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Tweedy Browne Q3 Letter
Posted by: Holly LaFon (IP Logged)
Date: November 1, 2012 05:33PM
To say that markets of late have been driven by the actions and comments of central bankers around the world is an understatement. Thanks in large part to their monetary policies, global equity markets posted solid gains for four consecutive months through quarter end. The Tweedy, Browne Funds were up solidly during the quarter producing returns between 4.98% and 6.48%, and are up between 15.76% and 21.79% for the last twelve months ending September 30. Fundamentally, however, in our humble opinion, not much has changed, particularly on the macroeconomic front where uncertainty still looms large. The global economic recovery remains anemic; the eurozone continues to be mired in uncertainty; China appears to be slowing; tensions are escalating in the Middle East; and the U.S. has made little-to-no progress with respect to its own budget crisis. Even corporate performance, which has been surprisingly good, now appears to be weakening somewhat. With bonds at historically high valuations, investment capital, supported by monetary ease, has only just begun to flow back into stocks ever so modestly, which on a relative basis seem to be a much better value, in our estimation.. Although, we are sure our view comes as no surprise.
Our returns for the quarter were driven in large part by strong results in beverage stocks, such as Arca Continental (ARCAY), Diageo (DEO), and Heineken Holding (HINKY); pharmaceutical holdings such as Novartis (NVS) and Roche (RHHBY); financials such as Provident Financial (PFS), Munich Re, and Zurich Insurance Group; and Total (TOT) and Phillips 66 (PSX), two oil & gas holdings. In addition, industrial companies such as Kone, Siemens, ABB, Akzo Nobel, and the information technology company, Google, were also significant contributors for the quarter.
Tobacco holdings such as Imperial Tobacco and British American Tobacco, together with a number of our Japanese holdings such as Canon, Honda and Takata produced disappointing returns for the quarter. The same held true for holdings such as G4S, Exelon and Vodafone. At the risk of repeating ourselves, we do not believe stock price movements over a quarter are necessarily indicative of specific comp any performance. In fact, most of these companies continue to make good economic progress.
With stocks on the move, new buys have been scarce of late, and several of our existing holdings are trading at or near intrinsic value. Consequently we have trimmed or eliminated a number of positions in our Fund portfolios including Fraser & Neave, Abbey PLC, Schibsted, Philip Morris International, Heineken Holding, Kone, ADP, and Kimberly Clark, among others.
New additions to the Fund portfolios during the quarter included NGK Spark Plug, Scor, and Lintec. All three of these companies trade at significant discounts from our conservative estimates of intrinsic value, and we believe that they enjoy competitive advantages in their respective industries, have strong balance sheets and solid growth prospects. We also added to our positions in Safran, Total, G4S, HSBC Holdings, Teleperformance, Royal Dutch and Tesco, among others.
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 discounts to these estimates. We believe the overall valuation characteristics of our Fund portfolios continue to be quite reasonable-to-attractive, with forward 2012 weighted average price/earnings ratios for their top 25 holdings ranging from 11.8X to a little over 13X, and a weighted average dividend yield that ranges from 3.1% to 4.4%.†† 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.† All of that said, bargains are getting much harder to come by and if equity markets continue to march forward in the weeks and months ahead, cash reserves will likely build at the margin in our funds. (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: November 1, 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. †† P/E ratios based on estimated 2012 earnings. Source: Bloomberg.
Guru Discussed: Tweedy Browne: Current Portfolio, Stock Picks
Stocks Discussed: ARCAY, DEO, HINKY, NVS, RHHBY, PFS, PSX, TOT,