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The second quarter of 2016 proved as volatile as the first. The commodities complex and emerging markets more broadly rallied amid a seeming stabilization of the U.S. dollar. The quarter closed with a sharp global selloff immediately following the U.K.'s "Brexit" referendum to leave the European Union, surprising polling firms, betting houses, and many market participants who had largely expected Britons to vote for remaining in the E.U. The 10-year U.S. Treasury yield immediately dropped some 30 basis points, and then in early July hit a new record low of 1.36%, as investors sought safe-haven assets. On the flip side, the pound fell to a 31-year low and the U.K. government bond yield dropped to below 1% for the first time ever. Yet after tumbling in the vote's wake, both British and European equity markets have since bounced back, both in local currency and dollar terms.

Thornburg Better World International Fund performed largely as expected in the second quarter, slightly lagging amid the rally in commodity-related equities, given our underweight positions in those areas. Fortunately, in several commodities-driven economies, we own companies that generate high returns on capital. These include a water utility in Chile, a food producer in Brazil, a hospital group in South Africa, and a consumer- goods company in Norway. As the rallies in energy and materials prices lifted the currencies and asset markets in these countries, our nicely profitable holdings helped pare the underperformance against the MSCI AC World ex-U.S. Index benchmark, which declined 0.64% in the three months ended June 30, versus the fund's 0.96% fall (A shares without sales charge). Better World International Fund's conservative positioning heading into the Brexit vote also helped: the fund's U.K. weighting stood at 11%, versus 15% for the ACWI ex-U.S. Index, and our positions are less cyclical than the index. Moreover, our cash positioning was ample at nearly 12%, giving us dry power to capitalize on the market dislocations.

While we would certainly like to participate in market rallies, we really aim for strong down capture—declines that are meaningfully less than those of the market. So we were pleased with Better World International Fund's performance during the January selloff, when over the first three weeks of 2016, it declined 8.8% (A shares, without sales charge), materially less than the index's 11.8% drop. Over the nine months since inception, Better World International's down-capture ratio stood at 43%. Limiting downside creates a higher base off which to rebound when the market turns. That has contributed to the fund's outperformance since its September 30, 2015, inception through June 30, 2016, returning 3.35% (A shares without sales charge), versus the benchmark's 2.19% gain in the period.

Among our top contributors last quarter was Twilio, a fast-growing U.S.-based cloud-computing platform provider that reached our target price, so we exited the position. Shares of Japan's Sundrug, which operates an outlet drug store chain mainly in the Tokyo area, advanced on continued strong sales growth and expansion. U.K.-based Poundland is a discount retailer whose low valuation attracted a potential strategic buyer. Japan's Keyence Corp., an industrial automation and inspection equipment manufacturer, continued to outgrow its factory automation peers, despite currency headwinds. Tsuruha, also of Japan, advanced as the drug store chain benefited from the integration of recent acquisitions as well as from a flight to less risky securities in Japan. We trimmed the position.

The major detractors last quarter included Surfstich, an Australian online action sports retailer, shares of which fell sharply as management became too aggressive in its pursuit of growth, in our view, so we decided to exit the position. Dublin-based consumer products and specialty pharma firm Perrigo suffered after a management departure just after a large acquisition, not to mention pricing pressure for its generic drug portfolio. Bank of Ireland, meanwhile, sold off following the U.K.'s Brexit referendum due to concerns around a potential recession in the U.K. and Ireland, lower-for-longer interest rate expectations, and property market risks. Germany's Brenntag, one of the world's largest distributors of chemicals for small to medium businesses, suffered from a lull in organic growth. Homebuilder Cairn Homes, which operates in Ireland, fell on "Brexit" concerns, which we believe will ultimately have little impact on the company. We added to the position. Brexit may even help Cairn Homes because companies that chose London as their European Union base may consider moving to Dublin, as Ireland, of course, remains in the E.U.

Sustainable food production is a value we take to heart. After Danone's $10.4 billion deal to buy U.S. organic-foods-maker WhiteWave Foods in early July, other investors should too. It's one of the reasons we hold Europe's leading organic- food company, Amsterdam-based Wessanen. Founded in 1765, Wessanen in modern times was among the first to recognize the growth potential in branded organic and sustainable foods, and dropped its distribution and private label assets. It was also an early pioneer in adopting environmental, social, and governance (ESG) principles, including promoting women to 55% of management1 and tying improvements in sustainability metrics to compensation. Wessanen boasts enviable ESG metrics, such as renewable energy contributing 94% of its total electricity consumption and a declining ratio of waste to volume sold. Improvements in ESG metrics are also helping translate into attractive financial momentum. Its return on average capital employed, a measure of relative profitability of capital used, hit 20% last year. It has an underutilized balance sheet and it boasts a free-cash-flow yield of nearly 5%.

Alongside an attractive share price, these are the sorts of synergistic financial and ESG characteristics that we like in our portfolio holdings. An attractively priced stock, newly focused Wessanen earns high returns, thanks in part to its sustainability branding and improving margins, as it gains scale.

Over the long run, through bouts of market volatility and rallies, we believe this approach can compound at a faster pace, rewarding investors who seek sustainable, and profitable, investments.

Thank you for investing alongside us in Thornburg Better World International Fund.