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Tweedy Browne First Quarter 2014 Letter to Investors
Posted by: Holly LaFon (IP Logged)
Date: May 5, 2014 09:42PM
After a strong year-end finish, global equity markets plateaued in the first quarter of 2014 as slowing growth in emerging markets and increasing tension in a number of regions slowed the building equity market momentum of 2013. On a relative basis, the Tweedy, Browne Funds responded well to this more unsettled environment with all four of our Funds besting their benchmark indices for the quarter. Most longer term performance comparisons continue to be quite favorable.
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.
* The Adviser has contractually agreed to waive its investment advisory fee and/or to reimburse expenses of the 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, 2014. The Global Value Fund II – Currency Unhedged has 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 the Fund's 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 and Worldwide High Dividend Yield 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 (for the Value Fund) and from September 5, 2007 through December 31, 2013 (for the Worldwide High Dividend Yield Value Fund). The Funds do not impose any front-end or deferred sales charges. 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. Please note that the individual companies discussed herein represent holdings in our Funds, but are not necessarily held in all four of our Funds. Please refer to footnotes on page 12 for the Funds' respective holdings in each of these companies.
As the bull market gained momentum over the last year, the more cyclical components of our Fund portfolios began to deliver the best returns. However, as markets got a bit choppier in the first quarter of this year, our pharmaceutical holdings were once again the best performing component of our Fund portfolios. Our big three long term pharma holdings, Roche, Novartis, and Johnson & Johnson, all produced high single digit returns. With the exception of Philip Morris International, tobacco holdings such as British American Tobacco and Imperial Tobacco produced strong returns during the quarter. The same held true for oil & gas and energy related companies such as Total, Royal Dutch, Cenovus, and Halliburton, which continued to perform well. Financials such as consumer finance company Provident Financial and insurance companies such as Zurich Insurance and CNP Assurances also contributed significantly to Fund returns during the quarter. In contrast, we did not get stock market recognition during the quarter in a number of our beverage, media, and bank stocks, despite continued fundamental progress for most of them. Companies such as Diageo, Coca-Cola Femsa, the Daily Mail, Pearson, Schibsted, DBS Group and HSBC had negative returns for the quarter.
In terms of portfolio activity, we established one new position during the quarter in all four of our Funds: Standard Chartered Bank (LSE:STAN), a large UK-based global bank with over 1,700 branches in 70 different markets around the globe. While Standard Chartered is domiciled in the UK, it is anything but a British bank. Founded in 1969 through the merger of Standard Bank of British South Africa and Chartered Bank of India, Australia and China, it is a bank with the bulk of its operating income derived from wholesale activities such as corporate finance, trade finance, foreign exchange, cash management, and custody services in markets such as Asia, the Middle East, and Africa. They also have a sizeable and conservative consumer business with a mortgage portfolio that is well secured by a loan-to-value ratio on its mortgages of less than 50%. Furthermore, it is a deposit financed bank that is not dependant on volatile, short term financing, as evidenced by a loan-to-deposit ratio of approximately 76%. The bank was considered a growth bank in the 2000s, somewhat immune to the problems of Western banks. It rode a wave of Asian growth and routinely traded at price/earnings ratios of 15 to 20 times earnings. Its fortunes began to change in 2011, as economic growth began to slow in a number of its most important markets. Some markets like South Korea have posed even bigger challenges, as new regulation impacted the growth prospects and the profitability of virtually all banks doing business in its jurisdiction. These factors, together with what we consider to be misplaced concerns about its capital position under Basel III and a recent management shakeup, have led its stock price to a fall from grace. This allowed us an opportunity to purchase our initial shares at approximately 9.5 times estimated 2014 earnings, 1.2 times stated book value, and what we believe to be a secure dividend yield today of over 4%. Standard's management still considers the bank to be a growth bank; however, it acknowledges that near-term growth will be lower than that enjoyed in the 2000s. We believe that a conservatively financed global bank that services many of the fastest growing parts of the world where middle classes are on the rise over the longer term and that is priced in the stock market at a significant discount to what we believe is a conservative estimate of its intrinsic value is worth a diversified bet in our Funds' portfolios.
In addition to this new position, we got a trading opportunity in Cenovus (CVE), the Canadian oil sands company, and added it to the Global Value Fund and Global Value Fund II – Currency Unhedged. It had previously only been held in the Worldwide High Dividend Yield Value Fund. We also added to our positions in Banco Santander Brasil, Antofagasta, Bangkok Bank, Imperial Tobacco, and Unilever. On the sell side, we sold our remaining shares of Tomen Electronics (TSE:7558), which had reached our estimate of intrinsic value; and Canon (CAJ), which had been a disappointment. We trimmed our positions in Daetwyler Bearer, Mediaset España, the Daily Mail, Nestle, Unifirst, MasterCard, Wal-Mart, and a number of Japanese holdings. In the Worldwide High Dividend Yield Value Fund, we sold ADP and BAE, both of which had reached our target prices, and Metcash, which had largely been a disappointment except for its high dividend. We also trimmed our positions in Sysco and Tesco.
As we have said before in some of our more recent updates, we are now five plus years into a strong recovery in equity prices, which in our opinion has outstripped the underlying economic recovery. It should come as no surprise that most securities are, in our view, fairly and, in some instances, overpriced. While we are seeing some new idea flow in lesser developed economies, it is not enough to offset the pruning we have been doing in our Fund portfolios and, as a result, we hold more cash reserves than we would like. Many so called "new technology and media" companies today trade at what we feel are nosebleed valuations, and as we write we are seeing a bit of a correction in those shares. Should that activity, or any of the macro fires that are burning around the world, begin to affect the broader market, we may very well get an opportunity to put some of the Funds' cash reserves to work. In the interim, we will remain patient.
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.
Guru Discussed: Tweedy Browne: Current Portfolio, Stock Picks
Stocks Discussed: LSE:STAN, CVE, TSE:7558, CAJ,