Value

Fourth Quarter 2009

During the fourth quarter of 2009, the Thornburg Value Fund (A shares without sales charge) returned 5.16%, slightly behind the S&P 500 Index, which returned 6.04%. Performance over the entire year was more satisfying, with the Fund returning 45.26% vs. a return of 26.46% for the benchmark.

We take a comprehensive approach to value investing, purchasing the best individual stocks that we can, regardless of sector. Our top contributors to performance in the fourth quarter were reflective of that, as a number of diverse names were additive to performance. Microsoft (MSFT) was the top contributor to Fund performance during the period. The company maintains one of the strongest balance sheets in corporate America, and initial reception to its new operating system has been positive. Another IT company, Visa (V), demonstrated an ability to pass along higher fees to the merchants using its services, resulting in strong Q3 earnings. Global consumer demand for LCD televisions has remained robust, even during a global recession, which benefited Corning (GLW), as they are a leading supplier of the glass for these televisions. Two recent additions in the materials sector, Monsanto (MON) and U.S. Steel (X), contributed almost immediately. U.S. Steel has significant operating leverage and should benefit if the economy recovers. DirecTV (DTV) and DISH Network (DISH), within the consumer discretionary sector, both rose as fears over the impact of internet delivery of television content abated. Other major contributions came from Crown Castle (CCI, telecommunications), ConocoPhillips (COP, energy) and Swiss Re (RUKN VX, financials).

In a relatively solid quarter, contributions from our strong performers well outweighed what we lost from our top detractors. Of note, we saw no signs of impairment of our investment thesis in any of the stocks that led the list of detractors, and, at the time of this writing, we remain invested in each. Names that did decline on an absolute basis were concentrated in financials, which is not surprising given that financials were the only sector of the S&P 500 Index to post negative returns for the quarter. Importantly, our holdings in the area held up better than others on average, as they declined by a smaller amount than the sector in aggregate. Hartford Financial (HIG) fell; the stock is trading at a fraction of book value and we believe that the long-term prospects for the business are intact. Another insurer, ACE Ltd. (ACE) declined. However, we remain confident in their ability to capture market share over time. Especially exciting is the fact that the company is trading at 6x earnings, despite an excellent balance sheet. KeyCorp (KEY) is a name we recently purchased under the belief that their balance sheet should continue to heal as the economy recovers. Mitsubishi UFJ (8306 JP) fell; we continue to believe that they trade at a significant discount to intrinsic value. Other detractors to performance were spread across the IT, healthcare, and consumer discretionary sectors.

Our flexible approach to seeking value led us to purchase several fixed-income securities in late 2008 and early 2009, primarily from issuers we were familiar with from our equity research. Given the panic taking place in the credit markets at the time, we took positions in bonds that were trading at significant discounts to what we believed they were worth. As the fixed-income markets healed and credit spreads compressed, the prices of these bonds rose, and we exited many of them at a significant profit. The opportunity that arose in the fixed-income market was unprecedented and we do not expect it to ever occur again.  Accordingly, we anticipate that over time the proportion of fixed income in the Fund will decline.

The success of corporations in cutting costs and refinancing or repaying debt has created the possibility that share prices may recover sooner than the economy.  The scope of government intervention and the degree of wealth destruction from declining asset markets make this market unique.  The headwinds facing economic growth and consumer spending are substantial.  Through our bottom-up fundamental analysis we have found companies that we believe can benefit from global economic growth and which are not dependent upon a recovery in US consumer spending.  The share prices of these companies may also benefit from the weak US dollar and sustained low interest rates.  As always, there are risks and uncertainties, but we are cautiously optimistic regarding the outlook for equities in general.  

 

For a print friendly version of the Value Fund market commentary click HERE.

Click here to see the top 10 holdings and performance of the Thornburg Value Fund

Important Information

The views expressed by the Portfolio Managers reflect their professional opinions and should not be considered buy or sell recommendations. These views are subject to change.

Securities, countries and sectors mentioned are presented for the general information of Fund shareholders. Portfolio holdings are subject to change daily. Under no circumstances does the information contained within represent a recommendation to buy or sell securities.

The S&P 500 Index, an unmanaged broad measure of the U.S. stock market, does not reflect sales charges.

The performance of any index is not indicative of the performance of any particular investment. Keep in mind that indices do not take into account any fees and expenses of the individual investments that they track. You cannot make an investment in any index.

Intl Value

Fourth Quarter 2009

The fourth quarter of 2009 marked a continuation of the rally in the preceding two quarters, and the year ended on a strongly positive note, especially considering where we were in March. The move from the lows to the highs of the year was astounding in most major markets, and more than doubled in some.  The Thornburg International Value Fund ended the year up a healthy 31.43% (A shares without sales charge), in-line with the MSCI EAFE Index and behind the MSCI AC World Index (ACWI) ex-US.  We continue to strive for long-term performance, as exhibited by our 3-, 5- and 10-year track records, which are in the top decile of the Fund’s Morningstar category, and invest accordingly.

Percentile Rank in Morningstar Foreign Large Blend Category A shares, as of December 31, 2009
	1-yr	3-yr	5-yr	10-yr
% Rank	43	4	8	6
# Funds	823	635	462	249
Past performance does not guarantee future results. Morningstar percentile rankings are based on total returns before sales charge.

The Thornburg International Value Fund posted positive returns in the fourth quarter, returning +3.76% (A shares without sales charge), versus the MSCI EAFE and ACWI ex-US indices +2.18% and +3.79% respectively.  Contribution to performance came from various sectors, most notably consumer discretionary, healthcare and financials. Within these sectors, companies with exposure to growth in developing economies stood out, while some European centric financial holdings detracted. The top performing stock during the quarter was Wal-Mart de Mexico (WALMEXV MM), which has consolidated its leadership position during the downturn and is now benefiting from improved economic conditions in Mexico while continuing to streamline costs and expand its store base.  Teva (TEVA), the leading global generic drug company, was our second top contributor, followed by BHP (BHP AU) with its strong position in metals and mining, and SAB Miller (SAB LN) with its leading beer franchise in South Africa as well as other emerging markets.  LVMH (MC FP) benefited from improved luxury consumer trends globally, specifically in China which currently represents near 20% of total revenues. Chinese financials China Merchants Bank (3968 HK) and ICBC (1398 HK) were also notable contributors during the quarter.

Given the positive nature of the quarter, many of our portfolio detractors were not negative in an absolute sense, but rather relative to other holdings.  Our biggest detractors included National Bank of Greece (ETE GA), which sold off on concerns about sovereign risk in Greece due to a high fiscal deficit; Vestas (VWS DC), which suffered due to a lack of visible progress on hard targets for carbon emissions at the conclusion of the talks in Copenhagen; and AXA (CS FP), primarily reflecting the uncertainties centered on the pending acquisition of its Asian affiliate.

Portfolio activity during the quarter focused on stocks with strong franchises that have exposure to growth in both their home territory, and the developing markets.  It is interesting to note that six of our seven purchases are stocks we have owned in the past, where we believe value has been created since our sale by progress in the business, more attractive valuation, or a combination of the two.  The previously owned names included Hyundai Motor (005380 KS), Taiwan Semiconductor (2330 TT), Tesco (TSCO LN), BP plc (BP LN), ING Groep (INGA NA) and China Mobile (941 HK).  We also added Cairn Energy (CNE LN), an oil company which we believe has exceptional potential for production growth, particularly in India.  We sold certain issues due to the achievement of what we believe to be full valuations, or to fund ideas with better risk adjusted return potential, including GAM Holding (CHF, spun off from Julius Bear), Barclays (BARC LN), Nokia (NOK1V FH), Deutsche Boerse (DB1 GR), Willis Group (WSH), and Visanet (VNET3 BZ). 

Although global financial markets experienced an impressive resurgence in 2009, we believe economic recovery is still at an early stage.  Unprecedented bail-outs and stimulus packages by governments have thus far served to stabilize the markets and global economies after one of the most serious challenges in the post-war era. The long-term consequences of these policies remain to be seen.  We believe that equity markets in 2010 will require sustained economic recovery, and top-line-driven corporate earnings growth to support capital appreciation from here.  In this uncertain environment, excellence in investment research focused on company fundamentals should once again serve as the dominant differentiating factor in investment performance.  As an old French proverb says, “A baby is an angel whose wings decrease as his legs increase”.  We have confidence that the development of the two legs of cost reduction and top-line recovery will serve our companies well in 2010.  We will also work to find fallen angels that have successfully managed through the crisis, exhibited strength of business model, and provide a promising future.  Ultimately, companies that have been effective cost managers while sustaining revenue growth are likely to post encouraging financial results, which will be reflected in stock price recovery.

For a print friendly version of the International Value Fund market commentary click HERE.

Click here to see the top 10 holdings and performance of the Thornburg International Value Fund

Important Information

The views expressed by the Portfolio Managers reflect their professional opinions and should not be considered buy or sell recommendations. These views are subject to change.

Securities, countries and sectors mentioned are presented for the general information of Fund shareholders. Portfolio holdings are subject to change daily. Under no circumstances does the information contained within represent a recommendation to buy or sell securities.

The Morgan Stanley Capital International (“MSCI”) Europe, Australasia, Far East Index (“EAFE”) is an unmanaged index. It is a generally accepted benchmark for major overseas markets.  Index weightings represent the relative capitalizations of the major overseas developed markets on a U.S. dollar adjusted basis.  The index is calculated with net dividends reinvested in U.S. dollars.

The Morgan Stanley Capital International All Country World ex-US Index (MSCI ACWI ex-US) is a market capitalization weighted index composed of approximately 2,000 companies, and is representative of the market structure of 45 developed and emerging market countries in North and South America, Europe, Africa, and the Pacific Rim, excluding securities of United States’ issuers.  The index is calculated with gross dividends reinvested in U.S. dollars.

The performance of any index is not indicative of the performance of any particular investment. Keep in mind that indices do not take into account any fees and expenses of the individual investments that they track. You cannot make an investment in any index.

Established in 1988, the Morningstar Fund Manager of the Year Award recognizes portfolio managers who demonstrate excellent investment skill and the courage to differ from the consensus. To qualify for the award, managers must have not only a great year, but also must have a record of delivering outstanding long-term performance and of aligning their interests with shareholders’. The Fund Manager of the Year Award winners are chosen based upon Morningstar’s proprietary research and in-depth evaluation by its senior analysts.

Morningstar Rankings: © 2009 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.

Core Growth

Fourth Quarter 2009

The Thornburg Core Growth Fund posted positive performance in the fourth quarter, returning 4.26% (A shares without sales charge). That wasn't enough to keep pace with the benchmark Russell 3000 Growth Index, which returned 7.65%. While disappointing in the short-term, philosophically, our horizon is much longer than any three-month period. The past year in its entirety reflects that, as we returned 45.39% in 2009, well ahead of the 37.01% return of the benchmark.

Those familiar with our strategy know that we do not attempt to predict whether a particular market cap or growth investing style will lead others. Rather, since inception, we have adhered to our basket approach, classifying stocks as Growth Industry Leaders, Consistent Growers, and Emerging Growth companies. Growth Industry Leaders are companies with strong market positions in industries growing faster than the economy as a whole. Consistent Growers are more defensive and are defined by having diversified businesses or recurring revenue models. Emerging Growth companies are firms with high rates of growth that have particular advantages in their marketplaces. We often invest in stocks in this basket with the idea that they will eventually mature into a Growth Industry Leader. This structure instills a sense of discipline at the portfolio level, as we seek to maintain roughly equal percentages of the Fund in each basket. We then populate those baskets with what we believe to be the most attractive individual stocks.

Looking back to late 2008, despite the fear and uncertainty in the market, we were actively seeking exposure to our most underweight basket - the Emerging Growth companies. That discipline paid off, as the Emerging Growth basket dominated performance through the first nine months of 2009 - Starent Networks (STAR), SBA Communications (SBAC) and Las Vegas Sands (LVS) all being examples of Emerging Growth Companies purchased late in 2008 that were top contributors to Fund performance through September 30th, 2009. In fact, seven of the top ten contributors to Fund performance through the first three quarters of 2009 came from the Emerging Growth Basket.

Market dynamics change over time, however, which is the reason we employ our basket structure - our goal is to participate in all growth markets. During the fourth quarter, higher quality, more dominant franchises returned to favor, which led to the relative outperformance of the Growth Industry Leaders and Consistent Growers - six of the top seven contributors in Q4 on an absolute basis came from one of these two baskets. Growth Industry Leaders were especially well represented as Microsoft (MSFT), Visa (V) and Google (GOOG), all members of that basket, were the top three contributors to performance during the fourth quarter. Microsoft maintains a pristine balance sheet and the market has been encouraged by the initial reception to its new operating system. Visa has been demonstrating an ability to increase the fees charged to merchants for its services and that pricing power was reflected in Q3 earnings. Prospects for a more favorable pricing environment also drove Google higher. The company maintains significant operating leverage and any increase in revenues could magnify profit margins.

We benefitted from our positions in data center providers - we maintain positions in Equinix (EQIX) and its European competitor Telecity Group (TCY LN), both were top-ten contributors to performance. Other stocks that contributed included DirecTV (DTV), priceline.com (PCLN), Talecris Biotherapeutics (TLCR), Express Scripts (ESRX), and FLIR Systems (FLIR). We believe in focusing our portfolio in a smaller number of names and took satisfaction from the fact that three of the top contributors to performance in the quarter were top six position weights within the Fund.

Two of our top contributors to performance for 2009 in aggregate detracted in the fourth quarter specifically. Goldman Sachs (GS) has been impacted by the press surrounding compensation for financial executives; however, we continue to be invested based on their strong margins and returns on equity. Las Vegas Sands saw profit taking; we remain in the name in anticipation of the cash flows that should be realized with the impending launch of their Singapore property.

Meanwhile, three of our Emerging Growth positions were impacted by the focus on high quality during the quarter, as well as company specific issues. STEC (STEC), a provider of steady-state hard drives declined amidst controversy over its costs, as well as the long-term reliability of its technology. We continue to be constructive on the story, although it is a relatively small weight in the portfolio. Coinstar (CSTR) is known for their DVD rental kiosks. Recent results have been promising as they have taken share from bricks-and-mortar DVD rental stores. However, concerns regarding receipt of content from the major movie production studios weighed on the stock. VCA Antech (WOOF), an operator of veterinary clinics in the U.S. was sold to redeploy capital to those names where we had higher conviction.

As our focus is on individual security selection, we do not overlay a macroeconomic view of the world into our process. Having said that, we are somewhat encouraged by signs that pricing of products and services is firming, something which could not be said several months ago. Earnings from a year ago are a low hurdle to beat and we would not be surprised, barring another economic setback, to see future estimates revised upward.

December 31st, 2009 marked the end of a disappointing decade for equity investors. While the Thornburg Core Growth Fund doesn't quite have a complete decade under its belt (we will hit our ten-year anniversary in December, 2010), we are satisfied that, since inception, we have delivered something which our benchmark has not over the same period, namely positive returns. We are constantly learning new things and incorporating them into our process; however, our long-term record reinforces our confidence in our team and approach.

For a print friendly version of Alex's market commentary click HERE.

Click here for the top 10 holdings of the Thornburg Core Growth Fund

Important Information

The views expressed by the Portfolio Managers reflect their professional opinions and should not be considered buy or sell recommendations. These views are subject to change.

Securities, countries and sectors mentioned are presented for the general information of Fund shareholders. Portfolio holdings are subject to change daily. Under no circumstances does the information contained within represent a recommendation to buy or sell securities.

The Russell 3000 Growth Index is an unmanaged index comprised of those Russell 3000 companies with higher price-to-book ratios and higher forecasted growth values.

The performance of any index is not indicative of the performance of any particular investment. Keep in mind that indices do not take into account any fees and expenses of the individual investments that they track. You cannot make an investment in any index.

Lipper Fund Awards are granted annually to the fund in each Lipper classification that consistently delivered the strongest risk-adjusted performance (calculated with dividends reinvested and without sales charges). Awards are given for three-year, five-year, and ten-year periods. The fund did not win the award for other time periods. Past performance does not guarantee future results.

Income Builder

Fourth Quarter 2009

Thornburg Investment Income Builder Fund paid dividends of $1.047 per Class A share in the twelve months ending December 31, 2009, up 2.2% from the $1.024 per share paid in the comparable prior year period. The dividends per share were higher for Class I and Class R5 shares, and lower on the Class C, R3, and R4 shares, to account for varying class specific expenses. The net asset value per Class A share increased during the period, from $13.93 to $17.83. The total return for the A shares, not including the impact of any front end sales charge, was 36.60% for calendar 2009.

The December 2009 dividend was slightly smaller than we paid in December of 2008, due to a smaller percentage of stocks in the portfolio paying special Q4 dividends. In 2009, the Fund's income was somewhat more evenly spread over the calendar year, reflecting the greater percentage allocation to interest bearing debt.

For the year ending December 31, 2009 Thornburg Investment Income Builder Fund outperformed the S&P 500 Index by 10.14%, and outperformed the blended index of 75% MSCI World Index/25% Barclays Capital Aggregate Bond Index by 12.56%.

For 3- and 5-year time periods, and since inception, your Fund has significantly outperformed both indices, as noted in the Performance and Expenses section of this web site pertaining to Investment Income Builder.

We did not pay any capital gain dividend for 2009. At September 30, 2009, the end of its most recent fiscal year, the Fund had tax basis capital losses of approximately $284 million. These may be used to offset future capital gains to the extent provided by regulations.

In assessing the performance of Investment Income Builder for 2009, it is constructive to consider the performance in $US of the sector components of the MSCI World Index over the year, because this comprises 75%, and the entire equity portion, of our global performance benchmark:

• All sectors showed positive total returns, with a range of +7.1% (utilities) to +62.1% (materials).
• Four sectors (materials, information technology, consumer discretionary, and financials) showed total returns exceeding 30%. Other than utilities, telecommunications was the only sector with a 2009 total return below 15%.

Relative to the index weightings, Investment Income Builder had a relatively large portfolio allocation in telecommunication service firms. These investments delivered well-above-average returns, mostly driven by their sizable dividends. Telefonica (TEF SM), Telstra (TLS AU), and Level 3 bonds were each among the leading contributors to portfolio performance for the period. We continue to have a large weighting in the cash-generative telecommunication service providers. Since financial asset prices around the world began to rally in March of 2009, the returns to our telecommunication service investments have substantially lagged the performance of most of our other holdings, and of equity market averages. These dividend payers are not highly valued, relative to other financial assets or to their own histories.

Investment Income Builder also maintained a relatively large investment allocation to the financial sector during the year. While this allocation hurt the absolute and relative performance of the portfolio during the October 2008 to March 2009 period, the rebound has been significant and the Fund's average return from this sector was greater than 40% for the calendar year as a whole...above the 31.8% performance of the comparable equities in the finance sector of the MSCI World Index. Our investment choices in the financial sector ended up being an important driver of outperformance vis-à-vis the benchmark for 2009. Among the best contributing investments to portfolio performance from this sector were Swiss Re Capital 6.85% notes; Bank of Montreal (BMO CN); mortgage REITs Chimera Investment (CIM) and Annaly Capital (NLY); convertible preferred stocks from Fifth Third Bancorp (FITB) and Huntington Bancshares (HBAN); business development company Apollo Investment (AINV); and Hong Kong Exchanges & Clearing (388 HK).

The Income Builder portfolio had strong outperformance, relative to the MSCI World Index sector performance, from its investments in utilities, telecommunications, and industrials. The health care investments of Investment Income Builder detracted from the Fund's performance. The stock price of Eli Lilly & Co. (LLY) was particularly disappointing among these, though the damage from its poor performance was mitigated somewhat by the Fund's significant underweighting in health care investments generally in relation to the MSCI World Index weighting in this sector of just above 10%. The Fund had relatively few investments in the two best performing sectors of the MSCI World Index, information technology and materials, due to the fact that firms in these sectors tend to pay low dividends. This underallocation, which we expect to persist, created a performance headwind that we were able to overcome with our investments in other areas, including bonds.

Within its bond portfolio, Investment Income Builder owned significantly fewer U.S. government and agency bonds than the Barclays Capital Aggregate Bond Index. This fact hurt the relative performance of the Fund's portfolio in Q4 2008, but was quite helpful as both the relative and absolute performance of corporate bonds improved significantly during 2009. Readers of this note who are long time observers of Income Builder will recall that the interest bearing debt portion of the Fund's portfolio fell well below 20% during the "yield drought" between 2004 and 2007, and stood at approximately 15% of the Fund portfolio on March 31, 2008 before increasing to around 30% at September 30, 2008. Since early 2009, the Investment Income Builder portfolio has been weighted at around 40% or more in interest bearing debt. In general, these debt investments have performed very well. Since yields available on debt investments have declined in recent months, expect the Fund's percentage allocation of interest bearing debt to decline gradually if this condition persists.

In calendar 2009, approximately 55.5% of Income Builder's income was derived from stock dividends, with the remaining 44.5% coming from interest. At December 31, 2009, domestic stocks, including preferred stocks, comprised around 31% of the portfolio; foreign stocks around 30%, and interest bearing investments 39%.

We have stated many times that an investment in Thornburg Investment Income Builder Fund should be considered a long-term investment, and should be evaluated over longer periods. That said, it appears that the financial market volatility of the last year, which was reflected in share price fluctuations of the Fund, was unnerving to some shareholders. Owners of approximately 57 million shares of Thornburg Investment Income Builder sold their shares at an average price of approximately $13.39 per share between October 1, 2008 and March 31, 2009. We have no idea how these investors redeployed the Funds redeemed from Income Builder, but the fact that the Fund's A shares achieved a price of $17.83 per share on December 31, 2009 and paid dividends totaling $1.047 over the course of the year sets a relatively high bar for the opportunity cost of having sold the Fund shares, thus far.

Recall that Thornburg Investment Income Builder seeks to generate attractive, and rising, dividends over time from its portfolio of income-producing stocks, bonds and hybrid securities. We continued to make good progress in generating income during 2009, mostly due to the fact that we increased the Fund's allocation to bonds during a period when many other investors were liquidating bonds at distress prices. The equity dividend landscape remains challenging.

Enough firms either cut or eliminated their dividends over the last year to cause the overall cash dividends paid by those firms comprising the S&P 500 Index, England's FTSE 100 Index, Japan's NIKKEI 225 Index, and the Dow Jones Euro Stoxx 50 Index to decline by more than 20% in 2009. Thornburg Investment Income Builder clearly avoided that outcome.

On average, the companies in the equity portion of the Income Builder portfolio are expected to grow revenues in the recession year of 2009. We currently expect earnings per share of these companies to decline by around 5% in 2009, with the energy holdings showing particularly significant earnings declines. For 2010, average earnings of the equities held in the Income Builder portfolio are expected to at least recover the earnings lost during 2009. Dividends from the average equity held in the Income Builder portfolio were approximately flat in 2009 vs. 2008. Both the earnings and dividend outcomes are disappointing in absolute terms, but outstanding in relative terms.

The most notable feature of the domestic economic environment is the shortage of income in the United States.

Within less than 2 years employment has fallen from approximately 138 million jobs to around 131 million. All readers of this note are well aware of the collapse in yields on bonds, bank deposits, stocks, and money market funds. The fact that the 2-year U.S. Treasury note yield now barely exceeds 1% indicates increasing acceptance by investors that it will be "an extended period of time" before the Federal Reserve ("the Fed") will begin raising short maturity interest rates. All recent communications from Fed officials have supported this position.

Writing in the November 2009 "U.S. Economic Forecast Monthly Summary," Standard & Poor's economists David Wyss and Beth Ann Bovino stated:

"Last year, households lost 19% of their net worth because of the drops in stock and house prices. We expect boomers (those born from 1946-1964) to react to the loss of wealth in three ways: by retiring later, saving more, and maintaining a lower standard of living after retirement. Surveys now show that Americans intend to retire at age 65, on average, up from 63 two years ago. They also intend to save more, although so far that is more intent than reality. If they don't do the first two, the third is inevitable."

Over the last 7 years, the annual dividends paid by Thornburg Investment Income Builder from net investment income have increased at an average annual rate of 13%, from 50.3¢ per A share for 2003 to $1.047 for 2009.

We do not expect to continue to achieve the rate of income growth seen in prior years. We should still have a very successful long-term investment program with much smaller average annual increases. Over time, higher income dividends are their own reward, and we believe that an investment portfolio that can generate these should maintain its value over the long term. While the market prices of most Income Builder investments have appreciated over the last year, we believe that the income generators in the Fund's portfolio have considerable intrinsic value, especially in an environment where there is a noticeable shortage of visible investment income.

For a print friendly version of the Investment Income Builder Fund market commentary click HERE.

Click here for the top 10 holdings of the Thornburg Investment Income Builder Fund

Important Information

The views expressed by the Portfolio Managers reflect their professional opinions and should not be considered buy or sell recommendations. These views are subject to change.

Securities, countries and sectors mentioned are presented for the general information of Fund shareholders. Portfolio holdings are subject to change daily. Under no circumstances does the information contained within represent a recommendation to buy or sell securities.

The S&P 500 Index, an unmanaged broad measure of the U.S. stock market, does not reflect sales charges.

The Morgan Stanley Capital International (MSCI) World Index is an unmanaged market-weighted index that consists of over 1,200 securities traded in 23 of the world's most developed countries. Securities are listed on exchanges in the US, Europe, Canada, Australia, New Zealand, and the Far East. The index is calculated with net dividends reinvested, in U.S. dollars.

Barclays Capital Aggregate Bond Index is composed of approximately 6,000 publicly traded bonds including U.S. government, mortgage-backed, corporate and Yankee bonds with an average maturity of approximately 10 years. The index is weighted by the market value of the bonds included in the index.

The Dow Jones STOXX 50 (Price) Index is a capitalization-weighted index of 50 European blue-chip stocks. The equities use free float shares in the index calculation. The index was developed with a base value of 1000 as of December 31, 1991.

The FTSE 100 Index is a capitalization-weighted index of the 100 most highly capitalized companies traded on the London Stock Exchange. The equities use an investibility weighting in the index calculation. The index was developed with a base level of 1000 as of January 3, 1984.

The Nikkei Stock Average is an index of 225 leading stocks traded on the Tokyo Stock Exchange. Similar to the Dow Jones Industrial Average, it is composed of representative "blue chip" companies (termed first-section companies in Japan) and is a price-weighted index, whereby the movement of each stock, in yen or dollars respectively, is weighed equally regardless of its market capitalization.

The performance of any index is not indicative of the performance of any particular investment. Unless otherwise noted, index returns reflect the reinvestment of income dividends and capital gains, if any, but do not reflect fees, brokerage commissions or other expenses of investing. Investors may not make direct investments into any index.

Treasuries are negotiable debt obligations of the U.S. government backed by the "full faith and credit" of the government and issued at various schedules and maturities. Income from Treasury securities is exempt from state and local, but not federal, taxes. Treasury Bills are short-term instruments with maturities of no more than one year. Treasury bills function like zero-coupon bonds. Investors buy bills at a discount from the par, or face value and then receive the full amount when the bill matures. Treasury Notes are intermediate to long term investments typically issued in maturities of two, five and ten years. Interest is paid semi-annually. Treasury Bonds cover terms of more than ten years and are currently issued only in maturities of 30 years. Interest is paid semi-annually.

Global Opps.

Fourth Quarter 2009

For the fourth quarter of 2009, the Thornburg Global Opportunities Fund produced a total return of 3.14% (A shares without sales charge) versus 4.63% for the benchmark MSCI All Country World Index (ACWI).  This caps a strong calendar year 2009 in which the Fund returned 45.98% versus 34.63% for the index.  The Fund’s longer-term performance, shown below, is also materially ahead of the index.  Note that during the year, the Fund paid income dividends of 37.6 cents per A share; total returns assume the reinvestment of such distributions.

Total Returns for A Shares as of 12/31/09 (Annualized for Periods over 1 year)	1 Year	3 Year	Return Since inception (7/28/06)
Thornburg Global Opportunities Fund without sales charge	45.98%	-0.06%	6.86%
Thornburg Global Opportunities Fund with sales charge	39.38%	-1.59%	5.44%
MSCI AC World Index	34.63%	-4.57%	-0.50%

In 2009 global stock markets performed remarkably well.  Yet for the world economy, 2009 represents one of the toughest years on record.  We believe the reason for this contrast has to do with expectations and depressed asset valuations reached at the depths of the financial crisis.  For many investments in the Thornburg Global Opportunities Fund, we attribute the recent price appreciation to the survival of the issuing company, rather than to particularly strong operating results during the year.  The performance drivers in the fourth quarter were a diverse group, while the full-year results benefited particularly from our investments in credit-related businesses as well as the telecommunications industry.

The following table shows five of the main contributors to recent results, by country of domicile:

Company	Country
Crown Castle International Corp. (CCI)	USA
Google Inc. (GOOG)	USA
Prospect Capital Corp. (PSEC)	USA
Swiss Reinsurance (87089AAA6)	Switzerland
Teva Pharmaceutical Industries (TEVA)	Israel

Rising debt prices were a key driver of Fund performance for the quarter and the year.  This was helpful for businesses in general — corporate borrowing costs declined throughout the year — and several of our holdings were direct beneficiaries of this trend: Apollo Investment Corp. (AINV), Prospect Capital, and Level 3 Communications (LVLT) in the US; as well as Babcock & Brown Air (FLY) and Swiss Re in Europe.  Just recently the credit rating agency Moody’s reported that the default rate on high yield bonds declined in December 2009 for the first time in 23 months, and forecast that the rate would drop more sharply by the end of 2010.

As discussed in previous reports, the Fund benefited significantly over the year from our long-held overweight position in the telecommunications industry.  Notable among these were Crown Castle International, Global Crossing Ltd. (GLBC), and Millicom International Cellular (MICC).  The share price of Crown Castle appreciated by more than 100% during the year, while both Global Crossing and Millicom rose over 70%.  As a result of this price appreciation we have reduced our exposure to these companies.

The Fund has evolved significantly versus its positioning one year ago.  Broadly, we have reduced our exposure to telecommunications companies as well as debt securities.  We do not anticipate that bonds will be a large weight in the portfolio on an ongoing basis, but the prices at which we were able to buy certain bonds in 2009 were extraordinarily low.  At the end of the year the portfolio included 33 stocks and two bond positions.  The Fund continues to have an overweight position in financial services and telecommunications; we remain underweight in consumer discretionary companies and utilities.

In the fourth quarter we made a new investment in ING Groep (INGA NA), a global banking and insurance group based in the Netherlands.  The share price of ING declined dramatically in 2008 and 2009, as the financial crisis revealed material flaws in the Group strategy and balance sheet.  In the fourth quarter of 2009 management announced plans to shrink the company, simplify its operations by disposing of all non-banking assets, and sell new shares in order to redeem quasi-equity previously issued to the Dutch government.  After this “back to basics” restructuring, ING Groep should become a bank (rather than a financial conglomerate) with strong market positions in the Benelux region, Eastern Europe, and India.

As of year-end 2009, our top industry groups were:

Banks	16%
Insurance	15%
Telecom Services	13%
Diversified Financials	12%
Pharma, Biotech, & Life Sciences	9%

For the past several months there has been a stream of relatively encouraging macroeconomic data from around the world.  These suggest that a global economic recovery, led by emerging economies, has begun.  In turn, investor expectations and financial asset prices are materially higher versus a year ago.  There are plain downside risks related to the withdrawal of monetary stimulus and the state of public finances in several developed countries, so we expect periods of turbulence in the financial markets.  We continue to focus our research on asset prices and asset quality, reflecting our belief in value-oriented, bottom-up analysis. 

Remember that you can review descriptive comments about the portfolio holdings under the “Holdings Commentary” section of this web site.

 

For a print friendly version of the Global Opportunities Fund market commentary click HERE.

Click here for the top 10 holdings of the Thornburg Global Opportunities Fund

Important Information

The views expressed by the Portfolio Managers reflect their professional opinions and should not be considered buy or sell recommendations. These views are subject to change.

Securities, countries and sectors mentioned are presented for the general information of Fund shareholders. Portfolio holdings are subject to change daily. Under no circumstances does the information contained within represent a recommendation to buy or sell securities.

The Morgan Stanley Capital International All Country World Index (MSCI AC World Index) is a market capitalization weighted index composed of over 2,000 companies, and is representative of the market structure of 45 developed and emerging market countries in North and South America, Europe, Africa, and the Pacific Rim. The index is calculated with net dividends reinvested in U.S. dollars.

The performance of any index is not indicative of the performance of any particular investment. Unless otherwise noted, index returns reflect the reinvestment of income dividends and capital gains, if any, but do not reflect fees, brokerage commissions or other expenses of investing. Investors may not make direct investments into any index.

Intl Growth

Fourth Quarter 2009

The fourth quarter of 2009 saw continued positive performance in equity markets around the world. The Thornburg International Growth Fund returned 5.53% (A shares at without sales charge), slightly beating its benchmark, the MSCI All-Country World ex-US Growth Index, which returned 5.29%. The fourth quarter also ended the Fund’s second full calendar year, with a 2009 return of 44.81%, outperforming the index return of 38.67%.

The Thornburg International Growth Fund employs a basket approach whereby stocks are classified into one of three baskets: Growth Industry Leaders, Consistent Growers, and Emerging Growth Companies. We expect Growth Industry Leaders and Emerging Growth Companies to lead in periods of market strength and Consistent Growers to provide a level of downside protection if the market encounters headwinds. During the quarter, the top five contributors came from the Emerging Growth Company and Growth Industry Leader baskets while four of the top six detractors were Consistent Growers. This result follows our expectations and is why we think our basket approach helps reduce risk while preserving the opportunity to participate in all market environments.

Positive returns were widespread during the quarter with nine of the ten sectors in the benchmark ending higher. We had particularly good results from two consumer discretionary names, Yoox SpA (YOOX) and Net Servicos de Comunicacao (NETC4 BZ), and two commercial and professional service names, Seek (SEK AU) and Experian (EXPN LN). Yoox is an Italian e-commerce retailer experiencing rapid growth in Europe by providing wholesale distribution opportunities for high-end fashion designers. Net Servicos de Comunicacao is a Brazilian Media company with a dominant share in cable TV and improving positions in broadband and voice. Net Servicos’ stock traded higher on good subscriber numbers driven by the company’s attractive triple-play offering. Seek is Australia’s leading online job website that traded higher based on the strength of the country’s economic recovery and declining unemployment rate. Additionally, Seek has ownership stakes in several companies domiciled in rapidly growing emerging markets. Experian is a UK-based credit rating agency whose revenue has increased as consumers have taken a more active role in monitoring their credit. Other top contributors to performance were Drogasil (DROG3 BZ), Arm Holdings (ARM LN), BPZ Resources (BPZ), Bayer (BAY GR), Telecity Group (TCY LN), and Solera Holdings (SLH).

The only sector in the benchmark with negative performance for the quarter was financials. Marfin Popular Bank (MYPSY), a bank based in Cyprus, has exposure to the struggling Greek economy and was sold during the quarter. While not in the financial space, Coca-Cola Hellenic Bottling (EEEK GA) also traded down on investor concerns over its Greek exposure along with unfavorable currency moves. The largest single detractor from performance was Actelion (ATLN VX), a Swiss-based biotechnology company. We are confident in the company’s drug pipeline and took advantage of the opportunity to add to the position during the quarter. Other detractors included Shanda Games (GAME), Fidessa Group (FDSA LN), RRSat Global Communications (RRST), Baidu (BIDU), Tokyo Steel Manufacturing (5423 JP), Research in Motion (RIMM), and New Oriental Education & Technology (EDU). It is important to note that three of these detractors - Baidu, RIMM and New Oriental maintained their positions as top contributors for 2009 in aggregate, despite pulling back in the fourth quarter.

A large underweight to materials, the strongest performing sector in the benchmark, hurt relative performance. We try to identify attractive growth stocks through rigorous, bottom-up, fundamental research and invest in companies where we identify sustainable long-term secular growth trends. The Fund’s low weight in this sector reflects our belief that better opportunities, which are more aligned with our approach, exist in other areas of the market.

The period since we launched the Fund has been difficult for equity investors. February 1st marks the Fund’s three-year anniversary, and we are pleased that our approach of finding promising growth companies at a discount to their long-term fundamental value has led to relative outperformance vs. its benchmark. We have consistently followed this same process with the Fund’s domestic sibling for almost ten years and we hope this approach will continue to serve long-term investors far into the future. We go forward in search of strong growth stories and unappreciated stocks, while staying ever mindful of diversification and risk.

      

For a print friendly version of this market commentary click HERE.

Click here for the top 10 holdings of the Thornburg International Growth Fund

Important Information

The views expressed by the Portfolio Managers reflect their professional opinions and should not be considered buy or sell recommendations. These views are subject to change.

Securities, countries and sectors mentioned are presented for the general information of Fund shareholders. Portfolio holdings are subject to change daily. Under no circumstances does the information contained within represent a recommendation to buy or sell securities.

The Morgan Stanley Capital International All Country World ex-U.S. Growth Index (MSCI AC World ex-U.S. Growth Index) Index is a market capitalization weighted index which includes growth companies in developed and emerging markets throughout the world, excluding the United States.

The performance of any index is not indicative of the performance of any particular investment. Keep in mind that indices do not take into account any fees and expenses of the individual investments that they track. You cannot make an investment in any index.

Funds invested in a limited number of holdings may expose an investor to greater volatility.

Muni. Bonds

Fourth Quarter 2009

Following three tremendous quarters in 2009, the bloom came off the rose in the fourth quarter. The quarter brought slightly negative results for most sectors of municipal bonds. Only the very short maturities produced a profit for investors.  

Key drivers for the market in the fourth quarter were strong retail demand for bonds, solid inflows into municipal bond funds, and supply constrained by the emergence of Build America Bonds (BABs).  For the year, roughly 16% or $64 billion of new issue volume in the municipal market consisted of BABs. Most of that represents displacement of tax-exempt supply, which is a predominant factor holding down tax-exempt yields.   The finance of the federal BAB subsidy is so attractive that issuing BABs is often a better option for qualifying municipalities.

Interest rates rose for intermediate and long bonds as the yield curve pivoted and steepened, with five years being the inflection point.  Inside of five years, bond yields declined to record lows.  At year-end, municipal yields were the lowest in 40 years, with one-year AAA municipals yielding around 0.30%, while 30-year AAA securities were yielding around 4.50%. 

The result of the pivoting yield curve was negative for many of the municipal bond indexes. The best performance, and the only positive returns, were for bonds inside of three years to maturity.

For the quarter, Limited Term Municipal Fund generated a return of -0.04% (A shares without sales charge), and Intermediate Municipal Fund reported a return of -0.60% (A shares without sales charge).  Most of our tax-exempt portfolios benefited from over-weights in short-maturity bonds relative to benchmarks. We remain over-weighted in revenue and insured bonds, and underweighted in general obligations and pre-refunded bonds.

Credit spreads had been compressing throughout the second and third quarters, but that trend stopped in the fourth quarter. The spread between BBB-rated bonds and AAA-rated bonds was 263 basis points, or 2.63%, at year end.    What that meant for performance is that credit positioning (over-weight or under-weight BBB bonds) was not a performance driver for the quarter.

We continue to maintain a close watch on state and local economies.  We are concerned about large budget deficits and for 2010 we anticipate most states will enact a combination of tax increases and spending cuts. Unless Congress approves more funding for state governments, stimulus spending will expire in 2011, leading to deficit pressure in 2012.

State tax collections in the first three quarters of 2009 posted their steepest decline in at least 46 years.  The Nelson A. Rockefeller Institute of Government reported that state tax collections declined 10.9% year-over-year in the third quarter of 2009.   For many states, the biggest drag on tax revenues has been the swoon in the personal income tax, down nearly 12% in the quarter.  Sales taxes were down by 9%.  Local government tax revenues look better with tax revenues that actually increased by 0.7%, due in large part to local governments’ reliance on more stable property tax revenue.  

We remain diligent on the credit front and continue to practice careful selection and diversification in order to protect portfolios in a difficult environment. 

2009 was a superb year for our municipal bond portfolios.  We are pleased to report as of December 31, 2009, the Limited Term Municipal Fund, Class I shares, was ranked by Morningstar in the top 1 percent of its peer group for the three-, five-, and ten-year time periods.  The Intermediate Municipal Fund, Class I shares, was ranked in the top quartile for one-, three- and five-year time periods.  Our new municipal fund, the Strategic Municipal Income Fund, which was launched on April 1, 2009, also had a strong year.  These historical results demonstrates the success of our approach to bond investing over both short and long periods of time.   It also reflects our team’s competent approach to managing risk, its disciplined laddering process, and its passionate pursuit of quality execution.

Morningstar Rankings
Total Return Ranks as of 12/31/09

Thornburg Limited Term Municipal Fund Rank in Muni National Short Category
	1-Year	3-Year	5-Year	10-Year
Class I
Actual	12	2	2	1
Percentile	8%	1%	1%	1%
Class A
Actual	13	8	10	7
Percentile	9%	6%	8%	10%
# of Funds	141	127	120	65
Thornburg Intermediate Municipal Fund Rank in Muni National Intermediate Category
	1-Year	3-Year	5-Year	10-Year
Class I
Actual	54	56	34	54
Percentile	22%	25%	17%	42%
Class A
Actual	66	94	81	86
Percentile	22%	43%	41%	67%
# of Funds	246	219	198	128
Past performance does not guarantee future results. Class A share ranks are based on total returns before sales charge. I shares do not have a sales charge.

 

For a print friendly version of the municipal bond portfolio manager market commentary, click HERE

Important Information

The views expressed by the Portfolio Managers reflect their professional opinions and should not be considered buy or sell recommendations. These views are subject to change.

Securities and sectors mentioned are presented for the general information of Fund shareholders. Portfolio holdings are subject to change daily. Under no circumstances does the information contained within represent a recommendation to buy or sell securities.

Build America Bonds (BABs) are taxable bonds issued by state and local governments. The U.S. Treasury then provides these entities with a direct federal subsidy for a portion of the borrowing costs.

Basis Point (bp) – A unit equal to 1/100th of 1%. 1% = 100 basis points (bps)

General Obligation Bond – A municipal bond backed by the credit and “taxing power” of the issuing jurisdiction rather than the revenue from a given project.

Revenue Bond – A bond on which the debt service is payable solely from the revenue generated from the operation of the project being financed or a category of facilities, or from other non-tax sources.

Pre-Refunded Bond – A type of municipal bond that has been escrowed or collateralized either by direct obligations guaranteed by the U.S. government, or by other types of securities. The escrow account is structured so that these refunded bonds are to be called at the first possible call date. Such bonds, if escrowed with securities guaranteed by the U.S. government, have little if any credit risk.

Insured Bond – A bond with interest and principle payments insured by a third party. Insured bonds are usually found as a feature of municipal bonds; they are purchased, underwritten and repackaged by a financial guarantee company who then sells the issue to investors.

Credit spreads – The difference between the yields of securities with different credit qualities.

Class I shares may not be available to all investors and minimum investments may be higher.

Morningstar Rankings: © 2009 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.

Lipper’s large firm universe is comprised of fund families with more than $28 billion in total net assets. Only fund families with at least five bond funds were eligible. Risk-adjusted returns are calculated with dividends reinvested and without sales charges. Past performance does not guarantee future results. The individual funds may not have ranked number one in their categories.

Corp. and Gov. Bonds

Fourth Quarter 2009

Ability and Willingness

An investment theme that I believe is worth watching over the course of the next several years is the likely deterioration of sovereign credit quality throughout the developed world. While it is more the purview of the tin foil hat crowd to discuss the imminent downfall of the U.S., when I look across the globe at countries in various states of fiscal and monetary disarray, I must say that I’m tempted to reach for a scrap of reflective material.

Clearly, the U.S. government has moved strongly towards a position that larger government interaction with markets is to be encouraged, and more broadly towards the idea that the government is the best solution to many problems. Gone are the days of Ronald Reagan’s famous joke about the most terrifying words being: “I’m from the government, and I’m here to help.” These days, we are instead rightly angry with the failure of private enterprise to survive without government intervention.

At the same time, we were and are unwilling to contemplate a world in which failure creates potentially destabilizing chaos. Ludwig von Mises, a somewhat divisive economist of the Austrian school, once said: “There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”

Unfortunately, nearly every developed market currency system has been involved. It is natural in a recession to increase government debt levels in response to lower GDP (and therefore taxes) and higher expenditure (Keynesian stimulus and the like). We have gone a long way down this road and have maintained a certain level of leverage in the financial system if only due to extraordinary efforts by the Federal Reserve and various central banks around the globe. Is it the right thing to do? It clearly avoids near-term pain and adjustments. Ben Bernanke has made a study of the Great Depression and has concluded that then-Treasury Secretary Andrew Mellon’s prescription to “purge the rottenness out of the system” through liquidation was as foolish as it was then unpopular. Further, Bernanke has clearly repudiated Mellon’s belief that “weak” banks needed to be weeded out. Bernanke’s belief is that the Great Depression was extended and deepened by the withdrawal of credit from the system, and he has predictably ensured that credit has continued to flow by any means necessary to include his now-famous prescription for throwing money out of helicopters.

So unfortunately, we are in the middle of a great experiment. The Depression Era was clearly not a success, though it will be endlessly argued whether this was due to the Mellon liquidation approach or a continuous stream of Rooseveltian New Deal stimulus. Now we will try the Anti-Mellon, Anti-von Mises route which will be the socialization (loaded word, but correct in its basic form) of debt from individuals and corporations into government. This process is occurring to a greater or lesser extent across the globe, with some countries (notably China) more appropriately structured for such centrally planned economic change. One interesting aspect to this experiment is that the socialization of debt is most extreme in geographies that had the most extensive credit systems (developed markets) and makes the underbanked, underleveraged, resource (natural or labor) rich BRIC countries look so much better.

The big problem with these bailouts is that the amount of debt hasn’t gone anywhere, and it is the amount of debt (relative to productive capacity…a ratio that can broadly be described as leverage) that is the true problem. Who can argue that when an entity takes on more debt, it becomes less creditworthy and more inclined toward failure? When governments take on more debt, it certainly follows that they will be less able to pay, and when individuals feel no particular responsibility towards a government, the willingness of that government to pay comes into question.

Greece is only the latest example of a government that has increased its expenditures in the best of times and, in the worst of times, is having trouble with its new and increased debt load. The more profligate countries of the EU (Portugal, Italy, Ireland, Greece, and Spain to name a few) are the standouts in this region (in direct contrast to the bastion of rectitude that is Germany). Dubai seems to be fading from our memory with the application of some significant petroleum salve from Abu Dhabi. Iceland is in the middle of the North Atlantic and is yesterday’s news anyway. There are structural problems with Japan given that their traditionally high savings rates may be eroded by a demographic nightmare, and an increase in rates paid by the government on its debt may be untenable given the sizeable obligations that nearly three decades of stagnation have incurred. The U.K. (that former financial miracle) and the U.S. are not in wonderful shape either. How much more debt can the global financial system support?

Not surprisingly, given that debt is part of the problem, looking at the global debt universe doesn’t give me comfort. Taking the Barclays Capital Multiverse Index (it’s the broadest characterization of debt markets globally), the USD represents 41.37%, the Euro is 29.21%, the Yen is 16.7%, and the Pound is 5.21%. For those of you without a calculator, that’s 92.5% of the total available universe. Sure there are other places to go, but broadly developed markets (and I mean that very much in the sense of places where the markets are developed enough to be easily and significantly investable) dominate the debt universe. It’s the classic case of not lending money to institutions that need it.

And we will need more. Barclays Capital (the keeper of the above index), estimates their widely followed Aggregate Index (an attempt at an amalgam of all taxable, dollar-denominated investment grade debt over 1 year in maturity) will be increasingly dominated by Treasuries. In the span of 2010, they estimate that the portion of the index which is comprised of direct obligations of the U.S. government will move from 27.6% to 33.5%. This is in the context of an index which is slated to grow by 18.3% overall. Putting those two figures together, Barclays believes that the amount of U.S. Treasuries outstanding with maturities greater than one year will grow by 43.3% in the span of one year.

Add to this the impending demise of the program of quantitative easing, in which the Federal Reserve bought Treasuries, Agencies, and Agency Mortgage debt in order to keep the costs of borrowing low, and you might start thinking about sharply higher rates. I’m more sanguine about that possibility in the U.S. than in a number of other places (to include Japan) given that we have a wide variety of folks who are now looking for greater stability and income in their investments. Still, supply will be higher, and demand may not keep pace. One more tidbit: Barclays sees one other area of significant debt growth in 2010. The increase of taxable municipal bonds in the index: 2% in 2009 to 5% in 2010. So it’s not just the Federal government, but state and local governments as well (though part of this is due to issuance in taxable versus tax-exempt structures).

The investment upshot of this is that I’m trying to stay with creditworthy institutions that might be issuing less, rather than more. Corporate issuance will be lower and given spreads at the moment that sector still looks like the best house in what may be a neighborhood in decline. Away from U.S. centric portfolios, the freedom to move outside the U.S. to relatively healthy economies like Australia (resource-rich, free to raise rates) drives some of our more recent investment decisions. In general, we’re trying to buy scarcity. Going forward, I would expect continued headlines and risk arising from government finances, with Venezuela as yet another trouble spot where untenable promises are backed by equally untenable financing and currency arrangements. Though the U.S. is not currently very fiscally responsible, I expect a number of other locales to run into significant issues that will highlight the benefit of responsibility and as such change the (until now) overwhelming Keynesian tide.

Thanks for taking an interest in our funds. I believe that Thornburg’s taxable bond offerings have been able to produce consistent investment results in the context of each portfolio’s goals, and we will continue to strive for these same outcomes going forward.

For a print friendly version of Jason's market commentary click HERE.

 

Important Information

The views expressed by the Portfolio Managers reflect their professional opinions and should not be considered buy or sell recommendations. These views are subject to change. 

The Barclays Capital Multiverse Index provides a broad-based measure of the global fixed-income bond market. The index represents the union of the Global Aggregate Index and the Global High-Yield Index and captures investment-grade and high-yield securities in all eligible currencies.

The Barclays Capital Aggregate Bond Index is composed of approximately 6,000 publicly traded bonds including U.S. government, mortgage-backed, corporate and Yankee bonds with an average maturity of approximately 10 years. The index is weighted by the market value of the bonds included in the index.

Agency Security – A debt obligation issued by government corporations or government sponsored enterprises. Agency securities are exempt from state and local taxes. They are not guaranteed by the U.S. government.

Agency Mortgage Debt – A mortgage backed security issued by a government agency.

Treasuries are negotiable debt obligations of the U.S. government backed by the “full faith and credit” of the government and issued at various schedules and maturities. Income from Treasury securities is exempt from state and local, but not federal, taxes.

The performance of any index is not indicative of the performance of any particular investment. Keep in mind that indices do not take into account any fees and expenses of the individual investments that they track. You cannot make an investment in any index.

Lipper’s large firm universe is comprised of fund families with more than $28 billion in total net assets. Only fund families with at least five bond funds were eligible. Risk-adjusted returns are calculated with dividends reinvested and without sales charges. Past performance does not guarantee future results. The individual funds may not have ranked number one in their categories.

Strategic Income

Third Quarter 2009

Lei Wang, who helps run our International Value portfolio, lent me (Jason Brady) a giant coffee table book recently entitled, “Cosmos.” It is full of pictures of colorful but far distant solar systems, galaxies and nebulae. When he gave it to me, he said, so I remembered, “how insignificant we all are in the grand scheme of things.” I gave him a book about future Fed actions in retaliation.

But his point is very well taken, especially since it seems that we have all been swept up in a rising tide of liquidity and excitement about no longer going down. The black hole of financial system meltdown has been replaced by a beautiful constellation of government stimulus, risk-loving, and economic stabilization.

Still, stabilization is merely a necessary precondition to economic growth, not an equivalency. Making the cost of short-term money zero for many participants, including struggling banks, does certainly help asset prices, at least in a nominal sense, but it is not fundamental improvement.

Risk markets have rallied significantly, and that has been an enormous tailwind for the Fund, and the biggest reason for the large capital appreciation in the Fund’s net asset value (NAV) year-to-date. In the past year, the Barclays Corporate Bond Index Option Adjusted Spread (OAS) has moved from 200 to 600 to 200, and though 600 was reserved for a time when it truly felt as though the financial system would fail, 200 barely discounts a wide array of potential future problems.

Market participants are generally focused on rate of change, or the marginal buyer/seller. That’s a reasonable focus, but it can also, in my opinion, cause overshoots if rate of change is extrapolated to broader conditions. If you see that, say, housing is stabilizing in sales after plummeting for the past couple of years, it is easy to extrapolate that that sector will contribute to growth. It’s just like the newly minted MBA who stops modeling continued negative 5% growth rates and starts modeling positive 5% growth rates to fill out the future in his model of XYZ company’s income statement. Suddenly XYZ is a can’t miss investment despite its recent brush with bankruptcy. Perhaps it is an investor psychology thing where investors believe that the rate of change of any given variable will be what they have experienced over the past short period. So if GDP was 2%, then it will be 2% forever, but if it is negative 3%, well then we’re going to spiral down at a negative 3% until we’re living in caves.

It is possible that the path forward will look like an MBA income statement, with strong growth from here on out. But though it seems that the world expects this sort of profit/GDP/growth evolution, I highly doubt we will be able to achieve that over the course even of the next couple of years. In fact, I’d say that the market we are currently experiencing could only exist with that sort of thinking, and it reminds me bizarrely of the “we’re on the brink of financial Armageddon” market that we experienced exactly a year ago. Prices of risk assets have thus far moved to assume the putative V-shaped, strong recovery, MBA-model-mandated growth recovery. The recent unemployment statistics in the United States are an example of a long-term drag on spending which will not turn with the speed of an Excel spreadsheet F9 recalculation.

Does this mean we are selling all the assets of the Fund and moving to cash? No. We think that churning the Fund is undesirable, and that the income production from our assets will provide a solid cushion for adverse price movements. However, we are ensuring that the Fund is nimble and that we are moving away from a bet of continued price recovery as a driver of returns.

Investing outside of the United States is certainly attractive in this environment, and will continue to be so if fiscal and monetary policy pushes us further down the path of dollar devaluation. However, it is important to keep in mind that currency gains and losses are both potentially more permanent (versus bond price gains and losses which will pull toward par) as well as expressed as a gain and loss in income. This is an important consideration for a Fund which strives to bring investors a high but sustainable income stream. While non-USD bonds can provide an excellent hedge as well as a solid and differentiated source of income, the volatility of income these positions bring keep them in a supporting role in the Fund.

We will continue to try to bring you interesting income returns from a variety of sources with an eye towards a myriad of risks in the marketplace. We firmly believe that income production will remain very important to a variety of investors, especially in an environment of slower growth/capital appreciation.  While the spread recovery “trade” may have run its course, we are still searching, telescope in hand, for good opportunities for the Fund and for our shareholders. The broad universe of investment options for the Fund will continue to be a boon and we will do our best to take advantage of what the market gives us.

Thanks for your investment and interest.

Important Information

Past performance does not guarantee future results.

The views expressed by the Portfolio Managers reflect their professional opinions and should not be considered buy or sell recommendations. These views are subject to change. 

U.S. Treasury securities, such as bills, notes and bonds, are negotiable debt obligations of the US government. These debt obligations are backed by the “full faith and credit” of the government and issued at various schedules and maturities.  Income from Treasury securities is exempt from state and local, but not federal, taxes.

The Barclays Capital U.S. Corporate Index covers USD-denominated, investment-grade, fixed-rate, taxable securities sold by industrial, utility and financial issuers. It includes publicly issued U.S. corporate and foreign debentures and secured notes that meet specified maturity, liquidity, and quality requirements.

V-Shaped Recovery – A type of economic recession and recovery that resembles a “V” shape when charting certain economic measures. The “V” shape indicates the economy took a sharp downturn and recovered quickly from its lows.

OAS -- Option Adjusted Spread (OAS) measures the yield spread that is not directly attributable to the security’s characteristics.