Thornburg Investment Income Builder Fund – 2nd Quarter Update 2024

Thornburg Investment Income Builder Fund – 2nd Quarter Update 2024

Adam Sparkman

Good afternoon and welcome to the Thornburg Investment Income Builder quarterly update call. My name is Adam Sparkman, and I am a Client Portfolio Manager with Thornburg Investment Management. A few housekeeping items before we get started. At this time, all participants are in a listen only mode. However, you can ask a question at any time by submitting them through the WebEx or emailing us at questions at Thornburg dot com.

This webcast is being recorded and a replay will be available in a few days. You can access today’s presentation slides by going to www.thornburg.com/TIBIX-quarterly. That’s www.thornburg.com/TIBIX-quarterly. Just to remind you, today’s presentation may contain forward looking statements based on management’s current expectations and are subject to uncertainty and changes in circumstances.

Actual results may differ materially from these statements due to various factors, including those described in our SEC filings. For those on the call today who may be less familiar with Thornburg, we are an investment manager based in Santa Fe, New Mexico, overseeing approximately $45 billion of assets across a suite of actively managed equity, fixed income and multi-asset solutions.

I’d like to quickly introduce our speakers today. Brian McMahon, Portfolio Manager, Vice Chairman and Chief investment strategist for Thornburg, along with portfolio managers Matt Burdett and Christian Hofmann. So with that, let me turn it over to Brian, who will kick us off today.

Brian McMahon

Okay. Thank you, Adam. And thanks to everyone for listening to the call today. We’re going to go through the slide deck that’s at our website on Thornburg.com and that’s www.thornburg.com, and just look for the webcast invitation there.

And I’m going to start with slide number two, where we will view some of the key macroeconomic issues. I won’t dwell on this, but I think the big one is that is the first one mentioned and that is that inflationary pressures have moderated. Core PCE was 2.6% in May, approaching the two that the Fed target. We don’t have a new release on that yet but we did get released on CPI today and that’s down 50 basis points in the last three months since we talked to you last.

And the important thing is that inflation rates are now close enough to the Fed’s targets to allow the central bank with much more latitude for paying increased attention to supporting employment, which is pretty good. And hopefully we get the soft landing that is much discussed. The other thing that I’ll point out is budget deficits of the US government and many other developed country governments are well above average.

Average would be in the 2 to 4% range and for many of these governments, including the US, it’s more like 6% of GDP budget deficit now. So that’s in good times that we have that. So that limits the fiscal flexibility, I think somewhat going forward in this political season. You hear various promises, but it’ll be tough to keep those.

Let’s go on to Slide three. The Income Builder. We’ve just a review here. It is a solution that consistently seeks to provide attractive income for our shareholders. Our objective is to pay attractive yield. Today. And when I look at a trailing 12-month dividend of $1.20 in our NAV at June 30 with 25.55, that’s a 470 yield. We expect to grow the dividend over time, although there will be periodic fluctuations.

Our first year, full calendar year 2003, the dividend per share was $0.53 and as I mentioned, the trailing 12 month, it’s a dollar 20 per share. And along that the NAV has gone from $11.93 when we started to $26.64 yesterday. So, we have had that capital appreciation if you want to consider and Matt will go into this in more detail. But for an investor that’s taken all of the distributions, a cash reinvestment, they’ve gotten since our inception, $179,112 in cash dividends. That’s an average of $8,330 per year. And they’ve gotten capital appreciation. So, the original $100,000 investment would be turned into $226,794 of value today. So that’s exactly what we’re trying to do. And what we expect to do and that’s the outcome for our third objective of long-term capital appreciation. And we do that with a global portfolio of dividend-paying stocks and some global bonds and hybrid securities. We have always been and continue to be focused on firms’ ability and willingness to pay attractive dividends today and hopefully rising dividends over time.

Slide number four, we go to slide number four. It shows our portfolio allocation shifts by sector going back two years. And I’ll just comment on the big changes here. The big one is a big increase in allocation to the communications services segment. Between June of last year and June of this year. That’s mostly a new position in AT&T new position in a Spanish smaller telco called Zegona that took over Vodafone’s Spanish business on bargain terms.

And Singapore Telecom, which is a bit of a conglomerate of Asian telecom businesses. So that’s what we’ve done there. And we’re focused on ability and willingness to pay with those. And we’ve paid for those by reducing our allocations of modestly to financials and also utilities and materials. So and a small decrease in allocation to information technology. Slide number five, the next slide, just to view some summary characteristics of the of the portfolio, the equity portfolio in particular.

And here I’ll just note the trailing P/E continues to be at a very wide spread to the MSCI P/E, which is closer to 20 times and we’re in the mid 13s there and the dividend yield at 4.9% for the Thornburg Income Builder equity portfolio as compared to 1.8% for the MSCI Global Index.

Going on to slide six, it shows our top ten equity holdings. These accounted for 36% of the portfolio as of June 30. Not a lot of change here. They do shuffle around a little bit. Three of those top ten are tied to the semiconductor business. That’s Broadcom, Taiwan Semi and Samsung Electronics. So really, the foundation of the digital economy there. And then we have a couple of telcos, some banks and utilities as has been the case for some time.

The next slide, as are the next ten equity holdings, which were 20% of the portfolio. So, the top 20 were 56% of portfolio assets as of June 30 and on both of these slides, you’ll see the dividend yield at the June 30, 2024, price. And the second column from the right and also the five-year dividend growth rate in the far right column.

And I invite you to peruse those at your own leisure. I will say that of our top 25 holdings, 11 of them had a lower share price in the first half of calendar 2024. Not because the businesses are down, just because investors are looking elsewhere from these dividend payers and what some might call value stocks. The next ten slides in number eight through 17 are more detailed descriptions of our top ten holdings.

I’m not going to go through all of them, but I will highlight a couple of them. So, slide number nine is Broadcom, which has been a holding of ours for some time. And you see that the dividend on Broadcom has a has a one handle on it. If you look back to the prior slide number six, when we bought it, it had a greater than a 3% dividend and that was several years ago.

As this detailed description says, Broadcom share price rose 99% in calendar 2023 and other 44% in the first half of this year. I’ll point out that over the last four quarters we sold about 30% of the shares that we own in Broadcom, and it’s still our second largest holding. So we’ve been able to redeploy the proceeds of those sales into other higher yielding equities, but that remaining 70% of the shares that we kept is worth $150 million more than it was at June 30 of 2023.

So some of that is redeploying to sustain higher yields. And it just, I think is indicative of how we work with lower yielding stocks because of capital appreciation and also just sheer risk, risk control as stocks get up around 5% of portfolio assets. The other one that I’ll talk specifically about is slide number 16, which is our ninth largest holding. And it’s a multinational utility that’s headquartered in Italy called Enel. And now and I think the interesting thing about Enel, by the way, that the stock price of the Dow was down six and a half percent in the first half of 2024 after being up more than 30% last year. But is a stock that has it June 30th, 6.6% dividend yield. It’s been growing its dividend the previous five years at an 8.8% compound annual growth rate and now gets just under 40% of its EBIDTA from grid operations. So it’s regulated. They’re paid on their asset base, and they get another 28%. So, call it two thirds together from renewable energy that’s in place. Solar and wind, mostly solar assets in sunny southern Europe.

And they have PPAs against most of these power purchase agreements against most of these. So the earnings are have high visibility. And by the way, another quarter of their appetite comes from just retail and wholesale commercial supply of electricity to some 55 million customers. So other than the fact that they’re headquartered in Italy, there isn’t an obvious reason why that stock chart should look as volatile as it does on slide number 16, but it has been helpful to us to be able to buy some dips in this one and we monitor it quite closely.

So that’s enough on the top ten. Let’s go to slide number 18, which highlights an important characteristic of most of our equities, and that is the ability to grow the dividend over time. And as we look at what happened in 2023 by weight, 73% of our equity holdings grew their dividends. And you can see that percentage breakdown there in increments of 5%.

We had 10% that had a flat dividend at 17%, a lower dividend. And most of those lower dividends were because they had paid a special dividend of some sort in calendar 2022 that wasn’t repeated in 2023. So this gives you a picture. And with that, I’ll turn it over to Matt Burdett to guide us through the rest of the presentation.

Matt Burdett

Great. Thank you, Brian. And thanks to everybody for tuning in here. By the way, if anyone has suggestions that they would like to like us to address in these calls, we do have every quarter we’re open to those suggestions. But I will start on slide 19 and really the next couple of slides are to give a flavor for how the Thornburg investment income, the Income Builder performs in in various rate environments.

And in this scenario on Slide 19, it’s a rising rate environment. And although we got a Fed friendly CPI print today and this recent data is supportive of, I think the Fed lowering interest rates, I do believe the comment Brian made earlier about deficits and just the fact that they’re expanding, and the CBO just updated its estimates a couple of weeks ago and the deficit is only going to get worse unless something changes.

So anyway, just to put this in context, really, so that you can, you know, clients can think about how investment income builder performs as you think about it as an income solution with other income producing solutions such as bonds. So, in this case, we’re looking at 36 different periods where the ten-year Treasury yield rose 40 basis points or more.

And we compare the investment income Builder’s relative performance to the US corporate Bond index, the US AG, the US high yield and then versus our blended index. And what you can see there is the frequency in the table is relatively pretty attractive with the range of 69% of the time outperforming high yield and that in the case of the other bond and blended index, it’s 75% or greater.

And we you know, we’ve done this historically while having a approximately 190 basis point higher yield than the US aggregate bond index. Slide 20 looks at it from a slightly different point of view where we’re comparing the investment income builder performance on a total return basis over ten periods where the ten-year yield increase the most. And you can see, see the dates and how much the ten-year yield rose in each of those periods.

And the table, you know, the take home here is that the investment income builder strategy has done very well, both in an upside capture sense meaning outperforming in up markets versus our blended index and of course, versus the corporate bond index, but also in drawdown markets where, when, when asset prices went down. We protected there, which is something we try to do.

And that’s all just from thinking about the individual companies that we select to put into this portfolio. Brian highlighted a couple earlier in the top ten or are described in more detail earlier in the presentation. And you know, this is all happened here with the Investment Income Builder’s average dividend yield being 250 basis points higher than our blended index advancing to Slide 21.

These are the market returns for various global portfolios. Probably not surprising to many of you this stand down, of course, is the Russell 3000 Growth Index, which was up almost 20% in the first half of 2024 after being up 41% in the calendar year 2023. The lone, modestly negative return was the U.S. Universal Bond Index, with a modest quarter of a percent negative return in the first half of 2024.

The S&P 500 returned 15.3% in the first half, and it’s maintained, as you probably know, that return was fairly concentrated. So, the top ten stocks contributed 69% of that 15.3% return in the first half of 2024. And Nvidia alone was 437 basis points of the 15.3% or 29% of that return. So, a fairly concentrated return in the US markets.

Advancing to Slide 22 is the performance of the investment income builder. And I won’t go through all of these numbers there, there for the readers to review as they can only highlight the inception return of the iShares at roughly 9.3% per annum for over 21 years and that that is broken down roughly 50% income and 50% price appreciation.

Advancing to Slide 23. This shows just the quarterly returns going all the way back to inception of the I shares. The big takeaway here is we just completed the 86th calendar quarter, of which 63 or 73% of those quarters were positive. 16 of the 21 calendar years we’ve delivered a positive total return for our shareholders advancing to Slide 24.

This is an important slide to just remind all of our shareholders about, about how we are different in thinking about creating an income solution with the investment income builder. This slide here is showing you the allocation of fixed income in cash over time of the investment income builder. That is the dark blue line there. And what you can see here is that it’s varied quite a bit over time when as high as 45% in 2009 with yield to worst spiking up above 20% at that time.

That’s what the orange and blue dotted blue lines are. And really, I think our philosophy is unique in this respect, and I think it speaks to the be different with purpose mentality that we have here at Thornburg around delivering this income solution in a way that is unique. So, we will buy bonds when we feel like we’re being compensated to do so.

And we’ll stick to equity when that compensation is not it not there. But this gives you a sense for the flexibility we have in providing an income solution using bonds.

The next slide is slide 25, which just shows the quarterly distributions for the Investment Income Builder. I would just highlight that the most recent quarter, second quarter of 2024 was 27.2 cents. That is 2.6% year on year versus last year. And if you were to look at the trailing 12-month dividend of a dollar 20, that’s roughly flat on a year over year basis.

Slide 26 is just showing you a calendar year view of the Investment Income Builder’s yield in the in the gray bars. This is the average yield over each of those years versus the blended index and that blue and then the corporate U.S. bond index and the gold number. And what you can see there is, you know, we were fairly competitive pre quantitative easing and in a much exceeded the blended index and the Bloomberg U.S. Bond Index post QE.

And now it’s getting a little bit more competitive with those. But the other point I would make is, you know, this is not really explaining the whole story. I think if you were to look at the after tax yield of the investment income builder, it would be in do the same comparison. It would be very, very attractive given the high GDP percentage in the portfolio advancing to Slide 27, This is our report card slide. Brian mentioned this a little bit earlier, but I think it kind of helps to reiterate it and see it in a picture.

This is a hypothetical one hand, $100,000 investment in the A-shares at the inception, the investment income builder and this individual takes the income every quarter and spends it so nothing is reinvested. And what’s the take home here? The cumulative dividends received over this period is $179,112 or $8,330 per year on average. At the same time, the capital had appreciated to 226,794.

So, you managed to get 1.8 times roughly your capital and income and you got 1.3 times capital growth and a strategy that is still producing income. So, what does that mean for me today? The trailing 12-month dividend is paid $10,150. So, if you think about it from a yield on cost perspective, that’s about 10.2% advancing to the next slide, Slide 28, this is the same high $100,000 hypothetical investment.

The difference here is that this individual is in a different stage of their life, and they don’t need the income, right? So, they’re able to reinvest the dividends over this entire period and able to buy more shares. Right. And so, when you when you do the analysis for this situation, cumulative dividends is $320,830. So, it’s basically, you know, a 3.2x, the original investment and cumulative dividends.

And so, what that means is, is you’re starting 8375 shares that were bought nearly triples to 24,981. And while that happened, the capital depreciated from 100000 to 318215. So total account value is now 633,653. So, a pretty powerful way of building wealth for someone. And now let’s say that this individual decides, you know what, now I’m ready to turn on the income.

Right? And if you were to just take the trailing 12-month dividend of $1.20. Right. And multiply it by that that share count of 24,091, that’s basically $30,000. Right. So, from a yield on cost perspective, yield on original cost, that’s a 30% yield on cost. So really just letting the dividends do the work over a period of time can be very powerful.

Advancing to Slide 29, just a reminder for everyone, the question people should be asking is where will total returns come from? Right. And I think this this slide here is instructive to at least help think about return distribution of the S&P 500. So, what we have here is a table going back many decades. And what we did was we took the average price appreciation and that in that particular decade, the average income component, the sum of the two is the total return, and the far right is income as a percentage of that total return.

And you can see the numbers very greatly across the board there take home roughly 50% of your total return comes from dividends, right? However, as the column in the far right shows, there are very different percentages of your total return that the dividends comprise. So, for example, if you were to look at the current decade, we’re in right in the world where we’re not even halfway through it, but right now the average price appreciation of the S&P 500 is 11.3% and the income component is very small at 1.7.

And so now we’re in a decade only halfway through where 13.1% of your total return is due to dividends. So not very important. But if you look back at other periods where dividends didn’t matter much, and I would point to 1991 to 2000 period where dividends were roughly 50% of your total return. They were followed by a decade where they were 136% of your total return, meaning that they were they were just much more important.

So, I think an important just to put that into perspective, I will end here and pass it back to Adam for any questions that have popped in.

Adam Sparkman

All right. Well, thanks, Matt and Brian for the great color on the portfolio. We do have a few questions that are coming in. I think I’ll start by opening it up to Christian are fixed income portfolio manager we’re obviously all stay tuned for what’s happening with interest rates.

We started the year with expectations of five or six interest rates. I think we were down to three rate cuts by the end of the quarter and now that’s been squeezing further. So Christian, from your perspective, when are we finally going to see some interest rate cuts?

Christian Hoffmann

It’s a lot more fun that we’re having this call today compared to yesterday. You know, what a difference a day makes. I think, you know, yesterday you could say was really a tossup between September and November. But the market is pricing near certainty of a cut at this point for September. And still looking at 2 to 3 for the year, it’s higher than the Fed’s one and is up from roughly two before the CPI data this morning.

You know, as Brian mentioned, the data is cooperating and recently the Fed has been acknowledging the more balanced risk between price stability and employment. This is an important number because the risk is actually very much weighted to the downside. Everyone expected this to be a good number, so it’s a bit good. And actually even better than expectations, you know, meant a lot.

And we had a pretty tremendous move across the curve today. CPI inflation cooled more than expected. The slowest headline reading since 2020 and I think the lowest scoring since 2021. We’ve seen we saw some volatility took off right. You’re seeing a rotation in the equity market. You know, I think we continue to see interest rates decrease. You will probably see some spread back up, which is a little counterintuitive.

That’s not purely because of economic concerns. But I think there’s also this dynamic where people have been willing to accept very low spreads really across fixed income markets. It’s an investment grade, high yield structured product because the all in yield was so attractive. So as the all in yield decreases, you know, I think you might need to see some additional spread compensation.

Look, we’re almost midway through summer at this point. Volatility has been extremely low. I think U.S. stocks have not had a two standard deviation move in 17 months. I think Nasdaq closed today. I don’t think we got there. But broadly, volatility is extremely low. You go through periods of high volatility and low volatility. And I think we could be on the precipice of a change here from here.

Just feels like almost the same thing happening every day to gain something perhaps more interesting, which excites me.

Adam Sparkman

All right, Christian, thanks for that. Glad to hear the excitement. Matt, I’ll come to you with the question. That’s a bit of a follow on to what Brian mentioned about the deficits in the US and abroad relative to GDP growth.

Do you have any thoughts on what that high level of deficits that we’re experiencing in the US and abroad relative to GDP might how it might impact the economy or rates more broadly?

Matt Burdett

Yeah, sure. Look, I think it’s a very important question and it gets some airtime, but probably not enough. And I think ultimately what will matter is, you know, does the bond market have appetite to fund all of those deficits that debt are coming?

So, if I were if I were to look at the most recent information from the CBO, so 2024 deficit will be roughly two 2 trillion, right. So, 1.99 trillion. 2025 is supposed to be about the same. And then it goes all the way out to 2034. And this and that. In 2034 it’s 2.846 trillion. So, the problem only magnifies, you know, look, there’s a couple of ways you correct it, right?

You raise taxes to have more revenue, or you spend less. And so, as it impacts the economy, it’s really a function of how much the bond market can fund these deficits and the willingness of the bond market to do so. And so, it’s something we’re watching. You know, for us being security selectors as opposed to, you know, index players or something like that, you know, we look at the balance sheets of our companies and we understand we want to make sure those balance sheets are strong and we want to make sure that they have a business where the demand profile for whatever product or service they’re providing is, you know, can be insulated to some degree if there is some kind of, you know, disruption or cut in government spending. So, it’s something we watch. I don’t know if anyone else in the team wants to add to it, but yeah, it’s not a pretty picture. And by the way, it’s the same if you were to look it at other countries, the UK, there you look at like queen deficits, the UK is there, many countries in Europe are there.

So, it’s really kind of it is a bit of a constraint and really it’s just a function of how much bond investors are willing to finance.

Christian Hoffmann

I just add that this stuff is pretty hard to trade because it doesn’t matter until it does. Right. Like, I think, you know, plenty of people have, you know, ended their careers trying to and, you know, trying to trade Japan and, you know, look at their fiscal picture.

And it’s certainly much, much worse than our are, as you know, it’s also another, you know, topical idea, you know, relative to what we’ve seen today. But yet it certainly matters that it’s very hard to trade.

Adam Sparkman

All right. Well, thank you both. That’s great color on that. Brian may be coming to you. Somebody got your comment on page five of the deck highlighting our trailing PE of roughly 13 times versus 20 times for the MSCI world.

But they also cut the spread between our trailing 13.6 and our forward looking P/E kind of sits in the ten. So there’s obviously some pretty decent implied earnings in that spread. Can you talk a little bit about what’s driving that, that spread between past and the forward looking?

Brian McMahon

Yeah, well, part of it is just some earnings growth expected across the portfolio, in particular in the ITC segment, which for us is it’s significantly the semiconductors three in our top ten holdings and earnings for these companies were depressed last year and they’re bouncing back big this year so far. Just to give you an example, one semi reported its July or June revenues a day before yesterday and that the second quarter revenues, so we now know are up 40% year over year. So, and we expect earnings to be at least that and it probably gets better in the second half of the year. So, some of it is just easy comps as these as these earnings roll in this a bigger difference we usually have between the trailing one year and the forward one year, it’s usually one and a half multiple points, but that’s a good catch.

And we are pretty optimistic about some growth and, hopefully some growth in ability to pay rising dividends in the calendar year 2025. But if those earnings come through.

Adam Sparkman

All right, thanks, Brian. And Matt well swing back to you. Got a couple different questions on rate environment so far to kind of combine them into one here, questions about the outlook for this bond in a higher for a longer rate environment. Obviously you’ve had that I think so far in 2024. But another question kind of tagging on to that is are you anticipating lower interest rate environments from here? And are you positioning the portfolio, I guess, for either of those situations?

Matt Burdett

Sure. Yeah. Look, I think, you know, we’re not trying to make an explicit call on rates. I think what we again try and do is, you know, select securities that we think are weather, whatever storm comes by. But I will say, you know, if you look at least historically to how we’ve performed indifferent rate environments and I think I think there’s a slide in the appendix that that kind of highlights this historic performance.

So, we tend to outperform our blended index and even the MSCI World when the Fed funds rate is a higher number now higher we’re saying in the table here at 3% or higher. And it shows the number of quarters, the relative performance on an annualized basis there. What’s really hasn’t been good for dividend type of investing, which is, you know, what we’re doing here, as well as taking advantage of dislocations in fixed income when they arise, is having, you know, 0% interest rate policies.

And I think the main reason is, is just because, you know, a lot of stupid things happen when rates when money’s free, right. And so, capital gets directed into areas are probably more risky. So, you know, for us it’s if you think about where Fed funds is today, 533 basis points rate the effective Fed funds rate that’s basically the average where it was going back to, I think the end of we start at the end of 1982 when you cut off the very high inflation that was going on.

Then the average from then to the end of eight before QE came became commonplace. That average was 533 basis points. So, it’s really, we’re kind of at the average level. If you were if you were to take a longer-term view, which is the way we think and we cut off that pre-1982 area because the US now has energy effectively energy independence or way less energy dependance on other countries. So you know, generally for us, you know, we’re going to be picking the businesses we think that are going to have the ability and willingness to pay us dividends. Generally speaking, a modest interest rate, environment or rate environment has been better for our performance historically. And, you know, it’s not in the slide deck, but also, you know, the pond we fish in is very discounted right now, which makes it very attractive and exciting for us because the discount is almost double what it has historically been, let’s say a growth in a growth index. So overall, we’re excited. And look, we’ll navigate whatever rate environment we’re given.

Adam Sparkman

All right. Thanks for that, Matt. And maybe shifting back to fixed income Christian, can you talk a little bit about the duration of our fixed income exposure and if you’ve made any changes within the bond sleeve?

Christian Hoffmann

Thanks, Adam. I think that we actually have it perhaps not in the way that you would expect.

And just for folks newer to the strategy, this is multi-asset, but this is not, you know, 6040 S&P 500, the AG or anything like that. And it’s not, you know, in a very good when we’re doing something very different, you know, in a way that provides, you know, a lot of value to shareholders. Certainly, it has over time, the fixed income portfolio does not resemble the AG. I think, as my co-managers often say, own equities that often resemble bonds and bonds that sometimes more closely resemble equities, the duration has crept higher. You’ll see that, I think I don’t know if we have the 2Q in a snapshot up but you should see that you know the two Q snapshot that was not us managing duration.

We actually had a nice chunk of a Williams bond mature Williams the midstream company we bought that it is very attractive levels going to late 2015 to early 2016 was almost ten years ago at this point. But at that period of time, the energy space was collapsing and the world was almost acting like we hoped that we were going to move, you know, oil and gas around and that there wouldn’t be a need, that we started buying those bonds at $0.80 on the dollar, which was around a 7% yield.

And I think the last trade we did was in the mid 50, which is almost 14% yield. Yeah, at that period of time, that last trade I think was the low tick on the bonds and was really just a short period of time, you know, when they, you know, kind of fell off a cliff in our investment grade bonds, the last trade before they matured, they were trading at around a 33-basis point spread.

So, this is something that was very high quality. You got in a very weird situation where it felt like the world was ending. We capitalize that, you know, and we appreciated nice income from those bonds, you know, for almost a decade. That position rolling off does decrease our fixed income exposure by roughly 50 basis points. And because it had become so short, we’ll actually increase duration.

So you should see duration increased something like 3.85 at the end of 1Q to something closer to four at the end of 2Q. So that this team, you know, is opportunistic, I think, you know, you’ve heard that over and over again, that’s up and down the cap stack, you know, throughout the world and through industries. You know, unfortunately, opportunity, these are not persistent.

They change, right? So, in buying Williams bonds today, you know, a 33 basis point spread, you know, isn’t particularly interesting. But, you know, underwriting goes something like, you know, 10% yield was incredibly interesting. So, we wait for the opportunity. We collect income and then we find new ones. We actually had another Miller bond get called yesterday. That was a smallish position, but I was just looking into the refinancing.

They’re actually going to refinance that bond at a spread of 140, which is pretty low. This is the high yield, high yield credit. We initially got involved in that story in 15 with a spread of near, you know, 850. So again, rinse, repeat, find the opportunities and move on. But thanks for the question.

Adam Sparkman

Yeah, thanks for that color Christian And everybody always loves hearing the security selection side of an opportunity stick. You bring it back to be at this fund. Brian may be coming back to you with this one. And we have a question about how you’re thinking about China risks within the portfolio, especially as it relates to some of the semiconductor positions that you highlighted.

Brian McMahon

Yeah, good, good question. One that we get a lot and I’ll tell you, we managed out of one of our China risks that we’ve been talking about internally for some time in the first half of this year, and that’s Qualcomm, which because it’s headquartered in San Diego, a lot of people don’t think maybe Qualcomm has China risk.

But if you look at their 10-K, they note that 62% of their sales were derived from China based customers and only 3% of their sales from U.S. based customers. So that is that’s some China risk. Can we understand that the Chinese government, like one of their big customers, Apple is basically trying to get it another supplier in Apple’s case.

They want it to develop their own communications chips and in China’s case, they want they want to have their own domestic suppliers. So, we’ll see whether they can do that or not. They’ve been trying to do that for a while. But that’s a big, big China risk. At least half the calls the last five years that we’ve done.

Somebody asked about Taiwan Semi and China risk there and they’re actually not in China they do sell into China they’re in Taiwan, but they are actually serious about diversifying their production away from Taiwan just in case China gets aggressive with Taiwan. So, you see them now well under construction to build large facilities in the United States, Japan and Europe.

So, we’re watching one, but I don’t view Thornburg Investment Income Builder as being overly exposed to that to China. But it is something that we keep our eye on. And just with respect to the Qualcomm and I mentioned Broadcom earlier, we got some pretty good capital gains there. And as we sit at June 30, we have a few hundred million of that realized long term gains.

It’s only a few percent of our NAV, but we’ve kind of run out of loss carryforwards to cover that couple of percent. So, we may have we definitely have a few tax lots in the portfolio that are underwater. So, we’ll work with that. And in the next few months, it’s nothing, nothing material relative to our net asset value.

So, if we have a few cents relative to a $26 net asset value, that’s not a big deal, but it is a little different than it has been when we’ve had hundreds of millions of net tax loss carryforwards over any possible gains. So that’s on China risk.

Adam Sparkman

All right. Thanks, Brian. We’ll get one last question in here, Matt. I’ll come to you with it. Orange, which is one of the largest holdings in the portfolio, has been for some time now. Can you give a little bit of color on the stock amid the recent volatility that we’ve seen in France in the elections over the past, the past month or so?

Matt Burdett

Yeah. Yeah, sure. Thanks. Thanks for the question there. Yeah. Look, orange has been a holding a large holding in a top holding for us for some time. I think the recent volatility has been caused by a couple of things. One there was a snap election called in early June. The results of that election are already out. And basically, what you have is there’s really no clear winner in terms of the different for the different parties. And therefore it’s likely means effectively gridlock from a governing perspective. So, no, no real extreme policy being able to be approved. That’s so that risk is effectively kind of already accounted for. The other risk was there was some aggressive pricing action in the French market and the mobile side of the business. I would just remind everyone that mobile only French, French mobile only for Orange is a pretty small part of their business.

It’s somewhere around, I want to say 16% of service revenues. So, it’s not it’s not huge. A lot of that was think an overreaction. Both Brian and I have had done some work around this. Brian was actually in France, met with Orange as well as well as some competitors around this. So, we feel like it’s probably the pricing impact is probably an overblown kind of situation.

Oftentimes when these things happen, many of the brokers will well put out notes, some in somewhat of an alarmist, you know, way of writing it. And really to drive, I think, trading revenue. Right. They get paid on trades not on investment results. So generally speaking, we think it’s fairly well contained. You know, the earnings will be reported in a couple of weeks and I think people will have more clarity.

But here’s a business that’s yielding north of seven and a half percent today with a dividend that we believe will grow modestly from here simply because the operating free cash flow that they’re generating is growing pretty meaningfully because they’ve spent a lot of money on the CapEx already. Right. So, they have a highly fiberized network which makes the business more resilient.

So those are those are kind of the details there. But overall, you know, where we saw the weakness and, you know, take advantage of that a little bit. And so, we’re still believers in investment

Brian McMahon

Slide 8. Yeah. I just might add to that a little bit. As Matt mentioned, it has a 7.67% dividend yield. And a couple of times in this call we’ve talked about long term perspective. And I just might remind listeners because it’s easy to forget the trailing 25-year return total return for the S&P 500 index through the end of last year was 7.56%. So, if we can kind of cover that with a dividend, that’s in and of itself sort of interesting in a business that seems to have the ability to sustain that, but a few other crumbs that are that are noted there.

These guys have €44 billion revenue, and we think that the CapEx can come down by a couple of percent of revenue from the high teens to the mid-teens and maybe even to the low teens. So, each 1% of revenue of CapEx is $440 million of free cash flow. And last year after their CapEx or on an all expenses, they had about €3 billion of free cash flow.

So, if you compare that to the €26 billion of market cap, that’s over a 10% free cash flow yield from a business that has more than 240 million mobile customers and 21 million terrestrial broadband customers that tend to pay their bill every month because we all want to stay in touch. So, it’s not a glamorous business, but if you look at the chart on the far right, that’s the concern about the snap French election.

And this is somewhat analogous to Christian Hoffmann referred to a few minutes ago about the Williams bond that we bought very opportunistically. And 2015 had had a big double-digit yield. So, we don’t see we definitely saw the opportunity and we bought more of it last month, which is why it’s number one in our portfolio. Even though the share price was down in the first half for this year. So, I hope that that adds to the to the picture and gives you maybe a little more color on how we think.

Adam Sparkman

All right. Don’t we leave it there as we close in on the hour. But Brian, Matt, Christian like to thank you for taking the time in the great insights you provided about the portfolio today. And for all our callers, we thank you for your engagement, for tuning in and making it as interactive as it was, as you can tell we would love to talk about the portfolio. We love to interact with our clients. So, if you have additional questions, we’re happy to get on the phone and continue the discussion. Thanks so much and have a great afternoon.