1st Quarter 2019

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Global equities posted strong returns during the first quarter, snapping back from their 2018 tumbles. Federal Reserve Chairman Jerome Powell’s dovish comments in late December and early January kicked off the initial ascent, while the People’s Bank of China and the European Central Bank have provided additional support for risk assets. The ensuing halt to U.S. dollar strengthening broadly benefited emerging markets.

Within the MSCI Emerging Markets Index, positive equity returns were found in 21 of the 24 countries represented. Poland, Turkey and Qatar were the only exceptions. More than 50% of the total index return came from China, followed by Taiwan, Brazil, Korea and India.

Performance Discussion

For the first quarter of 2019, the Thornburg Developing World Fund returned 14.93% (Class I shares, Accumulating), ahead of the MSCI Emerging Markets Index, which returned 9.91%. Since its inception, the Developing World Fund has returned an annualized 1.93% (Class I shares, Accumulating), compared with the MSCI Emerging Markets Index return of 4.61%.

The Fund employs a basket approach, allocating to “basic value,” “consistent earner” and “emerging franchise” stocks. This additional layer of diversification is unique to Thornburg and is intended to provide exposure to a wide range of companies with varied cash flow and market cycle characteristics.

Basic value companies are financially sound businesses that tend to be more economically sensitive but sell at low valuations relative to net assets or potential earnings power. The stocks tend to perform well early in an economic recovery as investor optimism begins to increase. For the quarter, this basket trailed slightly.

Companies within the consistent earners basket normally exhibit steady earnings growth and cash flow characteristics. Stocks within this basket outperformed during the quarter.

Emerging franchise companies are those in the process of establishing a leading position in a product, service or market with the potential to grow at an above- average rate. Stocks within this basket tend to perform well during growth-led markets. These stocks rallied ahead of the index by a wide margin over the quarter.

Top individual contributors to performance for the quarter included Alibaba, Tencent, AIA, B3 and Huazhu Group.

Investors became more optimistic about the outlook for the Chinese economy and underlying earnings growth for companies operating in China during the first quarter, thanks to progress made in U.S.–China trade negotiations and ongoing government support for the economy. The improved outlook boosted the share prices of e-commerce giant Alibaba, social network and gaming company Tencent, insurer AIA and lodging operator and franchisor Huazhu Group from what was an oversold state at the end of 2018. Tencent also benefited from the resumption of game approvals in China, which is still the largest part of their business.

B3, the largest equity and derivatives exchange in Brazil, saw its outlook improve on a combination of low interest rates and the brightening economic outlook, which has lifted general enthusiasm for investing.

Top individual detractors for the period included chipmaker Qualcomm, South African insurer Sanlam, Brazilian dental benefits firm Odontoprev, Brazilian apparel retailer Lojas Renner and specialty fertilizer producer and lithium miner Sociedad Quimica y Minera de Chile.

Qualcomm shares underperformed due to concerns about ongoing legal issues, which could invalidate part of its business model focused on charging for its intellectual property.

Sanlam shares were weak during the quarter due to concerns about soft demand in the domestic market and margin pressures across Africa.

Several small positions that we were exiting or that were recently initiated detracted from or were immaterial to performance during a period when the market was performing well. These positions included Odontoprev, Sociedad Quimica y Minera de Chile and Lojas Renner.

Looking ahead, earnings estimates point to growth close to 10% this year and next year. Equity valuations, while higher than a few months ago, remain attractive, especially considering that earnings have more to recover.

Several factors lead to a bullish outlook for the remainder of 2019. First, Beijing recently unleashed a slew of stimulus measures—from fiscal to monetary and housing—to boost the economy, and their impact has yet to fully be reflected. Comprising more than 30% of emerging markets overall, accelerating growth in China can lead to a strong spillover effect, benefiting emerging markets from Asia to Latin America and Africa. Given the anticipated impact of China’s stimulus, earnings expectations across the region may be conservative, while multiples currently run within a normal range. Moreover, the trade tensions that contributed to the 2018 correction in emerging market equities have eased. A resolution to the dispute could lift uncertainty and boost investor confidence in the outlook for global growth. Finally, the dovish pivot by the Fed’s Powell suggests the strong-dollar headwind that has plagued emerging markets for several quarters is abating.

Our approach to emerging market investing is through a focused, yet diversified portfolio of attractively priced, free-cash-flow-generative stocks. Our flexible and balanced process has benefited the Fund as the market shifted from growth-led stocks in 2017 to value- led names in 2018. Although macroeconomic conditions have been challenging within many emerging market countries, we believe great companies can still rise to the challenge and distinguish themselves over the long term.

Thank you for investing in Thornburg Developing World 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, visit the Prices & Performance page.
Important Information

Source of data: Factset, BBH, Confluence, Bloomberg—unless otherwise stated.

Date of data: 31 March 2019—unless otherwise stated.

Investments carry risks, including possible loss of principal. Additional risks may be associated with investments 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 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.

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