Tweedy, Browne First Quarter Letter with Outlook
1st Quarter 2012
The global equity markets' year-end price momentum carried over rather aggressively into the new year, producing returns for the first quarter that were quite strong, despite what could only be described as incremental improvement at best in the underlying fundamentals of the global economy. In fact, shortly after quarter end, Spanish bond yields spiked, once again heightening fears about a potential unraveling in the eurozone. While the Tweedy, Browne Funds produced very good absolute returns for the quarter, they trailed their respective benchmark indices, which is not surprising in light of the markets' rather aggressive return to risk. Longer-term comparisons for our Funds remain quite favorable.
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Our returns for the quarter were driven in large part by strong results in our financial stocks, and to a lesser extent by very solid results in some of our consumer staples stocks, as well as some consumer discretionary holdings. Among the financials, it was our insurance holdings that led the way with companies such as CNP (CNP), Munich Re and Zurich Financial, producing strong double-digit returns. We also had good results in our bank stocks, including Wells Fargo (WFC), Bangkok Bank and United Overseas Bank. We had nice returns for the quarter in beverage companies Diageo (DEO) and Heineken Holdings (HINKY); Henkel (HENKY), the household products company; as well as Philip Morris (PM), the tobacco giant. Two of our media holdings, Axel Springer and Schibsted had a strong quarter as well.
As was the case at year-end, very few of our stocks disappointed for the quarter. However, while their underlying businesses continued to make progress, we had negative returns in pharmaceuticals GlaxoSmithKline (GSK) and Novartis (NVS). The same held for a few of our oil stocks including Royal Dutch (RDS) and Total (TOT).
We made very little in the way of substantive changes to the Funds' portfolios during the quarter but we did have a handful of new purchases and sales, and took advantage of trading opportunities to add to and trim a number of positions. Material new purchases in the Funds included Hays PLC, the UK-based employment firm; HSBC Holdings (HBC), the large UK-based bank; and Tesco (TESO), the UK-based grocery chain. All three of these companies trade at significant discounts from our conservative estimates of intrinsic value and pay an attractive dividend while we wait for value recognition in the market. We also took advantage of trading opportunities to add to our positions in Royal Dutch, Total, Scor, United Overseas Bank, G4S, Imperial Tobacco (ITY), and J & J (JNJ). In terms of sales, we sold our remaining shares of Daehan City Gas, Carclo, Avatar (AVTR), and McDonalds (MCD), and trimmed our positions in Arca Continental, Coca-Cola Femsa, Kone, Linde, Diageo, Philip Morris International, and Arthur J. Gallagher
With the rather aggressive advance in global equity prices, bargain hunting became somewhat more constrained during the quarter. That said, we believe the overall valuation characteristics of our Funds' portfolios remain reasonable to attractive with a forward 2012 weighted average price earnings ratio for the portfolio's top 25 holdings across all our Funds of approximately 11-13X estimated earnings and a weighted average dividend yield of approximately 3-5%. (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.) These characteristics, we believe, compare quite favorably to benchmark indices and fixed income alternatives, in particular.† While we are cautiously optimistic longer term for the underlying success of our businesses and their stock prices, the investor's discount from our estimate of intrinsic value is now considerably smaller than it was three years ago, following what has been a nearly 100% move in global equity markets..
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: April 30, 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.