Value

Fourth Quarter 2011

After a challenging period of extreme volatility, the Thornburg Value Fund (A shares without sales charge) returned 5.74% versus the S&P 500 Index total return of 11.82% for the fourth quarter of 2011. Markets rebounded in October after a volatile summer with the announcement of a rescue plan for Europe to address the region’s debt. However, volatility returned in force in November and December as investors fled risky assets. The year finished with continued gridlock in Washington and the uncertainty of the European debt crisis which has plagued equity markets. U.S. markets fared better than global markets, supported at the end of the year by signs of improvement in the economy and strong corporate earnings. Going into 2012, markets remain vulnerable to European debt woes and the outlook for the global economy.

While we are disappointed with the Fund performance during this very volatile market, we do not see fundamental deterioration, as measured by earnings and cash flow, in the portfolio. Our process and philosophy have not changed. In the context of our “promise at a discount” philosophy, our portfolio holdings have on average maintained their promise over the last twelve months while the discount has increased. We believe there is the potential for recovery in the share prices of many of our holdings that experienced significant valuation compression during 2011 with little or no fundamental deterioration.

As bottom up stock pickers, we find “theme-driven” markets more challenging. In these environments, valuations may be driven by momentum instead of fundamentals for long periods of time with little interruption. As such, identifying mispricing and being rewarded for this practice may prove to be more difficult. At this moment, stocks with exposure to economic cyclicality, financial leverage, or headline risk appear extremely discounted. Most of these stocks are in our basic value category. We typically limit exposure to the basic value category to no more than 50% of the portfolio, so we have sufficient flexibility to have the chance to outperform in any market environment. We believe we have found specific companies with compelling promise and discount in the basic value category. The consistent earners category looks like greater promise at a discount than the S&P 500’s top performing sector in 2011, consumer staples. Our consistent earners are expected to grow faster, yet are cheaper.

Stocks in the information technology (largest exposure) and energy sectors were four of the top five contributors during the quarter. In the information technology sector, Google is the global leader in online advertising, which is a niche that we believe has dramatically better growth prospects than the overall economy. The online advertising market continues to grow as ad dollars shift online from print and other mediums. This “mature” business grew 26% year-over-year in the United States in Google’s most recent quarter. Google is also generating growing revenues from newer businesses including display advertising, YouTube, and mobile search. Over time, we expect Google to monetize other initiatives including their leading position in Smartphone operating systems with Android. Yahoo beat analysts’ expectations, reporting higher third-quarter earnings, and shares have risen on rumors of buyout speculation after the company fired its CEO in September. Yahoo announced Scott Thompson, the president of eBay’s PayPal business, as CEO right after year end.

In the energy sector, Exxon Mobil had strong third-quarter results with earnings surging over 40% from a year ago. Higher crude oil and natural gas price realizations and refining margin improvements offset output declines. SandRidge Energy Inc. rose on news that it profitably sold its interest in property in Oklahoma and southern Kansas to a Korean firm. We believe SandRidge has the potential to achieve high production growth and selective transactions help the company finance its growth.

Varian Medical rounded out the top contributors for the quarter. Varian Medical is the leader in radiation oncology equipment. It has greater than 50% market share and spends more on research and development than all of its competitors combined. Emerging markets, especially China, are underpenetrated and we are already seeing extremely strong demand for Varian Medical’s products. Varian Medical has net cash, earnings have grown dramatically during the past seven years, and the outlook for long-term growth appears robust.

Detractors during the quarter included stocks from the telecommunication services and information technology sectors: Level 3 Communications, KDDI Corp., and MEMC Electronic Materials. Level 3 Communications declined after announcing third-quarter results that disappointed analysts as they offered little positive information about performance, the recent Global Crossing acquisition, or guidance for the new combined entity. KDDI Corp., Japan’s second largest mobile carrier, reported in line 1H FY’11 results and no change to full year guidance. During the quarter, KDDI became the second carrier in Japan to offer the iPhone and the company revised up its sales targets of smartphones for the fiscal year. KDDI’s stock price has been weak of late as TEPCO sold its stake in the company and rumors surfaced about a new competitor possibly offering the iPhone. MEMC Electronic Materials Inc. reported a weak Q3 2011. The current operating environment is tough for the company’s semi and solar businesses. MEMC announced a major restructuring during the quarter and it appears that the management has truly shifted course by cutting costs and reducing capex spending. Profitability should improve next year as the company benefits from reduced expenses and increasing volumes of semi wafers and solar installation projects. The company is shifting away from upstream solar, increasing focus on cash flow generation and profitable businesses.

Other detractors included Thermo Fisher Scientific and Bank of America. Thermo Fisher Scientific is a leader in the manufacturing and distribution of equipment for biotechnology research. The stock declined after announcing it would lower guidance for FY2011. The revised lower growth estimates stem from reduced academic and government spending, and overshadowed positive third-quarter earnings, record revenues and adjusted earnings per share. Thermo Fisher is expected to grow earnings significantly in 2012. Bank of America fell on Eurozone sovereign debt concerns relating to its European capital markets business, its inclusion in a lawsuit by numerous pension funds regarding its role in the meltdown of MF Global, and the announcement of a new round of stress tests for U.S. banks by the Federal Reserve. Loan losses have been on a declining trend with the tightening of lending standards.

We have taken advantage of the historically low multiples and purchased what we believe are promising stocks, including Apache Corporation, Metlife, Apple and Juniper Networks. Apache Corporation is a leading independent oil company. We believe management is prudent and focuses on generating high returns on invested capital. The company has attractive projects in Australia and the North Sea that appear to be underappreciated by investors, and the valuation is compelling. Metlife Inc. is the global leader in life insurance. The company acquired the international life operations of AIG, which positions Metlife for superior long-term growth relative to the rest of the sector. Metlife is achieving high growth in unit sales, revenues and book value, even in the current environment. Apple Inc. is in the early stages of long-term share growth in the desktop, laptop and handset markets. Apple has dominated the tablet market so far, a market that should continue to grow. Enterprise penetration is low, but increasing across all of Apple’s platforms. The combination of strong product development and a growing ecosystem that creates customer loyalty has led to strong revenue and earnings growth for Apple over the last few years. There should be a strong product cycle in 2012 with the iPhone 5 and iPad 3. Juniper Networks Inc., the information technology and computer networking product provider, has good growth prospects with the increasing demand for data and routers. The current slowing in cyclical spending for carriers allowed for an opportunity to purchase the stock at a discount.

Sales during the quarter included Transocean Ltd., Goldman Sachs, Turkiye Garanti Bankasi and US Bancorp. Transocean Ltd. was sold due to fundamental deterioration. The Macondo disaster caused changes in the regulatory environment that have forced Transocean to experience significantly more downtime for its rigs. More importantly, the long-term outlook has been clouded by the willingness of competitors to build drilling rigs without contracts in place. Transocean’s business model was based on operating its rig fleet profitably and only building rigs when long-term contracts were available.

While we continue to believe that Goldman represents a strong investment opportunity at its current valuation, we have sold Goldman as a risk management measure. Of our three large-cap financials, Goldman, JP Morgan, and Bank of America, Goldman seems most exposed to the provisions of the Volker rule that limit U.S. banks’ ability to execute proprietary trading. Turkiye Garanti Bankasi, one of Turkey’s largest commercial banks, and US Bancorp were sold for more compelling investment ideas.

During 2010–2011 investors sought to reduce risk, and equities are perceived to be risky. This perception is due to the volatility and lack of appreciation of share prices since 2000. We think that this is part of a long cycle that has been going on for over a decade. Investors will probably return to equities when volatility declines. Investors may be skeptical that volatility will ever decline. While understandable, that fear is not justified by history. Over the past century we have had world wars, depression, regional wars, oil embargoes, nuclear threats (Cuban missile crisis), rampant inflation, interest rates near 20%, and more. Yet, market volatility has always returned to normal within a relatively short time frame after hitting levels similar to what we have recently experienced.

A hopeful fact is that the value proposition of equities relative to fixed income is the best that it has been in decades, so when confidence returns the money should flow to stocks. The 6.5% real earnings yield (taking into account inflation) of the S&P 500 Index today looks very attractive relative to real 10-year government yields, which are slightly negative, or real Baa corporate bond yields, which are just over 3%. After a decade of weak returns for equities, individual investor expectations have soured on the future prospects of this investment class. Keep in mind, in the moment when there is the least enthusiasm for equities – and we think we’re close today – we believe there is potential that subsequent returns will be high.

We are excited about the prospects for the current portfolio.

Thank you for your continued support.

 

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.

There is no guarantee the Fund will meet its objectives.

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.

A credit rating assesses the financial ability of a debt issuer to make timely payments of principal and interest. Ratings of Aaa (the highest), Aa, A, and Baa are investment-grade quality. Ratings of Ba, B, Caa, Ca, and C (the lowest) are considered below investment grade, speculative grade, or junk bonds.

Earnings per Share (EPS) – The total earnings divided by the number of shares outstanding.

Capex (Capital Expenditure) – Funds used by a company to acquire or upgrade physical assets such as property, industrial buildings or equipment. This type of outlay is made by companies to maintain or increase the scope of their operations. These expenditures can include everything from repairing a roof to building a brand new factory.

 

Intl Value

Fourth Quarter 2011

During an exceptionally volatile quarter for global equity markets, the Thornburg International Value Fund returned 4.05% (A shares without sales charge), versus 3.33% for the MSCI EAFE Index and 3.77% for the MSCI ACWI ex-US Index. Markets rebounded in October after a poor summer, aided by the announcement of a plan to address Europe’s debt problems. However, November and December brought renewed concerns and uncertainty regarding the implementation, ramifications and ultimate success of the authorities to address the problems in the Eurozone. This led investors to seek safety in the form of more defensively oriented stocks and dividend-oriented companies. Energy names also performed strongly, helped by the strong rally in the price of oil during the quarter.

Top contributors during the quarter included Novo Nordisk, China Merchants Bank, and Canadian National Railway. Novo Nordisk continues to expand its leadership position within the diabetes space, while maintaining a healthy balance sheet and successful pipeline development indicative of the company’s innovation-oriented growth prospects. Canadian National Railway has been expanding its port activity, allowing increased trading of U.S. and Canadian goods to and from Asia. China Merchants Bank was helped by China Central Bank’s recent reserve requirement rate cut, and the potential benefits of a more accommodating monetary policy on its substantial retail franchise. Energy names Canadian Natural Resources and Schlumberger rounded out the top contributors, and were positively impacted by the aforementioned oil price recovery. Further, Canadian Natural Resources’ Horizon Project is ramping up faster than expected and Schlumberger’s performance reflects the potential for increased international drilling activity in the future.

Mobile phone manufacturer HTC (trimmed during the quarter) detracted from performance, as patent litigation issues and a loss of market share, partially attributed to product cycle and poor shipment development in the United States, weighed on the stock. Other detractors during the quarter included Coal India, which declined due to environmental and regulatory issues. European sovereign debt concerns fueled continued apprehension regarding Turkey’s external vulnerability, putting pressure on Garanti during the quarter. Credit Suisse Group has little direct sovereign debt exposure, but profitability is being impacted by more stringent regulation in its investment banking unit, as well as a risk-averse low interest rate environment in its wealth management business. Mitsubishi UFJ also suffered from unease regarding European sovereign debt exposure, coupled with lackluster growth in its home market of Japan.

We purchased two new securities during the quarter, Vodafone Group and Svenska Handelsbanken. Vodafone is a leading global mobile phone service provider, and holds a 45% stake in U.S. telco leader Verizon Wireless, where cash flows may enhance Vodafone’s dividend yield potential. Svenska Handelsbanken is a highquality Swedish bank with strengths in retail banking, lending and financial services, operating primarily in Scandinavia and the United Kingdom. We believe Svenska’s solid track record, lack of exposure to questionable European sovereign debt, and focus on long-term shareholder returns through minimizing credit risk and maintaining cost efficiency positions the bank well for the future.

Notable sales included ING and Telefónica, as we believed the opportunity set provided by the current environment was more promising for Svenska Handelsbankena and Vodafone. ING Groep was a particularly difficult sell decision, as while we continue to believe in the company’s strategic operating plan, the macroeconomic situation in Europe warrants concern over execution risks. Telefónica was eliminated due to the ongoing challenges facing Spain, and subsequent pressures on dividend sustainability. Our focus has always been to continuously improve the quality of the portfolio, and we believe the changes we made during the quarter are consistent with this effort.

The market environment continues to be dominated by uncertainty and concerns surrounding the future of Europe’s economy and the euro. Western Europe represents approximately 18% of global GDP, significant enough to create disruptions in other economies and in the global financial markets. The subdued performance of major financial institutions in Europe mirrors the low expectations investors have for these systemically important entities going forward. Our portfolio has fewer holdings tied primarily to the European economy than in past periods, reflecting the uncertainty of the outlook for the region. Successful resolution of the European financial crisis would presumably go a long way toward bolstering investor confidence in global securities markets, but the core issue of a lack of united fiscal and monetary policy in the region persists. While we have been mindful of maintaining healthy exposure to more defensively positioned companies, certain factors that could hamper global progress have not come to pass, including a potential hard landing for China and a recession in the United States. In the months ahead, we are hopeful that the environment will improve in Europe. Meanwhile, many of the hurdles facing the region are seemingly priced into current valuations, which appear compelling. We will continue to evaluate opportunities one stock at a time, and balance the portfolio accordingly across our three baskets: basic values, consistent earners, and emerging franchises. We thank you for your continued support.

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.

There is no guarantee the Fund will meet its objectives.

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 MSCI EAFE (Europe, Australasia, Far East) Index 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 MSCI All Country (AC) World ex-US Index is a market capitalization weighted index representative of the market structure of 44 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.

 

Core Growth

Fourth Quarter 2011

The fourth quarter of 2011 saw continued volatility in US markets. Following a turbulent, negative third quarter, we are very pleased to report that the Thornburg Core Growth Fund (A shares without sales charge) significantly outperformed the benchmark, returning 18.38% versus the Russell 3000 Growth Index return of 10.94% for the quarter ended December 31, 2011. For the full year of 2011 the Fund returned 1.35% vs. 2.18% for the benchmark.

While extreme market volatility keeps us up late some nights, we will always embrace the opportunity to buy or add to what we see as compelling names at lower valuations than their growth prospects suggest. The significant market volatility in the third quarter gave us an opportunity to buy and add to a number of new growth stocks and existing holdings at attractive valuations. This led to somewhat higher than normal turnover.

In terms of the quarter’s investment results, the Fund experienced slightly negative allocation effect with significant outperformance driven by the portfolio’s individual security selection. An overweight in the financials and underweight in consumer staples provided some positive allocation effect, yet this was not enough to offset the negative allocation effect from other sectors. On the other hand, the Fund had positive stock selection effect in five of the seven sectors held over the quarter (information technology, industrials, health care, telecom services, and energy) while information technology and industrials stood out as particularly strong performing areas. Altogether, there were forty-one names generating positive returns over the quarter and eight names showing negative returns.

Strong performers in the IT sector included SuccessFactors Inc., Fusion-IO Inc., and MecadoLibre Inc.

SuccessFactors Inc., a provider of cloud-based software solutions held by the Fund, was acquired by SAP AG for a 50% premium and we sold the name. MercadoLibre, an eBay style e-commerce platform serving Latin America, benefits from the long-term structural trend of retail moving from physical stores to online. Following recent improvements to the firm’s online platform (a number of new features added) there was a significant increase in customer transaction value on the platform. We remain invested in MercadoLibre. Fusion-IO Inc. provides solid-state drive server memory cards and software solutions to enhance server efficiency. The stock traded in a wide range over the quarter. We continue to hold Fusion-IO, having benefited from this volatility, selling toward the higher end of its trading range and adding during times of market pessimism.

Within the industrials sector, RSC Holdings, Inc., an equipment rental provider in North America was acquired by a competitor for a 58% premium and was the Fund’s top contributor to performance. FedEx Corp. provided positive contribution following a rebound from earlier price pressure due to global macroeconomic fears; the company’s operating results and outlook showed resiliency given the global economic uncertainties.

Fourth quarter detractors to performance included Supergroup plc, Amazon.com Inc., Vera Bradley Inc., and Hargreaves Lansdown plc.

Supergroup plc, a UK-based fashion retailer, declined as investors became increasingly concerned about the willingness and ability of UK retail consumers to continue spending in the difficult economic environment. The company also suffered from a botched implementation of a warehouse IT system upgrade that caused a disruption in store supplies. We also became increasingly concerned about deterioration in the brand. Amazon.com Inc., the world’s largest online retailer, detracted from performance due to concerns about the launch of its new Kindle Fire tablet. Amazon issued fourth quarter guidance below analyst estimates, which also weighed on the stock. Vera Bradley Inc., was purchased in August and the stock contributed modestly to performance in the third quarter, yet was a moderate detractor to performance this quarter. We remain interested in the company’s longer-term growth potential, via customer recognition of both its brand and the value proposition that this multi-line ladies’ accessories retailer offers.

Looking forward to 2012 we expect continued volatility as the European debt crisis and its impact on global economies continues to drive uncertainty. We hope the volatility continues to bring new opportunities. As always we will continue to look for promising growth companies trading at attractive valuations. Thank you for your investment in the Core Growth Fund.

 

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.

There is no guarantee the Fund will meet its objectives.

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.

Income Builder

Fourth Quarter 2011

Thornburg Investment Income Builder paid an ordinary quarterly dividend of 37.5¢ per A share in the quarter ending December 31, 2011. This compares to dividends of 36¢ and 34.5¢ for the comparable quarters of 2010 and 2009, respectively. The Fund paid $1.165 per A share in the twelve-month period ending December 31, 2011, up 3.3% from $1.128 in calendar 2010. The dividend per share was higher for I shares and lower for C shares, to account for varying class specific expenses.

The Fund’s net asset value (NAV) declined by $1.08 per share ($19.02 to $17.94) during 2011, to $17.94, therefore, the dividend slightly overcame the net asset value decline to give the Fund a modest positive return at net asset value for 2011.

The quarter ending December 31, 2011, was the 36th full calendar quarter since the inception of Thornburg Investment Income Builder in December, 2002. In 27 of these quarters, including Q4 of 2011, the Fund delivered a positive total return. The Fund has delivered positive total returns in 8 of its 9 calendar years of existence.

Investment Income Builder outperformed its own blended benchmark (75% MSCI World Equity Index and 25% Barclay’s Capital U.S. Aggregate Bond Index) by 2.55% in calendar 2011, and trailed the S&P 500 Index by 1.62% for the year. Performance comparisons of Investment Income Builder to each of these benchmarks over various periods are shown in the Performance and Expenses section of this web site. Reviewing these, you will see that the performance of the Fund has compared very well to both benchmarks over various periods.

We did not pay any capital gains distribution for 2011 to shareholders of Thornburg Investment Income Builder.

In assessing the performance of Thornburg Investment Income Builder, it is constructive to consider the performance in $US of the sector components of the MSCI World Index over the year ending December 31, 2011. The MSCI World Index comprises 75%, and the entire equity portion, of the Fund’s global performance benchmark:

1. Four of ten Index sectors (energy, consumer staples, health care, and telecommunications) showed positive total returns, ranging from approximately +0.3% (energy) to approximately +10% (health care). The other six Index sectors (financials, industrials, materials, information technology, consumer discretionary, and utilities) delivered negative 2011 returns, ranging from negative 1.53% (utilities) to negative 19.3% (materials).
2. In general, stocks in those sectors that exhibit the highest degree of volatility with economic cycles were down the most: materials, financials, and industrials. Investor anxiety about slowing global economic growth set in during the late spring of 2011, and this has not lifted. The financial sector, down negative 17.8% for 2011, also delivered sluggish relative performance in 2010.

By delivering coupon-like returns, Investment Income Builder’s bond holdings boosted overall portfolio returns relative to the MSCI World Index for 2011.

The Investment Income Builder portfolio continued to have large portfolio allocations in telecommunications services firms, financials, and utilities, relative to the MSCI Index. Despite the fact that five of the six European telecom service providers held in the Fund portfolio delivered negative returns during 2011 (KPN, Telefonica, TDC, Telecom Italia, and France Telecom), the Fund’s overall return from its telecommunications industry investments was positive. In brief, Australia’s Telstra, the UK’s Vodafone, Thailand’s Advance Information Services, and AT&T “saved the year” with positive total returns. The same issues that have concerned investors in telecommunications businesses over recent years remain unresolved...mature markets, competitive price pressures, tradeoffs between the secular decline of the traditional fixed-line businesses and the growth of broadband connections. For the Europeans, concerns about refinancing maturing debts and possible increases in taxes were additional burdens.

Despite delivering a negative total return of slightly below -6% that burdened overall Fund performance, the Fund’s holdings in the financial sector outperformed those of the Index by more than 10% during 2011, accounting for most of our outperformance vis-à-vis that benchmark. The Fund’s average portfolio weighting in financials was almost 24%, including certain hybrid instruments and subordinated bonds. We owned only one small equity stake in a bank headquartered within the European Monetary Union (Intesa San Paolo, no longer owned), and our U.S. bank stock holdings were focused primarily in income-paying hybrid securities issued by Fifth Third Bancorp and Huntington Bancshares, both decent performers for the year. The Fund’s mortgage REIT holdings delivered mixed 2011 performances, with the “U.S. agency mortgage only” portfolios modestly positive and the investors in hybrid private/agency mortgages declining in price. The Fund’s insurance industry investments were also mixed, with Norway’s Gjensidige Forsikring up more than 20% and Allianz, Munich Re, and Zurich Financial each down for the year. The Fund’s modest holdings of medium-sized Swiss banks were weak against a backdrop of low interests rates and slow client trading, with Liechtenstein Landesbank turning in a particularly weak 2011 total return.

Income Builder’s investments in the energy sector delivered an absolute return of approximately 4% for 2011, significantly above that sector’s contribution to the MSCI World Index. Royal Dutch Shell, ENI, and Total each contributed. Our health care industry holdings were also very solid contributors to both absolute and relative performance in 2011, led by Pfizer, Roche Holding, and Merck.

Our utilities investments performed below index averages, with Europeans ENEL SpA and GDP Suez each falling more than 10% for the year. As with the European telecoms, special taxes, negative regulatory rulings, and debt refinancing concerns shadow investor perceptions of these businesses. As of December 31, just over 14% of Investment Income Builder’s portfolio assets were invested in euro-denominated securities. Almost half of this amount was invested in Royal Dutch Shell, ENI, and Total, large integrated international oil and gas firms that happen to be based in Europe. We have hedged a majority of the euro currency exposure of the Income Builder portfolio.

Income Builder’s 1.2% average equity weighting in the weak performing industrials sector, which was less than 15% of the weighting of this sector in the MSCI World Index, helped overall portfolio performance in 2011. Our low weighting in equities in the materials sector (under 2%) also had a positive effect on relative performance, although our investments in Southern Copper and Impala Platinum each performed poorly in 2011.

In addition to those previously mentioned, the best contributing investments to portfolio performance in 2011 were semiconductor producer Intel, Australian airport operator Sydney Airport, Philip Morris International, McDonald’s, and U.S. electric utility Entergy. Notable performance laggards included Apollo Investment, Och-Ziff Capital Management, and Australian retailer David Jones Ltd.

Within its bond portfolio, Investment Income Builder owned significantly fewer U.S. government and agency bonds than the Barclay’s Index. This had a modest negative impact on the relative performance of the Fund’s bond portfolio in 2011. We allocated the majority of new cash flow into equities in 2010 and 2011, because yields on corporate bonds and other non-government debt securities dropped to less interesting levels.

The chart below shows that interest-bearing investments as a percentage of the Fund’s portfolio have varied over time, ranging from less than 12% in mid 2005 to 45% at June 30, 2009. We tend to buy more bonds on those days when liquidity is pressured and bond prices are depressed.

As of December 31, the Fund portfolio included approximately 200 bonds and hybrid securities.

Since its inception, the dividend increases paid by Investment Income Builder have been powered primarily by dividend increases from the Fund’s equity holdings. These increases slowed significantly over the last three years, due to more than 20% aggregate declines in dividends paid in 2009 in most developed country equity markets. Dividend increases in 2010 and 2011 have brought aggregate dividends paid by U.S. listed firms almost back to pre-financial crisis levels, and Standard & Poor’s predicts that new records for cash dividend payments will be reached in the U.S. market during 2012. For the U.S. equity market as a whole, the dividend payout ratio averages slightly below 30% of corporate earnings. Outside the United States, dividend yields and payout ratios tend to be higher (see the Investment Income Builder September 2011 Annual Report), but dividend growth will likely be lower, especially from European firms.

The average payout ratio of companies held in the Income Builder portfolio is slightly above 60%, reflecting our preference for firms that share earnings with shareholders. We expect earnings growth in most developed markets to be below the U.S. market in 2012. The evidence that this expectation is widely shared by investors around the world is indicated by the fact that only two (Indonesia and Philippines) of the 46 non-U.S. equity markets tracked by Standard & Poor’s posted gains for 2011, while the S&P Global Ex-U.S. portfolio declined by 16.64%.

During 2011, the average dividend increase of our equity portfolio holdings was slightly above 6.5%. The average yield on our bond portfolio declined, reflecting the generally lower interest rates available on new investments vis-à-vis the Fund’s portfolio at the beginning of the year.

There is now a great debate regarding the prospects for global economic growth in 2012. Conflicting macroeconomic forces are expected to act on business conditions and investor sentiment. Leverage in most developed market economies cannot expand at the rates seen in prior years, and may need to contract in certain countries. We have seen clear evidence that global markets are unwilling to finance significant further borrowing by certain European governments at acceptable rates. This may serve as a warning to other developed and developing market governments that limits on borrowing will constrain the ability of elected officials to formulate new programs and fully deliver on prior commitments. On the other hand, some large emerging market economies would appear to have room to increase private borrowing, government borrowing, or both, and aggregate demand in these countries is expanding. An election year United States could increase or restrict aggregate global demand, though recent economic indicators have been slightly positive.

Commenting on the U.S. equity market in its December, 2011 “Market Attributes” publication, Standard & Poor’s states the following:

“Balance sheets and income statements for the S&P 500 are in excellent condition. Earnings (for the S&P 500 Index) best quarter was Q3’11, its second best was in Q2’11, and Q4’11 is estimated to be in third. Cash reserves are also at an all time high. Forward price-to-earnings ratios (P/Es) are historically low and yields are relatively high (compared to alternative investments or U.S. Treasuries)......Large-cap issues have found a way to cope with a slow economy and still improve earnings.”

Summary data on the global equity portfolio indicate that most balance sheet metrics outside the United States have also improved in the last two years, even as declining price-to-earnings ratios show that investor desire to own equities is muted. In brief, firm values are below recent historical averages and overall sales and earnings results are coming in reasonably well. A lack of optimism about future business conditions keeps equity investors on the sidelines.

Yields on taxable and tax-exempt money funds are below 1/4 of one percent, and banks have aggressively reduced yields on all deposits. A very large pool of investor dollars is looking for better returns elsewhere, but in sensible investments. We are optimistic that the types of income-producing investments owned by Thornburg Investment Income Builder will experience sustainable popularity among investors as their intrinsic values for income production are recognized.

A high percentage of investor funds belong to people over the age of 55, for whom income is an increasingly necessary and desirable attribute.

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 MSCI World Index is an unmanaged market-weighted index that consists of securities traded in 24 of the world’s most developed countries. Securities are listed on exchanges in the U.S., Europe, Canada, Australia, New Zealand, and the Far East. The index is calculated with net dividends reinvested, in U.S. dollars.

The Barclays Capital Aggregate Bond Index is composed of approximately 8,000 publicly traded bonds including U.S. government, mortgage-backed, corporate and Yankee bonds. The index is weighted by the market value of the bonds included in the index.

The S&P Broad Market Global Ex-U.S. Index is a market-capitalization weighted index that provides a broad measure of the global equities markets, excluding the U.S. market. The Index contains approximately 8,000 stocks.

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.

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.

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

Price/Earnings ratio (P/E ratio) – A valuation ratio of a company’s current share price compared to its per-share earnings. P/E equals a company’s market value per share divided by earnings per share.

 

 

Global Opps.

Fourth Quarter 2011

For the fourth quarter of 2011, the Thornburg Global Opportunities Fund produced a total return of 6.71% (A shares without sales charge) versus 7.19% for the benchmark MSCI All-Country World Index (ACWI). This caps the calendar year 2011 in which the Fund returned -7.79% (A shares without sales charge) versus -7.34% for the index. Note that in 2011 the Fund paid income distributions of 25 cents per share; total returns assume the reinvestment of such distributions.

Although our 2011 performance result was not satisfying, we continue to focus on the long term and believe that our approach to global value investing has fundamental strengths. July 28, 2011 marked the five-year anniversary of the Thornburg Global Opportunities Fund. For the five-year period ended July 31, 2011, Morningstar rated the Fund’s Class A shares five stars (based on risk adjusted returns) and ranked the Fund in the top 4% among 493 World Stock funds (based on total returns without sales charge). As of December 31, 2011, the Fund’s overall Morningstar Rating was 3 stars among 697 World Stock Funds (uses a weighted average of the fund's three- and five-year ratings*). The Fund ranked in the top 49th percentile for the year ended December 31, 2011 and in the 12th percentile for the five-year period (among 893 and 490 World Stock funds, respectively). The Fund has been “battle tested” through some of the most challenging market conditions of the past century; 2009 was an exceptionally strong year for global equities, while 2008 was plainly a calamity.

The Fund’s cumulative performance since inception in 2006 is shown below:

Cumulative Total Returns of Thornburg Global Opportunities Fund - A Shares July 28, 2006 to December 31, 2011
Without sales charge	33.50%
With sales charge	27.52%
MSCI AC World Index	2.63%
S&P 500 Index	10.50%

For global investors 2011 was a difficult year, overshadowed by sovereign credit concerns in the developed world and slowing growth in emerging economies. Major companies from industries such as banking and retailing that looked “cheap” a year ago only became cheaper as the year unfolded. In the U.S. only one in six equity portfolio managers outperformed the S&P 500 in 2011 — this was the worst result for active managers since 1997. In Europe, after a poor showing in 2010, some investors believed the weak outlook was “priced in”. But 2011 proved a tougher year still, with the EURO STOXX 50 index of European blue chips declining 15.77% in USD. Lastly, growth in emerging markets proved no safe haven: the MSCI Emerging Markets index fell 18.42% for the year.

In assessing the performance of the Thornburg Global Opportunities Fund, it is constructive to consider the performance in USD of the sector components of the MSCI All Country World Index over the year ending December 31, 2011. Two points are notable:

1. Three of ten Index sectors (consumer staples, health care, and telecommunications) showed positive total returns, ranging from approximately +0.2% (telecom) to approximately +9% (health care). The other seven Index sectors (financials, industrials, materials, information technology, consumer discretionary, utilities, and energy) delivered negative 2011 returns, ranging from negative 2.68% (energy) to negative 21.2% (materials).
2. In general, sectors that exhibit the highest degree of volatility with economic cycles were down the most: materials, financials, and industrials. Investor anxiety about slowing global economic growth set in during the late spring of 2011, and this has not lifted. The financial sector, down negative 18.9% for 2011, also delivered sluggish relative performance in 2010.

Much of the 2011 performance of the Thornburg Global Opportunities Fund can be attributed to security selection rather than country or sector allocation. Our largest positive contributor was long-time holding Global Crossing in the telecommunications sector. In the second quarter Global Crossing announced its sale to Level (3) Communications in an all-stock transaction. Level (3) appears to be a good strategic fit with Global Crossing, and we now hold shares in the combined company. We also benefitted from favorable security selection in emerging markets, as evidenced by the strong contribution from Brasil Foods in both 2010 and 2011. Brasil Foods continued to report rising profitability and volume growth that leads the global food industry. The company still faces an interesting opportunity to gain worldwide market share in the years to come.

In addition to those cited above, the Fund enjoyed solid contributions to portfolio performance from restaurateur Arcos Dorados, telecommunications provider Telstra Corp. and insurance brokerage firm Willis Group Ltd.

However these positive contributions were more than offset by disappointing results from a number of investments, particularly in the banking and energy sectors. This is evident in the list below, which shows five of the main detractors from 2011 results:

Company	Industry Group
Bank of America Corp.	Diversified Financials
Bankers Petroleum Ltd.	Energy
Cable & Wireless Worldwide	Telecommunications
Liechtenstein Landesbank	Banks
Transocean Ltd.	Energy

The banking industry in developed economies continued to wrestle with a host of challenges in 2011. Principal among these are sovereign credit concerns, low interest rates, slow customer activity, and a cloudy regulatory backdrop. So bank stocks performed even worse than the broader financial sector. For the Fund, the largest detractor from results in this area was Bank of America (BAC). BAC in particular is also subject to concerns about potential off-balance sheet liabilities related to underwriting of residential mortgages prior to the financial crisis, as well as additional costs the bank may incur related to its mortgage foreclosure practices after the crisis. We continue to hold Bank of America, which appears to have sufficient scale and profits to absorb these potential costs. In fact the Fund has benefitted in early 2012 as BAC has led a modest recovery in U.S. bank stocks thus far in January.

In the energy sector, offshore driller Transocean Ltd. was a notable underperformer. Since the April 2010 tragedy at BP’s Macondo well in the Gulf of Mexico, in which Transocean’s Deepwater Horizon rig sank, the company has faced new challenges. There is uncertainty surrounding the litigation regarding the Macondo accident. Moreover, in the current regulatory and safety environment the company has had to spend more resources on inspections, certifications and retrofits of its existing assets. Transocean’s challenges weighed heavily on the shares in 2011, but some resolution is plausible in 2012. Transocean shares currently trade well below the market value of the company’s tangible assets.

The Thornburg Global Opportunities Fund portfolio does not resemble a global equity index portfolio, as it is concentrated in fewer securities and does not match industry or geographic weightings that are typical in an index. In 2011 we reduced our exposure to financials and telecommunications businesses, while we increased our exposure to information technology and industrial businesses. Relative to our benchmark, the Fund has an overweight position in financial services and industrial companies; we remain underweight in utilities and health care businesses. Companies based in emerging markets currently constitute about 10.7% of the Fund.

The following table illustrates the Fund’s largest geographic weightings, based on the country of domicile:

Country	Fund Weighting
USA	43%
Switzerland	11%
UK	9%
Brazil	9%
Australia	7%

As we begin 2012 there is a great debate regarding the prospects for global economic growth in the year ahead. Conflicting macroeconomic forces will affect business conditions and investor sentiment. Leverage in most developed market economies cannot expand at the rates seen in prior years, and may need to contract in certain countries. We have seen clear evidence that global markets are unwilling to finance significant further borrowing by certain European governments at acceptable rates. This may serve as a warning to other countries that limits on borrowing will constrain the ability of elected officials to formulate new programs and fully deliver on prior commitments. For instance in both Italy and Spain newly elected governments recently announced plans to raise taxes and reduce public spending in 2012. On the other hand some large emerging market economies appear to have room to increase private borrowing, government borrowing, or both, and aggregate demand in these countries is expanding. An election year United States could increase or restrict aggregate global demand. Recently U.S. housing and employment are at last showing signs of life — strong positives for private sector health.

In many markets equity valuations now convey a deep pessimism about the prospects for future growth. Commenting on the U.S. market in its December, 2011 “Market Attributes” publication, Standard & Poor’s states the following:

“Balance sheets and income statements for the S&P 500 are in excellent condition. Earnings (for the S&P 500 Index) best quarter was Q3’11, its second best was in Q2’11, and Q4’11 is estimated to be in third. Cash reserves are also at an all time high. Forward price-to-earnings ratios (P/Es) are historically low and yields are relatively high (compared to alternative investments or U.S. Treasuries)......Large-cap issues have found a way to cope with a slow economy and still improve earnings.”

Summary data on the global equity portfolio indicate that most balance sheet metrics outside the United States have also improved in the last two years, even as declining price-to-earnings ratios show that investor desire to own equities is muted. In brief, firm values are below recent historical averages and overall operating results are coming in reasonably well. A lack of optimism about future business conditions keeps many investors on the sidelines, but this environment could reward those with a long-term view.

As bottom-up value investors, we continue to focus on “promising companies at a discount”, or good businesses at low prices. This is the framework that has served us well over many years.

Remember that you can review descriptive comments about the portfolio holdings at www.thornburg.com/funds.

 

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.

There is no guarantee the Fund will meet its objectives.

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.

Price-to-Book Value (P/B) Ratio – A ratio used to compare a stock’s market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter’s book value per share.

To determine a fund’s Morningstar Rating™, funds with at least a three-year history are ranked in their categories by their Morningstar Risk-Adjusted Return scores. The top 10% receive 5 stars; the next 22.5%, 4 stars; the middle 35%, 3 stars; the next 22.5%, 2 stars; and the bottom 10% receive 1 star. The Risk-Adjusted Return accounts for variation in a fund’s performance (including the effects of all sales charges), placing more emphasis on downward variations and rewarding consistent performance. Other share classes may have different performance characteristics. © 2011 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.

* Overall Morningstar Rating out of 697 World Stock funds, based on risk-adjusted returns, using a weighted average of the fund’s three and five-year ratings: respectively, 3 stars and 3 stars among 697 and 490 funds, as of 12/31/11.

Morningstar World Stock Category consists of world-stock portfolios that have few geographical limitations. It is common for these portfolios to invest the majority of their assets in the United States, Europe, and Japan, with the remainder divided among the globe’s smaller markets. These portfolios typically have 20%-60% of assets in U.S. stocks.

The MSCI All Country (AC) World Index is a market capitalization weighted index that 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 EURO STOXX 50 Index, Europe’s leading Blue-chip index for the Eurozone, provides a Blue-chip representation of supersector leaders in the Eurozone. The index covers 50 stocks from 12 countries: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain.

The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The MSCI Emerging Markets Index consists of the following 21 emerging market country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.

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.

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

Intl Growth

Fourth Quarter 2011

The fourth quarter of 2011 saw the market stabilize following a significant move down for international equities in the third quarter. The Thornburg International Growth Fund underperformed the MSCI All Country World ex-U.S. Growth Index returning 0.22% during the quarter (A shares without sales charge) compared to 4.12% for the benchmark. While we failed to keep up with the rebound in the benchmark during the fourth quarter, we remain pleased with the Fund’s performance relative to the benchmark, year-to-date and since inception. For the full year of 2011 the Fund returned -2.97% (A shares without sales charge) vs. -14.20% for the benchmark. Since the February 1, 2007 inception, the Fund’s A shares without sales charge have returned 17.84% cumulatively vs. the benchmark’s -11.97% loss over the same time period; this is a nearly 6% annualized performance difference, throughout several years of historically tumultuous international market environments.

Underperformance during the quarter was divided between the portfolio’s allocation and its individual security selection effect. The Fund’s significant underweight allocation to materials and financials provided some positive allocation effect, however this was not enough to overcome results within the other sectors. The Fund had negative selection effect in consumer discretionary, information technology, health care, energy, financials and utilities. While the Fund generated positive stock selection in industrials, consumer staples, materials and telecom services, this was not enough to overcome the negative sectors.

Notable positive contributors to performance in the fourth quarter included MercadoLibre Inc., New Oriental Education & Technology Group, Experian plc, Start Today Co. Inc., MakeMyTrip Ltd., and Clicks Group, Ltd. MercadoLibre is an eBay-like, e-commerce platform serving Latin America. The company benefits from the long-term structural trend of customers moving from physical stores to online retail. MercadoLibre faces relatively few competitors in most of Latin America. Following recent improvements to services and features offered on the firm’s online platform there has been a significant increase in goods sold on the site.

We also remain confident in the steady business model profile of Experian PLC, an information services firm providing consumer credit information. Experian provides credit scores, credit risk management, and approval decision-making data mainly to financial institutions. The firm has a consistent revenue profile with a significant portion of its revenue recurring.

Fourth quarter detractors to performance included Supergroup PLC, Blinkx PLC, ASOS PLC, Xing AG, and Credit Suisse Group AG. Supergroup PLC is a UK-based fashion retailer which sells apparel through their own brick-and-mortar outlets as well as through other department stores. After a solid post-IPO period of strong market and business results, the company experienced operational difficulties, including hiccups during the installation of a new inventory management system. We exited the position on concerns that the operational difficulties could be masking more serious issues, including brand deterioration.

Blinkx PLC, a bottom contributor within IT over the quarter, is a London-based specialty search engine focused on analyzing and aggregating video content. Blinkx encountered significant selling pressure after missing earnings expectations, doing a dilutive secondary offering to fund an unpopular acquisition, and announcing a significant change in strategy. The company was sold due to the fundamental deterioration mentioned above, and the impact on our investment thesis.

The cash position of the Fund as of December 31, 2011 was relatively high at 10.8%, however we would caution that it does not reflect our outlook for the market. In a concentrated portfolio, the sale of two or three positions can cause cash to rise significantly for short periods. We anticipate putting it to work over the coming weeks and returning cash to more normal levels.

We look forward to our 5-year anniversary in February 2012, and will continue to adhere to our core approach. As always, we continue to utilize our bottom-up, fundamental driven research process. Our goal is to find promising growth companies trading at attractive valuations. We encourage you to learn more about your portfolio. Descriptions of each holding and links to company websites can be found on the Holdings Commentary page of this web site. Thank you for investing with us.

      

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.

There is no guarantee the Fund will meet its objectives.

The MSCI All Country (AC) World ex-U.S. Growth Index is a market capitalization weighted index that 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.

Dev World

Fourth Quarter 2011

During the fourth quarter of 2011, the Thornburg Developing World Fund returned 5.76% (A shares without sales charge) versus 4.42% for the MSCI Emerging Markets Index. While policy visibility has not improved in Europe and notable downside risks remain, the United States is showing surprising signs of economic resilience and emerging market central banks are beginning to introduce more accommodative monetary policy. Notably, emerging markets with real or perceived external vulnerability to capital outflows continued to struggle, as visible in stock and currency performance. For example, the MSCI India Index declined 7.01% in local terms and 14.25% in dollars in the quarter, while the MSCI Turkey Index declined 14.40% in local terms and 15.72% in dollars. The overall market environment can best be described as tenuous, as risk aversion, asset price correlation and share price volatility remain high.

Against this challenging backdrop, we have focused on positioning the portfolio to survive further economic and policy deterioration, while also seeking to capitalize on high correlation across asset prices that has rendered many high-quality businesses inexpensive. For example, we have used recent share price declines to initiate positions in HDFC Bank (the premier private-sector Indian bank), Santander Chile (the leading Chilean private-sector bank), and Baidu (China’s dominant Internet search engine provider). These franchises have declined markedly in price in recent months and offer strong snap-back potential due to above-average growth prospects and attractive valuations, yet maintain a degree of market leadership and financial strength that should enable them to outperform other businesses if the overall market environment deteriorates further. We continue to resist the temptation to move down the quality spectrum or violate our investment process, despite sharp share price declines in some areas of the market. Ultimately, our focus on financially sound, self-funding companies should limit our exposure to the pitfalls of leverage and external finance, without sacrificing capital appreciation potential.

Top contributors for the quarter included Latin American e-commerce firm MercadoLibre, South African drug store chain Clicks Group, Chinese education company New Oriental Education, Peruvian bank Credicorp, and Mexican consumer products company Genomma Labs. MercadoLibre saw past infrastructure investment manifest itself in revenue growth acceleration, despite a more challenging economic backdrop. Clicks benefited as the share price began to reflect a solid year of good business development. New Oriental appreciated sharply intra-quarter as other Chinese stocks were making new lows, at which point we exited the position; since then, short sellers have questioned the company’s accounting and corporate governance practices, causing a subsequent decline in the stock. Credicorp saw improved business confidence in Peru following the political fallout from Ollanta Humala’s presidential victory earlier in the year. Genomma performed well as economic recovery in the United States became more visible, which in turn benefited many Mexican stocks (including Genomma) due to Mexico’s economic ties to the United States.

Detractors included Taiwanese contact lens maker St. Shine Optical, Indian consumer products company Asian Paints, Turkish bank Turkiye Garanti Bankasi, Chinese Internet company Sina, and Indian energy producer India Coal. St. Shine declined as news surfaced that a Chinese contact lens manufacturer that controls a chain of eyewear stores in Taiwan plans to enter the Taiwanese market. Asian Paints fell as the Indian rupee declined, the Indian economy began to decelerate, and inflation remained stubbornly high. Garanti fell victim to the central bank’s unconventional monetary policy, which has pressured returns and margins, and to Turkey’s external vulnerability to Europe. Sina declined along with many Chinese Internet stocks during the quarter, and also suffered from regulatory issues that may pressure the development of its Weibao social networking business. India Coal experienced good business development but continues to be plagued by various regulatory concerns that have hampered pricing.

As we enter 2012, emerging markets equities have suffered disproportionately against a backdrop of heightened risk aversion. For countries such as Turkey and India that face balance of payment challenges and high degrees of external vulnerability, this performance may be justified. However, most major emerging markets enter 2012 not only with better economic and fiscal outlooks than their developed market counterparts, but also with far greater potential for monetary and fiscal stimulus. For example, Brazil recently lowered interest rates and relaxed rules surrounding repatriation for foreign investors, China eased banking reserve rate requirements, and Indonesia lowered interest rates despite a favorable growth outlook. Further policy action in 2012, notably from China and India, is possible and arguably probable. This backdrop stands in contrast to policy gridlock and austerity in Europe, and should help to support favorable growth rate differentials in the emerging world.

      

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

Click here for the top 10 holdings of the Thornburg Developing World Fund

Important Information

The view expressed by the portfolio manager reflects his professional opinion and should not be considered buy or sell recommendations. This view is subject to change.

There is no guarantee the Fund will meet its objectives.

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 MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. As of May 27, 2010 the MSCI Emerging Markets Index consisted of the following 21 emerging market country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.

The MSCI country indices are free float-adjusted market capitalization indices that are designed to measure equity market performance in that specific country 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.

 

Muni. Bonds

Fourth Quarter 2011

The last year was a wonderful year for municipal bonds. If one measures the performance of the municipal market by the performance of a broad index of municipal bonds, say the BofA Merrill Lynch Municipal Master Index (+11.19%), the results speak for themselves. Table I shows the results for the last six quarters. It illustrates that the foundation for 2011’s results were laid in the market’s drubbing in the 4th quarter of 2010.

The repeatability of these results is a very low probability event. Going forward into 2012, we expect returns in the municipal market to be in line with yields plus or minus a small change in prices. In fact, we expect the higher probability event to be market yields minus a small change in price.

The drivers of the municipal market returns, which turned significantly positive in the 2nd quarter of 2011, started with a large decrease in the yields of Treasury securities. Table II shows the quarter-by-quarter changes in representative Treasury yields.

One-year Treasury bills decreased in yield by 0.16% (16 basis points) and 30-year Treasury bonds decreased in yield by 1.35% (135 basis points) over 2011. This is in spite of the fact that Standard and Poor’s downgraded the credit rating of the United States in August 2011. This rally in the Treasury market was driven by investors seeking to escape the turmoil in Europe. They found a safe haven in Treasury securities because as a colleague says, “The United States was the best house in a bad neighborhood”. The largest declines in the yields of the various Treasury securities occurred in the third quarter of 2011. The Federal Reserve Board announced “operation twist” in September 2011:

“Operation Twist, modeled on a similar program last tried in 1961, will attempt to push down long-term interest rates by shifting the balance of the Treasury’s securities holdings towards longer-term securities and selling shorter-term investments.”

Table III shows the change in AAA rated municipal general obligation bonds.

One will notice that the change in yields of the highlighted AAA municipal general obligation securities roughly followed the decline in Treasury yields.

One of the other factors affecting the performance of the municipal market was that the fears gripping the municipal market in the 4th quarter of 2010 never materialized. The increased supply of long-term municipal debt caused by the end of the Build America Bond program turned into a 32% decrease in new issuance supply. The “hundreds of billions of dollars of defaults” never happened. Investors, once they realized these fears were overblown, stopped pulling assets out of municipal bond mutual funds thereby easing selling pressures. The 4th quarter of 2011 had the second lowest performance of the year; only the 1st quarter of 2011 was lower.

Although by the end of the 4th quarter of 2011 the municipal market looked fully valued, many pundits were pointing to the ratio of municipal yields to Treasury yields as an indicator of value. Investors must not only focus on this metric but also the ratio of municipal yields to other fixed income products as a true measure of relative value. Chart I shows the ratio of AAA general obligation yields versus Treasury yields for securities with a 10-year maturity.

By this measure, municipal bonds look “cheap”. Chart II shows the ratio of AAA general obligation (GO) yields versus AAA industrial corporate bond yields.

By this measure, municipal bonds look “fair”. The real conclusion may be that Treasuries are overvalued at this time.

Within the municipal bond market, investors are being well compensated to assume credit risk. Chart III shows the difference in yield between a AAA GO and a BBB revenue bond (credit spread) with a 10-year maturity.

Credit spreads are still wide; investors are being compensated to prudently take credit risk. This is especially true if the credit environment improves, which we think it will. Chart IV shows the estimated state budget shortfalls for different recessionary periods. As the heading states, they are the “Largest State Budget Shortfalls on Record”, but they are declining.

Another area of opportunity lies in the slope of the yield curve for maturities longer than 10 years. The slope of the yield curve measures the difference in yield between two securities of similar quality but different maturities.

The difference in yield between AAA GO municipals with a 10-year maturity and a 30-year maturity is very wide.

By the end of the 4th quarter of 2011, the municipal market was set up to enjoy the seasonal “January Effect”, caused by a supply/demand imbalance. New money comes into the market from coupon payments and bond calls only to meet a dearth of supply after the year-end holidays. A very public example of the “January Effect” can be seen by the premium that investors were willing to pay for one municipal exchange traded fund (ETF). As recently mentioned in a Barron’s article¹, on January 9, 2012, this ETF traded at a significant premium, only 50 basis points lower than its distribution yield. This seems a little steep to us.

Given our view of the municipal market, we again counsel investors to have an appropriate time horizon for their investments in municipal bonds. We recommend two to three years, depending on the duration of your investment. This time horizon would be longer for portfolios of longer durations. The other risk management tool that should be used in this uncertain environment is to remain diversified among credits and along the yield curve – own some short-term, intermediate-term and long-term assets. An investor should weight these holdings to correspond with their individual risk tolerances.

 

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

Important Information

1. “More Clear Skies for Munis”, Barron’s, January 21, 2012

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.

There is no guarantee the funds will meet their objectives.

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

Build America Bonds – 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.

Duration – A bond’s sensitivity to interest rates. Bonds with longer durations experience greater price volatility than bonds with shorter durations.

Exchange Traded Fund (ETF) – A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. ETFs experience price changes throughout the day as they are bought and sold.

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.

Industrial Bond – A bond issued by a company that produces and distributes goods and services.

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.

Operation Twist – A monetary process where, in an attempt to lower long-term interest rates, the Fed sold short-term Treasury bonds and bought long-term Treasury bonds, which pressured the long-term bond yields downward.

Standard Deviation – A statistical measurement of dispersion about an average which, for a mutual fund, depicts how widely the returns varied over a certain period of time. Investors use the standard deviation of historical performance to try to predict the range of returns that are most likely for a given fund. When a fund has a high standard deviation, the predicted range of performance is wide, implying greater volatility.

A bond credit rating assesses the financial ability of a debt issuer to make timely payments of principal and interest. Ratings between AAA (the highest) and BBB are investment-grade quality. Ratings of BB and below are considered speculative grade, or junk bonds. Unless otherwise noted, the ratings listed are from Municipal Market Data and are a combination of ratings from Standard and Poor’s, Moody’s Investors Service, and Fitch Ratings.

U.S. Treasury securities, such as bills, notes and bonds, are negotiable debt obligations of the U.S. 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 BofA Merrill Lynch Municipal Master Index tracks the performance of the investment-grade U.S. tax-exempt bond market. Qualifying bonds must have at least one year remaining term to maturity, a fixed coupon schedule, and an investment grade rating (based on average of Moody’s, S&P, and Fitch).

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.

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 2011

What are you supposed to do in a low interest rate environment where everyone wants yield?

Is this a trick question?

While the last few weeks have seen an increase in yields for U.S. Treasuries, particularly in the long end of the curve, the year finished at very low yield levels. Even at the time of this writing yields across the so-called “risk-free” curve are pretty uninteresting. (And, as the market’s discovered, “risk-free” has risk.) 2011 finished with the lowest yields for high-quality corporate bonds in more than a decade, but the second highest spreads in more than a decade. So either high-quality corporates are a really good deal or a really bad one.

Keep in mind, too, that yield is really not a great measure of your likely short-term return. Prices move around and given that yields of Treasuries can’t go too much lower (famous last words, perhaps; just ask Japanese bond investors), it seems as though their yield may even be overstating your return. A further caveat: these yields are nominal, not real numbers. So with inflation at 3%, pretty much the entire Treasury curve is promising a real loss if inflation stays at this rate.

Having fun yet?

With the prospect of very low income from the Limited Term Income Fund and the Limited Term U.S. Government Fund, as well as a likely negative return at some point in the next several years, many investors would ask why they should own high-quality fixed income at all.

Owning high-quality fixed income in this environment is clearly not about the income, but about the role that it plays in your overall portfolio. There are a number of frightening potential outcomes (see: Europe/Japan/LEH redux) that would lead to notable draw downs in risky assets. In this case, a high-quality portfolio that has a low correlation to risky assets can help give you flexibility. If you DECIDE to sell as the market gets ugly, that’s fine; you made an explicit decision, right or wrong. If you are FORCED to sell when the market gets ugly, then your decision was made for you and your capacity for loss is less than it needs to be.

In this sort of portfolio construction, it’s important that your high-quality fixed income allocation is not highly correlated with your riskier portfolio components. Reaching for yield is nearly always an increase in risk, so searching for a high yielding fixed income allocation that will completely protect you on the downside is more or less akin to searching for a pot of gold at the end of the rainbow. At Thornburg Investment Management, we take our position as a provider of high-quality fixed income in our laddered funds seriously. While we don’t take zero risk, and we certainly attempt to provide a reasonable return, we’re not likely to be the highest yielding component in your portfolio. Even today, when the Limited Term Income Fund has a notable (33%) portion of the portfolio in BBB credit quality bonds, we believe we are taking a lesser risk route. Many of the highest rated bonds in the corporate universe are banks and other financials. If we wished to define “risk” merely by ratings quality, we wouldn’t need to do much credit work. Instead, we spend nearly all of our time doing credit work, and if we disagree with the rating agencies, so much the better.

It’s hard to recommend the U.S. Government Fund here with yields at extremely low levels as the risk of having a losing year at some point in the next several years is fairly high. We think of yield not so much as a measure of return but as a cushion against adverse events. Right now that cushion is low and there are many scenarios where U.S. Government bonds will lose value. Because corresponding yields are small, it’s also likely that total returns will be negative. Again, with inflation currently running at 3%, it’s difficult to find any security that fits within the mandate of the Fund that has a positive real return (assuming, of course, that inflation continues at the current rate). At the same time, we try to keep volatility of the Fund low, such that the U.S. Government Bond Fund can remain a store of value in times of adversity.

We continue to believe that volatility in prices of all asset types will continue, and in this environment we strive to fulfill the three main goals of both funds: a good balance of risk and reward, reasonably low volatility, and a low-to-negative correlation with equities. These characteristics should make our funds fundamental long-term holdings in any portfolio, even at a time when high-quality bonds on the face of it seem unattractive.

Thanks for your interest.

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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.

There is no guarantee the Funds will meet their objectives.

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.

A credit rating assesses the financial ability of a debt issuer to make timely payments of principal and interest. Ratings of AAA (the highest), AA, A, and BBB are investment-grade quality. Ratings of BB, B, CCC, CC, C and D (the lowest) are considered below investment grade, speculative grade, or junk bonds. Unless otherwise noted, the ratings listed are from Municipal Market Data and are a combination of ratings from Standard and Poor’s, Moody’s Investors Service, and Fitch Ratings.

The Barclays Capital Aggregate Bond Index is composed of approximately 8,000 publicly traded bonds including U.S. government, mortgage-backed, corporate and Yankee bonds. The index is weighted by the market value of the bonds included in the index.

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.

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

Fourth Quarter 2011

The Need . . . for Speed

Tom Cruise’s Maverick character in Top Gun must have retired from flying and gotten heavily into investing. Perhaps Maverick got out of the Navy in time for the dot-com bubble, then flipping houses. We wonder what he’s up to now and really hope that it’s not buying income-producing securities.

2011 was a year of widening credit spreads and general “risk-off” behavior. While bonds generally outperformed stocks, there was wide dispersion across both asset classes. Our investments in the Fund performed reasonably well, returning 1.99% for the 4th quarter and 4.44% for the year as a whole (A shares without sales charge). As was the case at the end of 2010, the end of 2011 saw a rally in risk that reversed the performance of certain riskier assets. This rally has continued through to the time of this writing at the end of January. Just as the rally of a year ago did not, in the end, produce stellar results, we worry that this rally also will fizzle out as investor expectations are dampened by continued global deleveraging.

No commentary would be complete without a brief survey of the European debt situation. It is symptomatic of a larger global debt and deleveraging issue in addition to affecting a large part of the global economy. The IMF downgraded global growth expectations, and apart from some very recent better news from manufacturing indicators in Germany the broader tone seems negative. A mild recession in Europe would not be a disaster, of course, but keep in mind that it’s the base case economic backdrop to a potentially volatile resolution to a Greek default.

And don’t kid yourself, Greece is going to default. With an untenable debt-to-GDP figure and a notable primary deficit, Greece really can’t afford any debt. Portugal seems to be headed down the same road. Both countries' workforces are not competitive inside the Euro, and a significant change in wages (deflation) is required to get them on side. A deflationary recession is not an environment conducive to paying down debt! Does any of this matter if the juggernaut that is Germany decides to transfer wealth to the South? No. But a mild recession in Europe is not a politically easy environment to affect that transfer. So the overall situation there is dicey to say the least. We can decide that it doesn’t matter for the United States or for Asia, and perhaps it matters less, but we’ve yet to see decoupling actually happen. The transfer mechanism of the global banking system is still in place, and while many of the risks have been identified, the fixing of the problems (better balance sheets, for one) is not a short-term process.

Still, there is optimism in the riskier corners of the fixed income market, particularly in high-yield corporate bonds. Higher spreads mean higher cushions against adverse events (at least relative to Treasuries, which have nearly zero cushion). At the same time, corporations have the least leveraged balance sheets in over a decade. Finally, investors need income. This combination could lead to an overshooting of value in a global economic environment that is frankly unfavorable for risk, though that would certainly be a short-term positive for our fellow investors in the Strategic Income Fund. On the negative side, we’re seeing a surprising number of problems given the overall low leverage environment. As an example, a European refinery that borrowed from banks and pledged oil as collateral was cut off from financing. The deleveraging environment had ugly consequences there. The liquidity environment remains terrible both from a bank lending perspective, and from a market transaction perspective. We have moved to running with slightly larger cash balances to remain nimble and opportunistic.

We are hoping for the best of a reasonably positive risk environment across all income-producing securities, but not one that ignores for too long the likelihood of a long-term deleveraging environment combined with unresolved sovereign debt and financial system issues.

We just hope Maverick isn’t in there buying with a “need for speed.”

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.

There is no guarantee the Fund will meet its objectives.

Debt-to-GDP Ratio – A measure of a country’s federal debt in relation to its gross domestic product (GDP). By comparing what a country owes and what it produces, the debt-to-GDP ratio indicates the country’s ability to pay back its debt. The higher the debt-to-GDP ratio, the less likely the country will pay its debt back, and the higher its risk of default.

The Blended Index is composed of 80% Barclays Capital Aggregate Bond Index and 20% MSCI World Index. The Barclays Capital Aggregate Bond Index is composed of approximately 8,000 publicly traded bonds including U.S. government, mortgage-backed, corporate and Yankee bonds. The index is weighted by the market value of the bonds included in the index. The MSCI World Index is an unmanaged market-weighted index that consists of securities traded in 24 of the world’s most developed countries. Securities are listed on exchanges in the U.S., Europe, Canada, Australia, New Zealand, and the Far East. The index is calculated with net dividends reinvested, in U.S. dollars.

The Barclays Capital U.S. Universal Index represents the union of the U.S. Aggregate Index, U.S. Corporate High-Yield Index, Investment-Grade 144A Index, Eurodollar Index, U.S. Emerging Markets Index, and the non-ERISA eligible portion of the CMBS Index. The index covers USD-denominated, taxable bonds that are rated either investment-grade or below investment-grade.

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.

U.S. Treasury securities, such as bills, notes and bonds, are negotiable debt obligations of the U.S. 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.