Value

First Quarter 2009

During the first quarter, the Thornburg Value Fund (A shares without sales charge) returned negative 8.30% vs. a return of negative 11.01% for the benchmark S&P 500 Index. While disappointing on an absolute basis, we are pleased that the Fund outperformed the S&P 500 by a healthy margin.  Recognition of improving company-specific fundamentals, and some relief in credit spreads played a role in our out performance vs. the benchmark. To-date, government initiatives to solve the global credit crisis have been constructive for financial markets. However, improved visibility toward positive earnings developments will likely be a requirement for additional gains.

The stocks of financial service companies continued to take center stage in the first quarter. Most of these stocks were off significantly before rebounding in March after the announcement of the Public-Private Investment Partnership (PPIP). A relaxation in mark-to-market accounting rules provided support for additional gains later in the month. Although the net effect of our financial services exposure was slightly negative, we were pleased to see share price appreciation in companies that we consider market share gainers in this environment. Specific examples included U.S. Bancorp (USB), Charles Schwab (SCHW), JP Morgan (JPM) and Goldman Sachs (GS).  U.S. Bancorp and Schwab were positions we had owned in the past that we repurchased in the first quarter during the severe sell-off in financials.

Other stocks which contributed to performance included Corning (GLW), Apple (AAPL), and Transocean (RIG). After disappointing investors through much of 2008, Corning’s stock responded robustly to news of an improving supply chain in the company’s most important end market, LCD televisions.  Apple’s top-line has held up in this tough operating environment, while its profitability continues to be impressive.  We see smart phone demand growing meaningfully even as basic cell phone demand declines for the first time in over a decade.  In energy, Transocean gained traction as oil prices stabilized and benefits  from having long-term contracts in-place for its deepwater assets gained recognition. 

Healthcare names were mixed as the prospects for universal healthcare coverage and lower reimbursement levels for some medicines/procedures in the U.S. increased the level of regulatory uncertainty in this sector.  On the one hand, the Genentech (DNA) acquisition finally closed, and at what we view as an acceptable price.  On the other hand, Gilead Sciences (GILD) announced an acquisition (CV Therapeutics) which the market viewed negatively. We disagree as we see value in the combined company.  At the same time we have taken advantage of negative sentiment in the Healthcare sector during the quarter with two new purchases - Community Health Systems (CYH) and ThermoFisher Scientific (TMO).  Community operates rural hospitals and Thermo designs and distributes research and diagnostic equipment. 

Areas of weakness included one of our banks (Fifth Third-FITB) and several of our insurance/reinsurance companies (Ace-ACE, Allstate-ALL, Hartford-HIG, and Swiss Re-RUKN VX). We were encouraged with fundamentally positive news released by Fifth Third late in the period (the sale of a portion of their Fifth Third Processing Solutions subsidiary), and added to the position at depressed prices. Swiss Re experienced weakness as the credit crisis impacted the value of bonds held on their balance sheet. Hartford also fell on concerns regarding exposure to variable annuity guarantees. We continue to monitor our insurance exposure, and are guardedly optimistic that the programs announced by the U.S. government to support distressed securities could prove beneficial. Stock-specific disappointments occurred with Conoco Phillips (COP) and Eli Lilly (LLY).  Conoco temporarily suspended its share repurchase program due to cash flow pressures from lower oil/gas prices and Eli Lilly received negative news regarding a Phase II compound in schizophrenia.

During the period we purchased select fixed-income securities. In many cases, we were already familiar with the issuers of the debt from our fundamental research on the equity. Given the extreme dislocation in the equity and fixed-income markets, we were presented with what we believe to be an opportunity to generate equity-like returns, while providing better capital protection to our shareholders. We do not anticipate that bonds will be a significant weight in the portfolio on an ongoing basis, and in fact some of these bonds have already been sold after hitting our internal price targets.

We do not have a formal or uniform macroeconomic view.  However, we do take into account relevant macroeconomic issues when evaluating stocks. At the present time, we expect the global economy to be under stress for an extended period and near-term corporate earnings will reflect this. We maintain a diversified portfolio and therefore hold some issues where we believe the negative view of the economy or the stock is largely priced in. Our portfolio reflects a mix of steady businesses along with some issues that are deeply depressed. We have tried to be careful in our stock selection within financial services and last year effectively reduced exposure to what we thought would be the most vulnerable companies. Recent additions to the portfolio have considerable potential, we believe, and were specifically chosen for this prospect as well as our view of the reliability of their assets to generate satisfactory returns in a more normal operating environment.

 

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

First Quarter 2009

In a continuation of the extremes seen in 2008, the first quarter of 2009 was marked by a mixture of intense skepticism along with hopes for a recovery.  The quarter began with high expectations placed on the new democratic administration with its pledges to stimulate growth through infrastructure spending, as well as on the Federal Reserve which has been employing both conventional and unconventional policies to address liquidity issues and the financial crisis.  However, investor optimism has been repeatedly interrupted by poor visibility, dour job numbers, and political missteps.  Pessimism during the quarter resulted in various indices, including the Dow Jones Industrial Average, reaching 12-year lows.

Investors have been tempted to discontinue investing in this volatile environment, willing to ignore the potential opportunity associated with future participation in economic growth and progress. The month of March highlighted this, as we saw many depressed financial stocks more than double within a short time period, and most major market indices appreciate by over 20% from their lows. Globally, government initiatives and determination to address long-term structural issues in an orderly manner have been supportive of markets.  We are hopeful that positive market movements reflect early signs of stabilization in the financial industry and have a positive impact on the real global economy. However, sustainable market improvement from here will likely require the support of business fundamentals and positive earnings development.  Ultimately, we believe that it is the company fundamentals and the realization of intrinsic value that counts. This remains our primary focus.

The Thornburg International Value Fund (A shares without sales charge) returned negative 10.61% during 1Q 2009, versus negative 13.94% for MSCI EAFE Index and negative 10.62% for MSCI ACWI ex-US Index.  Interestingly, the disparity between the two indices was north of 300 basis points (bps), as the emerging markets collectively outperformed the developed markets during the quarter.  In fact, the MSCI Emerging Markets Index was up 1.18% during the quarter in USD terms, ahead of the EAFE by 15 percentage points. To put this performance into context, the four MSCI “BRIC” countries (Brazil, Russia, India and China) returned +12.6%, +8.9%, -1.6% and +0.4% respectively, each outperforming the collective benchmarks by a healthy margin. Encouraging data, we think.

The portfolio remained overweight in health care and telecommunication services and underweight in financials and commodity-related sectors. Our heavier exposure to consistent earners compared with the more cyclically oriented basic value stocks served the portfolio well during January and February, but caused a lag during the last two weeks of March when financials and energy companies rallied strongly.  We have been selectively adding to higher quality financial services names and trimming health care names which have become outsized positions by holding up relatively well and are relatively closer to our established price targets. Market volatility gave us plenty of opportunities to identify solid businesses but depressed stocks during the quarter in both existing and new names.

During the quarter, top contributors included Baidu (BIDU, China’s leading internet search engine), Teva (TEVA, the leading global generic drug manufacturer), China Life (2628 HK, China’s largest life insurance provider), Standard Chartered (STAN LN, a U.K. domiciled bank with a primary focus on emerging economies), and Carnival (CCL LN, a leading cruise line operator).  As evidenced, the positive contributors varied by industry and basket (collectively representing basic value, consistent earner, and emerging franchise names).  This reflects our philosophy of focusing on individual stock selection, and managing risk through diversification.

Detractors for the quarter included AXA (CS FP, a multi-line insurance firm based in France), Swiss Re (RUKN VX, a global re-insurance company based in Switzerland), Rogers Communications (RCI/B CN, a Canadian communication services and cable TV provider), Nokia (NOK1V FH, the Finnish based global handset manufacturer), and Groupe Danone (BN FP, French consumer staples company).

New purchases during the quarter included the aforementioned Baidu, Fresenius (FME GR, a leading dialysis provider), British American Tobacco (BATS LN), and Covidien (COV, a global healthcare product manufacturer and distributor). We sold Swiss Re due to concerns with visibility, mainly surrounding the value of its assets on the balance sheet.

In this challenging environment, we are executing the same investment philosophy and research process that has allowed the portfolio to deliver a historically solid long-term track record (see table below – data as of 3/31/09). We recognize that we are still faced with many uncertainties, including those that might be unprecedented. A dual focus on balancing risk and upside participation remains a key priority. 

International Value Fund Performance A Shares as of March 31, 2009
	1 yr	3 yrs	5 yrs	10 yrs
Without Sales Charge	-41.82%	-8.81%	1.93%	7.17%
With Sales Charge	-44.44%	-10.19%	0.99%	6.67%
MSCI ACWI ex-US	-46.18%	-12.75%	-0.24%	0.89%
MSCI EAFE Index	-46.51%	-14.47%	-2.18%	-0.84%
Periods over one year are annualized. Inception of the A shares is 5/28/98. The total annual fund operating expenses for A shares are 1.36%.
Percentile Rank in Morningstar Foreign Large Blend Category A Shares as of March 31, 2009
	1 yr	3 yrs	5 yrs	10 yrs
% Rank	13	3	2	1
# of Funds	789	584	455	241
Past performance does not guarantee future results. Morningstar percentile rankings are based on total returns before sales charge.

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 Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 actively traded “blue chip” stocks, primarily industrials, but includes financials and other service-oriented companies. The components, which change from time to time, represent between 15% and 20% of the market value of NYSE stocks.

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 January 2009 the MSCI Emerging Markets Index consisted of the following 23 emerging market country indices: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.

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 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 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.

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

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

First Quarter 2009

The markets regained some optimism in March, cheering the announcement of the Public-Private Investment Partnership (PPIP) by the Treasury Department, designed to take “legacy” toxic assets off the balance sheets of our financial institutions. Further fueling the markets were an easing of mark-to-market accounting rules and preliminary indications that the pace of economic deterioration could be slowing.

Despite a strong March, the markets finished the first quarter in negative territory. The S&P 500 Index lost 11.01% and the Russell 3000 Growth Index, the benchmark for the Core Growth Fund, returned negative 4.54%. The Fund itself returned negative 1.54%. While disappointing on an absolute basis, we are pleased with the fact that we outperformed the benchmark.

As bottom-up investors, we found encouragement from signs that the market is beginning to focus again on company-specific fundamentals, something that was not happening in the indiscriminate sell-off of 2008. Hansen’s Beverage Company (HANS) is an example of that. The company generates 40% gross margins and significant amounts of cash – what we consider to be a very solid business. While posting anemic returns last year, investors during the quarter began to appreciate Hansen’s existing business as well as new distribution arrangements both domestically and abroad. The stock was one of our top contributors to performance.

We also observed that, unlike in 2008, the market began differentiating between firms that had manageable debt loads and those that may struggle to meet their obligations. Many of those firms with material debt loads were pushed to very low valuation levels in 2008.  Two of our top detractors to performance last year – Energy Development Corporation (PNOC) and ON Semiconductor (ONNN) – were punished based on the debt they carry, yet both rebounded in the first quarter. Another more recent addition, SBA Communications (SBAC), also falls in that camp. The independent telecommunication tower operator utilizes leverage, and we purchased the stock at the height of the credit crisis when leveraged companies were especially out-of-favor. SBA rose smartly during the quarter. 

We do not as a policy shy away from companies with leverage, provided our analysis leads us to believe that the debt loads are manageable, and that any borrowings are being put to productive use. In the case of SBA, we felt that the stable, consistent business of the firm mitigated those risks.

Notable during the quarter was the contribution to performance from our financial service stocks. Banks were front-and-center during the quarter, and despite a rally in March, financial stocks in the benchmark were off in excess of 17%. Our financials in aggregate posted positive performance, based in no small part on the results of Goldman Sachs (GS) and Charles Schwab (SCHW). Goldman Sachs faces challenges in replacing the outsized profits generated by proprietary trading, however we do believe that the company will retain a dominant position in M&A as well as non-proprietary trading. We have followed Schwab for many years and we believe it is a solid franchise and business.The company continues to attract client assets, and we feel the banking side of Schwab’s business is materially underappreciated. The broad sell-off in financials provided us with the opportunity to purchase the stock during the quarter at what we felt to be an attractive valuation.

Other stocks contributing to performance included Starent (STAR), QUALCOMM (QCOM), Google (GOOG) and Genentech (DNA). In the case of Genentech, the long anticipated acquisition by Roche was completed in March.

Las Vegas Sands (LVS) led our detractors to performance. We actually exited Sands at a higher level in 2008 before repurchasing the stock at a much smaller weight during a capital raise late in the year. Problems persist with casino traffic in Macau and Las Vegas, however there are signs that these issues may be stabilizing. Increased competition for phone and cable subscribers impacted two holdings- Comcast (CMCSK) and AT&T (T). Comcast is struggling to maintain video subscribers while AT&T’s wireline business has declined. Relatively recent addition FLIR Systems (FLIR) declined after the failure to win a defense department contract. Research in Motion (RIMM) fell after our purchase, however, as of the date of this writing, the stock has regained all of those losses after issuing strong results for the fourth quarter along with positive guidance for the first quarter of 2009.

Health care, a particular source of strength in 2008, reversed itself in the first quarter. Both Celgene (CELG) and Gilead Sciences (GILD) saw share price declines as concerns arose over the new administration’s taxation of overseas profits. Other material detractors included Data Domain (DDUP), Entergy (ETR), and Massimo (MASI).

Overall, there are some reasons for guarded optimism. The markets appear to be reacting in a more calculated manner to company-specific news, something it did not do in 2008 when any news was bad news. The IPO market is showing some signs of life. Inventories are being worked down, which could result in higher production. From a technical standpoint, the current pattern “looks” like a recovery.

That being said, we remain cautious about the current environment. While the markets rallied on the announcement of the PPIP, questions remain as to its effectiveness when implemented. Taken in aggregate, economic data continues to be dismal and first quarter earnings could be horrific when compared to the first quarter of 2008. We believe that much of the current bad news is already reflected in equity values. Therefore, guidance moving forward will be critical.

Based on that caution, we are trimming positions when we see strong gains. We are also employing a flexible approach to purchasing new stocks, taking longer to build new positions and attempting to use market volatility to our shareholders’ advantage.

We continue to maintain the same consistent, disciplined approach to investment management.  While our fundamental approach has not changed since the inception of the fund, we are constantly learning new lessons that we incorporate into our process.  We believe in our process and believe it works particularly well when there is greater dispersion between winners and losers in the market. 2008 was indiscriminant in its treatment of stocks as share price losses were broad based. We remain confident in our ability to add value as the market again differentiates between businesses in a rational manner. 

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

May 2009

Thornburg Investment Income Builder paid ordinary quarterly dividends of 54.8¢ per A share in the six-month period ended March 31, 2009, up marginally from 54.7¢ in the comparable six-month period of the prior fiscal year. The Fund’s net asset value decreased by $4.27 per Class A share during the six-month period under review. As of March 31, the net asset value per Class A shares was $12.59. The Fund outperformed its blended benchmark (75% MSCI World Equity Index; 25% Barclays Capital Aggregate U.S. Bond Index) and the S&P 500 Index by 0.86% and 8.38%, respectively, over the six-month period. We consider these to be hollow victories in light of the net asset value decline we experienced.

As has often been the case with Thornburg Investment Income Builder, the best and worst performers in the portfolio during the period were diverse collections of businesses. The negative contributors overwhelmed the positive in number and magnitude: 8 of the portfolio stocks delivered positive returns for the period under review, while 60 showed negative returns.

Consider the largest average sector weightings in Thornburg Investment Income Builder, along with the average price performance of the investments we owned in these sectors during the six-month period under review: Financials (20.9% weighting; negative 38.5% performance), Telecommunications Services (13.5% weighting; negative 14% performance), Energy (10.5% weighting; negative 28.6% performance), Utilities (10.2% weighting; negative 23.5% performance), Consumer Staples (8.6% weighting; negative 17.8% performance), and Consumer Discretionary (7.9% weighting; negative 16.3% performance). We expected our stocks in several of these sectors, especially telecom, utilities, and staples, to give better price resilience in this tough market. Instead, all ten sectors of the MSCI World Index portfolio and all ten sectors of your Income Builder portfolio delivered negative returns over the six-month period.

The portfolio’s top performers included: Chimera Investment Corp. (CIM), a mortgage REIT that we purchased near its 52 week low in November; Cincinnati Financial (CINF), an insurance holding company; Banque Cantonale Vaudoise (BCVN SW), a Swiss bank; Associated Bancorp (ASBC), a Wisconsin bank; and six different bonds issued by the following companies: Deutsche Telekom, Sovereign Bancorp, Vornado Realty Trust, Dominion Resources, Entergy Gulf States, and Enel Finance International.

The Fund’s worst performers were all equities: Swiss Re (RUKN VX), KKR Financial Holdings (KFN), Enel SpA (ENEL IM), Canadian Oil Sands Trust (COS-U CN), Apollo Investment Corporation (AINV), Huntington Bank Preferred Stock (HBAN), Diamond Offshore Drilling (DO), Aristocrat Leisure Ltd. (ALL AU), AXA (CS FP), and Seek Ltd. (SEK AU). Each of these has its own story. We sold shares of Canadian Oil Sands Trust, Aristocrat, and AXA. The European insurers, Swiss Re and AXA, have been subject to investor concerns about the values of financial assets on their balance sheets and the potential for dilution of common equity holders if they must issue additional shares at the current low valuations in order to satisfy ratings agencies or regulators. Huntington Bank, KKR Financial, and Apollo are now trading below their stated book values due to investor concerns about possible future loan losses, and possible equity dilution if they are forced to issue new shares to offset realized losses. Enel, a large Italian electric utility, joins Canadian Oil Sands Trust and Diamond Offshore Drilling as perceived losers if lower oil prices persist through 2010. Aristocrat develops and sells gaming equipment to casinos, a business that turned down significantly over recent quarters. Seek is an Australian-based internet employment clearinghouse and internet education developer. Its business softened along with the resource-heavy Australian economy in late 2008 and early 2009.

Prices of bonds and preferred stocks were already soft in the first three quarters of 2008 due to credit concerns and forced liquidations from leveraged investors. As the forced liquidation of assets of leveraged players, including Lehman Brothers, began last autumn, prices of bonds and hybrid securities experienced additional sharp declines. When bond prices decline, the yields available to buyers of the lower-priced bonds increase. Since we like higher yields, we viewed the market dislocation caused by the bond portfolio liquidations of others as a buying opportunity for Thornburg Investment Income Builder. The chart below shows that interest-bearing investments as a percentage of the Fund’s portfolio increased sharply over the last year, from 16% at March 31, 2008, to 45% at March 31, 2009. A large portion of this increase happened during the six-month period ended March 31.

As of March 31, 2009, the portfolio included more than 150 bonds and hybrid securities, with an average cost just below 75% of the maturity value of these bonds. In general, secondary market prices of these bonds declined over the six-month period, so the average market price of these bonds on March 31 was slightly below 63% of maturity value. We believe most of these bonds will recover a substantial portion of their value over time, while paying us interesting income yields in the interim. Why? (1) Corporate borrowers are finding it attractive to buy back their own debt at discounted prices in the secondary market, even if they have to issue new equity to do so; (2) Individual and institutional investors are in the early stages of allocating additional investment dollars to bonds. For those bonds with the highest credit ratings, prices have already appreciated.

At March 31, 2009, domestic stocks, including preferred stocks, comprise around 26% of the portfolio; foreign stocks around 31%, and interest-bearing investments 43%. We cannot predict how this will evolve over the coming months, but we expect the interest-bearing proportion of the portfolio to remain high as long as bond yields remain competitive with expected equity returns.

In recent years, the dividend increases paid by Income Builder have been powered almost entirely by dividend increases from our equity holdings. There were 58 stocks in the Income Builder portfolio on September 30, 2008. In the period under review, 38 companies in the portfolio increased their per-share stock dividends, 17 decreased their dividends, and 3 held dividends constant. We sold 12 of the 17 stocks that cut dividends, and we are hopeful that the smaller remaining portfolio of equities will continue to pay attractive, growing dividends. You may be interested to know that the average per share earnings of companies whose stocks we own increased by around 1% in 2008. Recognizing that conditions can change, we expect another single-digit percentage increase in average earnings this year. We also expect a higher percentage of the companies we own to hold their dividends constant during 2009 in comparison to prior years. We believe that the attractively yielding bonds we have acquired in recent months should keep our quarterly dividends at interesting levels.

For almost two years, an overwhelming majority of new investor dollars invested in mutual funds have flowed into money market funds . . . more than $1 trillion. Yields on taxable and tax-exempt money funds have dropped below 3/10 of one percent, and it is only a matter of time before a very large pool of investor dollars will be looking for better returns elsewhere, but in sensible investment programs. We are optimistic that the types of income-producing investments owned by Thornburg Investment Income Builder will experience renewed popularity among investors as their intrinsic values are recognized.

Short-term stock price fluctuations notwithstanding, we are generally encouraged by the progress, and the dividend-paying capacities, of the businesses owned in the portfolio. We expect price appreciation to accompany income production from the bond portion of the portfolio.

 

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.

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

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 46 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.

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 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 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.

 

Global Opps.

First Quarter 2009

After reporting positive absolute and relative returns in 2006 and 2007, Fund performance has been unsatisfactory for the past year or so.  In the early months of 2009 we saw sharp declines in January and February, then steady appreciation beginning in March.  Nonetheless for the first quarter of 2009 the Thornburg Global Opportunities Fund declined 14.32% (A shares without sales charge), compared with a decline of 10.70% for the MSCI AC World Index.  You can find other historic return data elsewhere on our web site, or by using the symbol “THOAX” (for the A shares) with various data services.

Early 2009 showed a continuation of the 2008 market themes, during which macroeconomic concerns – trends in GDP, inflation, etc. – dominated the pricing of equities and most other asset classes.  As bottom-up investors we have been challenged during this period.  However we are encouraged by recent signs that the market is returning to a more balanced consideration of both macro and micro factors, including the merits of individual businesses and their valuations.  We continue working to improve the Fund results and are perhaps seeing early signs of progress on this front.  For example, performance has been much better on both an absolute and relative basis from early March continuing into late April as this is written.

Detractors from performance in the quarter were a diverse group of companies.  Some of these reported disappointing fundamental developments although many others did not.  Bachem Holdings (BANB.SW), Comcast (CMCSK), and Swiss Re (RUKN VX) were among the decliners.  Bachem sold off with the pharmaceutical sector but has subsequently recovered, while Swiss Re experienced weakness as the credit crisis impacted the price of assets on its balance sheet.  Additionally, stock-specific shortfalls occurred with Eclipsys Corp. (ECLP) and Precision Drilling Trust (PDS).  We continue to monitor these investments closely.

Positive contributors to the quarter included long-term holding Teva Pharmaceutical Industries (TEVA) and the preferred shares of U.S. regional bank Fifth Third Bancorp (FITB), which we purchased late in 2008.  Teva continues to be a steady grower with low gearing to the overall economy.  Regarding Fifth Third, we were encouraged with the news released late in the period (the sale of a portion of their Fifth Third Processing Solutions subsidiary), and added to the position at depressed prices.  Telecom has also been an area of strength in 2009, including appreciation in shares of Crown Castle International (CCI) and Millicom Cellular (MICC).  Both companies have recently reported respectable profit growth despite the economic headwinds.  In addition, Crown Castle was able to strengthen its balance sheet through a refinancing transaction in January.

Google (GOOG), Walgreen Company (WAG), and Redecard SA (RDCD3 BZ) in Brazil were among our new purchases during the quarter.  We also continued to buy select fixed-income securities which we believe to offer strong absolute returns.  In all of these cases we were already familiar with the issuers of the debt based on our fundamental equity research.  Our bond investments have included Level (3) Communications, Swiss Re, and Vornado Realty.  We do not anticipate that bonds will be a large weight in the portfolio on an ongoing basis, and in fact we sold some bonds after recent price appreciation.

Investors have lately been encouraged by signs of thawing in the credit markets and other indications that the severity of the recession may be easing.  However, numerous challenges remain, not the least being stretched household balance sheets in the United States and a bleak employment market in many important economies.  In this challenging environment, we are executing the same investment philosophy and research process that has produced the long-term track record of Thornburg Investment Management.

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 48 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

First Quarter 2009

After a bleak start to the year, global equity markets rallied strongly in March. The MSCI EAFE Index rose more than six percent in that month alone, while the broader MSCI AC World ex-US Index posted even stronger gains on the back of strength in emerging markets. The rally in March was not enough to offset a dreadful start to the year however, and at quarter-end the Thornburg International Growth Fund had lost 8.08%. While disappointing on an absolute basis, the Fund finished ahead of its benchmark, the MSCI AC World ex-US Growth Index, which returned a negative 9.38%.

Our investment approach is rooted in detailed fundamental analysis and we are not afraid to search in unconventional places for promising international growth companies trading at what we believe are discounts to their long-term values. Top contributors to performance in the first quarter were a Philippines-based utility (Energy Development Corp. – EDC PM), a Chinese internet company (Baidu – BIDU) and a Brazilian futures exchange (BM&F Bovespa – BVMF3 BZ).

Energy Development Corporation (PNOC) was a top detractor in 2008 as any company with debt was punished indiscriminately in the face the credit crunch. PNOC’s yen-denominated borrowings created additional headwinds as the Phillipine peso declined in value against the Japanese currency. Our ongoing analysis led us to remain invested as we believed PNOC’s debt load to be manageable. The stock rallied strongly when an increased appetite for risk appeared in the first quarter.

Baidu, the dominant Chinese search engine provider, was added to the Fund early in the new year. The stock had traded down late in 2008 on concerns that the removal of a number of questionable sponsor links and a general slowdown in the Chinese economy could weigh on earnings. We believed the market overreacted and were rewarded when performance exceeded the market’s expectations.

BM&F Bovespa is the largest financial exchange in Latin America. The stock fell in 2008 as commodity price declines weighed on the emerging economies of Latin America and market multiples compressed. We remained optimistic about BM&F Bovespa’s long term positioning and its strategic relationship with the Chicago Mercantile Exchange. The stock rallied in the first quarter.

Reflective of our bottom-up, flexible mandate, other contributions to performance came from a Pan-European data center operator (Telecity – TCY LN), an English education-service provider in China (New Oriental Education and Technology – EDU), an integrated Brazilian oil company (Petrobras – PBR), a Canadian software company (Open Text – OTEX), and an Israeli satellite-broadcast enterprise (RRsat – RRST).

Detractors to performance also represented a range of industries and geographies. Nintendo (7974 JP) was the top detractor to performance. Despite a resilient underlying game business, a stronger yen reduced the value of foreign revenues when converted to the Japanese currency. Swiss Re (RUKN VX) was sold as the credit meltdown impacted the value of bonds held on its balance sheet.  EFG International (EFGN SW) was also sold after announcing weak results due to customers moving away from some of its core products. China Security & Surveillance (CSR) fell on company-specific liquidity concerns. Lower energy prices impacted European utilities Cez (CEZ CP) and Verbund (VER AV). Other detractors included Porsche (POR3 GR), EFG Eurobank (EUROB GA), Zee Entertainment (Z IN) and Icon PLC (ICLR).

At the time of this writing, the markets have added to March’s rally. Equity investors cheered the announcement of the Public-Private Investment Partnership (PPIP) by the U.S. Treasury Department. First quarter earnings results could be dismal, but we believe that much of the bad news is already priced into equities. If so, forward guidance will be critical.

We are optimistic that the market is beginning to differentiate between winners and losers, which should bode well for our bottom-up, fundamentally-driven strategy. Like its domestic sibling, the Thornburg International Growth fund diversifies its assets among different growth baskets – we categorize stocks as Growth Industry Leaders (market leaders in growing industries), Consistent Growers (those with steady earnings or cash flow growth) and Emerging Growth companies (characterized by promising companies in developing industries). A year ago, we wrote that emerging growth companies were a particular source of pain as the markets demanded visible earnings then-and-there. In the first quarter of 2009 the reverse was true as our top contributors to performance were disproportionately weighted towards this same basket.

We remain cautiously optimistic; as questions remain as to the effectiveness of the PPIP and other global efforts address the “legacy” toxic assets on the balance sheets of global financial institutions. The credit crisis may be far from over, and global economies may continue to struggle. However, market turmoil is giving us the opportunity to buy quality international businesses with solid growth profiles at good valuations. We believe that our approach will reward patient investors over the long-term. 

      

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-US Index (“MSCI ACWI ex-US”) is a market capitalization weighted index composed of approximately 2000 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 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-U.S. Growth Index (MSCI AC World ex-U.S. Growth 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.

Muni. Bonds

First Quarter 2009

Base level AAA general obligation municipal bond yield levels declined in the first quarter of 2009 an average of 37 basis points.  The decline in yields was more pronounced in shorter maturities versus longer maturities.  On average yields decreased 44 basis points for maturities 10 years and shorter, while yields decreased on average 37 basis points for longer maturities. The yield curve remained steep; the differential in yield between an AAA general obligation bond with 30 years to maturity and an AAA general obligation bond with one year to maturity was 4.36% at the beginning of the quarter and ended the quarter at 4.33%.  Today’s market reflects the largest differential in term structure that most market participants can remember.  Thought of another way, the cost of risk aversion (shorter maturity securities are perceived by the market to be less risky) has never been higher. 

Credit quality spreads (the incremental yield an investor is paid to entice them to buy securities of lower credit quality) posted mixed results.  Credit quality spreads as measured by the difference in yield between an AAA and BBB general obligation bond increased an average of 65 basis points for maturities 15 years and shorter and decreased an average of 31 basis points for maturities longer than 15 years.  An investor focusing on a ten-year maturity was able to pickup 3.50% more yield by buying a BBB general obligation bond vs. an AAA general obligation bond at the end of the quarter.  That spread was 3.00% at the beginning of the quarter.  Two years ago that differential was a paltry 62 basis points.  Credit quality spreads have increased as market participants have become more concerned about underlying credit conditions.  Two years ago markets participants probably paid too little attention to underlying credit conditions and now are demanding a risk premium that is in excess of what current conditions call for.

Most states are currently producing or revising budgets for the 2009-10 fiscal year that begins July 1st. Standard and Poor’s estimates that collective budget gaps (before corrective measures) faced by the 50 states exceed $100 billion. This is clearly an enormous challenge for state lawmakers. The projected deficits vary widely from state to state as do proposed solutions. A few states are benefiting from strong regional economies and rising tax revenues – North Dakota and Iowa stand out. However, most states are working on solutions that raise taxes, make expenditure cuts, draw on previously set aside reserves, and use funds from the $787 billion American Recovery and Reinvestment Act. We expect that the vast majority of municipalities will get through this recession with their credit quality intact and are keeping a watchful eye out for the few that don’t.

The fear that had gripped the market in the fourth quarter of 2008 seems to have subsided.  Market liquidity has improved as retail investor demand has dominated the market place.  The latest California general obligation deal to come to market serves as an example.  The deal was originally scheduled to come to market at a size of $4.5 billion.  Retail demand was so strong that the deal was upsized to in excess of $6 billion to fill it.

The news on municipal bond insurers continues to be negative.  AMBAC (Ambac Assurance Corporation) has been downgraded to junk status. Even the newest entrant to the market place, Berkshire Hathaway, lost its AAA rating by Moodys Investor Services.  Thankfully, the credit quality of the underlying municipal bonds has generally proved to be more resilient than that of the bond insurers.

Many of the best performing sectors of the last quarter did an about-face and were the worst performing sectors of the first quarter of 2009.  Refunded bonds backed by US Government Treasuries were one the best performing sectors of the market in the fourth quarter of 2008 but in the first quarter of 2009 they were the worst performing sector of the municipal market.  Other market segments such as insured bonds and revenue bonds were laggards in the fourth quarter of 2008 but excelled in the first three months of 2009.

All the Thornburg municipal bond strategies had a very good first quarter of 2009 relative to their benchmarks and Lipper categories.  The main positive drivers of this performance appear to be sector exposure and security selection.  The main negative drivers of performance relate to our shorter durations and yield curve exposure.  Credit quality spreads are very wide and represent a great value in the market.  We have taken this opportunity to selectively lower the credit quality of the funds to take advantage of this opportunity, all the while remaining in the investment grade portion of the market.  We believe, given the current levels of credit spreads, lower investment grade credits represent an unnoticed and under appreciated value in the municipal market. 

Over the years, our practice of laddering a diversified portfolio of short- and intermediate- maturity investment grade municipal bonds has helped this program perform consistently well in varying interest rate environments. The current environment presents unique challenges and significant opportunities for long-term investors. Thank you for investing with Thornburg Investment Management.

We started a new municipal bond fund in April 2009, the Thornburg Strategic Municipal Bond Fund.  This fund is quite different from our other municipal bond funds in that it will buy lower quality securities (50% of the fund can be invested in sub investment grade securities) and will invest further out the yield curve.  It will also have a more flexible mandate than our laddered bond funds. We believe it is an opportune time to start such a fund because, as mentioned earlier, municipal bond investor’s are being well compensated to increase their credit risk and term structure risk (extending maturities).

 

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

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.

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.

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.

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.

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

The laddering strategy does not assure or guarantee better performance and cannot eliminate the risk of investment losses.

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.

Refunded Bond – Bonds that have their principle cash amount already held aside by the original issuer of the debt. A subset of the municipal and corporate bond classes, the funds required to pay off refunded bonds are held in escrow until the maturity date, usually by purchasing Treasury or agency paper.

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.

Revenue Bond – A municipal bond supported by the revenue from a specific project, such as a toll bridge, highway, or local stadium.

Corp. and Gov. Bonds

First Quarter 2009

The year thus far has treated both the Thornburg Limited Term U.S. Government Fund and the Thornburg Limited Term Income Fund relatively well. The A share class of the Thornburg Limited Term U.S. Government Fund (LTUSX) is up 1.07% (without sales charge) through 4/17/09 while the Barclays Capital Intermediate Government Index is down 0.60%. The A share class of the Thornburg Limited Term Income Fund (THIFX) is up 2.77% (without sales charge) with the Barclays Capital Intermediate Government/Credit Index up 0.13% through 4/17/09. Over the same period, the broader Barclays Capital Aggregate Bond Index is up 0.38%.

Bond market sages often talk about risky bonds and “riskless” bonds. Risky bonds (and they are risky, certainly) include things like high yield and more recently, non-agency mortgages. This category also includes very high quality bonds, which have some credit or prepayment risk, including investment grade corporate bonds, municipals, and agency mortgage bonds. “Riskless” bonds are code for government bonds, and here in the U.S., U.S. Treasuries. What that terminology fails to point out is that Treasuries can be quite volatile, and though they are guaranteed by the U.S. government to pay off at par at maturity, investors’ time horizons often differ from that stated maturity, and movements in interest rates can be a source of significant gain and loss.  In the past 30 years, for example, 10-year Treasury rates have broadly moved in one direction: down. Today we stand at a 2.90% rate on 10-year Treasuries, which is higher than the low (2.05% or so at the end of 2008) but much lower than the 80s (>10% in 1982) or the 90s (~7%). In addition, it’s tough for Treasury rates to go through zero on a nominal basis, let alone in a sustained way on a real basis, so the size of possible gains from “long” duration or continued downward moves in Treasury yields is very low.

So what is “riskless”? I would argue nothing, in the same way that not making a decision is in itself a decision. Even short-term Treasuries, which seem “riskless” and as such right now are trading close to zero, have tremendous risk. There is the opportunity cost of not being in something that actually makes money. There is the risk of getting run over by inflation over some period of time. There is a big risk that you won’t get to you or your client’s financial goals with a zero percent return.

That brings us to so-called “risky” bonds. It is a part of the market that in 2008 not only had some of the worst absolute returns available to investments broadly, but certainly had some of the worst returns relative to the history of the asset class. While that does not, alone, make “risky” bonds good now, I’d rather buy them at lower prices than higher ones. The best performing broad asset class I know of year-to-date in 2009 is that of speculative grade corporate bonds: mostly they are up because performance was so bad in 2008. But other types of bonds, bonds in which I have much more continuing confidence, were down quite a bit and have performed well thus far in 2009. I think these bonds have the scope for continued capital gains and certainly provide attractive income. Within the context of the Limited Term U.S. Government Fund, we switched quite aggressively from Treasuries to Agency-Backed Mortgages in the beginning of the year. That has benefited the fund’s performance as the “risky” bond, in this case agency mortgages, have outperformed “riskless” Treasuries. In the Limited Term Income Fund, we have moved 15% of the fund out of more highly rated bonds into BBB rated securities. While I feel the bonds that we have bought actually have less credit risk than the ones we sold or that matured (we bought quite a few utility bonds, a sector I continue to like as a bond investor), the increase in spread exposure I think will benefit the Fund and help shield it from a backup in Treasury prices/an increase in Treasury yields.

Well, if I like “risky” bonds, why not move to equities wholesale and forget about the intermediate step? First, because non-Treasury fixed-income performance was bad enough in 2008 due to extreme rates of deleveraging that it could form the basis of longer-term value for the asset class. In other words, given that bonds generally either mature at par or default, and assuming defaults will be much worse than history but not apocalyptic, the value recovery that could take place is very interesting relative to any other asset class. Second, and more importantly, is the role that fixed income can play in your portfolio now, that maybe it could not have previously. If you ask investors what their long-term annualized return target is, many will respond with an answer that is in the mid-to-high single digits. Disregarding whether or not we are in a new, low return environment (a worthwhile debate, but we’ll save it for another time), if you were looking at fixed income as part of your portfolio in 2006, you thought of it as an “anchor” and not necessarily in a good way. In order to achieve mid-to-high single digit returns, you had to believe in “equities for the long run.” I have a majority of my personal assets in equities, but frankly the attractiveness of high quality fixed income merits giving your asset allocation a closer look. Though deemed by the market as “risky,” investments in such assets as high-quality corporates can produce the mid-to-high single digits returns many strive for with a far more muted volatility outlook.

In short: even after an interesting first quarter or so, there remains plenty to write home (or to you) about, and we’re excited about the opportunities which some of these asset classes can provide. I’m certainly not tremendously optimistic around the economy, nor do I expect a straight-line recovery in assets, but I believe that it’s a good time to be a bond investor, as long as you have an inclusive view of “risk.”

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

 

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. 

Barclays Capital Intermediate Government Bond Index  An unmanaged, market-weighted index generally representative of all public obligations of the U.S. Government, its agencies and instrumentalities having maturities of up to ten years.

The Barclays Capital Intermediate Government/Credit Bond Index is an unmanaged, market-weighted index generally representative of intermediate government and investment grade corporate debt securities having maturities of up to ten years.

The Barclays Aggregate Bond Index is composed of approximately 6,000 publicly traded bonds including US 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.

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.

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

First Quarter 2009

Thus far 2009 has been a fairly good year for the Thornburg Strategic Income Fund. The Fund is up 6.34% for the A share class (without sales charge) through 4/17/09 which compares well to the Barclays Capital U.S. Universal Bond Index which is up 1.01% and the blended benchmark of 80% Barclays Capital U.S. Aggregate Bond Index and 20% MSCI World Index which is down 0.18%. Broadly, many of the themes in 2008 were somewhat reversed for the first part of 2009 with the exception of equity and particularly financial equity underperformance. High Yield bonds are up significantly this year so far, and our allocation to those securities along with our allocation to BBB corporates has been additive. We did not participate in the dollar weakness trade to any great degree and have therefore not been whipsawed by dollar strength. Some of these moves may be due for a reversal, and we are actively reviewing the portfolio daily, but the continued income generation of many of these securities remains attractive.

I have been asked a few times if there is a “lesson” to be learned out of the past 6-12 months of market movement, and clearly there are several. I believe the most important, particularly for bond investors, is to stay very close to the idea that anything can happen, and that the market’s focus on one central outcome to the exclusion of all others is a sure path to underperformance and bad outcomes over the long term.

Markets, collectively, will never learn this lesson; it seems that people are not wired to think this way. As an example, I was watching a basketball game recently and one of the series of seemingly ubiquitous “I’m an IBMer” advertisements came on. In this particular spot, various putatively smart people were extolling the virtues of math and how math can “build a smarter planet.” One of the things that math can do specifically, according to the ad, was “help better predict financial markets” and “fix the economy.” Later the ad went on to talk about jet engineering, stopping pandemics and helping you get to work on time.

Though I don’t know a whole lot about pandemics or jets, and my commute is fairly straightforward, I’m pretty certain that the idea that math alone can fix the economy is part of the deterministic worldview that makes markets so volatile. If it were just a question of better math, then this job would be a lot easier. In addition, the folks that succeeded the most would be a collection of science types known collectively in the industry as “quants.” I am not the first to point out that quants and a blind faith in the power of math pushed us into poor decisions over the course of the past 5 years, culminating in a resounding crunch in the past 12 months.

Though math is of course necessary as a part of the toolbox for financial analysis, the math that is required is actually quite rudimentary. Beware any investment product that requires much above what you learned in high school. It’s not that you can’t more accurately describe the world with better math, or physics, or whatever, it’s just that the world, or the financial world anyway, moves too reactively to make precise descriptions that valuable.

As another example, I was recently looking at a hybrid security that was issued in the past couple of years, and the coupon was 6.189%. On issuance, the precision of the coupon was required in a world where models of return dominated and fixed income managers were fighting for each basis point. Now the bond trades in a market that is not bounded by thousandths of a percent. Instead, the market is bid at $40, offered at $45 on a $100 par value. The original creators, structurers, sellers, and buyers of the bond were looking at the 6.189 precision, but the accuracy of a market view that showed the bond trading down 60% was lost in the math.

So what, you say? As I’ve said before, bonds are often a security where the downside case, while remote, is devastating to the portfolio relative to what the maximum projected upside could be. This is why investing in bonds is often called a “negative art” and practitioners are typically gloomy folks. After a devastating 2008, however, we’re at a place, which is unusual in bonds: there is significant upside. Still, after some better days and months thus far in the New Year, the folks who were dependent on models that have broken entirely are out of the market, or trying to get out. So the return for risk that was paltry at best a few years ago is now impressive. We continue to look for opportunities in the low end of the investment grade universe and the high end of the high yield universe in corporate bonds. Non-agency mortgages, too, represent some opportunity but the uncertainty of government action makes this market a crapshoot so we haven’t moved our positions much and that remains a small portion of the fund. Going forward I would expect credit markets to continue to normalize, albeit slowly, in the face of continued ugly economic news. I’m not an optimist in this environment, but even a pessimist, or perhaps more properly a realist, recognizes that value in fixed income is relatively and absolutely very interesting. We continue to look for the big picture events, which can kill returns, including inflation, broader financial sector problems, and a significant uptick in sovereign defaults: things which wouldn’t fit too well in a model.

All in, though, I believe these are investments you can make with a better chance at upside than downside. Can I precisely quantify that upside for the year? Sure. Ask me on December 31st.

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. 

The Barclays Aggregate Bond Index is composed of approximately 6,000 publicly traded bonds including US 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 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. The index is calculated with net dividends reinvested, in U.S. dollars.

The Barclays 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. 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.

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.