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CEF Insights Podcast: TBLD's Global Strategy for Building Income

Ben Kirby, Thornburg


Ben Kirby

CFA, Co-Head of Investments, Managing Director & Portfolio Manager

Thornburg Investment Management

Robust economic growth surprised investors this year, but significant geopolitical tensions and other factors bring uncertainty. As 2024 approaches, Thornburg Investment Management’s Ben Kirby discusses its global strategy for providing long-term investors with income despite current market challenges, and views on the broader market outlook. Listen to the episode and view the transcript below.

Thornburg is a privately held global investment firm delivering on strategy for institutions, financial professionals, and investors worldwide, and offers a variety of products including closed-end funds. Its Thornburg Income Builder Opportunities Trust (TBLD) allocates between global equities and fixed income to support an income stream as well as total return for investors.


Welcome to CEF Insights, your source for closed-end fund information and education, brought to you by the Closed End Fund Association. Today we are joined by Ben Kirby, Managing Director and Co-Head of Investments with Thornburg Investment Management, as well as Portfolio Manager of Thornburg Income Builder Opportunities Trust, ticker TBLD. Ben, we are happy to have you with us today.

Ben Kirby:
Thanks. Great to be here.

Ben, TBLD allocates between global equities and fixed income to support an income stream as well as total return for investors. Can you discuss the investment strategy for the fund and how the components of this strategy complement each other?

Ben Kirby:
Yeah, so TBLD is really focused on providing an income stream for longer term investors, and we think it's important that that income stream not only be attractive relative to current market opportunities, but also have the ability to generate capital gains and long-term appreciation over time. So, it's a strategy that focuses on a wide toolkit. We can look at dividend paying stocks on a global basis. We can look at bonds and hybrid securities also on a global basis. And then we have an option strategy that allows us not only to dampen volatility, but also to provide an additional source of income. So, those three income streams really do provide, we think a resilient and robust source of income for our long-term investors.

As a multi-asset strategy, you have a broad range of opportunities in the TBLD investment universe. How does your process make specific security selections and allocate those positions as you build your portfolio?

Ben Kirby:
So, we're always looking at the risk and reward of different asset classes and within the asset class. And what we really want to do is try to find those securities that will meet our objectives of that attractive long-term return and especially income stream, but to do so in the lowest risk way possible. On the equity side, we're definitely going to look at a company's ability and willingness to pay dividends. So, whenever we use that phrase, ability to pay dividends is shorthand for good companies. It's companies that have robust businesses, they have a moat around the business, they have competitive advantages, they're generating cashflow. So, that's a good business. It's a quality business.

Those kinds of companies that generate cashflow have the ability to pay dividends, but we have to marry that with companies' willingness to pay dividends. So, ability is shorthand for cash generative companies. Willingness, is shorthand for a decision that's made in the boardroom and a company's desire to share a portion of those cash flows with shareholders in the form of dividends. So, on the equity side, we're always looking for those companies with those attractive dividend policies. And then we're always comparing the valuation and the risk reward of those securities to corporate credit and other fixed income instruments for the best risk reward for our clients.

TBLD launched in July 2021, and you have managed the fund through a period of significant change in the economic environment. How did the portfolio adjust as you were going through this period?

Ben Kirby:
Yeah, we definitely launched the portfolio at a moment in time right before the Fed started really increasing the interest rate. And that was a moment in time where, for example, high yield bonds were yielding about 4% and today they're yielding closer to 9%. So, that's a really big move in yields. Of course there was also a really big move in the front end of the curve as well. We've positioned the portfolio over that time by gradually increasing our exposure to fixed income. That really is, again, getting back to the risk reward of opportunities as yields have risen in fixed income, the go forward return expectations now look a lot more attractive. So, being able to lock in a 4% yield on high yield bonds at inception was not very attractive relative to the ability to lock in 8%, 9%, or even higher percent yields today. So, gradually we've been shifting to a bit more fixed income. We like the risk reward here relative to especially some of the growthier equities.

How is the TBLD portfolio currently positioned?

Ben Kirby:
We continue to be positioned significantly overweight international equities. So non-US equities are about 39% of the portfolio and US equities are another 19%. As you think about those two combined, that's a bit below our long-term target of about 70% equity. And again, that gets back to the reality that we think that the fixed income opportunities look a bit more attractive. In terms of domestic versus international. This portfolio has always had, and we think will likely continue to maintain, a relatively high exposure to international equities relative to domestic. And the reason for that, there's actually a few. One is simply that international stocks tend to have much higher dividend yields than domestic stocks. Even for companies that are very similar, operating in very similar businesses, with very similar assets, with very similar growth rates, there's just higher dividend yields, especially in Europe than there is in the US.

So, for a portfolio that really cares about income generation, we're going to naturally skew increasingly international. The other part is that international assets really are trading at a discount today, and we've taken advantage of that discount by continuing to hold those securities and increase our exposure to those international assets. International stocks normally do trade at a discount to domestic equities, but today that discount is unusually wide and we think that presents an opportunity.

On the fixed income side, again, we have increased our fixed income weighting and we're pretty happy with our fixed income portfolio, the yield to worst on the fixed income side, certainly in the high eights at this point. So, we're excited about that. We've increased cash a little bit, so one year ago, and certainly at inception, cash essentially paid zero. Today cash is paying around 5%, so we have a bit more cash in the portfolio, which generates some income and also gives us some flexibility to be responsive as asset prices move in the future.

Ben, the Federal Reserve has raised interest rates to over 5%. Inflation has been a challenge, economic growth has been resilient, but federal deficits are daunting. We also have significant geopolitical tensions that impact markets. Where do you see the investment markets currently and what is your outlook for the rest of 2023 and into 2024?

Ben Kirby:
Big surprise in 2023 really has been that economic growth has remained so robust in the face of monetary tightening. We all knew that the rates were going to be going a lot higher a year ago, and sure enough, they continue to increase for the better part of 2023. The big surprise is that growth has also come in much, much stronger than expected. So, Q3 growth was 4.9%. That's well above potential growth of about 2%. And to your point, inflation 3.7% is still well above the Fed's target. So, overall the economy is still running pretty hot based on those metrics. I think that's been the big story of 2023.

We also think the Fed is probably relatively near the end of the hiking cycle, maybe completely done or maybe just relatively near the end. 525 basis points of tightening take a while to work through the system. And that really is something that, as market participants, we can get impatient, we can see the rates have increased, but it turns out that it takes a little while for that to flow through the economy, to flow through different sectors, to slow growth and to eventually increase defaults probably within lower income consumers and some of the weaker corporates as well.

So, we think that process is still playing out. We think that a recession is still more likely than not, although we have to acknowledge that things seem to be trending in a direction that would at least make the possibility of a soft landing a bit higher today than it was a year ago. But that said, it just takes a while for that tiding to roll through the system. Certainly the conflict in Russia and Ukraine and now between Israel and Hamas present another layer of uncertainty.

And as we position the portfolio for that uncertainty, it's important to have humility and to realize that we don't know what potential outcomes are. And so to have a portfolio that can protect and participate in a variety of environments, to us that means having some cash. It also means having our option portfolio positioned in a way that's relatively defensive. So, in general to be writing a few more calls and a few less puts in the portfolio in case we do get those periods of volatility, we can provide a layer of downside protection in this portfolio.

Where are you seeing the best opportunities in this market?

Ben Kirby:
We are definitely seeing great opportunities in international equities, and so we talked about that earlier. There's a broad discount on international equities. Let me go a step further. There's an even bigger discount in dividend paying stocks around the world and especially international dividend paying stocks. At a time when the US has returned, the S&P 500 has returned, 13% this year as of early November, the equal weighted S&P is flat, so pretty close to zero return, which really reflects the reality that the return has been driven by a very narrow leadership in the market and the dividend paying part of the market is down for the year, if you look at various dividend paying indices. Fortunately, our stocks are up for the year, so we feel good about that. But look, the valuation discounts of high quality dividend paying companies in the US, but even more so outside the US, is exceptionally wide today and exceptionally attractive.

We think that we are in a cost of capital normalization so that whenever interest rates were at zero for so much of the last decade, that really was an unusual period, and that we're just simply getting back to a more normal environment where interest rates should not be zero, there should be a positive real return. And in that new environment, where the cost of capital is higher, that's both debt and equity capital is higher, that will tend to favor those more robust companies as opposed to those earlier stage growth companies.

We talked early on about the security selection process for this portfolio, where we really want to look at those companies with the ability and the willingness to pay dividends. Those are the companies that we think are especially going to benefit in a higher rate environment because they do have that moat around the business. They do have those competitive advantages that cash generation, they don't need to access capital markets to grow. They have enough internally generated cashflow to grow. So, we are excited that in many ways the normalization of the cost of capital is likely to be a benefit for this strategy and to improve our long-term returns.

How do you see active investment management across the range of potential investments available to TBLD addressing the challenges this market environment presents?

Ben Kirby:
Active management is critical. We think, especially as you look at a couple of things. One is the likelihood of lower returns going forward. So, the last 10, 15 years was really a strong period for stock investors and especially investors in the NASDAQ or in the S&P 500. And that's because in 2010 the PE of the S&P 500 was 10, and today that PE is 18 or 19 on a go forward basis. So, there's been a huge re-rating of the US market over that time period. So, those really exceptional returns that were able to be achieved in the past decade simply by closing your eyes and buying the S&P 500 ETF or index fund, much of those returns came from that multiple re-rating. The starting place today is very different. 18 PE versus 10 is a huge difference. Probably we're not going to go from 18 to 26 over the next 10 years.

So, that really does mean that the role of active management and being able to identify those parts of the market that are more likely to be undervalued, more likely to outperform is much more important today than it was in the last 10 years. So yeah, we think that the future for active management is bright.

Maybe one other point I'd make on it is for a strategy like this, which is focused on income generation, it's important that dividend oriented strategies don't simply mechanically buy the highest dividend yielding stocks in the market. And that's because those companies with a very high dividend yield are more likely to be cutting their dividends in the coming 12 months or in the coming 24 months than the average stock. And it turns out that the process of going from having a very high dividend yield to the market worrying about it and eventually having that dividend be cut, is really bad for the shareholders. Stock prices tend to go down a lot over that time period.

So, as active managers, we're not just looking for the companies with the highest yields, we're using deep fundamental analysis, we're talking to management teams, we're building financial models, we're traveling, we're doing price target analysis and sensitivity analysis, all the deep fundamental work that helps us to avoid those dividend cutters and focus on those dividend payers and dividend growers in the portfolio that are going to be able to provide not only more attractive income streams over time, but also much more attractive total return.

Ben, how do you see an allocation to a global multi-asset strategy like TBLD best positioned in an investor's diversified portfolio? And likewise for an investor that is more income oriented?

Ben Kirby:
An interesting statistic is that over time dividend paying stocks tend to outperform the market. And I think that in the period of very low interest rates, many investors forgot that, because in the past 10 or 15 years, the companies that really outperformed were those that had no dividends, right? So think about the Magnificent Seven. These are high quality growth companies, but in general have very low or no dividends. So, we've had a period where rates were very low and companies that didn't generate a lot of cash flow, did not pay dividends, tended to outperform. But if you want to go back longer than that, go back 40 years and look at the returns of companies that pay dividends versus companies that don't. It turns out that companies that pay dividends not only generate higher through cycle returns on an annualized basis, but they also have a lower volatility.

And you can do even better, again, if you avoid the dividend cutters and you focus on the dividend growers and those companies that are just starting to pay dividends. Those companies outperform the market by several percentage points per year over a 40-year time period and with less volatility. So, the way that we think about arguing for how a portfolio like this should fit into a client's broader portfolio, is that it should be a big part of the portfolio. Income paying securities, whether equity or fixed income, should form, we believe, the core for most investors' portfolio, even if they're not necessarily income focused, again, because you get the income benefits, but you also get the benefit of better long-term returns and lower volatility. So for us, it's a robust long-term strategy, both for investors who are interested in total return and especially for investors who are interested in an attractive income stream and the potential for growth in the portfolio over time.

Ben, thank you for taking the time to share your thoughts with us today.

Ben Kirby:
Thanks so much for having me.

And we want to thank you for tuning into another CEF Insights podcast. For more educational content, please visit our website at

Podcast recorded November 2023.

This material is not, and is not intended as investment advice, an indication of trading intent or holdings, or the prediction of investment performance. All fund-specific information is the latest publicly available information. All other information is current as of the date of this presentation. All opinions and forward-looking statements are subject to change at any time.
Thornburg disclaims any responsibility to update such views and/or information. This information is deemed to be from reliable sources; however, Thornburg does not warrant its completeness or accuracy. This presentation is not intended to and does not constitute an offer or solicitation to sell or a solicitation of an offer to buy any security, product, investment advice or service, nor shall any security, product, investment advice or service be offered or sold in any jurisdiction in which Thornburg is not licensed to conduct business and/or an offer, solicitation, purchase or sale would be unavailable or unlawful.

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