and positive, with our best stock performance in the financials, health care, and energy sectors. Our stock attribution in information technology and industrials were a slight drag.

Contributors and Detractors

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.

First-Quarter Top Performers

  • Thermo Fisher Scientific, Inc.
    Thermo Fisher continues to perform well with broad strength in end market demand leading to solid organic growth.
  • Devon Energy Corp.
    Despite continued execution on their portfolio transformation that highlights what we view as DVN’s undervaluation in absolute terms and relative to U.S. peers, oil prices and Canadian oil spreads continue to be the main driver of the stock in recent quarters. The stock was a detractor from our performance in the fourth quarter 2018, and rebounded to be one of our top contributors in the first quarter 2019.
  • Oaktree Capital Group LLC
    Shares of Oaktree climbed after the company received a takeout offer during the quarter.
  • Enterprise Products Partners
    Enterprise Products Partners continues to be one of the major beneficiaries of increased U.S. shale drilling, as its integrated infrastructure benefits from the growing volumes of energy molecules along the Gulf Coast via growth of downstream and export opportunities. It is currently self-funding its growth capex, has a large and growing 6% distribution and significant distribution coverage that should allow them to continue growing the distribution moving forward.
  • Nomad Foods Ltd.
    Nomad Foods continues to outgrow its European frozen foods end markets, integrate recent acquisitions successfully and generate significant cash flows which help the company de-lever and prepare for future tuck-in acquisitions. We continue to like the combination of strong business momentum and discounted valuation relative to U.S. food peers.

First-Quarter Bottom Performers

  • CASA Systems, Inc.
    Casa is a supplier of communications equipment to cable and telecom companies. A pause in capital spending by their top customers ahead of a shift in cable infrastructure architecture, combined with delays in getting telecom wireless equipment certified has led to an air pocket in the company’s revenues and increased uncertainty around the timing and trajectory of a recovery in revenues moving forward.
  • HP, Inc.
    HP announced weak January quarter results in their printing segment, as the trajectory of supplies revenue growth declined a couple percent from prior run-rate and expectations. This changed the near-term earnings trajectory of the stock, causing the stock to re-rate lower.
  • Activision Blizzard, Inc.
    Activision is a leading publisher and developer of video games. After a weak fourth quarter, Activision shares continued to adjust to lower forward revenue and earnings estimates. Additionally, a competitor launched APEX Legends during the quarter, further fueling concern surrounding competition from the battle royale genre.
  • Crown Holdings, Inc.
    Crown Holdings is a newer position for us. As most of the portfolio increased in value, the lack of a positive contribution during the quarter qualified it as a detractor.
  • Medtronic plc
    Medtronic is the largest medical device company in the world. The stock lagged the strong market in the first quarter due to guidance for a higher tax rate and hence lower earnings growth for the year. The change is a one-time hit and does not alter our long-term thesis for this Consistent Earner.

Thank you for your continued trust and confidence.

NOTABLE PURCHASES (December 2018–February 2019)
Huntsman Corp.
ADT, Inc.
Echostar Corp
RPC Group plc


1. “Growth Stocks Haven’t Been This Expensive Since the Dot-Com Peak,” www.bloomberg.com.

2. https://medium.com/the-mission/10-000-hourswith- claude-shannon-12-lessons-on-life-and-learning- from-a-genius-e8b9297bee8f

Important Information

Performance data for the U.S. Equity Strategy is from the U.S. Equity Composite, inception date of November 1, 1995. The U.S. Equity Composite includes discretionary institutional and high net worth accounts invested in the U.S. Equity strategy 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 all 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. 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.

The information provided herein 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.

Notable purchases and sales includes material transactions other than recently purchased securities, which may be excluded for best execution purposes.

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.

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.

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.

Please see our glossary for a definition of terms.