Thornburg Investment Income Builder Fund – 4th Quarter Update 2023

Thornburg Investment Income Builder Fund – 4th Quarter Update 2023

Adam Sparkman: Good afternoon and welcome to the Thornburg Investment Income Builder Quarterly Update Call. My name is Adam Sparkman and I’m 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 questions at any time by submitting and through WebEx or emailing us at questions at Thornburg. Com. This webcast is being recorded and a replay will be available in a few days. Also, you can access today’s presentation slides by going to 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 $40 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. Bryan McMahon, Portfolio Manager, Vice Chairman and Chief investment strategist for Thornburg, along with Ben Kirby, Portfolio Manager and Thornburg, Head of Investments, as well as portfolio managers Matt Burdett and Christian Hofmann. So, with that, let me turn it over to Brian McMahon, who will kick us off.

Brian McMahon: Okay. Thank you, Adam, and thank you to everybody on the call. As Adam mentioned, we’re going to go through a slide deck today, approximately 30 slides, and the call will be more meaningful if you have those slides in front of you. And I will start with a quick overview on Slide three of the key macroeconomic issues at the moment. Number one, everyone knows, but it goes without saying that inflationary pressures have been high, but they’ve moderated.

We now have a three handle on most measures of inflation. The Fed pays the most attention to personal consumption expenditures. Today we got CPI and core CPI in the high threes. They’ve been trending down. Prices of many commodities and tradeable goods declined last year. Some of these appear to have bottomed and the next 1% decline in inflation, which is clearly the Fed’s goal, is probably going to be tougher.

But inflation rates are now low enough to allow central bankers some latitude for paying increased attention to supporting employment and supporting the the economy. I mentioned that budget deficits of both the U.S. government and many other developed countries are well above average relative to GDP, which means that bond issuance, net bond issuance is also above average, particularly with central banks now selling some of their holdings rather than supporting the market by buying government debt.

So, you’ve heard a lot about supply, and that supply has been absorbed by private market investors, but demanding higher yields than the Fed was demanding when it was buying up so much of the debt. And I expect that to continue. There is a cautious U.S. macroeconomic outlook. About half of economists that are surveyed by Bloomberg expect a recession in the next 12 months, but that’s actually been shrinking.

A year ago, at this time, it was closer to two-thirds of the economists who were expecting a recession. And, of course, that didn’t happen. So interesting to me is despite the cautious macroeconomic outlook, analysts expect earnings for the market to grow by about double-digit percent, somewhere between nine and 12%, depending on which index you’re looking at, which probably implies margin expansion, even though it’s pretty clear that labor costs are going up, as we note here.

And so I won’t do any more on that. I would like to reiterate on slide four that some big investment income builder fund is a solution that seeks to provide attractive income. We want to pay an attractive yield today. We hope to grow the dividend over time. There will be fluctuations, and we expect that if we have growing cash flows and growing income flows, we’ll get long-term capital appreciation.

Along with that, our investable universe is almost anything that pays cash, dividends, or interest. And we are remaining focused on ability and willingness to pay income and to support our income mission. Going to the next slide, you’ll see an overview of our portfolio allocation shifts. And this one reads from left to right. And if you want to summarize what happened in calendar 2023, we added a fair amount to our holdings in communications services, which totaled 15.1% of the portfolio on December 31.

And we also added to our allocation to infotech formation tech with our tech. That’s mostly market appreciation over the course of the year. We drew down a bit our holdings in financials and health care. And again, a lot of that is due to relative underperformance of our holdings in those sectors. If I look on Slide six at the current portfolio characteristics, as of 1231 and this is just a summary, but trailing PE 11.3 times forward, P 10.1 time.

A lot of these look very similar to what we’ve had over the last couple of years. Return on equity, double digit percent. The one thing that maybe has improved a bit from say two years ago is the dividend yield at 5% and that we feel pretty good about as far as composition by asset class. It is 86% equities, 14% cash and interest-bearing debt as of December 31.

We had some big paydowns on some bonds that we’ve done for a while in the in the fourth quarter of last year and haven’t fully replaced that. As far as the geographic exposure, it remains just under 50% in North America, just over 50% everywhere else in the world. Slide number seven lists our top ten equity holdings. And maybe the thing that I would draw your attention to here is how many of the holdings that had negative returns in calendar 2022 bounced back pretty strongly in 2023, and that’s not a huge surprise to us. They didn’t all bounce back, but many of them did, and some of them bounced more than back. But I guess the important thing is that if you look in the far right at the dividend growth rates, you see a mix. Some of the higher yields as far as the closing year and dividend yield have lower five-year growth rates and some of the lower ones like say a Broadcom have significant double-digit five-year growth cagers And this portfolio has a mix of those kinds of investments.

Slide number eight is the next ten equity holdings. And together these two pages you see 55% of the portfolio assets as of 1231. There are only two of those top 20 that haven’t had dividend growth over the last five years. And they’re both Telcos actually. You’ll see that AT&T, which we added in 2023, in the second half of 2023, is an investment that we’ve been out of for a number of years, but we probably owned it for more than a decade in the in the prior period of holding it.

And we think that they can begin to grow their dividend slowly once again, having reset it. And we kind of dodged a bullet there by selling in the mid-thirties but buying back in the teens. So, with that, the next ten slides from 9 to 18 give you some specific information on our top ten holdings in the Income Builder Fund.

I’d be happy to talk through any of those or any of my colleagues, but our purpose here is to just give you a flavor of the kinds of things that we own. A little more specificity. We want you to appreciate the ingredients and why we own what we own. And maybe I’ll speak to a couple of these, and I’ll start with our largest single holding, which is Orange, which is a multinational telecom syndication services provider, 246 million mobile customers and 24 and a half million terrestrial broadband customers in 27 countries.

So why do we own this? Look at the stock chart. It’s the biggest reason we own it is its attractive dividend and we think it can grow over time. A cash generative business. You’ll notice that it’s kind of been between nine and 13 over the last four years, and we do get opportunities to buy this bet when it’s down.

The stock price is a lot more volatile than the underlying business, which has been gradually growing. I looked back and two years ago they had 211 million mobile customers, now 246, and they’ve added about 3 million terrestrial broadband customers. And we think that they’re getting some pricing power. And very importantly, they’ve built out a fiber to the home footprint that is really a one-time CapEx that they’ve been spending a lot of money on over the last decade. But over the next decade, they don’t have to duplicate that. That should last longer than almost anybody listening to this call. So, slide number three is an example of a lower yielding faster grower. I’m sorry, slide number 11. Our third largest holding, which is Broadcom and with Broadcom, if you look at that chart, it was up 99% last year.

Basically, a lot of excitement about A.I. with respect to Broadcom and some of its application specific chips, but also an acquisition that they made that was approved and closed in November. And you kind of see that spike into the year end when a lot of things spike. So, we don’t we don’t buy a lot of new investments that a one hand or a dividend yield.

But this is one that we’ve done for some time, and we continue to like it and like the dividend growth that we see. The last one that I’ll mention is slide number 13, which is an insurance company, actually the largest insurance company in the Netherlands called N.N. Group. You see 7.8% dividend yield and you know here’s a company that has been actually growing its dividend.

There was a shadow over the stock for much of the last year about some litigation lawsuits about annuity products that we saw literally in the 1990s and was there some mis-selling and kind of view that as an uncorrelated risk. But they have settled that in recent days completely for much less than people were worried about. And so, the share prices recovered a bit, but we had an opportunity to add to that last year.

And at one point the dividend yield was double digit. So, I’ll leave it at that for talking about specific stocks. And go to slide number 19, which reviews what happened to our equity holdings last year. How many of them were able to grow the dividend in local currencies? And it was just over two thirds. 68% of our holdings by weight grew their dividends last year we had 17% that paid a lower dividend. Most of those were stocks that paid some special dividend in calendar 2022. We had far fewer special dividends last year than we had in calendar 2022, which impacted our total dividend for the year. But I think this year we have a maybe a more solid base with fewer specialties, special dividends to the comp against in about 15% year with flat dividends.

And you can see the ones with flat or lower dividends tended to have higher dividend yields. So, with that, I’ll turn it over to Matt Burdett to guide through the next set of slides and finished the prepared comments.

Matt Burdett: Thanks, Brian. I will be starting on Slide 20, hopefully my sound is coming in clear here. The first couple of slides I’m going to talk about are just giving you a flavor for how the Investment Income Builder Fund has performed in various rising interest rate environments.

And we realized that maybe it’s some think it might be a falling interest rate environment, but it’s more likely to be a volatile one. And what Slide 20 shows us here is, we looked at 36 periods where the U.S. Treasury yield rose by 40 basis points or more. This is over the life of the Thornburg Investment Income Builder Fund.

And we look at our performance versus various income producing portfolios. So mostly bond portfolios, the U.S. Corporate Bond index, the AG US-High Yield and then our blended index, which is our stated benchmark. And what we see is that the frequency of the investment income builder outperformance is pretty high across all those portfolios across the period.

So, you can see those percentages on the far right. And we do this by having all at the same time having a 190 basis points average higher dividend yield than the U.S. AG so able to outperform them in a rising rate environment while also offering a better yield. And turning to Slide 21, this shows a little bit more specificity of the return of the income builder across several different rising rates.

And what you can see there in the chart, the dark blue line is TIBIX the I share of the Thornburg Investment Income Builder. Total Return compared to our blended index, which is in orange and then versus the U.S. corporate bond index and in yellow here. And if you look down at the bottom you can see and the little silver arrow looking shapes the distance traveled so trough to peak in yield move in the ten-year treasury yield.

And the big takeaway here really is that, you know, in most periods, whether it’s positive for four income producing portfolios from a from a positive total return perspective or in drawdowns, we tend to outperform these various indices here. And again, doing this while having an average dividend yield that’s 250 basis points higher than our blended index. Moving on to Slide 22, this is showing you various selected market portfolios returns for various calendar years here.

I won’t dwell on this too much, but you can see for 2023, a fairly strong year for total returns across many market portfolios. And I guess what I would highlight is the S&P 500 up 26.3%. Most people are probably aware of this, but 54% of that return was due to seven stocks. So, it was a very, very concentrated return. The other thing I would highlight is, which might be surprising to me is the Euro Stoxx 50 index, which is kind of the large cap European index actually slightly outperformed the S&P 500 in 2023.

Moving on to slide 23, this is investment performance for the Thornburg Investment Income Builder Fund over various periods for both the a-shares and the iShares I won’t, I won’t dwell on this too much. I would I guess I would just highlight the table at the bottom shows 11 calendar year periods of which seven of which the Thornburg Investment Income Builder Fund was a positive return. And you can see that since inception and total return is averaging about eight and a half percent over the 21-year period of our existence. Slide 24 is showing quarterly returns since inception. Again, we’ve just completed the 84th quarter of which 61 we delivered positive total returns there. Slide 25 Just a reminder of what we believe is a unique approach. And in this income solution where we highlight in the dark blue line the investment income builder cash and fixed income allocation, we’re mapping that versus the yield to worst for us high yield and the dashed blue line European high yield and the dashed orange line.

It’s a pretty simple picture we add to fixed income when bond yields are high and we don’t add to fixed income when bond yields are low. And you can see throughout history, you know where it was, the fixed income allocation was as high as 45% in the financial crisis when the yield to worst, which is the Y axis on the right side of the slide, was north of 20%.

We haven’t seen anything like that since then. And so, the allocation to bonds has been lower. But we do think that this dynamic shift to into bonds when the yields are more compelling is a unique feature of how we seek to provide an income solution. Slide 26 is showing the quarterly distributions for the I Shares of the Investment Income Builder Fund.

I guess I would just highlight here for calendar 23, we’re basically a comparable dividend on an annual basis. As Brian mentioned earlier, we had fewer special dividends in 23 versus 22 and we also didn’t have any of the tax reclaims which were benefits in both 22 and 21. Slide 27, just showing the historic dividend yield of the investment income builder.

That would be the bars in the chart here showing this compared to our blended index, which is the light blue line, U.S. corporate bond index and the gold line. And then the dark blue is CPI. The takeaway is here are consistently having a north of 4% dividend yield throughout the history here, the CAGR over this period. So, one years is about 4.1% and the NAV grew about three and a half percent over that time frame.

And on to Slide 28, this is our report card, which we show every, every quarterly conference call just to see how we’re doing. And in this case, this is a hypothetical $100,000 investment. And this individual is taking the dividends every quarter, and they’re spending them. So, they’re not they’re not reinvesting the dividends and. What I would highlight here is the trailing 12 months dividends received is almost is almost $10,000. So, the original $100,000 investment in the last 12 months is kicking off close to $10,000 in dividends, 9,972, to be precise, cumulative dividends over that period, $174,819, which if you average that out over the 21 years, is 8,325 per annum on your original $100,000. So, and then the capital has more than doubled. And so, you grew your capital by $113,473.

So not a bad outcome. Yield on original cost on the trailing 12-month dividend is 10%, but it’s not a whole lot of things out there where you can get a 10% yield on your original cost and you more than doubled the capital that you have. Turning to Slide 29, we thought that we would throw an extra slide in here, same situation.

This is the hypothetical $100,000 investment where the individual collects the dividends and spends it. And what we wanted to do was just take a look back three years, right? So just to kind of, you know, show that this is an investing style and solution that is truly timeless. And so, what you’re seeing here is a slide taken from our quarterly conference call at the end of 2020.

So, three years ago. And what we did was we added the little box in the upper right there that shows you what this three-year dividends and capital increase was over this time frame, which we think is helpful and instructive for people to see a more recent performance and income generation from the Thornburg Investment Income Builder. So, what you see here is between, you know, the last three years, the incremental cash dividends paid was $31,189 or an average of 10,396 per year. Right? So that’s just averaging over three years. And the capital increase by 21,914. So, you know, the take home here is the returns we’re showing on these report cards. You know, they’re not they’re not front end loaded necessarily.

This is the last three years, which we think is a pretty cool outcome. Moving to Slide 30, this is another report card slide, although this is the one, we usually show. Same hypothetical $100,000 investment. But this individual is someone who does not need the dividend distributions. Right. So, they’re reinvesting the dividends as they’re receiving them over time.

And so, the real the real take home here is just the power of putting those dividends to work, of buying more shares over the 21-year history here. And so, what you see is cumulative dividends received $309,000 a little over that. And what does that mean? It means you started off with 8375 shares and you end up with 24,142 shares.

Now, if this person decides at the end of the period, hey, you know what? I want to turn on that. I want to turn the income on and start collecting those dividends. Well, basically what they’re going to get is that $1.18 trailing year dividend that that was mentioned on a previous slide time that number of shares and that’s $28,415. Right? So, think about the original $100,000 investment. Well, that’s a yield on cost of 20 north of 28%. Right. It really just highlights the power of letting the dividends do the work for you. And the total account value is now $585,079. So, a very, very powerful way to invest.

Turning to Slide 31, this is again a revisit back to December 2020 quarter end. So, three years ago, same situation here. This this is just one more those dividends are reinvested. And what you can see in the upper right is the incremental dividends received were 78,741. Right. And so that’s just that power of having those additional shares that were reinvested. And if you average that out, that’s 20,000 $247,000 a year. Right. Of incremental in the last three years. Right. On your hundred-thousand-dollar original investment. And then the account value grew by $134,308. So again, we just wanted to highlight something, you know, to answer the question, well, hey, maybe, you know, it’s nice to see this 20-year figures, but what about the more recent years and the last three years? Those are those are the numbers that you can think about.

Turning to Slide 32, this is the slide we show every time, really just to help frame how important dividends are to total return over time, over long periods of time, dividends are roughly 50% of your total return. And what we’re showing here is a table of a breakdown of the S&P 500 price and income component. The sum of the two is the total return, and in the far right column is the income as a percentage of total return. Right. And so, the observations I would lean on this slide as well. Over time it’s 50% of your total return comes from dividends. However as indicated on the far right column, that share of return is highly is highly variable. Right. And you have periods where it’s north of 100% of your total return, which implies the price went down. Right. And then there are other periods, kind of like the last two decades, or at least that the post GFC era 2011 to 2020 where dividends didn’t matter as much, right, 16.7% of the total return. And as we kick off the next decade, 2021 through 2023, so far, it’s really not that different. Right? But it’s important to remember, I think this relationship of how income as a percentage of your total return can change.

And then the last slide I would leave you with for prepared remarks is on slide number 33. And you know, this really, we included this to help people answer the question of where my future returns are going to come from. It’s really easy to talk about returns that already happened, but it’s a much deeper question to ask Where might my future returns come from?

Right. And kind of touched on it a little bit in the prior slide. But what this here is, is showing you, I’ll walk you through it from top bottom. This is some work provided by Ned Davis Research. And what you’re looking at here is just a sanity check. Right. And so, the top graph is something called the Buffett Indicator. And what it is, is it’s the stock market capitalization divided by gross domestic income or by GDP. You can do either one. And in this time series, Ned Davis goes all the way back to the 1920s. And what you can see on the top, the top box there, the orange line, is that ratio of market cap to GDI, right? And then the dotted line upward sloping is the linear regression of what that line is. Right. So, of what, what the, the slope is about this ratio. And so, where we’re at today, we’re at 176% today. The trend line is at 119%, roughly. Excuse me. And then the bottom, the bottom graph is basically showing you the percentage of that market cap ratio over or under the trend line. Okay. So, it’s given you a sense for it helps you try and understand is the market kind of getting ahead of itself relative to how much income is produced in the country, how much gross domestic product is produced in the country. And finally, what it tells you, if you look at the table at the bottom is the column, they’re showing you the years later. Right? And so, it’s telling you that when the market cap as a percentage of GDP is over or under the trendline and the two dotted lines on the bottom chart are telling you those are the that’s the 30.33 line and the -30.36 line. And then the years later, what that is telling you is historically, what’s the percentage change in the S&P 500 x many years later when that trend line, when the actual ratio is above the 30.33 or below the -30.36.

So just as an example, looking five years out because the market this ratio is above the 30.33, like it’s above that trend line. The expected percent change in the S&P 505 years later is -13 and a half roughly percent. Right. And if it were below the trend line, below the -30.36 and that bottom chart, then five years later, the S&P 500 would be up 75%. Right? And so, the take home here is when you use something like this as a sanity check for where your returns are going to come from, it’s just instructive and interesting to think about it in this way because we’ve enjoyed such a strong price component to returns in the S&P 500. So, I will leave it here and pass it back to Adam for any questions that may have come in.

Adam Sparkman: All right. Thank you, Matt and Brian, for that update on the portfolio and that instructive information on maybe where we’re at currently in the cycle will transition. Now to Q&A. And Matt, maybe before I let you off the hook, I’ll throw out a question that that I had. Well, I see some coming in from the audience on the screen, but, you know, even if we do see some easing from the Fed this year, Matt, I think we’re obviously in a much different rate environment than we’ve been in for much of the last decade plus.

I know we’ve talked a lot about the implications of a more normalized cost of capital with clients over the past year, but from your perspective, what are some areas of the market that you think are well-positioned for this pivot to a real cost of capital again and then I guess on the other side, where do you see some of the potential risks for the market this year?

Matt Burdett: Thanks, Adam. Look, again, the cost of capital normalization is going to take years to play through, right? I mean, the Fed funds rate moved extremely rapidly because the Fed had to because it was behind the curve. And there have been victims of the pace at which rates increased. And look, it’s still an adjustment right, that the cost of capital, some companies are going to have to refinance at higher rates. And so, this is still playing out. I think, you know, as Brian highlighted earlier, inflation is going in the right direction. So that’s encouraging that you’re not going to see further tightening right. Generally, where you know, honestly, I think it’s the big established companies that are going to stomach slightly higher interest costs relative to two others that are going to kind of just weather this storm.

And those are a lot of the companies that we would own in the investment income builder. The companies that I would be more worried about are those companies that, you know, business models were highly predicated on, on either 0% financing or extremely low rates. Right. Which is unlikely to be normal and then in the near term.

So generally, I think the bigger, you know, for lack of a better word or descriptor boring companies, you’re probably going to be okay as we adjust through this kind of multi period, multi-year period.

Adam Sparkman: All right. Thanks, Matt. We’ve got a question here about the Buffett Indicator and valuations. I actually think it’s a pretty good setup for where we are finding value within equities relative to maybe what the S&P 500 says.

So, Ben maybe I’ll throw this one to you. You know, given what Matt showed with the Buffett Indicator, you know, stocks look a little bit frothy at this point. They’re above the trend line. But we currently have 86% of the portfolio invested in stocks. So, you know, can you kind of explain maybe that that paradox of why we’re overweight stocks within this portfolio, despite what we share with the Buffett Indicator?

Ben Kirby: Yeah, definitely. So, it’s a good question. I mean, I would say this portfolio is really a rifle shot approach. We don’t own the whole market. We typically have 50 to 60 stocks in the portfolio. And, you know, these are companies that we’ve owned in many cases for many years that we have researched fundamentally. So, again, you’re not buying an index fund, you’re not buying the entire market, you’re buying, in this case, a select number of, we think, very high-quality companies that also have this attractive income generation and income growth potential.

So, where the overall market, the S&P is, you know, 20 times earnings roughly, this portfolio is closer to ten. So really just a very different fundamental profile than the broad market. I would add. The S&P 500 is about 33% more expensive than the European markets, and that is an all-time high discount for Europe versus the U.S. And even on a sector neutral basis because of course the sectors in Europe look a little different than the sectors in the U.S. so, if you want to try to compare apples to apples a little bit more, Europe is still a 17% discount to the U.S., which is near an all-time high, and that’s going back to 1988. So geographically, I think being diversified outside the U.S. makes a lot of sense right now. And even more important than that, I think the rifle shot approach to find some of these undervalued investments really is where we’re adding value for clients.

Adam Sparkman: All right. That’s great. Thanks, Ben. Why don’t we turn it over to you, Christian. On the fixed income side, I see a question here about rates and how we should interpret the recent messaging that we received from the Fed over the last couple of months of 2023.

Christian Hoffmann: I mean, the interesting thing is, on paper, the last three Fed meetings were kind of the least interesting. I mean, really, no action was taken. And that’s after, you know, almost two years of, you know, a lot of fireworks and, you know, wildly varying expectations of what would happen in the Fed meeting. That Fed, despite not doing anything, we saw, you know, a tremendous amount of volatility, you know, over those three meetings.

I think the shocking thing, you know, of the last one was, you know, really the pivot we saw from Powell. And, you know, we’ve had Powell for a number a number of years now and seen a number of surprising pivots, but not in recent years, because it was just two weeks before the meeting basically doubled down on his hawkish tone.

So, you know, it’s too early to talk about, you know, cutting rates. And we thought this was going to be a ho hum meeting and it just turned out to be wildly dovish. And then oftentimes when you see that, you know, they push back against it, you know, in the press conference. But there was absolutely no pushback. It’s really hard to interpret anything besides an overall dovish meeting, which was, again, very surprising given the comments that he had made just two weeks before.

You know, I’ve seen various interpretations of what happened or what might have changed. I think, you know, one sell side analyst kind of broke it into three possible scenarios. It’s my favorite interpretation. The first one is the Fed has seen bad data. You know, the rest of the market has not seen that changed their changed their view. And really tone.

The second is that Powell was losing support of committee members. And this certainly has been a consensus driven process and committee. So, he decided to act a bit more dovish to appease committee members. And the third one is kind of wildly controversial that that suggested political motivations that the Fed may be trying to influence the election. I don’t believe the third one. I think that’s inflammatory. That’s not to say the Fed isn’t a political institution. I believe that it absolutely is. To me, the correct interpretation is probably the second one, but the second one could have been influenced by both the first and the third. So, you could have had members of the committee that might have, you know, more political considerations going into their views.

And I think maybe there is some data that has spooked some of the members. So, I think those things probably led to some members seeking a more dovish tone, and that’s really what came through. But overall kind of shocking and very surprising. The market really took that and ran with it. We’re now looking at 380 Fed funds by the end of the year. Just a dramatic repricing in the market on a day-to-day basis. Debating cuts, you know, starting as soon as this month. I think the risk there is that we see that, you know, reprice. Again, that’s not to say we don’t get that as the final outcome, but I think to see more than that would take a tremendous amount in a wildly different economic picture.

It would be pretty easy to see, you know, the Fed push back against that more or see inflationary data like we did today, which wasn’t as supportive. So, I think the risk you know, from a trading perspective is probably to the downside that we see some of those cuts get pulled back. Okay, thanks.

Adam Sparkman: Thanks, Christian and Brian, why don’t we turn to you. We’ve got a question here about the dividend and dividend criteria when it comes to dividends. And you see a company cut the dividend or leave it flat or grow it or maybe it comes in less than projected. So, when there’s uncertainty or moves in a different way than you were thinking, does this cause you to reassess the investment thesis of the company and its fit within the portfolio, especially if it lasts over a certain period of time?

Brian McMahon: Yeah, thanks for that always timely question. And the answer is, yeah, we’re, we’re always we assess in the investment portfolio and Thornburg Investment income builder, and it ties back to the point we made at the beginning the ability to pay, a willingness to pay. That’s what we look for. And realistically, I think Matt summed up on slide number 27 in this deck that put across the portfolio, we’ve grown the dividend 4.1%, compound average annual growth rate for 21 years.

And in order to do that, we have to have the equity part of the portfolio with kind of a mid-single digit average growth rate. And so, we do have a mix of some lower dividend payers that are growing faster and some that are that are higher, that might be flattish. We tried to avoid dividend cuts, but we’re not always going to be able to avoid those.

But for the most part, a majority of the companies that paid a lower dividend last year, I’ll give you an example, like a Total, that’s one of our largest positions. And they paid it. They paid a big special dividend at the end of 2022, and they didn’t repeat that in 2023. But what they did do is buyback almost 8% of their shares outstanding.

So, if they pay the same dividend per share in 2024, the cash outlay will actually go down by about 8%. So what they’re doing is, is setting a foundation maybe for better dividend growth down world, because there clearly are fewer straws in the drink to drain the drink. So we look at it all, but we try to look at it holistically in light of what are we trying to accomplish with this with this program? And if we can grow the dividend 5% per year, I will. I’ll feel pretty good about that the next 20 years. So that it’s a question of what will contribute to that end. And if you look at the ingredients, especially the specific ones that we that we give you some detail on, I think you’ll I think you’ll begin to appreciate how we’re how we’re trying to blend the ingredients together to get that outcome.

Adam Sparkman: All right. Thanks for that color, Brian. Ben, we’ve got another equity markets question, and I’ll come to you with your as Brian mentioned on our review at the beginning of the deck. If you look at the consensus earnings estimates across markets, a lot are coming in kind of, you know, low double-digit levels, an expectation of growth in 2024 coming off the strong year that we saw in 2023.

You know, do you think that’s overly optimistic, overly bullish? Should we expect equity markets to really do that or are they potentially getting ahead of themselves from your perspective?

Ben Kirby: Yeah, you know, so from an earnings expectation standpoint, I don’t think there’s a ton of information sort of and the analyst expected earnings growth in January for the full year because they almost always start at 10% kind of from year to year.

You go by a lot. The chart is almost always about 10% and that ends up being normally a lower number by the time the year finishes. So, in the last ten years and 20 years and 30 years, the S&P is compounded earnings at about six and a half percent. So, you know, 12% looks, you know, higher than sort of historical, which gives us a little bit of pause sort of on again, the overall market income builder stocks have historically had much more resilient earnings revisions over the course of the year than the market.

And what I mean by that is our earnings expectations might have started. The year at 8%, but, you know, maybe they finish the year at 7% actual growth, whereas the market might start at 12 and actually end up delivering six. So, our companies tend to have very resilient businesses, great moats around the business and as a result, earnings expectations tend to more likely to be delivered.

I want to wrap up just a bit more answer on the question about valuations and sort of stocks versus bonds, because I think it’s really important. So, I talked about the P.E. of the U.S. market at 20 in the P.E. of this portfolio at ten. A good way to compare stocks and bonds is to flip that P.E. ratio around, to look at the look at the earnings yield. So, a PE of 20 is an earnings yield of 5% and the Fed funds is five and a half percent. Right? So, when you compare the earnings yield on the S&P, it’s pretty close to the cash yield. So, you’re not getting a lot of extra spread there. Or even if you want to look at a ten-year bond, that’s a 4%.

So, you’re getting a 1% spread for the income builder at a 10% earnings yield. That’s a very attractive spread versus almost any fixed and fixed income instrument you can buy. And if you consider that 10% earnings yields again, which is more comparable to a bond yield, and you add to the fact that 75% of our companies accrue their dividends per share last year, then I think you see why we’re still very optimistic on the types of stocks we own, their ability to generate that income over time and probably generate a capital appreciation as well.

Adam Sparkman: Great. We have another fixed income question that I’ll throw over to you, Christian. Somebody notes the strong performance in credit spreads into the year end and what you make of that.

Christian Hoffmann: I think I had a comment on the last call of fall traditions and bond prices falling. I think at that period of time, you know, we were still in the thick of it. You know, what happened after that, you know, also mirrored 2020 to, you know, almost exactly the same fashion. So, 2022 and 2023, bond prices started selling off in September. And really by the end of October, we’re pretty much left for dead. So, I mean, maybe Dia de los Muertos or, you know, what they call Day of the Dead could really be a bond holiday. You know, once we cleared October and, the selloff really kind of burned off on its own weight. People decided actually Bonds looked pretty interesting and started to buy them. Then you followed that into the surprising December Fed meeting, which we talked about. The timing of that is pretty interesting. I think I’ve talked about this before, but this really two times a year when the bond market ostensibly shuts down.

That’s the last two weeks of December and the last two weeks of August. There’s really no new issuance. It’s kind of expected that people are traveling. And so, the calendars are pretty clear. Liquidity is low and in a stable market, that just means it’s kind of sleepy and quiet, boring. But if it’s a risk off market, it feels pretty heavy because people are trying to unwind positions and reduce risk and there’s not people around on the other side to take it. And the opposite can be true too, that when people are struggling to add risk into year end and right size risk positions, you know, they’re not finding sellers and everyone’s kind of grabbing at the same time. And that’s what we saw this year is, well, you know, into poor liquidity, people trying to buy paper. So, we saw high yield spreads grew from 440, which is kind of an average level to 311 by the year end, which really felt silly and overdone.

You kind of saw some of that normalization happened, you know, when everyone got back to their seats in January, January 4th, we’d already bounced to 362. They were around 334, not surprisingly. And that’s just not that’s not just high yield, right? That’s across income markets. That’s pretty tight. Like we’re through average levels. We’re closer to the heights than even average levels. I.G. issuance has started this year in a frenzy. And we’ve had over 70 issuers come to market. And just the start of the year, just not even two weeks, and that’s about 30% above average. Other markets are a little slower to react, but we see them teeing up. I think if markets stay healthy, we’re going to see a lot of high yield issuance, a lot of it probably taking out that 2025 maturity wall that the media likes to report about, and we’ll see E.M. pick up as well. And structured product. And I think issuance will stay heavy so long as the market can support it.

Adam Sparkman: All right. Thanks, Christian. I see one more question I think is interesting and we’ll try to hit it and then wrap here at the hour. I’ll throw it over to you, Brian. What is your investment outlook for the consumer and specifically, which sectors or portfolio holdings do you think are most exposed to consumer spending?

Brian McMahon: Yeah, well, the consumer’s been squeezed a bit by inflation here and elsewhere over the last three years. And maybe what we’ve seen develop since early 2023 is real wages actually increasing. So nominal wages increasing faster than inflation, which is encouraging to see. And if that if that will continue. And you know, in the in this early slide three that I started with the macro slide, it does point out that the Atlanta Fed wage indexes got a five-plus handle to it.

So, If that continues, then I think the outlook for the consumer ought to be okay. Employment is strong overall number of jobs in the U.S. increasing overall and real wages going up. So even though the consumer has been pinched, I think we always have to be worried about what could happen. But when we look at what is happening, it’s not a terrible picture for the consumer, broadly speaking. As far as stocks, we’re really focused ability to pay and willingness to pay in in the income builder portfolio. So we like stocks that provide some important product or essential service. And if they can build a consumer monthly or maybe even more frequently and get paid and not have big receivables, I’m not a big credit risk, then we’re pretty happy with those kinds of stocks.

Credit performance on our banks has been good but we always watch that pretty carefully and we’ll start to get some more observations on that within 24 hours. So, we’ll watch. But overall, I think watchful but optimistic.

Adam Sparkman: All right. Well, I think that’s a good place to leave it. I’d like to thank everybody for being on the call today.

We appreciate the questions. And making it as interactive is as it’s been. As always, please feel free to reach out to us with any follow up questions. As Bryan mentioned, he and rest of the team are happy to talk through stocks or any other aspects of the portfolio and help you any way we can. So, thank you so much and we’ll talk to you next time.