Value

First Quarter 2013

Performance for the Thornburg Value Fund for the first quarter of 2013 was favorable. For the three-month period ended March 31, 2013, the fund returned 10.98% (for the A shares, without the inclusion of the sales charge) versus 10.61% for the benchmark S&P 500 Index.

On Thursday, March 28, the last business day of the quarter and the end of a trading week cut short by the Good Friday holiday, the S&P 500 Index closed at a new record high. The end of the quarter, coincidentally, also marked the four-year anniversary of the current bull market. Using the term “bull” might seem a bit generous to some, but what does seem clear is that markets are emerging from the risk-on/risk-off behavior that governed for many quarters into a pattern more reflective of the middle stages of a steady U.S. economic recovery, though events such as the recent banking crisis in Cyprus and periodically weak U.S. economic data still give equity markets intermittent fits.

Longtime investors may recall that when the Thornburg Value Fund was launched in 1995, we distinguished ourselves from deep-discount value investment strategies by emphasizing that we sought promising companies — that is, sound businesses with bright growth prospects — at a discount to our calculation of their intrinsic values. The objective was to build a portfolio with some growth characteristics that would perform well in both up and down markets; with the U.S. equity markets having staged a broad, strong rally this quarter, the Value Fund has achieved that objective via modest market outperformance.

For the quarter, the strategy’s exposure to the health care sector proved the strongest positive contributor to returns. Our exposure to the financial and consumer discretionary sectors also contributed to returns. And over the course of the quarter, we uncovered several interesting purchase ideas in the consumer staples sector, which had been more difficult to find over the last few years.

On a stock-by-stock-basis, those that contributed most to performance this quarter were Gilead Sciences, Community Health Systems, ThermoFisher Scientific and Softbank.

Biopharmaceutical firm Gilead Sciences focuses primarily on antivirals, cardiovascular conditions, and respiratory diseases. Gilead has grown rapidly since its 1987 founding, with results driven in recent years by the company’s strong HIV treatment franchise. The stock performed well during the quarter, with stronger sales and earnings-per-share growth than expected. Community Health Systems, one of the largest operators of for-profit hospitals in the U.S., saw its fourth-quarter revenues grow at the fastest pace since at least 2010; its management remains the most bullish of those of the major hospital management teams about the likely earnings impact of the Affordable Care Act. The stock has appreciated 190% from our initial purchase point but still appears inexpensive versus 2014 and 2015 projections, though we have taken some profits. ThermoFisher Scientific manufactures and distributes lab equipment, analytical instruments, software, and services used in healthcare and life sciences research. The company reported a strong fourth quarter, driven by organic growth. Softbank, a Japanese telecommunications and internet corporation with operations in broadband, telecommunications, e-commerce, internet, broadmedia, technology services, finance, media and marketing, and other businesses, recently reported operating income up 23%, with year-over-year growth from all segments.

Among the stocks that detracted from performance for the quarter were Apple, Liquidity Services, Bankers Petroleum, and Capital One Financial.

Apple underperformed as increasing competition from Samsung in the handset market took a toll, with many analysts expecting this pressure to cause compression in Apple’s profit margins. Liquidity Services provides an online marketplace for businesses and governments to dispose of surplus assets and was purchased initially during the fourth quarter, but the company’s December report was disappointing, and fiscal year 2013 guidance was weak. Liquidity Services’ December 2012 earnings reports proved disappointing, and the company’s earnings guidance was weak. Bankers Petroleum detracted from performance as it reported lower year-over-year reserves and announced the retention of a new CEO. The company has, however, made meaningful improvements to production growth and cash flow generation in recent quarters. Capital One Financial Corp., a U.S.-based bank holding company specializing in credit cards, home loans, auto loans, and banking products, was purchased early and sold late in the quarter due to increasing concerns about competition.

Notable Purchases and Sales During the Period

Sales during the quarter included Conoco Philips, Harman International, and Charles Schwab. Conoco Phillips did not make the threshold to remain in a focused portfolio and was sold to make room for other investment ideas. We sold Harman when our initial investment thesis proved to be incorrect; company results were more dependent upon auto production than we had originally perceived. Charles Schwab appreciated materially and reached our price target.

Purchases included Seattle Genetics, Zoetis, and Walgreen Company. Seattle Genetics is the leader in the technology behind antibody drug conjugates (ADCs), which are a novel approach to cancer treatment. Zoetis is engaged in the discovery, development, manufacture, and commercialization of animal health medicines and vaccines. Another new purchase, Walgreen Company, is the largest retail pharmacy chain in the United States, with over 6,000 locations throughout the country. The company has increased its store count over the last decade, focusing on the “best corners” in the country; these stores require an initial investment to establish, but tend to reach higher levels of profitability as they mature.

Conclusion

Our objective is to provide investors with attractive returns during both rallies and downdrafts. With a focus on seeking promising companies trading at a discount to intrinsic value, we will continue to work hard to achieve that goal in quarters and years to come. Thank you for investing alongside us.

 

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.

Any securities, countries, and sectors mentioned are for informational purposes only. 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 2013

For the first quarter of 2013, the Thornburg International Value Fund returned 2.44% (for the A shares without sales charge), versus 5.13% for the MSCI EAFE Index and 3.27% for the MSCI All Country World ex-U.S. Index. Global developed markets posted solid returns led by Japan, where the election of the Abe government in December suggests a change in central bank philosophy and monetary policy. The espoused targeted 2% inflation and monetary expansion efforts jump-started the market, in part reflecting the sharp drop in the Yen. Emerging markets lagged on mounting concerns of slowing growth, exemplified by the negative performance in each of the BRIC markets. Volatility picked up in the latter half of the quarter as the Italian elections, the U.S. budget sequester, and the Cypriot bail-in rattled confidence, leading to a rebound in more defensive issues, but the global markets still ended in positive territory. Returns were even stronger in local currency terms, as the major developed market currencies all weakened against the dollar. Notably, U.S. equity markets ended the quarter at record high levels, extending a four-year bull market. Slow but steady economic growth, assisted by accommodative Federal Reserve policy, is improving consumer and business confidence without the excessive overheating that has presaged material stock market corrections.

Contributors to performance included adidas, Mitsubishi UFJ Financial, Novartis, Reckitt Benckiser, and Toyota. Adidas is gaining market share in developing countries including Russia and China and making progress toward longer-term revenue and margin growth targets through successful innovation efforts and more focus on directly operated stores. Reckitt Benckiser reported strong results, and their healthy balance sheet contributed to an 11% increase in the dividend. Novartis is also benefiting from increased confidence in the pipeline and a change in management after the departure of the CEO. Japanese companies Mitsubishi UFJ Financial and Toyota have been buoyed by the overall strength of the Japanese market, which led global markets performance during the quarter in local currency terms. Both are positioned to benefit from recent policy moves in Japan and renewed stimulus in the Japanese economy, with Toyota also leveraged to the subsequent weakening of the yen.

Detractors from performance included Teck Resources, CNOOC, Deutsche Bank, Fanuc, and Volkswagen. Growing concerns about China’s growth trajectory and rising inventory levels have pressured copper and coking coal prices, negatively impacting sentiment on Teck despite its compelling position on the cost curve. CNOOC declined as production growth was not as favorable as anticipated due to project delays and other short-term issues. Investor concerns about the company’s acquisition of Nexen also weighed on the stock. Deutsche Bank was pressured during the quarter on concerns that the company will need to raise additional capital. We believe Deutsche Bank will benefit from any improvement in the European capital markets due to its increased market share within the investment banking segment. Fanuc is experiencing some weakness as orders for robodrills related to smart phone production are under pressure. The company also serves the automakers, and should benefit from a longer term structural trend toward increasing automation in manufacturing. Volkswagen declined after issuing operating profit guidance below analysts’ estimates due to a slowdown in growth in China.

Notable purchases included WPP, Lululemon, Saipem and Roche. WPP is a global advertising company with a leading position in the higher-growth areas of emerging markets and digital advertising. WPP generates strong free cash flow and is expected to continue a trend of increasing its dividend payout ratio over the coming years. Lululemon is a leading designer and retailer of technical athletic apparel, a fast growing segment of the market. The company has a robust expansion plan and is able to execute on square footage growth through the use of internally generated cash. Saipem is an out of favor highly esteemed onshore and offshore engineering and construction services company with the prospect for a recovery in profitability after a recent disappointment. Within healthcare, Roche is the global leader in oncology and virology. Its core products have high barriers to entry due to their biologic nature, which should sustain their record of noteworthy sales and earnings progress.

Notable sales included Svenska Handelsbanken, BM&F Bovespa, BG Group, and Hyundai. Svenska Handelsbanken performed well due to its safe haven status within the European bank sector, and reached our price target. BM&F Bovespa appreciated nicely, and given heightened concerns regarding regulation and the competitive industry landscape, we exited the position for better opportunities. We eliminated BG Group from the portfolio after the company announced disappointing production guidance. Profits in Hyundai were harvested after margins expanded to near-peak levels and competition appeared to be intensifying, in part, reflecting changes in currency levels compared with the South Korean Won.

While the European Central Bank’s accommodative policies have helped stabilize the sovereign debt situation, there are signs of growing austerity fatigue in the periphery and bailout fatigue in the core (Italian elections, botched Cyprus bailout). Though bank capital is improving in aggregate, lending stagnation and austerity measures in Southern Europe will likely remain negative influences on European growth for some time to come. In China, though the leadership transition has been smooth, there is still uncertainty about whether the new government will be effective in rebalancing the economy. Japan’s pro-growth “Abenomics” has injected a large dose of investor and consumer confidence into the market in recent months. As the new Bank of Japan governor Haruhiko Kuroda takes over, the time has come to find out whether the new monetary policies will deliver the needed boost for growth. Meanwhile, an improving U.S. economy and weaker yen may continue to provide tailwinds for Japanese exporters, and strength in these economies could serve as an offset to a continued slowdown in Europe.

Amid the risks and uncertainties, we maintain a balanced posture, with limited exposure to Europe-centric financials. Our European holdings are largely in businesses generating the majority of their revenue from other parts of the world. For example, Reckitt Benckiser, Nestle, Novo Nordisk, Roche and LVMH all have important business in the U.S. and fast-growing emerging markets. Meanwhile, the upside for industrial and other cyclically oriented equities is material once Europe adjusts to new realities, with additional benefits stemming from recovery in the U.S. and Asia. Our consumer cyclical companies are industry leaders, predominantly valued at the low end of historic ranges reflecting subdued near term expectations with diversified geographic exposure. Our commodity holdings are predicated on unit volume growth and are among low cost producers. We believe our philosophy of owning good businesses balanced between basic value companies, consistent earners and emerging franchises will allow us to successfully navigate the uncertain road ahead.

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.

Any securities, countries, and sectors mentioned are for informational purposes

only. 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-U.S. 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.

The BRIC countries are Brazil, Russia, India, and China.

The Thornburg International Value Fund, Institutional class, led the 113-fund international large-cap growth category to take the 2012 Lipper Fund Award for the 10-year period ended 11/30/2011.

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). Awards are given for three-year, five-year, and ten-year periods. The fund did not win the award for other time periods. Class I shares may not be available to all investors and minimum investments may be higher.

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 2013

2013 is off to a fast start as equity markets and risk assets generally fared well. The Thornburg Core Growth Fund also performed well during the quarter, both on an absolute and relative basis. The Fund returned 11.12% (for the A shares, without inclusion of the sales charge) versus Russell 3000 Growth Index’s return of 9.82%. Because we are bottom-up, fundamentally driven investors who manage concentrated portfolios, stock selection tends to be the primary driver of performance over time — as it was this quarter. Information technology had the greatest selection effect (loosely defined as the return attributable to choosing different securities within sectors from the benchmark index), despite the fact that technology was the worst performing index sector.

Other sectors with positive selection effect included financials, industrials, and energy. Sectors with negative selection effect included consumer staples, consumer discretionary, health care, and materials.

On a stock-by-stock basis, the top contributors to performance included WisdomTree Investments, LinkedIn, Gilead Sciences, Valeant Pharmaceuticals, and VeriSign. WisdomTree is a provider of enhanced exchange traded funds (ETFs). Rather than base its funds’ position sizes on price or market cap, WisdomTree uses fundamental metrics such as valuation and earnings. Recently ETFs generally and WisdomTree in particular have seen strong inflows. WisdomTree also manages the largest and most liquid Japan-equity ETF, which has been extremely popular of late, since new leadership in Japan has generated hope that that country’s long stagnant economy can resume growth.

LinkedIn delivered strong quarterly results, with much higher growth than expected, driven by strong user engagement. This upside surprise drove price/earnings multiple expansion and very strong stock performance during the quarter.

Gilead Sciences’ core HIV franchise continues to perform well. In addition, recent data have validated the safety and efficacy of the company’s new treatments for Hepatitis C. Early data indicate that Gilead could dominate this large market.

Valeant Pharmaceuticals is a Canadian company that develops, manufactures, and markets a broad range of pharmaceutical products. Valeant has a unique operating philosophy for a pharmaceutical company, focusing more on management and operations rather than on research and development. Valeant acquires undermanaged businesses and products and drives operational efficiencies through cost-cutting and revenue optimization. Valeant reported a solid quarter, beating earnings expectations and raising guidance. Management also disclosed that the acquisition of Medicis late last year is expected to yield greater synergies than initially anticipated.

VeriSign is the master registry for all .com and .net internet domain names. The company, in essence, keeps a single, updated database of all internet websites so they can be found and accessed. The company operates as a regulated monopoly. Late last year, the company renewed its contract for six years, which involved a cap on some price increases, and the stock moved lower on the news. The first quarter saw a nice recovery, as investors realized that VeriSign is a very high margin, high cash flow business with healthy growth prospects, despite the limitation on pricing.

The top detractors to performance during the quarter included Allot Communications, Apple, BroadSoft, Fusion-io, and Ellie Mae. Allot Communications manufactures deep-packet inspection equipment that allows telecom carriers and cable companies to monitor and control traffic on their networks. For example, Allot can give priority to video streaming customers to ensure that they experience no buffering as they view content, while delaying an email that is not time sensitive. Increased efficiency of existing network assets results. The stock has been depressed as concerns of carrier spending weakness have recently surfaced, causing Allot to lower guidance.

Apple reported weaker-than-expected fourth quarter results and changed the methodology around supplying analysts with earnings guidance, which in its case has been very conservative. This seemed to add strength to the bear argument that Apple may be going the way of Motorola, HTC, or Blackberry. The stock now appears out of favor and cheap by a number of valuation metrics, with very low forward expectations. We believe a combination of further steps toward cash return and slightly better-than-expected growth over the next couple of years (in existing and new categories) could generate upside in Apple shares.

BroadSoft creates software that converts traditional phone calls into internet protocol (IP)-enabled calls, allowing more “features” to be applied to a call and, more importantly, reducing the total cost for each call. The company reported a good fourth quarter, but unveiled poor 2013 guidance, including increased R&D expenditures to support a move into mobile LTE, which is a new area for the company. Mobile LTE is much more competitive than BroadSoft’s current business and much less certain; we therefore sold the stock during the quarter.

Fusion-io provides flash storage at the server level. Although its technology is interesting, the company’s high customer concentration constitutes a risk that caused us to maintain a small position size. Unfortunately, our apprehensions were realized this quarter when the company’s largest customers delayed orders — and revenue and earnings expectations suffered as a consequence. We sold the position due to lack of earnings and revenue visibility and increasing competition.

Ellie Mae reported strong quarterly results with revenues up 60%, exceeding expectations. This, however, was not enough to offset concerns that a slowdown in mortgage refinancing will materially impact growth going forward. But we believe Ellie Mae’s growth is more closely tied to the adoption of its best-in-class mortgage application processing tools, and are hopeful that a gradually improving U.S. economy and the very low interest rate environment will continue to drive mortgage activity to levels higher than generally expected.

While economic data appear choppy and the global recovery lackluster, we continue to see positive economic signs: the U.S. housing market is recovering (which has not been the case over the last few years), China seems to have bottomed (time will tell whether that’s the case), Europe is still messy (though markets seem to be reacting less to headlines), and Japanese leaders appear steadfast in their resolve to boost their economy. While this points to more volatility, it also provides reason to be cautiously optimistic. As always, no matter what the environment, we continue to look for promising growth companies with sound business fundamentals trading at reasonable valuations. Thank you for investing along with us in the Thornburg Core Growth Fund.

 

For a print friendly version of the Core Growth Fund 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

First Quarter 2013

Thornburg Investment Income Builder paid an ordinary quarterly dividend of 21.5 cents per A share in the quarter ended March 31, 2013. This compares to dividends of 21.5, 21.0, and 19.8 cents for the comparable quarters of 2012, 2011 and 2010, respectively. The fund paid $1.12 per A share in the 12-month period ending March 31, 2013, down 4.3% from $1.17 in the prior comparable 12-month period. 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 increased by $1.26 per share ($18.82 to $20.08) during the quarter, to $20.08. For the trailing 12 months ended March 31, 2013 the fund’s net asset value increased by $1.44.

The quarter ended March 31, 2013 was the 41st full calendar quarter since the inception of Thornburg Investment Income Builder in December 2002. In 31 of these quarters, including the first quarter of 2013, the fund delivered a positive total return. The fund has delivered positive total returns in nine of its 10 calendar years of existence. We are also proud of the fact that Thornburg Investment Income Builder has delivered tax-efficient average annual total returns in excess of 11% since inception.

Investment Income Builder outperformed its own blended benchmark (75% MSCI World Index and 25% Barclays U.S. Aggregate Bond Index) by 2.19% in the first quarter, and trailed the S&P 500 Index by 2.67% for the period. 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 compares very well to both benchmarks over various longer periods. It is not unusual for Investment Income Builder to trail these benchmarks over shorter trailing measurement periods where annualized benchmark returns are greater than 10%.

We did not pay any capital gains distribution for 2012 to shareholders of Thornburg Investment Income Builder, continuing our tax-efficient record.

In assessing the first quarter performance of Thornburg Investment Income Builder, it is constructive to consider the performance in U.S. dollars of the sector components of the MSCI World Index over the first quarter of 2013. The MSCI World Index comprises 75%, and the entire equity portion, of the fund’s global performance benchmark:

1. Nine of 10 index sectors showed positive total returns for the first quarter of 2013, ranging from approximately -3.3% (for materials) to approximately +14.4% (healthcare). Stocks of firms in the consumer staples, telecom, and financials sectors delivered index-beating returns for the quarter, while stocks of firms in the utilities, energy, and industrials sectors joined those in the materials sector in underperforming the index. Thornburg Investment Income Builder maintains higher allocations to firms in some of these index-trailing sectors (excepting information technology), due to their above-average cash flow and dividend paying characteristics. In the first quarter, this did not hurt the fund’s performance relative to the index for reasons noted below.
2. Income Builder Fund investments in firms in the financials (26% fund weighting), telecommunications (20%), healthcare (11%), consumer staples (10%), energy (9%) and utilities (7%) sectors comprised the largest equity weightings in the portfolio during the first quarter of 2013. The fund’s performance relative to the MSCI World Index was hurt by comparatively small portfolio allocations to firms in the strongly performing industrials and consumer discretionary sectors, and by modestly negative returns from our equity investments in the energy, industrials, and materials sectors. Strong performance from the fund’s investments in firms in the telecommunications, finance, and health care sectors more than compensated.
3. In the Income Builder portfolio, 50 equity investments contributed positive returns of at least 0.05% (five basis points) to the portfolio during the first quarter. Five of our equity investments and one bond contributed negative returns of -0.05% or worse for the quarter. None of the negative- performing equities cut their dividend payments during the quarter, and we have retained these in the Income Builder portfolio.

Investment Income Builder’s bond holdings delivered positive returns during the quarter, but were a modest drag on overall portfolio returns relative to the MSCI Index for the period.

Strong absolute and relative returns from your fund’s holdings in the telecommunications sector were the primary factor driving the fund’s outperformance vis-à-vis the MSCI Index benchmark in the first quarter. Telefonica Brazil, Denmark’s TDC, global giant Vodafone, and Russia’s Megafon each contributed significantly to performance for the quarter, and every portfolio holding but one in the telecommunications sector made a positive contribution to first-quarter performance.

Your fund’s average return from its investments in the financial sector also exceeded the performance of the equities in the finance sector of the MSCI World Index in the first quarter of 2013. Fund investments in J.P. Morgan, Chimera Investment Corp., MFA Financial, Invesco Mortgage Capital and Senior Properties Trust were among the strongest performers in the portfolio. A growing expectation that interest rates will remain “lower for longer” in the United States and Europe caused near-term earnings estimates for several of our financial holdings to be reduced in recent months. The ongoing environment of low bond yields is making it impossible for many “non-bank” financials to maintain dividends at prior-year levels. Nevertheless, financial asset prices are well supported by low interest rates, and investors appreciate the interesting-if-lower dividends paid by many of these firms in light of low and declining bond yields.

Among Income Builder’s investments in the energy sector, Italy’s ENI, France’s Total SA, Canada’s Husky Energy, and Royal Dutch Shell each detracted sufficiently from portfolio performance in the first quarter to cause the fund’s overall return from its energy-sector investments to be slightly negative for the period. Oil prices remained firm throughout the quarter, and much of the gas produced by the European multinationals was sold at formulas tied to oil prices.

Among investments in the consumer staples sector, Walgreen’s, Coca Cola, Philip Morris International, and household products producer Reckitt Benckiser each added share price appreciation to rising dividends to generate positive contributions to portfolio performance. Over the last year, investors have bid up prices of most dividend-paying firms in this sector.

Investment Income Builder’s holdings in the health care sector continued the positive price appreciation seen in 2012 during the first quarter, led by Roche, Novartis, Pfizer, and Merck. The fund’s weighting in firms from the health care sector was close to that of the MSCI index, and the fund’s performance contribution from its investments in this sector relative to the index was positive.

Your fund’s holdings in the utilities sector lagged the already below-market returns from this sector, weighed down by negative contribution from multinational electric power generator GDF Suez.

Among other portfolio holdings, notable contributors included chemicals producer LyondellBasell Industries, casino operators Wynn Resorts and Sands China, and Microsoft. The former benefitted from low gas input prices in its North American processing operations. Negative contributors included gold miner Gold Fields Ltd., Hong Kong-based infrastructure and real estate conglomerate Hopewell Holdings, and Australian airport operator Sydney Airport.

The euro, British pound, Swiss franc, and certain Asian currencies depreciated modestly vis-à-vis the U.S. dollar during the quarter. We hedged a majority of the currency exposure to the euro and other European currencies tied to it, since we are more focused on risk control than on reaping possible currency gains from exposure to assets denominated in these currencies. This was a modest positive for performance relative to the unhedged MSCI index during the quarter.

Within its bond portfolio, Investment Income Builder owned significantly fewer U.S. government and agency bonds than the Barclays U.S. Aggregate Bond Index. This fact was helpful again in the first quarter, since yield spreads of corporate credits over these government yield levels fell. Corporate bond prices have increased as their yields have declined, leading us to allocate most incoming cash flows to equities in recent quarters. You can expect us to increase the portfolio’s allocation to bonds if rising yields lead to lower bond prices. Readers of this commentary who are longtime shareholders of Income Builder will recall that the interest-bearing debt portion of the fund’s portfolio has varied over time, ranging from less than 12% in mid 2005 to 45% at June 30, 2009.

As of March 31, the fund portfolio included approximately 170 bonds and hybrid securities.

Investors have experienced well-above-average financial market volatility over the last four years. Investment bank Credit Suisse points out that the average number of quarters with a return of greater than +10% or less than -10% in each of the last six decades is just below eight per decade. There are 40 quarters per decade, so these “highly volatile” quarterly results have occurred just 20% of the time over the six-decade span. In eleven of the last eighteen calendar quarters, the returns to the S&P 500 Index have been either less than or equal to -10%, or greater than or equal to +10%. Equity mutual fund investors clearly do not welcome the more volatile equity returns seen since September of 2008, as indicated by outflows of investor dollars from both equity mutual funds and individual equities. Returns to shareholders of Thornburg Investment Income Builder have been considerably less volatile than returns to broad equity market indices.

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 during the global financial crisis, due to more than 20% aggregate declines in dividends paid in 2009 in most developed-country equity markets. Dividend increases since 2010 have brought aggregate dividends paid by U.S.-listed firms back above pre-financial-crisis levels. For the U.S. equity market as a whole, the dividend payout ratio is around 33% of corporate earnings. For the Income Builder equity portfolio as a whole, the dividend payout ratio is slightly above 60%, reflecting our preference for owning firms with both the ability and willingness to pay attractive dividends. Outside the United States, dividend yields and payout ratios tend to be higher, but dividend growth has been lower since 2010. Readers should be aware that the reduced yields now available from bond investments pose a formidable near-term challenge to delivering year-over-year dividend increases on Investment Income Builder shares.

If the global economy recovers, we expect firming interest rates, better business conditions, and reduced anxiety from corporate boards about distributing retained earnings. To the extent that the global economy does not recover—and this is always a possibility—we can expect the opposite. The political debate around tax rates for dividends to higher income taxpayers continues the long running tug of war regarding “double taxation of dividends.” In effect, U.S. corporate profits are taxed prior to dividend payments, and then taxed again when dividends are received by non-corporate shareholders. On January 2, 2013 legislators raised the prior 50% combined rate for the government’s share of distributed corporate profits (35% corporate tax rate + 15% tax rate on dividends received) to 55% by increasing the dividend tax rate to 20%. This acts as a disincentive for corporations to favor dividends over other uses for accumulated earnings and profits.

Investors seek additional clarity on how European governments (and financial institutions) will manage through a debt contraction and at least one state default; though a strong surge by European indices in the second half of 2012 led most of these to outperform the U.S. equity market that year. The European Central Bank and the Bank of Japan have joined the Federal Reserve and the Bank of England in creating sufficient liquidity so as to avoid deflationary outcomes. Investors also have questions about whether China can transition from an investment-led economy to a consumer-led economy, and whether the United States government can implement a reasonable framework of pro-growth policies while also reining in public sector borrowing.

We do not expect to know clear answers to these questions during the coming months. There will be news from day to day that will feed hopes or fan despair, thereby moving the prices of financial assets by significant percentages. The “fiscal cliff” debate contributed to a negative return quarter for the S&P 500 Index in the fourth quarter of 2012, and the decision to take no further legislative action and allow the previously negotiated “sequester” to take effect was viewed positively by investors in the March quarter.

Earnings expectations for the MSCI All Country World Index portfolio have been reduced for 2013 and 2014 in recent quarters, as global economic growth has been below prior expectations. Most major central banks around the world have significantly eased monetary conditions, and give no indications of changing course. Equity price movements in the first half of 2013 appear to incorporate expectations that lower interest rates and plentiful liquidity will create a foundation for better economic growth in the future. Bond yields have dropped significantly over the last six quarters, as indicated by a 1.52% average yield decline in the FINRA-Bloomberg Index of Active Investment Grade U.S. Corporate Bond Yields, from 4.80% on September 30, 2011 to 3.28% on March 31, 2013.

While lower interest rates are good news for borrowers, they have negative consequences for conservative savers. Interest income as a percentage of overall personal income in the United States has fallen from more than 11% in 2008 to around 7% today. The interest contribution to personal income is set to continue dropping in 2013 as previously issued bonds and CDs mature.

Investors must consider other options. Yields on taxable and tax-exempt money funds remain below 1/5 of one percent. 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 the Thornburg Investment Income Builder Fund 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.

Any securities, sectors, or countries mentioned are for illustration purposes only. Portfolio holdings are subject to change daily. Under no circumstances does the information contained within represent a recommendation to buy or sell securities.

The FINRA/Bloomberg Active U.S. Corporate Bond Indexes are comprised of the “active” (most frequently traded) fixed coupon bonds represented by FINRA’s transaction reporting facility that disseminates all over-the-counter secondary market transactions in these public bonds.

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 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 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. 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.

Payout ratio is the percentage of a company’s net income paid out to shareholders.

 

 

Global Opps.

First Quarter 2013

For the first quarter of 2013, the Thornburg Global Opportunities Fund produced a total return of 7.95% (for the A shares without sales charge) versus 6.51% for the benchmark MSCI All Country World Index (ACWI). Recall that Thornburg Global Opportunities Fund seeks capital appreciation from a relatively focused portfolio of equity investments from around the world. Since its inception almost seven years ago, the fund (A shares: THOAX) has established a return advantage over the MSCI All Country World Index of over 500 basis points (or 5%) per year. Returns for standard time periods are shown in the Performance and Expenses section of this web site. For the one-, three-, and five-year periods ending March 31, 2013 the fund has outperformed the ACWI index.

The first quarter saw liquidity-driven positive returns in most global equity markets, though Europe and various emerging markets lagged. For the fourth consecutive year U.S. equity markets performed well in the first three months. In the prior three years, U.S. returns declined significantly in the second quarter. European sovereign credit problems and potential contagion are again weighing on investor sentiment.

Equity Returns in Q1 2013	Return in USD
S&P 500 Index (USA)	10.61%
MSCI All Country World Index	6.51%
Nikkei (Japan)	9.75%
EURO STOXX 50 (European blue chips)	-2.88%
MSCI Emerging Markets Index	-1.62%

The largest contributor to the performance of the Thornburg Global Opportunities Fund recently was our investment in U.S. industrial/military vehicle manufacturer Oshkosh Corporation. We purchased Oshkosh in 2011, and the shares have risen by about 100% since last summer. Combined with our investment in aircraft lessor Fly Leasing, the fund’s investments in industrial stocks strongly outperformed the returns delivered by industrials to the MSCI ACWI portfolio. Our investments in the health care sector were also significant recent contributors to the portfolio performance, including Valeant Pharmaceuticals, Walgreen’s, and Roche.

Other significant contributors to performance included a diverse set of businesses: German cable TV company Kabel Deutschland, U.S. satellite operator EchoStar, Telefonica Brasil, Google, and Swiss Re. We continue to own all of these.

Significant detractors from portfolio performance during the first quarter of 2013 were also a diverse group: Weight Watchers International, Bankers Petroleum, Level 3 Communications, and Apple Inc.

Turnover during the first quarter was moderate; we sold U.S. medical device maker Illumina Inc. and Canadian drilling services firm Ensign Energy Services to make room for other opportunities. Top industry weightings as of quarter-end are: diversified financials (15.9%), software and services (11.9%), telecom (9.7%), pharma, biotech, & life sciences (8.8%), technology hardware and equipment (6.5%), and consumer services (5.7%). Expected price-to-earnings multiples for 2013 on the portfolio companies owned in Thornburg Global Opportunities Fund stand at 13.6x, vs. 13.4x for the MSCI All Country World Index portfolio. We have relatively low direct exposure to Europe, and companies based in emerging markets currently constitute about 14% of the fund.

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

Country	Fund Weighting
USA	43.2%
Brazil	10.4%
Switzerland	8.7%
Canada	8.0%

This year corporate earnings expectations for both 2013 and 2014 have declined relative to earlier expectations. Corporate management teams that we meet with from less cyclical businesses are reasonably upbeat about their businesses. Those in more cyclical industries and financials are more cautious, though there are exceptions to this cautious attitude among certain businesses exposed to a spending recovery from U.S. consumers. Many countries and specific businesses are currently posting interesting growth. We expect profit growth in 2013 from the majority of our holdings in Thornburg Global Opportunities Fund.

Though a strong surge by European equity indices led most of these to outperform the U.S. market for 2012, investors still seek additional clarity on how European governments (and financial institutions) will manage through a debt contraction and the potential for at least one state default. The European Central Bank and the Bank of Japan have joined the Federal Reserve and the Bank of England in creating sufficient liquidity so as to avoid deflationary outcomes. Investors also have questions about whether China can smoothly transition from an investment-led economy to a consumer-led economy, and whether the United States government can implement a reasonable framework of pro-growth policies while also reining in public sector borrowing.

We do not expect to have clear answers to these questions in the near term. While the U.S. private sector is expanding and corporate balance sheets are healthy, the economy has not fully transitioned from government-assisted growth to genuine private sector leadership. So we anticipate news from day to day that will feed hopes or fan despair, and affect the prices of financial assets significantly. The “fiscal cliff” debate contributed to a negative return quarter for the S&P 500 Index in Q4 2012, while the decision to take no further legislative action and allow the previously negotiated “sequester” to take effect was viewed positively by investors in the March quarter. The debate continues.

We believe that competing macroeconomic forces of fiscal restraint and monetary stimulus from governments in major economies will affect business conditions and investor sentiment, so we expect periods of volatility in the financial markets. With volatility comes risk, but also opportunity. We continue to focus our research on business valuations and business quality, reflecting our belief in value-oriented, bottom-up analysis.

 

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.

Any securities, countries and sectors mentioned are for illustration purposes only. Portfolio holdings are subject to change daily. Under no circumstances does the information contained within represent a recommendation to buy or sell securities.

A basis point is 1/100 of one percent.

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 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 S&P 500 Index is an unmanaged broad measure of the U.S. stock market.

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.

Japan’s Nikkei 225 Stock Average is the leading index of Japanese stocks. It is a price-weighted index comprised of Japan’s top 225 blue-chip companies on the Tokyo Stock Exchange.

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.

The European Central Bank (ECB) sets monetary policy for certain member states of the European Union; The Federal Reserve Bank, the Bank of England, and the Bank of Japan are likewise the central banks of The United States, the United Kingdom, and Japan.

Intl Growth

First Quarter 2013

We are pleased to report continued strong relative (and absolute) performance in the Thornburg International Growth Fund. For the first quarter of 2013, the fund returned 10.72% (for the A shares without sales charge) versus 4.51% for the MSCI All Country World ex-U.S. Growth Index. Longer time periods as seen in the performance section of this website are favorable as well. We are pleased to announce that the International Growth Fund received the Lipper Award for best risk adjusted returns for the three- and five-year periods ended December 31, 2012.

As the above numbers indicate, overall equity markets showed strong performance in the first quarter of 2013. Across most of the globe, developed markets fared much better than emerging markets; the MSCI World Index, which represents global developed markets, returned 7.73%, while the MSCI Emerging Markets Index returned a negative 1.62%. The so-called BRIC countries (Brazil, Russia, India, and China) represent 43% of the index and were particularly weak after showing some signs of slowing. This marks a sharp reversal of the situation in 2012, when emerging markets represented one of the bestperforming asset classes (the MSCI Emerging Markets Index returned 18.22% for the year). While this type of divergence and market volatility is difficult to stomach, it also provides opportunities. With the Thornburg International Growth Fund, we strive to initiate and add to positions when stocks with sound business fundamentals are impacted by broad market weakness, and alternatively, we seek to sell and trim positions when market strength pushes valuations past fundamentals.

Turning to performance drivers during the quarter, the selection effect (loosely defined as the return attributable to choosing different securities within sectors from the benchmark) for the fund was most positive in the consumer discretionary, financials, materials, and energy sectors. Selection effect was most negative in industrials, consumer staples, telecom, and health care. Positive selection materially outweighed negative selection (our stocks generally performed well this quarter) with positive absolute return in the materials and energy sectors. Both were negative for the index.

Top contributors to performance included Japan Exchange Group, Anton Oilfield Services, Valeant Pharmaceuticals, Mitra Adiperkasa, and Sands China. Japan Exchange Group is an entity formed from the merger of the two largest investment exchanges in Japan, the OSE and the TSE Group. It is now the third-largest stock exchange in the world, trading a total of 8% of global market capitalization. The stock performed well on the back of an extremely strong Japanese market. For the year to date, the Nikkei Index has been the strongest of the major indices and is up 20.13% in local currency terms.

Anton Oilfield Services is a leading Chinese oilfield services company, focusing on onshore development. The company provides drilling and well-stimulation services to the major oil and gas companies in China and is positioned as the leader in onshore unconventional development in part through its joint venture with Schlumberger. The company’s performance in the quarter was driven by strong interest in recent concession auctions for unconventional acreage, continued positive comments about China’s interest in developing gas resources, and a very strong fiscal year 2012 report that exceeded estimates.

Valeant Pharmaceuticals is a Canadian company that develops, manufactures, and markets a broad range of pharmaceutical products. Valeant has a unique operating philosophy for a pharmaceutical company, focusing more on management and operations rather than research and development. This means acquiring already-approved drugs and undermanaged businesses, then driving operational efficiencies through cost cutting and revenue optimization. Valeant reported a solid quarter, beating earnings expectations and raising guidance. Management also disclosed that the recent acquisition of Medicis late last year is expected to yield greater synergies than initially anticipated.

Mitra Adiperkasa is an Indonesian company that licenses rights to operate well-known foreign retail and restaurant brands in Indonesia such as Zara, Lacoste, Starbucks, Burger King, and Domino’s Pizza. Inclement weather impacted sales early in the quarter, but February sales rebounded nicely, growing 30%. The company also made positive statements regarding competitive positioning and improving cost structure in the face of government-mandated minimum wage increases.

Sands China operates casinos in Macau, which is the gambling Mecca of Asia. The Macau regulators have awarded six licenses to operate casinos, one of which went to Sands. While high-roller VIP gaming has slowed with the Chinese economy and with the government transition, it continues to grow at a reasonable rate, with room for positive growth surprises as the government transition ends. Mass gaming (for smaller players) continues to grow nicely, and Sands China has material exposure to this market.

Top detractors to performance included Allot Communications, Hyundai Glovis, Baidu, Intime Department Store, and Orpea. Allot Communications manufactures deep-packet inspection equipment, which allows telecom carriers and cable companies to monitor and control traffic on their networks. For example, the company can give priority to video-streaming customers to ensure that no buffering takes place as they view content, while delaying an email for another customer that is not time-sensitive. This increases the efficiency of existing network assets. The stock has been weak as concerns of carrier-spending weakness have surfaced, causing Allot to lower guidance.

Hyundai Glovis is a logistics business in South Korea, whose primary customer is Hyundai Motor. Glovis has suffered from the strengthening of the Korean Won in 2012 (which hurt exports) and slowing growth at Hyundai Auto. We believe Glovis remains positioned to gain share at Hyundai Motor and grow its non-Hyundai business. The current price is at multi-year lows, and we find the valuation compelling.

Baidu is essentially the Google of China and is the dominant search engine provider, with 80% market share. Slowing pricing growth coupled with increasing margin pressure from marketing expenditures as a new competitor has recently entered the market caused the stock price to decline. We see Baidu as the long-term winner in the space and believe the stock will rebound when margins stabilize.

Intime Department Store operates a chain of Department stores in China, primarily focused on Hangzhou (in the Zhejiang Province) and other tier-two and -three cities in China. It is well positioned geographically and has a good portfolio of relatively young stores. However, data from the first few months of 2013 seem to indicate that the Chinese consumer recovery will be slower than expected. Although we fundamentally like the Chinese domestic consumption story longer term, we see increased earnings risks near term, and sold the stock.

Orpea is the largest nursing home provider in France. The French government pays about 30% of nursing costs, while the end-user pays approximately 70%. From time to time, discussions surrounding the possibility of the French government’s cutting certain of its subsidies arise, and those discussions surfaced in the last quarter, triggering concern about future revenues. We believe that it will prove politically difficult for France to change the current payment plan, per studies that show nursing home care to be cheaper than most other alternatives, including hospitalization.

While economic data continue to appear choppy and the global recovery lackluster, we continue to see some positive economic signs: the U.S. housing market is recovering (which has not been the case over the last few years), China seems to have bottomed (time will tell whether that’s the case), Europe is still messy, (though markets seem to be reacting less to headlines), and Japanese leaders appear steadfast in their resolve to boost their economy. While this points to more volatility, it also provides reason to be cautiously optimistic. As always, no matter what the environment, we continue to look for promising growth companies with sound business fundamentals trading at reasonable valuations. Thank you for investing along with us in the Thornburg International Growth Fund.

      

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 manager reflect his 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.

Thornburg International Growth Fund, Institutional class was named best fund for the 3- and 5-year periods among 264 and 205 funds in Lipper’s international multi-cap growth funds category, based on risk-adjusted returns as of 11/30/12. 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 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 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. 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.

Dev World

First Quarter 2013

During the first quarter of 2013, the Thornburg Developing World Fund returned 10.43% (for the A shares without sales charge) versus -1.62% for the MSCI Emerging Markets Index. For the 12-month period ended March 31, 2013, the Fund returned 15.34%, versus 1.96% for the index. Major emerging markets including Brazil, Russia, India, and China all declined in absolute terms and underperformed in relative terms during the quarter. Korea, which comprises approximately 15% of the MSCI Emerging Markets Index, declined 5.02% during the quarter as tensions flared with North Korea and Korean exporters suffered from the sharp decline in the Japanese Yen in the wake of “Abenomics.” European, North African and South African markets also underperformed in light of tensions in Cyprus and the renewed prospect of “tail risk” in the Eurozone. By contrast, Southeast Asian markets such as the Philippines, Thailand and Indonesia increased at double-digit rates in U.S. dollar terms during the quarter, as global central bank accommodation and favorable relative growth rate differentials resulted in capital flows into these and other markets.

Top contributors to performance for the quarter included Chinese baby formula importer Biostime, Cambodian casino operator Nagacorp, Thai digital advertising company VGI Global Media, Indonesian consumer company Mitra Adiperkasa, and Taiwanese process control company Hermes International. Biostime surged as the company experienced favorable earnings development and Chinese consumers gravitated toward imported western brands with a reputation for high safety standards. Naga rose as investor optimism increased for Southeast Asia generally and Vietnam in particular (Naga’s casinos, in large part, service Vietnamese tourists). VGI increased as the robust Thai economic backdrop continues to support network expansion and price increases for the company’s digital billboards. Mitra Adiperkasa benefitted from investor attention surrounding a related initial public offering in the Indonesian consumer sector, and financial results that suggested the company can manage through continued cost headwinds. Hermes benefitted from strong earnings results that seem to validate the company’s leadership position and longer-term opportunity in process control technology at advanced nodes.

Detractors from performance included Indian financial services company M&M Financial Services, Indian gold jewelery and watch retailer Titan Industries, South African drug store chain Clicks Group, U.K.-listed E&P company Tullow Oil, and Brazilian document specialist Valid Solucoes. MMFS and Titan are both good companies that have come under pressure due to an unfavorable Indian economic backdrop as the current account deficit balloons and business confidence declines. While both companies were sold from the portfolio during the quarter, we have added to our other Indian positions and initiated a new position in HDFC Bank, which may be able to better weather these near-term headwinds. Clicks declined due to uninspiring earnings results and reduced optimism for South Africa generally and South African consumer stocks specifically. Tullow suffered from debate surrounding an increased skew of development opportunities, while the company’s expertise continues to be oriented toward exploration. Valid underperformed against a backdrop of sluggish growth and Brazilian economic weakness.

As we stated last quarter, it is hard to issue a cautious tone on equities against the backdrop of today’s abundant liquidity. At the same time, it is notable that emerging markets equities have substantially underperformed their developed-market brethren during a time when “risk assets” should presumably be in favor, and that the Developing World Fund has experienced positive absolute returns during this same period. A key reason for this divergence is the composition of the MSCI Emerging Markets Index – which is significantly exposed to BRIC countries, the energy and materials sectors, western-facing markets such as Korea and Taiwan, and state-owned enterprises. While the Developing World Fund is exposed to these elements to varying (though lesser) degrees, we continue to maintain a focus on end-market demand rather than domicile, and on markets in Southeast Asia, the Andean region of Latin America, and other parts of the world that can complement our exposure to better-recognized emerging markets. Combined with our focus on companies and countries with limited degrees of external dependence, we believe that we have created a framework for participation in emerging markets equities with the potential to mitigate the volatility of shareholder returns through multiple layers of diversification.

      

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.

Any securities, countries, and sectors mentioned are for informational purposes only. 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. 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 BRIC countries are Brazil, Russia, India, and China.p>

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 2013

Municipal Market Observations — First Quarter 2013

Municipal bond yields increased, albeit at a measured rate, during the first quarter of 2013. This increase in rates was not uniform along the maturity spectrum (referred to as the “yield curve”) and continued a trend that began in December of 2012. The increase in yields was greater for longer-maturity securities versus shorter-maturity securities. Graph I illustrates this phenomenon.

Graph I: Changes in AAA General Obligation Municipal Yield Curve, Q1 2013

Quality spreads continued to marginally narrow in the first quarter of 2013. Investors in search of income were willing to accept slightly smaller yield increments to own securities of lower credit quality. In addition, the overall credit quality of the municipal bond market continued to improve. Graph II shows the yield differentials between a BBB municipal revenue bond and a AAA municipal general-obligation bond on December 31, 2012 and April 1, 2013.

Graph II: Quality Spreads – BBB Municipal Revenue Bond Yields less AAA General-Obligation Bond Yields, Q1 2013

Chart I is a “heat map,” a graphical representation of data in which the individual values contained in a matrix are represented as colors. It is referred to as the “Bloomberg Economic Evaluation of States,” and shows how an index of various indicators of financial health changed between the fourth quarter of 2011 and the fourth quarter of 2012 (latest data available). These economic indicators include:

1. Mortgage delinquencies
2. Personal income
3. Tax revenue
4. Employment
5. Home prices
6. Equity index – a capitalization-weighted index consisting of equities domiciled within an individual state.

Chart I: Bloomberg Economic Evaluation of States, 4Q 2011 to 4Q 2012

The scale at the bottom of the chart shows that the percentage change in the economic health of the states ranged from -10% to +10%, with the majority of the states colored some shade of green, indicating a significant increase in economic health.

We can contrast the latest results above with the same chart for the period from the third quarter of 2009 through the third quarter of 2010 — the period before Meredith Whitney appeared on CBS’ 60 Minutes with an apocalyptic forecast for municipal fiscal health — and we see quite a difference. Chart II shows the heatmap from that time.

Chart II: Bloomberg Economic Evaluation of States, Q3 2009 to Q3 2010

Cash flows into municipal bond mutual funds, a prime driver of market performance, were negative in December 2012 by a little more than $3 billion. These cash flows rebounded in January by approximately $7 billion; market participants were no doubt relieved that the tax exemption of municipal bonds was untouched in the fiscal cliff deal. February saw another month of positive cash flows, but at a much lower rate of approximately $2.5 billion. March cash flows through the week of March 20, 2013 were mixed at a slightly negative $250 million. It is hard to say what has caused these cash flows to turn negative; one reason is the early realignment of assets to pay income taxes. This usually affects money market funds the most, but the low levels of yields may have driven investors out the yield curve in search for more yield and consequently they will have to sell these assets to pay Uncle Sam.

Short-Term Segment

Yields in the short end of the municipal market increased 0.14%, on average. As Graph I illustrates, the majority of the increases came in the 7-10 year maturity range. Shorter maturities have been well bid in both the primary and the secondary market. This could be indicative of market participants fearing rising interest rates and searching for safety in a portion of the market that offers more income than cash and not a great deal of duration risk. The index we use to benchmark the performance of this segment of the market, the BofA/Merrill Lynch Municipal 1-10 Year Index, posted a total return of 0.612% for the three months ended March 31, 2013. A closer look at the index’s returns reveals a principal loss of 0.443%, a result of marginally rising interest rates.

Quality spreads in the short-term segment of the municipal market have not narrowed quite as much as those in the longer ends of the market (see Graph II on page two). This would suggest that market participants are only grudgingly paying more for lower quality short-term securities. Graph III shows a three-year view of quality spreads for a five-year maturity BBB municipal revenue bond versus a five-year maturity AAA municipal general-obligation bond. Graph III shows the incremental yield enjoyed by investors owning the BBB revenue bond versus the AAA general-obligation bond at three-year lows.

Graph III: 5-Year Quality Spread – BBB Revenue Bond Yields less AAA General-Obligation Bond Yields, Rolling 3-Year View

One of the main risks inherent in all fixed income markets is that they are somewhat “rich” (or overvalued) compared to other broad investment alternatives. One way of measuring this is to calculate the current “real” yield in a given segment of a particular market. This is found by taking the yield available on a given security and subtracting an inflation measure. Inflation is enemy number one of the fixed income investor, because it attacks the fixed income investor’s purchasing power. Graph IV depicts our calculation of the real yield of a five-year AAA general-obligation bond using the core personal consumption and expenditure index (or PCE) — the Fed’s favorite inflation measure. It shows that since June 1994, investors in five-year AAA general-obligation bonds have received an average of 1.37% above core PCE. Today they are earning -0.51% less than core PCE. So the risk is that if an investor owns a five-year general-obligation bond at -0.51% versus core PCE and the relationship were to revert to its long-term average of +1.37%, an investor may incur a capital loss. There are many factors that would impact that risk, foremost among them being how long it takes for the relationship to revert to the long-term mean relative to the remaining maturity of the five-year AAA general-obligation bond. If an investor owns a five-year AAA general-obligation bond today and the above relationship were to revert to its long-term mean over three years, the loss incurred by the investor would be much smaller than were the relationship to revert within one year.

Graph IV: 5-Year AAA General Obligation Bond Real Yield (using Core PCE) 6/1/1994 to 3/31/2013

Municipal bonds do look attractive relative to Treasury bonds. Graph V shows the ratio of a AAA municipal general-obligation bond relative to a five-year Treasury note. At the end of the quarter, a five-year municipal AAA general-obligation bond yielded 120% of a comparable five-year Treasury note. Based on the long-term average of this relationship, an investor may conclude that municipal bonds are an attractive alternative to Treasury securities in the short-term segment of the market.

Graph V: Ratio of 5-Year AAA General Obligation Bond Yields versus 5-Year Treasury Yields, Rolling 3-Year View

The Intermediate Segment

Yields in the intermediate segment of the municipal market (10-20 year maturities) increased on average 0.25%. As Graph I illustrates, the majority in the increases came in the longer part of the maturity range. The index we use to benchmark the performance of this segment of the market, the BofA/Merrill Lynch Municipal 3-15 Year Index, posted a total return of 0.609% for the three months ended March 31, 2013. Again, a closer look at the index’s returns reveals a principal loss of 0.435%, a result of marginally rising interest rates.

Quality spreads in the intermediate segment of the municipal market have narrowed more than in the short segment of the market (see Graph II). Investors may find more incremental yield premium as they move out the yield curve, where they would accept more market risk and credit risk. Graph VI shows a three-year view of quality spreads for a 10-year maturity BBB municipal revenue bond versus a 10-year maturity AAA municipal general-obligation bond.

Graph VI: 10-Year Quality Spreads — BBB Revenue Bond Yields less AAA General-Obligation Bond Yields, Rolling 3-Year View

Graph VI suggests that investors are not being paid more to take credit risk in the intermediate segment of the market relative to the short-term segment of the market, and quality spreads as measured over the last three years are at three-year lows.

Measuring the value of intermediate-term municipal bonds through the prism of real yields leads one to the same conclusion that this analysis did when we performed it on the short-term segment of the market (see Graph VII). There is, however, one exception to the set of conclusions drawn in the short-term segment of the market. As one extends the maturity of bonds or funds, one is extending the time period that this relationship may revert to its long-term average, and thereby extending the time period an investor could incur a potential loss.

Graph VII: 10-Year AAA General Obligation Bond Real Yield (using Core PCE) 6/1/1994 to 3/31/2013

Intermediate-term municipal bonds look attractive compared to a similar maturity Treasury security but not as relatively attractive as they do in the short-term segment of the market. Graph VIII shows the ratio of 10-year municipal AAA general-obligation bonds versus 10-year Treasury securities for the last three years. At the end of the quarter, that ratio was approximately 105%.

Graph VIII: Ratio of 10-Year AAA General Obligation Bond Yields versus 10-Year Treasury Yields, Rolling 3-Year View

The conclusion of this analysis is that municipal bonds are attractive alternatives relative to Treasuries in the intermediate segment of the market.

Long-Term Segment

Yields in the long-term segment of the municipal market (20-30 year maturities) increased on average 0.43%. As Graph I illustrates, the increase in yields was almost uniform across this segment of the market. The index we use to benchmark the performance of this segment of the market, the BofA/ Merrill Lynch Municipal Master Index, posted a total return of 0.518% for the three months ended March 31, 2013. A closer look at the index’s returns reveals a principal loss of 0.574%, a result of marginally rising interest rates.

Quality spreads in the long-term segment of the municipal market have narrowed more than in the short or intermediate segments of the market (see Graph II). Investors may find incremental yield premium as they move out the curve, where they would accept more market and credit risk. Graph IX shows a three-year view of quality spreads for a 30-year maturity BBB municipal revenue bond versus a 30-year maturity AAA municipal general-obligation bond. Graph IX shows the incremental yield enjoyed by investors who own the BBB revenue bond versus the AAA general-obligation bond, to be fair.

Graph IX: 30-Year Quality Spread — BBB Revenue Bond Yields less AAA General-Obligation Bond Yields, Rolling 3-Year View

Real yield analysis on a 30-year municipal AAA general-obligation bond leads one to the same conclusion as this analysis did when we performed it on the short-term and intermediate-term segments of the market (see Graph X). The same additional risk mentioned in the intermediate-term section is seen here: as one extends the maturity of the bonds or funds owned, one also extends the time period that this relationship may revert to its long-term average — and thereby the time period the investor could incur a potential loss.

Graph X: 30-Year AAA General Obligation Bond Real Yield (using Core PCE) 6/30/1994 - 3/31/2013

Long-term municipal bonds look fairly valued relative to a similar-maturity Treasury security, but not as relatively attractive as they do in the short or intermediate segments of the market. Graph XI shows the ratio of 30-year municipal AAA general-obligation bonds versus 30-year Treasury securities for the last three years. At the end of the quarter, that ratio was approximately 104%.

Graph XI: Ratio of 30-Year AAA General Obligation Bond Yields versus 30-Year Treasury Yields, Rolling 3-Year View

Conclusion

Yields rose marginally across most of the yield curve. These increases were not uniform and were higher for longer maturities. Quality spreads narrowed over the quarter as investors continued to stretch for yield. Municipal securities look attractive as an alternative to Treasury securities, especially in the shorter segments of the market. Most fixed income markets look expensive on a real yield basis, the municipal market included. The greatest protection afforded investors from a reversion to the real yield long-term averages may come from the short-term segment of the market, because the time for the reversion is the most limited. Investors seem to be withdrawing assets from municipal bond mutual funds but this could be because they need to pay taxes. This short-term trend does bear watching. Overall, the credit quality of the municipal bond market is steadily improving. In light of these market dynamics, we have maintained our neutral stance on the short-term municipal market, targeting a neutral duration for our limited-term funds. We have become more defensive with our longer funds, targeting the top end of our bearish duration range.

 

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

Important Information

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

There is no guarantee the funds will meet their objectives.

The Thornburg Limited Term Municipal Fund, Institutional class, captured top honors for performance for the five- and 10-year periods ended November 30, 2011, among 30 and 23 short-intermediate municipal debt funds, respectively. The I shares also captured the award for the five- and 10-year periods ended November 30, 2012, from among 31 and 25 funds, respectively. Such awards are granted annually to the fund in each Lipper classification that consistently delivered the strongest risk-adjusted performance (calculated with dividends reinvested). Fund Classification Awards are given for three-year, five-year, and 10-year periods. The fund did not win the award for other time periods. Thornburg Investment Management ranked #1 out of 41 eligible firms in Lipper Inc.’s fixed income Large Company universe for the three-year period ended 11/30/11, based on riskadjusted returns, without sales charge. Lipper’s Large Company universe is comprised of fund families with more than $40 billion in total net assets. Only fund families with at least five bond funds were eligible for the fixed income funds manager award. Fund family awards are given for the three-year period only.

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

A general-obligation bond is a municipal bond backed by the credit and taxing power of an issuing jurisdiction rather than from revenue from a given project. A revenue bond is a bond on which the debt service is payable solely from the revenue generated from the operation of a project being financed by the bond proceeds or from other non-tax sources.

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.

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 1-10 Year Municipal Securities Index is a subset of the BofA Merrill Lynch U.S. Municipal Securities Index including all securities with a remaining term to final maturity less than 10 years.

The BofA/Merrill Lynch 3-15 Year U.S. Municipal Securities Index is a subset of the BofA Merrill Lynch U.S. Municipal Securities Index including all securities with a remaining term to final maturity greater than or equal to 3 years and less than 15 years.

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 Personal Consumption Expenditures (PCE) Index is an inflation gauge used by the Federal Reserve Bank (or the Fed, the central bank of the United States) to track changes in the prices of goods and services used for personal consumption. The PCE is measured using a chain base index which closely follows the purchasing tendencies of consumers by allowing the goods and services included in the PCE basket to change as consumer preferences change. Core CPE excludes food and energy prices.

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.

 

 

Corp. and Gov. Bonds

First Quarter 2013

Another quarter, another frustrated set of bond market shorts. They used to call the short JGB (Japanese Government Bond) trade the “widowmaker” because so many traders lost their livelihoods as yields in Japan remained at unthinkably low levels for decades. While many folks in today’s marketplace say that U.S. rates have to rise “eventually” (including us), it hasn’t happened yet. In both cases central bank buying seems to be having a greater effect on bond prices than on underlying economic fundamentals.

Though Ben Bernanke’s criticism of the Bank of Japan (they didn’t try hard enough to create inflation and growth) is perhaps true, it is becoming clearer in the U.S., and indeed around the globe, that inflation and growth are harder to create in the deleveraging aftermath of a banking crisis than in a run-of-the-mill recession. Part of the issue seems to be that easy financing works through different parts of the financial system at different speeds and with different effects. While U.S. housing is just now beginning to recover, nearly a half decade of zero percent rates along with a growing Federal Reserve balance sheet has had a much larger influence on asset prices.

Should this be a surprise? After all, asset market participants seem to have a shorter and shorter time horizon, overreacting to bad news but recovering quickly. This is perhaps due to significant leverage in the investor base, which was also a big reason why the 2008 recession was so ugly. “Wall Street” has reacted much more quickly to massive central bank stimulus than “Main Street.” As Christine Lagarde, the Managing Director of the IMF, said, “The pickup in financial markets is clearly not translating into a sustained pickup in growth and jobs.” As an example, asset prices have risen dramatically, leaving economic fundamentals in the dust. It is possible that, like U.S. home prices, GDP growth (at least in a nominal sense) will react with a lag. But what will asset prices look like then? We are already seeing a revival in bad behavior, from massive CLO issuance to covenant-lite high yield and a general lack of concern over issuers’ ability to repay. As rates overall stay low, and look to stay low for a very long time, the attraction of higher leverage has become irresistible to many and has led to long-term opportunities for few.

Given this sort of environment, and our lack of enthusiasm for picking up nickels in front of a steamroller, we are currently trying to take very little overall risk in both portfolios. Our low-duration position in the funds (3.5 years for Limited Term Income, 2.9 years for Limited Term U.S. Government) should lead to lower price volatility in times of both credit and interest rate volatility. We do not believe that rates will rise dramatically any time in the very near future, but the value in extending our exposure to risk-free interest rates remains very low, as it has been for several years. With regard to credit, we have notably cut back risk in the Limited Term Income Fund within the last several months. While the Limited Term Income Fund has benefitted substantially over the past four years by having a large allocation to corporate credit, spreads have contracted to the point that such gusto is no longer warranted. The fund’s prospectus limitation of at least 65% in single-A rated securities and above has been truly a limit over most of the past several years as we have run approximately 34% in BBB securities (in part due to a desire to take higher credit risk, and in part because BBB securities are often industrial, as opposed to financial, issuers). We have cut that to slightly below 30%, with the money moving largely into AAA securities mostly backed by the U.S. Government. Examples of these investments include securities backed by Small Business Administration loans and Agency Mortgage Backed Securities.

In all, as we look at the current market, we see far fewer opportunities than we did even six months ago, and our commensurate desire to take risk is much less, especially in the context of portfolios whose primary goals revolve around the preservation, rather than the growth, of capital. We continue to believe that high quality fixed income should serve as a safe haven in times of stress, and though the traditional “flight-to-quality” safe harbor of U.S. Treasuries is vastly complicated by the market intervention and corresponding value destruction of the Federal Reserve, we believe that it is still possible to find an appropriate port to weather a storm. These are the investments that currently interest us and we hope that the portfolios will continue to serve as ballast in your asset allocation.

Thanks for your interest in the funds.

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

 

Important Information

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

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.

Thornburg Investment Management ranked #1 out of 41 eligible firms in Lipper Inc.’s fixed income Large Company universe for the three-year period ended 11/30/11, based on risk-adjusted returns. Lipper’s Large Company universe is comprised of fund families with more than $40 billion in total net assets. Only fund families with at least five bond funds were eligible for the fixed income funds manager award. Fund family awards are given for the three-year period only.

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

The Federal Reserve is the central bank of the United States; the Bank of Japan is likewise the central bank of Japan. Both set monetary policies in their respective countries.

The IMF is the International Monetary Fund.

A CLO, or collaterlized loan obligation, is a special purpose vehicle with securitization payments in the form of different tranches. Financial institutions back CLOs with receivables from loans.

Agency mortgage-backed securities are issued by government-sponsored enterprises such as Ginnie Mae, Fannie Mae or Freddie Mac.

 

 

Strategic Income

First Quarter 2013

“Several participants suggested that enhanced supervision could serve to limit, at least to some extent, the increased risk-taking associated with a lengthy period of low long-term interest rates, and that effective policy communication or balance sheet management by the Committee could reduce the probability of excessively rapid increases in longer-term rates.”

– Federal Reserve Minutes, April 10, 2013

The above quote is telling in that it indicates that the Fed, albeit with significant caveats, truly believes that the supervision that so miserably failed in the last go-around (and the one before that, and...) will be successful THIS time. The “enhanced” supervision no doubt includes more banking oversight, the Volcker rule, etc. Yet if this is all in the works, why is it that it feels like the market is repeating so many of the same leveraged mistakes that characterized many other euphoric asset price run-ups in the past few decades?

Let’s survey the landscape. The Fed has taken out the yield on cash, not just on an emergency basis for liquidity purposes, but over the past FOUR (4!) years — with little foreseeable end. This has led, as it often does, to a significant market response. If you are looking for return either from income or price appreciation, and cash promises zero (actually negative on a real basis, given non-zero inflation), it’s possible that you hold on to that cash for some time, given its promise of safety and the optionality of cash (optionality, in this case, being the option to have spending power if prices fall, given the low volatility of cash; of course this is the flip side of opportunity cost). Still, after four years of getting nothing on cash, the memory of 2008 has faded for most investors. For some of Wall Street, due to increasingly short time horizons, 2008 is virtually the Mesozoic era. As a result, we have seen a big rampup in risk-taking behavior, particularly in fixed-income investments. No one wants to hold cash. The Fed and other central banks are buying up U.S. Treasuries such that prices are inordinately high. The corporate bond market has more than recovered: Credit strategists are no longer talking about room to tighten toward the average of the past decade; they are discussing room left to tighten towards the 2007 lows in spreads. CLOs (collateralized loan obligations) printed on average one new deal every day in the first quarter. The bank-loan mutual fund universe grew by 20% in the first quarter of 2013 alone. The CMBS (commercial mortgage-backed securities) market is wide open, and deal underwriting standards have deteriorated significantly. The rest of the ABS (asset-backed security) markets (car loans, aircraft loans, etc) are at pre-2008 levels. Only the non-agency MBS market, including subprime, is still closed. However,I have seen multiple politicians discuss the inequity of a lending market that will only give money to those who don’t need it, mirroring the previous administration’s “ownership society.”

I have often been told, and have frankly repeated, that the same crisis doesn’t recur and the cause of the next set of market bumps and bruises will be different. But today I’m wondering if that’s true. Perhaps it’s more accurate to say that the problems and market issues we had in 2008 were never really resolved, merely transferred and papered over. I don’t want to cry wolf here, and certainly the sort of behavior described above can continue for some time (hello 2005, 1996, and 1989...). However, it’s not that a market crash is imminent, it’s that the market environment is vulnerable.

When prices rise dramatically, as they have, it’s probably partly because prices a few years ago were too low. Indeed, in those times we at Thornburg were working hard to uncover and take advantage of large numbers of opportunities. We were playing offense. But when price advances continue, as they have, without regard to a less-certain fundamental environment, the margin of safety available becomes much more limited. Unfortunately, this problem is compounded by the fact that momentum is a considerable force, and no matter how often we say that past performance is no indication of future results, human psychology tends to drown out those words of warning.

Perhaps the biggest risk we run is that the central bank policies that we’ve seen pursued more and more aggressively over the course of the past several years don’t work to reflate economies. I say this with the full awareness of the damaging power of inflation, especially to fixed-income portfolios. Recent declines in gold and other commodities may indicate a different sort of “lack of faith” in central bank policy. We’ll see. It’s too early to tell.

Within the Thornburg Strategic Income Fund, we have actively reduced risk, particularly in the form of higher-beta fixed income. Today we are playing defense. We had a few positions that moved dramatically both in reaction to an improving credit-specific story (our thesis) and also due to a huge increase in risk appetite (no longer our base case). We sold those. In their place, and with incoming cash flows, we have bought lower-beta positions and a number of idiosyncratic credit stories, plus increased slightly our weight to equities. In all, we have reduced our risk, especially towards those specific areas where global central bank policies are the most keenly felt. Though we will never be able to achieve the dream of significant income and return with no volatility, we generally feel that taking some risk chips off the table, even at the expense of some yield, makes sense. We are also holding a higher cash balance than we would typically in anticipation of better deals in the future.

After all, if everyone hates cash, I don’t mind owning a bit more. Thanks for your interest in the 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.

The Blended Index is composed of 80% Barclays Aggregate Bond Index and 20% MSCI World Index. The Barclays 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 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.