Tweedy, Browne Fund Second Quarter 2013 Commentary
Returns in our Funds over the last twelve months have ranged from 13.89% to 19.12%, and since the bottom of the financial crisis in March of 2009 have compounded on an average annual basis between 19.27% and 21.07%. Our underperformance relative to benchmarks over the last twelve months has been largely due to our increasing level of cash reserves, an d our modest exposure to the Japanese market which is up over 50% in local currency (MSCI Japan).
● 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' holdings in each of these companies.
In general, returns in our Funds were led by strong results from several Japanese automotive components companies, i.e. NGK Sparkplug and Takata; two of our media holdings, Mediaset España and the Daily Mail; several of our pharmaceutical holdings including Johnson & Johnson, Roche, and GlaxoSmithKline; and our two technology holdings, Cisco and Google. A number of our food, beverage and tobacco stocks including Diageo, Nestle and Philip Morris International, among others, produced disappointing results for the quarter, as was the case with a number of our bank stocks including our new Brazilian holding, Banco Santander Brasil, Bangkok Bank and United Overseas Bank. As is often the case in the short run, we think that these results had more to do with headline macro events around the world than with these companies' underlying economic performance.
We established a few new positions in our Funds during the quarter including Banco Santander Brasil (BSBR) and National Oilwell Varco (NOV). In addition, we also sought to take advantage of trading opportunities and purchased shares in Pearson for our two international funds and added Joy Global to the Value Fund. Although Banco Santander Spain is a significant shareholder of Banco Santander Brasil, the Brazilian bank is an independently listed subsidiary with its own management team, board of directors, and capital base. At purchase, Banco Santander Brasil was trading at a discount from book value, below 10 times 20 13 estimated earnings, and had a dividend yield of approximately 5%. It has a strong capital position (underleveraged), high net interest margins, and among its three local competitors, it has the highest consumer exposure to the rapidly growing middle class in Brazil. While the comp any has traded down since our initial purchase, we think largely due to the general sell-off in the emerging markets and the demonstrations in Brazil, we are very positive about the longer term prospects for the company. The other new holding is National Oilwell Varco, a leading global manufacturer of drilling rig equipment and consumables to the energy industry. It has a leading market position in the segments of the oil & gas industry that are generating the most growth, deepwater drilling and shale drilling. The company has historically generated high returns on capital, has what we believe to be a conservative balance sheet with minimal debt, and at purchase was trading at a significant discount to our estimate of the company's intrinsic value. In addition to these new purchases, we added to our positions in G4S, DBS Group, Joy Global, TNT Express, Cisco and Total, among others.
On the sell side of the ledger, we sold our remaining shares in Vodafone (VOD), Kimberly Clark (KMB), Brown & Brown (BRO), and Norfolk Southern (NSC), all having reached our estimates of fair value. We continued to sell down our position in Arca Continental, the slow trading Mexican Coca-Cola bottler, completely exiting our position in the Value Fund. We also took advantage of continued strength in the Japanese equity market to exit Kaga Electronics and pared back a number of our other Japanese holdings. At quarter end, Japanese equities only accounted for 3.36% of net assets in the Tweedy, Browne Global Value Fund. We also trimmed our positions in Unifirst and Munich Re.
Despite a dizzying array of macro factors impacting global equity markets on a daily basis, Federal Reserve "tapering;" rising interest rates in the U.S.; Brazilian protests; a coup in Egypt; slowing economic growth in China; a Syrian civil war; a weakening Port uguese government; correcting commodity prices; and a sell-off in the emerging markets; just to name a few, global equity markets have continued their advance. Unfortunately, the volatility in June did not last long enough to produce much in the way of bargain priced stocks. As we have mentioned in other updates, we belie ve that much if not most of the value in many publicly traded companies has now been recognized by markets and is reflected in their stock prices. While this is a welcome occurrence, it means that finding significant new mispricings in our markets is a much more difficult proposition today. This dearth of new opportunity coupled with positive fund flows has caused cash reserves to build at the margin in all four of our Funds. This could become a drag on returns in our Funds if this speculative market fervor persists in the weeks and months ahead. Our shareholders should participate in the advance, but edging out indices will be challenging in such an environment.
We are pleased to announce that three of our analysts, David Browne, Roger de Bree, and Jay Hill, will be joining us as members of the firm' s Investment Committee effective, August 1 st . Their tenures at Tweedy, Browne span between eight and thirteen years, and all three have played a very active role in the research process. We look forward to working more closely with them in their expanded roles at the firm and to their contributions to the continued success of Tweedy, Browne. The attached announcement has more detailed information on their backgrounds.
Thank you for investing with us an d for your continued confidence.
Tweedy, Browne Company LLC
William H. Browne
Thomas H. Shrager
John D. Spears
Robert Q. Wyckoff, Jr.