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Tweedy, Browne Q3 Investor Letter
Posted by: gurufocus (IP Logged)
Date: November 8, 2011 08:55PM
Volatility returned with a vengeance to global equity markets in the 3rd quarter set off by the debt ceiling debate, the resultant downgrade in the U.S. credit rating, and the resurgence of the Southern European debt crisis. Over the last three months, the MSCI World and EAFE Indices had peak to trough declines of around 20%, and finished the quarter down -16.61% and -19.01%, respectively. The S&P 500 also finished the quarter down -13.87%. While the Tweedy, Browne Funds were also down for the quarter (which is nothing to crow about), all four comfortably bested their benchmark indices. Longer-term comparisons also remain quite favorable.
We are also pleased to report that two of our Funds, the Tweedy, Browne Worldwide High Dividend Yield Value Fund, and the Tweedy, Browne Value Fund, won the Silver and Bronze Awards, respectively, in the Global Equity category (out of three nominees), for the Standard & Poor's Mutual Fund Excellence Awards in 2011, which recognizes Funds that have achieved the highest overall ranking of five-star in their category on the most consistent basis for the twelve month period ending August 31, 2011, based on S&P's proprietary, quantitative research methodology. This is the second year in a row that the Value Fund won the Bronze Award in this category. Some of the factors that S&P's research process seeks to identify are: consistently strong performance; high quality holdings as measured by S&P STARS (Stock Appreciation Ranking System); S&P Credit Ratings; S&P Quality Ranks; and favorable cost factors. Additional information about the awards program, the selection methodology, and the award recipients is available at www.spfundawards.com. †
The performance data quoted herein represents past performance and is not a guarantee of future results. Investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please visit www.tweedy.com to obtain performance data that is current to the most recent month-end.
As market volatility spiked up over the last three months, it was the consumer staples stocks, which are the more traditionally defensive stocks, that held up best in our mutual fund portfolios, i.e., the food, beverage, tobacco, and healthcare holdings. This included companies such as Unilever (UL), Coca Cola (KO), British American Tobacco (BAT), and Roche (RHHBY). The earnings of these companies typically hold up relatively better in recessions, as consumers generally resist cutting back on these types of expenditures, and that has proven to be the case. We also had good relative results in holdings such as Cisco (CSCO) and MasterCard (MA), whose businesses performed well in a difficult period.
As concerns about the debt crisis both in Southern Europe and the U.S. resurfaced, the financial stocks in which our Funds were invested began to contract, especially a number of our insurance stocks, such as Zurich Financial, Munich Re, and CNP Assurances. One bright light in the financial group was Provident Financial, the UK consumer lender, whose business is somewhat insulated from the macro factors affecting more mainstream financials. The company also continued to post steady and growing results during the period particularly in their credit card business. Their dividend yield of nearly 9% was another contributing factor. In the wake of forecasts suggesting a significant slowdown in economic growth, our media holdings declined led by Axel Springer and Mediaset España. Also, our oil & gas stocks including ConocoPhillips (COP), Devon Energy (DVN) and Total (TOT) contracted in price as the price for crude oil came down, again impacted by what appeared to be the prospects for a more sluggish recovery near term.
Portfolio activity was somewhat incremental during the quarter as we tried to pick our spots carefully to get the best entry point pricing we could in our purchases. We established a few new positions in the Funds, and added to and trimmed a number of others. There were also a couple of sales. The new positions included UK based Imperial Tobacco (ITY), the fourth largest tobacco company in the world, which at purchase was trading at roughly 11 X 2011 earnings and had a dividend yield north of 4%. We also purchased some shares in a company we have owned in the past, United Overseas Bank, one of the three leading commercial banks in Singapore, which at purchase was trading at approximately 10X earnings, and had a current dividend yield including special dividends of around 4%. In addition, we purchased shares in NGK, a Japanese spark plug manufacturer which has a strong market position and at purchase was trading between 7 and 8 times 2011 earnings. As oil prices declined bringing down oil stocks, we added to our positions in ConocoPhillips and Total. We also added to our positions in Roche, Akzo Nobel, Wells Fargo (WFC), and Berkshire Hathaway (BRK.A)(BRK.B), among others.
On the sell side, we sold our position in Federated Investors, a company that was highly dependent for its profitability on its money market fund business, after Federal Reserve Chairman Bernanke indicated he was going to keep short term interest rates down at rock bottom levels until 2013. We also sold our position in Transatlantic Holdings after a number of companies put forth competing takeover bids for the company that drove the market price to levels we deemed adequate. We trimmed our positions in Linde, SK Gas, Jardine Strategic, Kone, and Arca, among others.
From a valuation perspective, as of September 30, we think that the equities in our Fund portfolios were reasonably to attractively priced with the weighted average price earnings ratio on 2011 earnings for the Top 25 positions in our Funds ranging from 11.2 to 12.4 times earnings. The Top 25 positions in our four Funds also had an average weighted dividend yield ranging from 3.8% to 5.1%. (Please note that the average weighted dividend yields shown above are not representative of the Funds' yield, nor do they represent the Funds' performance. The figures solely represent the range of the average weighted dividend yield of the top 25 common stocks held in each Fund's portfolio. Please refer to the 30-Day Standardized Yields in the performance chart on Page 1 for the Funds' yields.) The level of cash reserves currently range from roughly 22% in our newer unhedged Global Value Fund, which is still in the construction phase, all the way down to 10% in our Value Fund. If equity markets continue to churn in the weeks and months ahead, we still have some dry powder with which to take advantage.
The confluence of too much debt, a sense of political paralysis in the U.S., and unnerving volatility has created a level of stress in public equity markets that tests the resolve of even the most resolute of investors. Until policy makers formulate a credible long-term workout plan, equity markets are likely to remain volatile. It is important in this type of market environment to have portfolio holdings that can weather turbulent market conditions. We believe this to be the case with respect to our Funds. Our Fund portfolios continue to consist for the most part of larger, less cyclical, steadier companies with more sustainable demand characteristics that are globally diversified, have solid balance sheets, sell products to an aspiring and growing middle class, and pay an attractive dividend yield while we wait for value recognition.
Thank you for investing with us, and for your continued confidence.
Tweedy, Browne Company LLC
William H. Browne
Thomas H. Shrager
John D. Spears
Robert Q. Wyckoff, Jr.
† S&P Capital IQ's 2011 Mutual Fund Excellence Awards were derived from an initial universe of over 19,000 funds and were recognized as having most consistently achieved the highest overall quantitative ranking of five-star funds in their respective categories using S&P Capital IQ's proprietary, holdings-based research during the 12-month period ending August 31, 2011. To be considered, a fund must be open to retail investors with a minimum initial investment of $25,000 or less and must have an overall S&P Capital IQ ranking of five stars with positive indications for Performance Analytics, Risk Considerations and Cost Factors as of August 31, 2011. Among the factors considered are consistent strong performance; high quality holdings as measured by S&P STARS research, S&P Credit Ratings, and S&P Quality Ranks; and favorable cost factors. The three funds with the highest consistency score in each category are declared Gold, Silver and Bronze Award recipients of S&P Capital IQ Mutual Fund Excellence Awards.
As of September 30, 2011, both the Tweedy, Browne Value Fund and Tweedy, Browne Worldwide High Dividend Yield Value Fund received an overall S&P Mutual Fund Ranking of 5 stars out of 1,285 Global Equity funds. The overall S&P Mutual Fund Ranking is based on a weighted average computation of three components – performance analytics, risk considerations and cost factors that evaluate, relative to its peers, a fund's underlying holdings, its historical performance, and characteristics of the fund. The S&P rankings do not take into account loads or any other sales charges. The top 10% of funds in each category receive 5 stars, the next 20% receive 4 stars, the middle 40% receive 3 stars, the next 20% receive 2 stars and the bottom 10% receive 1 star.
* The Adviser has contractually agreed to waive its investment advisory fee and/or to reimburse expenses of the Worldwide High Dividend Yield Value Fund and Global Value Fund II — Currency Unhedged to the extent necessary to maintain the total annual fund operating expenses (excluding fees and expenses from investments in other investment companies, brokerage, interest, taxes and extraordinary expenses) at no more than 1.37%. This arrangement will continue at least through December 31, 2012. In this arrangement the Worldwide High Dividend Yield Value Fund and Global Value Fund II — Currency Unhedged have agreed, during the two-year period following any waiver or reimbursement by the Adviser, to repay such amount to the extent that after giving effect to such repayment such adjusted total annual fund operating expenses would not exceed 1.37% on an annualized basis. The performance data shown above would be lower had fees and expenses not been waived and/or reimbursed.
The Funds do not impose any front-end or deferred sales charge. However, the Tweedy, Browne Global Value Fund, Tweedy, Browne Global Value Fund II – Currency Unhedged and Tweedy, Browne Worldwide High Dividend Yield Value Fund impose a 2% redemption fee on redemption proceeds for redemptions or exchanges made within 60 days of purchase. Performance data does not reflect the deduction of the redemption fee, and if reflected, the redemption fee would reduce the performance data quoted for periods of 60 days or less. The expense ratios shown above reflect the inclusion of acquired fund fees and expenses (i.e., the fees and expenses attributable to investing cash balances in money market funds) and may differ from those shown in the Funds' financial statements.
Guru Discussed: Tweedy Browne: Current Portfolio, Stock Picks
Stocks Discussed: UL, KO, BAT, RHHBY, CSCO, MA, COP, DVN, WFC, BRK.A, BRK.B, TO,