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Tweedy Browne Fund's 2nd-Quarter Commentary

Discussion of markets and holdings

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Jul 31, 2020
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Seldom have we seen the rise of a phoenix the likes of which we witnessed in the second quarter in global equity markets, particularly in capitalization-weighted indices. For the average stock, it has been somewhat of a different story. While many, if not most, sectors, industry groups, and stocks participated in the recovery in stock prices, the strongest returns were concentrated in technology stocks, particularly those dominant U.S. companies we know so well. Economically sensitive stocks, in general, once again took a backseat to their higher growth brethren. It has led to a bifurcated market where the spread between growth and value indices has rarely if ever been wider. For example, the MSCI World Value Index in local currency trailed its growth counterpart by 1,280 basis points in the 2nd quarter, and year-to-date the Value Index remains behind the MSCI World Growth Index by over 2,400 basis points. If the past is indeed prologue, we know that this teeter-totter will eventually shift back in favor of the more value oriented components of the market. We just don’t know when.

In this robust environment for stocks, all four of the Tweedy Funds produced strong absolute returns for the quarter of between 9.9% and 11.7%, but significantly trailed their respective benchmark indices.

Most stocks in the Tweedy Funds were up during the quarter, many quite significantly. In fact from the March 23rd lows through 2nd quarter end, the Funds were up between 24% and 27%. That said, it was not enough to keep up with capitalization-weighted market indexes, particularly the global indexes dominated by tech giants. For example, in the Global Value Fund, only 17 stocks out of 90 in the account produced a negative total return during the quarter. It is not a surprise that one of the best performing industry segments was the Interactive Media & Services group, which includes the Chinese internet company, Baidu (

BIDU, Financial), and the U.S. search engine giant, Alphabet (GOOGL, Financial). The specialty retail, machinery, insurance, and chemical stocks also produced strong returns from companies such as AutoZone (AZO), CNH Industrial (CNHI, Financial), Trelleborg (OSTO:TREL B), Munich Re, SCOR, and BASF. We also had a strong contribution from companies such as Nestlé (XSWX:NESN, Financial), ConocoPhillips (COP, Financial), Siemens (NSE:SIEMENS), Safran (XSWX:SAF), DBS, and Cisco (CSCO, Financial), and from pharma companies such as Johnson & Johnson (JNJ, Financial) and Roche (XSWX:ROG), all of which recovered meaningfully from their March lows.

In contrast, a few stocks in the oil & gas segment and the banking segment led decliners for the quarter. Royal Dutch (RDS.A) and Total (XPAR:FP) continued to be weighed down by deep concerns about declining oil demand despite an uptick in oil prices. Bank stocks continue to be hobbled by ZIRP policies (zero interest rates), and concerns about growing loan losses in the face of a depressed but recovering global economy. As a result, the stock prices of HSBC (

HSBC, Financial), Standard Chartered (LSE:STAN), and Wells Fargo (WFC, Financial) disappointed during the quarter. In addition, the portfolio’s two British defense-related companies, BAE (LSE:BA.) and Babcock International (LSE:BAB), also finished the quarter in the red.

Despite the recovery in indexes, most stocks were trading well below their pre-pandemic prices during the quarter, and as a result we were very active on the buy side of the portfolio. Some of the newly established positions among our Funds include CK Hutchison (HKSE:00001), the Hong Kong-based industrial conglomerate; Coca-Cola Femsa (MEX:KOF L), the Mexican-based Coca-Cola and beverage bottler; Fuji Seal (TSE:7864), and Kuraray (TSE:3405), two mid-size Japanese industrial companies; Dali Foods Group (HKSE:03799), the Hong Kong-based snack food and beverage company; and Jardine Strategic (LSE:JDS), the Singapore-based holding company with interests in Jardine Matheson, Hongkong Land, Mandarin Oriental, and Cycle & Carriage. We also added to the Funds’ positions in Yamaha, Astellas Pharma, and SCOR.

With price volatility associated in part with the coronavirus and the recent civil unrest in Hong Kong, we got a pricing opportunity in CK Hutchison, a conglomerate with interests in ports, telecommunications, retail (AS Watson), infrastructure, energy, and several other small businesses. All four of our Funds now maintain an interest in this company. While CKH is often viewed as a Hong Kong conglomerate (and is listed on the HKSE), a majority of its earnings come from Europe (48% of revenues and 57% of EBIT in 2019). At purchase the shares were trading around 60% of a conservative estimate of the company’s underlying intrinsic value, and at roughly 6 times earnings. It paid a dividend yield close to 6% while maintaining a low payout ratio, so there may well be the opportunity to increase the dividend over the long-term. Since May 2019, there has been significant insider buying in the company’s shares, with some at much higher prices than we paid for our shares. The insiders have included various senior members of the management team including the founder Li Ka Shing and his son Victor Li (now Chairman and Co-Managing Director). There are potential catalysts for value recognition which include a potential spinoff of the company’s telecom tower assets which could possibly under certain reasonable valuation scenarios add HK$5-6/share to the company’s value, or in the longer-term a potential IPO or sale of part of its retail assets. Also, we believe that Covid-19 will have a more limited impact on CK Hutchison’s earnings, as a substantial portion of its EBIT comes from infrastructure and telecommunications (roughly 58% of 2019 EBIT), and these business have been relatively resilient. The ports business has seen some slowness with 9% year-over-year decline in TEU (volume) for the first five months, but better than the industry. Retail has borne the brunt of the virus impact due to store closures (especially in China), lower footfall and spending per capita, but should see gradual recovery as end-markets improve. Many of the stores in Europe remained open through the crisis as they are in a pharmacy/drugstore format.

On the sell side, we sold the Funds’ remaining shares during the quarter in Delta, G4S, Alcon, Hyundai Motor, Imperial Brands, MRC Global, and WPP, among others. We also trimmed back the Funds’ positions in Antofagasta, AutoZone, Bank of New York Mellon, DBS, LG Corp, Nestlé, Novartis, Roche, Royal Dutch, GlaxoSmithKline, and Johnson & Johnson.

While market pricing volatility since late March has resulted in a number of new names and additions to existing names in the Fund portfolios, it has not resulted in our view in a material repositioning of the overall portfolios. Rather, it has been change at the margin, but meaningful change. As previously mentioned, the Japanese component of the Funds has increased with the addition of new names that could be added to over time. At quarter-end, the Funds’ portfolios held between 5% and 12% of their total assets in cash reserves.

As a reminder, we took steps in May to make the all-in costs of our Funds more competitive over time. Effective May 22, 2020, we established a voluntary fee waiver pursuant to a new schedule that includes a number of breakpoints as the assets under management in the Tweedy, Browne Global Value Fund achieve various thresholds. For example, all assets greater than $6 billion in the Fund (and up to $7 billion) will now be billed at 0.80% which is a 36% reduction from our standard 1.25% rate. On assets greater than $7 billion and up to $8 billion, the fee rate falls to 0.70%, and for all assets greater than $8 billion, the fee breaks to 0.60%. The reduction to 0.60% on assets over $8 billion represents a 52% reduction from the 1.25% rate. To be clear, all assets up to and including $6 billion will still be billed at a 1.25% rate, but as the assets increase over time, as we are confident they will, the blended fee declines as the break points are triggered. It wasn't that long ago (March 2018) that the assets in the Global Value Fund topped $10 billion. As the markets recover, if we are able to get back to that $10 billion dollar level of AUM, the blended fee on the Fund via the waiver falls to 1%. Under the fee waiver arrangement and for as long as it remains in place, the blended fee rate will continue to fall as assets in the Global Value Fund increase. If, for example, the Fund’s assets increase to an asset level of, say, $20 billion, the Fund’s blended fee would fall to 81 basis points under the arrangement. We also continue to waive fees and expenses in our other Funds to keep their expense ratios in line with that of the Global Value Fund. We are pleased to report that with the recovery in equity prices, the Global Value Fund has crested the first breakpoint, and the blended fee has already come down, albeit modestly.

If you were Rip Van Winkle, just waking up from a six-month long sleep, you might think very little had changed in global equity markets since you nodded off, but you couldn’t be more wrong. In early March, it was as if a bomb went off, causing a cataclysmic decline in equity markets over a three to four week period, followed by, as Jason Zweig has observed, the largest rise for the S&P 500 in such a short period of time (almost 40%) since 1933. The rapid rise in equity prices over the last quarter has driven valuations in some instances north of pre-pandemic record highs. This has indeed been the case for the NASDAQ index in the U.S, and the S&P 500 is just 5% off its all-time high. And this is in spite of a global economy that still remains pretty much in shambles, corporate earnings that, while in modest recovery, remain severely suppressed, private and public debt levels that are rapidly rising from previous record levels, unemployment rates in the U.S. that remain at multi-decade highs, uncertainty surrounding additional stimulus measures, and pandemic infection rates that are spiking in many parts of the world including the world’s largest economy. With U.S. elections coming in the Fall, this is, in our view, no time for complacency. That said, in our view, value has rarely if ever been cheaper compared to growth. We have been able to prune and freshen the Funds’ portfolios at the margin over the last several months, and feel we are well positioned for whatever the markets may have in store for us.

Thank you for investing with us. Stay well.

William H. Browne, Roger R. de Bree, Frank H. Hawrylak, Jay Hill, Thomas H. Shrager, John D. Spears, Robert Q. Wyckoff, Jr.

Investment Committee

Tweedy, Browne Company LLC

July 2020

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