Propelled in part by improving news on the inflation front, a moderation of Covid restrictions in China, and hopes for a soft economic landing, global equity markets rebounded significantly off their October lows to finish the 4th quarter solidly in the black. While equity markets retreated somewhat near quarter end due in part to continued strength in labor markets, it was not enough to erase what was a rather strong quarter for financial assets. In this improving environment for risk assets, all four of the Tweedy funds produced strong returns for the quarter of between 10.07% and 17.24%. The Tweedy, Browne International Value Fund II - Currency Unhedged was the best performer, although not quite enough to best its benchmark. Our other three Funds finished the quarter ahead of their respective benchmark indices.
While all four Tweedy funds finished calendar year 2022 in the red, three of the funds significantly outperformed their broad-based benchmark indices, as we would expect given their well-honed, value-oriented investment strategies, which have generally tended to hold up a bit better than growth strategies in declining market environments. Only our flagship fund, the Tweedy, Browne International Value Fund, failed to best its hedged benchmark, due in part to its policy of hedging only its perceived foreign currency exposure (the benchmark is fully hedged). That said, its return of -7.53% was nearly 700 basis points better than the unhedged MSCI EAFE Index, which finished the year with a return of -14.45%.
As you can see from the peer group comparison chart below, the International Value Fund continues to rank near the top of its peer group (Morningstar Foreign Large Value Funds) in virtually every standardized reporting period.
TWEEDY, BROWNE INTERNATIONAL VALUE FUND
MORNINGSTAR PEER GROUP RESULTS
PERIODS ENDING 12/31/2022
| 1 YEAR | 5 YEARS | 10 YEARS | 15 YEARS | 20 YEARS | ||
| Percentile Rank: | T op 3 5% | T op 9 % | T op 8 % | T op 1 % | T op 1 6% | |
| TBGVX | o ut o f | o ut o f | o ut o f | o ut o f | o ut o f | |
| Total Funds | 3 54 | 2 98 | 1 77 | 1 18 | 6 6 | |
| in Category | ||||||
Morningstar has ranked the International Value Fund among its peers in the Foreign Large Value Category. Percentile rank in a category is the Fund’s total-return percentile rank relative to all funds that have the same Morningstar Category. The highest (or most favorable) percentile rank is 1 and the lowest (or least favorable) percentile rank is 100. The top-performing fund in a category will always receive a rank of 1. The “out of” number represents the total number of funds in the category for the listed time period. Percentile rank in a category is based on total returns, which include reinvested dividends and capital gains, if any, and exclude sales charges. Rankings may have been lower had fees not been waived from May 22, 2020 onwards. The preceding performance data represents past performance and is not a guarantee of future results.
PERFORMANCE ATTRIBUTION
Please note that the individual companies discussed herein were held in one or more of the Funds during the quarter ended December 31, 2022, but were not necessarily held in all four of the Funds. Please refer to each Fund’s portfolio page, beginning on page 5, for selected purchase and sale information during the quarter and the footnotes on page 14 for each Fund’s respective holdings in each of these companies as of December 31, 2022.
In what was a volatile but surprisingly robust quarter for global equities, most stocks held in the Tweedy, Browne Funds acquitted themselves well, producing in many instances double- digit returns for the quarter. Leading the pack were the Funds’ industrial, financial, and energy-related holdings, with strong returns from machinery companies such as CNH (CNHI, Financial); aerospace & defense companies such as Safran (XPAR:SAF, Financial) and BAE Systems (LSE:BA., Financial); and financial-related companies such as National Western Life (NWLI, Financial), Berkshire Hathaway (BRK.B, Financial), SCOR (SCOR, Financial), and United Overseas Bank (SGX:U11, Financial). FMC (FMC, Financial), the agricultural chemical company; Kemira (OHEL:KEMIRA, Financial), the Finnish water chemicals business; and Megacable (MEX:MEGACPO, Financial), the Mexican cable company, also produced good returns for the quarter.
In contrast, the Funds’ healthcare and technology related holdings did not on the whole fare well during the quarter. This included disappointing results from companies such as GSK (GSK), Roche (XSWX:ROG), Ionis Pharmaceuticals (IONS), and Alphabet (GOOG). Transcosmos (TSE:9715), Tarkett (XPAR:TKTT), Baidu (BIDU) and Paramount (PARA) also produced delining returns for the quarter.
The moderation of Covid restrictions coupled with more limited governmental intervention in private industry, particularly with respect to internet platform companies, gave a boost to a number of the Funds’ Chinese and Hong Kong based holdings, including companies such as Haitian International (HKSE:01882), the plastic molding injection company; Uni-President (HKSE:00220), the high end noodle company; and Tencent (HKSE:00700), one of China’s dominant internet platform companies.
PORTFOLIO ACTIVITY
While portfolio activity in the 4th quarter was not quite as robust as in previous quarters, a few new positions were established in the Funds including Alten (XPAR:ATE), a French company that provides outsourced engineering services across Europe; and Grafton Group (LSE:GFTU), a UK-based building materials distributor. In our view, at purchase, these newly added positions were trading at significant discounts from our conservative estimates of their underlying intrinsic values, had solid balance sheets that should allow them to weather economic storms, and appear to be positioned to benefit from future runways of potential growth. We also added to numerous other holdings during the period.
On the sell side of things, we sold our remaining shares of Michelin (XPAR:ML), the French tire company; Haleon (HLN), the UK-based consumer healthcare company; and Astellas Pharma (TSE:4503), the Japanese pharmaceutical company. The stock prices of these businesses had either reached our estimates of underlying intrinsic value, or had been compromised in some way by virtue of declines in our estimates of their underlying intrinsic values and future growth prospects. In several other instances, we trimmed back positions to make room for new additions to the Funds, and/or to generate losses, which could be used to offset realized gains.
PORTFOLIO POSITIONING AND OUTLOOK
The Funds’ portfolios remain defensively positioned in a diversified group of better businesses that in our view can continue to compound their underlying intrinsic values at attractive rates, a group of more average and cyclical businesses that we believe in most instances have competitive moats supported by durable competitive advantages, and a group of companies that we often refer to as “statistical bargains” that, at purchase, were, more often than not, trading at deep discounts to our estimates of their intrinsic values and whose C-suite executives and/or directors were actively buying shares at prices at or around the prices the Funds paid for their shares.
Over the last several years, the market capitalization profile of the Funds has changed somewhat as more and more of the newer opportunities we are uncovering are of a smaller and medium capitalization character. This represents the typical ebb and flow that occurs over time in a value portfolio, as the opportunity set of undervalued companies is ever changing.
We would reiterate the point we made in our recent semi-annual report to shareholders that relative to their US counterparts, we believe non-US equities have only rarely been as attractively valued as they are today. This is reflected in the chart that follows.
US AND INTERNATIONAL VALUE MEASURES
| INDEX | DIVIDEND | ||||
| YIELD | P/E | P/E FWD | P/BV | ||
| S&P 500 Index | 1.77 | 19.17 | 17.57 | 3.66 | |
| S&P 500 Value Index | 2.10 | 17.04 | 15.55 | 2.58 | |
| S&P 500 Growth Index | 1.48 | 22.10 | 20.75 | 6.56 | |
| MSCI EAFE Value Index | 4.62 | 9.85 | 8.92 | 1.05 | |
| MSCI ACWI ex USA Value Index | 4.79 | 9.54 | 8.80 | 1.07 | |
| MSCI Europe Value Index | 4.65 | 9.30 | 8.49 | 1.13 | |
| MSCI AC Asia ex Japan Value Index | 4.27 | 9.64 | 8.83 | 0.96 | |
| MSCI Emerging Markets Value Index | 5.19 | 8.71 | 8.26 | 1.04 | |
The above chart displays valuation metrics (dividend yield, price/earnings and price/book value ratios) for various indexes provided by S&P Global and MSCI. The consensus earnings estimates are taken from financial analysts as provided by Thomson I/B/E/S for all countries except Japan. For Japan, data from Toyo Keizai is used for securities that are not covered by Thomson I/B/E/S. Source: S&P Global and MSCI Fact Sheets as of December 31, 2022
A comparison of many of our non-US holdings to similar US-based companies reflects discounts from underlying intrinsic value that, as we said in our semi-annual letter to shareholders, get us “trembling with greed.” While it’s hard to know for sure, this dichotomy in valuations would appear to have caught the attention of investors of late, as non-US equities have begun to come back to life over the last several months. From September 30, 2022 through January 11, 2023, the MSCI EAFE Index has returned 22.66% in US dollars, versus 11.26% for the S&P 500. The value component of the MSCI EAFE Index is up 24.49%, versus 19.17% for the S&P 500 Value Index. A weakening US dollar, improving inflation data, weather-related declines in energy prices, and a relaxation of Covid restrictions in China are no doubt playing a role with respect to this apparent change in investor sentiment. Our two global-oriented Funds are significantly underweighted in US equities while all four Funds remain almost fully invested, with approximately 5% or less in cash reserves.
The near term investment environment continues to be extremely challenging as market prices for equities continue to be buffeted by a host of macroeconomic concerns. On the heels of a global pandemic, stubbornly persistent inflation and the prospect that interest rates will remain higher for longer, coupled with the Ukraine war and the disrupted supply lines that have resulted, continue to wreak havoc on investor sentiment. The rise in uncertainty has caused many investors to focus daily on a plethora of data points emanating from market observers, central bankers and other private and public sources. While this has caused great angst with investors and led to greater market volatility, it is in our view precisely the kind of market environment that can present pricing opportunities to disciplined, price sensitive investors who have longer term time horizons.
Thank you for investing with us.
Roger R. de Bree, Andrew Ewert, Frank H. Hawrylak, Jay Hill, Thomas H. Shrager, John D. Spears, Robert Q. Wyckoff, Jr.
Investment Committee
Tweedy, Browne Company LLC
The performance shown above 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, which is current to the most recent month end.
