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Tweedy Browne Second Quarter Commentary
Posted by: guruhl (IP Logged)
Date: July 26, 2012 10:40AM
Global equity markets turned negative for the 2nd quarter as concerns about a slowing global economy, recurrent eurozone uncertainty, and an unresolved budget standoff in the U.S., put a damper on equity prices. While all four of the Tweedy, Browne Funds beat their respective benchmarks, they declined modestly for the quarter. Year-to-date numbers were positive, as the table below indicates, and long-term performance comparisons remain quite favorable, with all four Funds besting their benchmarks in all standard annualized reporting periods.
* 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, 2013. 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 Value Fund's performance data shown above would have been lower had certain fees and expenses not been waived from December 8, 1993 through March 31, 1999.
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.
Our returns for the quarter were driven in large part by strong results in beverage stocks such as Arca Continental, Coca-Cola Femsa and Diageo (DEO); pharmaceutical holdings such as Johnson & Johnson, Novartis and Roche; and two rail holdings, Norfolk Southern and Union Pacific. In addition, Wal-Mart (WMT) was also a significant contributor to the returns in the Value Fund, as was Pearson PLC and Kimberly Clark in our Worldwide High Dividend Yield Value Fund.
Our media, oil and gas, and insurance holdings produced disappointing returns for the quarter, leading the overall portfolio into negative territory. The same held true for holdings such as Emerson Electric, ABB, one of our chemical stocks, Akzo Nobel, and the Japanese electronics company, Canon. At the risk of repeating ourselves, we do not believe stock price movements over a quarter are necessarily indicative of specific company performance. In fact, most of these companies continue to make good economic progress. With the uptick in volatility during the quarter, we established several new positions across our Funds and sold a number of positions that had reached our targets. We also took advantage of price movements, adding to and trimming a number of other positions. Material new purchases in the Funds included Safran (SAFRY), the French aerospace company; Siemens (SI), the German engineering and industrial giant; Vallourec (VLOWY), the French seamless pipe manufacturer; and Google (GOOG), the US-based information technology company. We also began building a position in HSBC (HBC), the UK-based, but largely Asian bank, and in Guoco Group, the Hong Kongbased property company, which we owned successfully in the past. All six of these companies trade at significant discounts from our conservative estimates of intrinsic value, enjoy competitive advantages in their respective industries, have strong balance sheets, and what we believe to be solid growth prospects. We also took advantage of price movements to add to our positions in Total (TOT), Bank of New York (BK), ABB (ABB), Axel Springer, Novartis (NVS) and J & J (JNJ), among others.
In terms of sales, we sold our remaining shares of Linde, AT&T (T), Genuine Parts (GPC) and Coca-Cola (KO), all of which had performed well, meeting our intrinsic value targets. We also sold our remaining shares of Mediaset SpA, which had been a disappointment in the wake of continued eurozone instability and economic malaise in Southern Europe. We continued to reduce our positions in the Mexican coca cola bottlers, Arca Continental and Coca-Cola Femsa, and trimmed our positions in Henkel, Kone, Philip Morris International, Diageo, Wal-Mart, and Kimberly Clark, among others as these companies' equity prices approached intrinsic value, and more attractively priced alternatives became available.
While many of our steadier consumer products company holdings are up in price, and in some instances trading at or near our estimates of intrinsic value, other parts of our portfolio continue to trade at substantial discounts to these estimates. We believe the overall valuation characteristics of our Fund portfolios continue to be quite reasonable-to-attractive, with a forward 2012 weighted average price/earnings ratio for their top 25 holdings ranging from 11.5X to a little over 13X, and a weighted average dividend yield that ranges from 3.2% to 4.6%. These characteristics, we believe, continue to compare quite favorably to benchmark indices and fixed income alternatives, in particular, and should, we hope, lead to attractive but invariably lumpy returns for investors with longer term time horizons. † (Please note that the range of weighted average dividend yields shown above is not representative of a Fund's yield, nor does it represent a Funds' performance. The figures solely represent the range of the average weighted dividend yield of the top 25 common stocks held in each of the Funds' portfolios. Please refer to the 30-day Standardized Yields in the previous performance chart for each of the Fund's yields.)
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.
Dated: July 25, 2012
† Stocks and bonds are subject to different risks. In general, stocks are subject to greater price fluctuations and volatility than bonds and can decline significantly in value in response to adverse issuer, political, regulatory, market, or economic developments. Unlike stocks, bonds, if held to maturity, generally offer to pay both a fixed rate of return and a fixed principal value. Bonds are subject to interest rate risk (as interest rates rise bond prices generally fall), the risk of issuer default, issuer credit risk, and inflation risk.
Guru Discussed: Tweedy Browne: Current Portfolio, Stock Picks
Stocks Discussed: SAFRY, SI, GOOG, HBC, VLOWY, TOT, BK, NVS, JNJ, ABB, T, GPC, K,