The third quarter in global equity markets was characterized by a dramatic increase in equity market volatility, seemingly driven in large part by concerns about slowing growth in China, the devaluation of the yuan, volatile oil prices, and the prospect for an increase in U.S. interest rates. While the Tweedy, Browne Funds finished the quarter in the red, all, with the exception of the Worldwide High Dividend Yield Value Fund, bested their respective benchmark indices, with our two international Funds, Global Value and Global Value II, doing so by a considerable margin. Near quarter-end, equity markets began to rebound, and as we write, they have regained much of the ground that was lost in August and early September, and the same holds true for the Tweedy, Browne Funds.
The Funds do not impose any front-end or deferred sales charges. However, the Global Value Fund, Global Value Fund II – Currency Unhedged and Worldwide High Dividend Yield Value Fund impose a 2% redemption fee on redemption proceeds for redemptions or exchanges made less than 15 days after purchase. Performance data does not reflect the deduction of the redemption fee, and, if reflected, the redemption fee would reduce any performance data quoted for periods of 14 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.
While we welcomed the market turbulence during the quarter for the opportunities such events often present to price sensitive investors such as ourselves, our Fund portfolios temporarily lost some ground on an absolute basis. Solid returns in several of the Funds’ food, beverage and tobacco holdings, including Nestlé (NSRGY, Financial), Heineken (XAMS:HEIA, Financial), Embotelladora Andina, and Imperial Tobacco (LSE:IMT, Financial); a nice bounce in our Korean auto companies, Hyundai Motor and Kia; solid results in aerospace holding Safran; and a strong return in Google were simply not enough to offset declines in the Funds’ financial, energy, pharmaceutical, and industrial holdings, i.e. banks and insurance companies such as Standard Chartered (NAI:SCBK, Financial), DBS Group (SGX:D05, Financial), CNP, and Zurich Insurance; energy companies such as Devon Energy, Royal Dutch, Total, and Halliburton; pharmaceutical holdings including GlaxoSmithKline, Novartis, and Johnson & Johnson; and industrials such as Emerson Electric, Vallourec, and G4S, among others. We also faced a decline in our lone mining holding, Antofagasta, the financially strong Chilean copper mining company. As we write, all of these stocks, with the exception of Novartis, have rallied back, well above their quarter-end prices.
The volatility during the quarter led to a considerable pick- up in portfolio activity in our Funds as we were able to take advantage of pricing opportunities to establish a new position in MRC Global, a U.S. based distributor of pipes, valves and fittings, largely to the oil and gas industry; Ebara, a Japanese manufacturer of pumps, compressors, and incinerators; and IBM, the global information technology company. All three of these companies at purchase were trading at significant discounts from our conservative estimates of their respective intrinsic values, and we believe they are financially strong and have attractive prospects for future growth in intrinsic value. In addition to the establishment of these new positions, we also added to our pre-existing positions in Antofagasta, Hyundai Motor, Kia, Diageo, Standard Chartered, United Overseas Bank, and Royal Dutch.
On the sell side of our Fund portfolios, we sold our positions in Eni (MIL:ENI) and National Oilwell Varco (NOV, Financial), which we concluded would have a difficult time making financial progress if oil prices stay low for longer than expected. We also sold our positions in Leucadia (LUK) and Schindler (XSWX:SCHP), which had reached our estimate of intrinsic value, and trimmed our positions in Headlam, Novartis, and Roche.
With the return of volatility and a healthy dose of skepticism in markets during the quarter, we began to see valuations come back into what we believe to be a more reasonable relationship with our view of underlying business values and their future prospects. If this continues, as we suspect it will, despite the rebound over the last several weeks, we feel we are well positioned to take meaningful advantage.
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.
Managing Directors
Dated: October 26, 2015
