4th Quarter 2018

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Thornburg Investment Income Builder paid an ordinary quarterly dividend of $0.048 per I USD Distributing (Unhedged) share in the quarter ending 31 December 2018. This compares to a dividend of $0.06 for the comparable quarter of 2017. The Fund paid $0.344 per I USD Distributing (Unhedged) share in the 12-month period ending 31 December 2018. The trailing 12-month dividend yield was 4.7%, which exceeds the yield on most bonds and stocks. The Fund’s net asset value decreased by $0.87 per share ($10.88 to $10.01) during the December quarter. Importantly, the Fund showed attractive downside protection against both the blended benchmark (75% MSCI World Index and 25% Bloomberg Barclays U.S. Aggregate Bond Index) and the MSCI World Index during the fourth quarter, declining materially less than both of the benchmark indices.

Specifically, Investment Income Builder Fund’s return of negative 7.29% for the December quarter (I USD Distributing Unhedged) shares exceeded its blended benchmark, which declined by negative 9.75% for the quarter. The Fund’s negative 4.90% total return for calendar 2018 exceeded the blended benchmark by 1.52% for the 12-month period. Currency hedges utilized to protect the U.S. dollar value of the Fund’s non-U.S. assets added approximately 1.3% to relative performance in 2018. The portfolio uses hedges to protect investor principal when we seek yield abroad, and these hedges added value as the trade-weighted value of the dollar increased 6.8% during 2018.

The quarter ending 31 December 2018, was the 26th full calendar quarter since the inception of the Fund in June 2012. In 18 of these quarters the Fund delivered a positive total return. The Fund has delivered positive total returns in four of its six full calendar years of existence. As at 31 December 2018, Thornburg Investment Income Builder Fund has delivered tax efficient average annual total returns of 6.47% since its inception (I USD Accumulating Unhedged shares).

Dividend increases from a majority of your Fund’s equity portfolio holdings did not quite offset the headwinds of (1) a stronger currency that reduced the U.S. dollar value of dividends paid in foreign currencies, and (2) year-over-year reductions in “special” dividends paid by two of the Fund’s largest holdings, China Mobile and CME Group. We cannot predict how currency fluctuations will impact your Fund’s 2019 dividend, but we do expect annual dividend growth to resume in 2019 for China Mobile and CME, if we continue to hold these investments. The following list shows the year-over-year percentage changes in trailing 12-month dividends paid by the 12 largest equity positions in the Fund during calendar 2018:

Equity Holdings Trailing 12-Month Dividend % Change
(Reporting FX)
CME Group
(ordinary dividend +6%; 2018 special dividend down 50% vs. 2017)
China Mobile Ltd.
(ordinary dividend +18.9%, no 2018 special dividend)
Orange S.A. +7.7%
Royal Dutch Shell plc no change
Électricité de France -16.4%
JPMorgan Chase & Co. +21.6%
Walgreens Boots Alliance, Inc. +8.5%
Total S.A. +2%
Taiwan Semiconductor +8.5%
Qualcomm, Inc. +14.3%
Home Depot +15.7%
NN Group N.V. -4.8%

Source: Bloomberg.


In assessing the fourth quarter 2018 performance of Thornburg Investment Income Builder, it is constructive to consider the performance in U.S. dollars of the sector components of the MSCI World Index over the three-month period. The MSCI World Index comprises 75% (which is the entire equity portion) of the Fund’s global performance benchmark.

  1. During the fourth quarter, 10 of 11 index sectors showed negative total returns during the fourth quarter, with sector results ranging from approximately 0.50% (utilities) to negative 22% (energy). Stocks of firms in the information technology, industrials, consumer discretionary, financials, and materials sectors joined energy sector stocks in underperforming the index. Stocks of firms in the real estate, consumer staples, health care, and communications services sectors joined utility stocks in generally outperforming the index for the December quarter. In general, stocks in sectors that are most sensitive to fluctuations in economic activity performed worse, while stocks in sectors less sensitive to changes in economic growth held up better in both the December quarter and calendar 2018.
  2. Relative to the index, Thornburg Investment Income Builder’s portfolio was significantly overweight the higher-dividend-paying companies in the communications services, financial, and energy sectors, as it has been for most of its history.
  3. Income Builder Fund investments in firms in the following sectors comprised the largest average sector weightings in the Fund portfolio during the fourth quarter:
    • Financial sector (23% average weighting in the Fund’s equity portfolio; negative 2% change in sector weighting over the quarter)
    • Communications services sector (14% weighting in the Fund’s equity portfolio; unchanged over the quarter)
    • Energy sector (11% weighting in the Fund’s equity portfolio; negative 1% over the quarter)
    • Information technology sector (9% weighting in the Fund’s equity portfolio, plus 1% over the quarter)
    • Health care sector (10% weighting in the Fund’s equity portfolio; unchanged over the quarter)
    • Consumer staples sector (8% weighting in the Fund’s equity portfolio; unchanged over the quarter)
    • Industrials sector (5% weighting in the Fund’s equity portfolio; unchanged over the quarter)
    • Utilities sector (7% weighting in the Fund’s equity portfolio; unchanged over the quarter)
  4. The Fund’s quarterly performance relative to the MSCI World Index in the fourth quarter of 2018 was helped by comparative outperformance from its holdings in the communications services, health care, financials, industrials, and information technology sectors, as well as currency hedges. The Fund’s quarterly performance relative to the MSCI index was hindered by its large weighting in the energy and financials sectors.
  5. In the Income Builder portfolio, 15 and eight equity investments contributed positive returns of at least 0.05% (five basis points) to the portfolio during calendar 2018 and fourth quarter 2018, respectively. Forty-seven and 44 of the Fund’s equity investments contributed returns of negative 0.05% or worse in calendar 2018 and in fourth quarter 2018, respectively.

Your Fund’s average return from its investments in the financial sector, though negative in the fourth quarter, significantly outperformed the equities in the finance sector of the MSCI World Index during the quarter and for calendar 2018. CME Group was among the strongest performers in the portfolio. JPMorgan Chase, Axa Equitable Holdings, UBS Group, NN Group, and BNP Paribas were weak performers in the quarter. We do not believe the competitive positions of these firms with weak performing stocks have been impaired. Heavy selling of most large banks and insurance companies around the world in late 2018 cut the share prices of many of these by more than 20% during the December quarter.

Your Fund’s holdings in the communications services sector delivered a slightly negative performance during the quarter, significantly outperforming the equities in this sector of the MSCI World Index. England’s BT Group, France’s Orange, Netherlands KPN, and Deutsche Telekom each delivered modestly positive December quarter returns. U.S. network operator AT&T made a negative contribution to portfolio performance in the fourth quarter. For the year 2018, your Fund’s communications services investments underperformed the overall portfolio, as investors earlier in the year favored more cyclical equities over the modest growth profiles of these telecommunications firms. Importantly for Thornburg Investment Income Builder Fund, each of our telecommunications holdings mentioned in this paragraph (other than BT Group) increased their dividend in 2018.

The entire energy sector was influenced by the 35% drop in the Brent oil price, to $53.80, during the December quarter. Integrated oil companies Royal Dutch Shell, Total, and ENI, along with pipeline operator ONEOK, and U.S. refiner Valero each delivered significant negative returns in the quarter. For perspective on the $53.50 year-end 2018 price, the average Brent oil price fell from approximately $115/barrel in June 2014 to a January 2016 low of $28/barrel, before recovering to approximately $65/barrel at the end of 2017. We expect volatile oil prices to persist. Demand fundamentals appear positive for the sector, as consumption increased by more than one million barrels per day in 2018. Our investments in this sector are focused on resilient dividend payors with strong balance sheets.

Fund investments in the technology sector delivered negative returns in the December quarter, following strong overall performances in the first nine months of the year. Trade tensions created uncertainty around the near-term outlook for device sales and trade policy questions that may change geographic logistics for manufacturing networks. A positive contribution from Broadcom in the December quarter was insufficient to overcome negative returns from Qualcomm, Taiwan Semiconductor, Samsung, and ASE Technology Holding. We expect most of these firms to benefit from the ongoing proliferation of “connected” digital devices and associated data flows since these firms hold important positions in the value chain for producing the devices along with enabling data transmission and storage capability.

The Fund’s fourth quarter 2018 returns from its holdings in the health care sector significantly outperformed the return of this sector within the MSCI index during the quarter. Merck and Roche Holding each made positive contributions to portfolio performance as results from key clinical trials of new drugs were favorable.

Income Builder’s investments in the industrials and materials sectors delivered slightly negative returns in the December quarter, led by European toll-road operator Vinci, chemicals producer Lyondell Basell, and defense contractor BAE Systems. Norilsk Nickel made a positive contribution that allowed your portfolio’s holdings in the materials sector to significantly outperform the broader materials sector of the MSCI World Index.

Income Builder investments in the consumer staples sector delivered index-matching negative returns in fourth quarter 2018. Share prices of Korea Tobacco & Ginseng, Walgreens, and Nestle each declined modestly.

Among other portfolio holdings, notable contributors to December quarter and 2018 portfolio performance included Hong Kong conglomerate Hopewell Holdings and Italian electric utility Enel SpA. Hopewell Holdings received a buyout offer from its largest shareholder at a premium to its then depressed share price. Detractors from portfolio performance included Électricité de France and Home Depot.

A stronger U.S. dollar decreased the value of our non-U.S. assets during 2018. We hedged a majority of the currency exposure of our asset positions denominated in the British pound, the euro, the Chinese Yuan, and the Swiss franc. These hedges added modestly to the relative performance of Thornburg Investment Income Builder Fund during 2018, since benchmark indices are not hedged. Our hedging activity is used to manage risk in the portfolio, not to speculate on currency movements. However, we believe increasing U.S. government fiscal deficits could create conditions that would lead the dollar to weaken, and we would consider reducing foreign currency hedges if these deficits persist.

Today, investors debate the future direction of the economies of China, Europe, various emerging markets, and the U.S. They consider potential policy actions by the U.S. Federal Reserve, Congress, the Trump administration, and foreign government regulatory and policy actions. Concerns about tariffs and trade policy changes continue to impact share price movements of global producers of tradeable goods, which are volatile day-to-day. We expect the volatility to continue until new trade policies are established. We believe that people around the world will continue to buy goods and services and trade with each other. Importantly, overall global consumer spending grew in 2018 and appears poised to grow in 2019, along with global population and industrial production. Following the largest annual price declines since 2008 for U.S. equity markets and many others, price-to-earnings multiples for most stocks have adjusted downward to account for uncertainty around macro-economic policies and expectations for slowing economic growth in 2019 and beyond.

Most firms held in Thornburg Investment Income Builder’s portfolio delivered positive year-over-year earnings in 2018, even as the U.S. Federal Reserve hiked the Federal funds target rate to 2.50%, which is roughly in line with inflation. Most major central banks around the world continue to pursue very easy monetary conditions, which artificially suppress interest rates and support prices of financial assets.

While low interest rates are good news for borrowers, they have negative consequences for conservative savers. Interest income as a percentage of the aggregate adjusted gross income of U.S. households fell from 4% in 2007 to less than 2% in 2016, according to Statistics of Income published by the Internal Revenue Service.

Investors must consider other options. Banks in the U.S. offer below-inflation yields on most deposits. A very large pool of investor dollars is looking for better returns elsewhere, but in sensible investments. We are optimistic that the types of income-producing investments owned by Thornburg Investment Income Builder Fund will experience sustainable popularity among investors as their intrinsic values for income production are recognized. A high percentage of investor funds belong to people over the age of 55, for whom income is an increasingly necessary and desirable attribute.

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 December 2018—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.

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To determine a fund's Morningstar Rating™, funds and other managed products with at least a three-year history are ranked in their categories by their Morningstar Risk-Adjusted Return scores. The top 10% receive 5 stars; the next 22.5%, 4 stars; the middle 35%, 3 stars; the next 22.5%, 2 stars; and the bottom 10% receive 1 star. The Risk-Adjusted Return accounts for variation in a managed product's monthly excess performance (excluding sales charges), placing more emphasis on downward variations and rewarding consistent performance. Other share classes may have different performance characteristics. © 2019 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.

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