COMMENTARY
After coming out of the starting gates strong at the beginning of the year, global equity markets shrugged off a mid-March banking crisis and were able to finish the quarter solidly in positive territory, led in large part by the performance of large-cap technology stocks. Despite underperforming their benchmarks in this “risk on” environment, the Tweedy, Browne Funds made considerable financial progress during the quarter, producing returns of between 5.09% and 6.64%. While global equity markets clearly demonstrated their resilience after an extremely challenging year in 2022, it remains to be seen whether they have fully adjusted to reflect new economic and business realities.
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.
Many, if not most, stocks held in the Funds’ portfolios performed quite well in the first quarter. This was particularly true for the Funds’ non-US equity holdings, many of which have come into their own over the last two quarters, despite years of underperformance versus their US counterparts — a welcome shift given that our Funds’ portfolios have been somewhat non-US-centric in terms of their portfolio allocations for well over a decade.
The Funds received a significant boost from their European holdings during the reporting period, particularly their German, Swedish and Dutch holdings. For example, a quartet of companies in Sweden, i.e. SKF (ball bearings), Trelleborg (seals and tires), Husqvarna (outdoor maintenance and recreational products), and Autoliv (seatbelts and airbags) were significant contributors to the Funds’ performance during the quarter. The Funds also received a long overdue boost from their Chinese and Hong Kong-based holdings in the wake of China’s reopening and the government’s signaling of a relaxation of their interventionist policies. This included strong returns in Baidu and Alibaba, among others. A diversified group of small and medium-sized Japanese companies including Sumitomo Heavy Industries, Kuraray, Nifco, Fuso Chemical, and Yamabiko also contributed nicely to returns during the quarter. This is not to suggest that the Funds’ US-based holdings didn’t also contribute to the quarter’s returns. Long-term holdings, Alphabet and Cisco, produced strong returns for the quarter as did two more recent additions, FedEx and Vertex Pharmaceuticals.
In contrast, the Funds received very little in the way of return contributions from many of their financial, energy, media, and healthcare holdings. The Funds’ bank holdings faced headwinds from declining interest rates and a mid-quarter banking crisis which led to the failure of two US banks (Silicon Valley Bank (SVB) and Signature Bank), and a last minute bailout acquisition of Credit Suisse by UBS. While it would appear that a crisis was avoided by the quick intervention of bank regulators in the US and Switzerland, some uneasiness still remains in the global banking community. This turmoil couldn’t help but have a negative impact on investor sentiment and in turn on Fund bank holdings such as Wells Fargo, Bank of America, US Bancorp and Truist. Other than KBC, the Belgium-based bank, the Funds have little exposure to European banks. Their two Singapore-based bank holdings, United Overseas Bank and DBS, finished the quarter marginally in the red in terms of price return.
On the energy front, the Funds’ one significant oil & gas holding, the French oil giant, TotalEnergies, finished the quarter down modestly as oil prices continued to drift lower during the quarter. Megacable, which rejected a buyout offer from its Mexican rival, Televisa, and Swiss-based TX Group, which reported disappointing earnings, also had a difficult quarter. A number of the Funds’ healthcare holdings were also negative contributors during the reporting period including, Fresenius, the German-based healthcare conglomerate; Johnson & Johnson; Roche; and biotech holding, Ionis Pharmaceuticals.
PORTFOLIO ACTIVITY
Portfolio activity slowed somewhat during the quarter as equity prices advanced. While there were a few new positions established, and a few sales, portfolio activity overall was quite modest compared to the rather brisk pace of the last two years. Newly established positions in one or more of the Funds included Brenntag SE (XTER:BNR, Financial), the German specialty chemical company; Mitsubishi Gas (TSE:4182, Financial), the Japanese chemical producer; Johnson Electric (HKSE:00179, Financial), the Hong Kong-based manufacturer of micromotors; and Computacenter PLC (LSE:CCC, Financial), the British technology product distributor. All four of these companies at purchase, in our view, were trading at significant discounts from our estimates of their intrinsic values, were financially strong, and had attractive runways for potential future growth.
On the sell side, a number of holdings were sold or pared back, including Babcock International (LSE:BAB, Financial), Jungheinrich (XSWX:JUNGH, Financial), Krones (XTER:KRN, Financial), Shizuoka Gas (TSE:9543, Financial), CK Hutchison (HKSE:00001, Financial), Alphabet (GOOG, Financial), and Unilever (UL, Financial), among others. The stock prices of these businesses had either reached our estimates of their underlying intrinsic values, or had been compromised in some way by virtue of declines in our estimates of their underlying intrinsic values and future growth prospects. Or, they may have been sold or trimmed to make room for new additions, or to generate losses, which could be used to offset realized gains.
PORTFOLIO POSITIONING AND OUTLOOK
As we have written in previous commentaries, we believe a reset is likely afoot in our capital markets. With inflation remaining persistent - and interest rates that, in our view, are likely to normalize higher from the zero-bound levels of the last decade - the next ten years could prove to be radically different from the previous ten years. In our humble view, it could very well be an environment that favors active investment strategies over passive strategies, value stocks over their growth counterparts, and non-US-based equities over “big tech” US-based equities. To that end, we believe the Tweedy, Browne Funds remain well positioned to take advantage of this apparent “reset.” First and foremost, their portfolios bear little resemblance to large cap indexes. The multi-cap character of our International Value
Fund’s portfolio has been enhanced over the last couple of years by the addition of a significant number of smaller and medium capitalization companies. For example, as of March 31, 26% of our flagship Fund’s total equity market value was invested in companies whose market capitalizations were equal to or less than $10 billion. This compares to a little over 10% for the same cohort in the MSCI EAFE Index.
The Funds’ country weightings, in many instances, are also radically different from those of the MSCI EAFE or World Indices. For example, at quarter end, the Worldwide High Dividend Yield Value Fund had approximately 14% of its equity capital invested in US companies compared to the MSCI World’s US weighting of 68%. The unhedged International Value Fund II has roughly 6% of its equity market capitalization invested in Japanese companies compared to the MSCI EAFE Index weighting of 21% in Japan. In addition, according to Bloomberg, as of March 31, all four Funds have “active share” calculations respectively of 89.8% (International Value), 90.0% (International Value II), 94.2% (Value), and 95.5% (Worldwide High Dividend Yield Value). Active share calculates the percentage of stock holdings in a fund portfolio that differs from the fund portfolio’s benchmark index. Secondly, all four of our Funds have been non-US-centric in terms of their portfolio allocations for years, and remain so today. As wementioned earlier, the valuation differential between US and non-US equities has grown quite significantly over the last many years, and in our view, continues to be largely in favor of non-US equities.
And thirdly, the Tweedy, Browne Fund portfolios, in our view, remain attractive, on the whole from a valuation perspective . All four of our Funds’ portfolio holdings, when considered in aggregate, generally trade atreasonably attractive weighted average valuation multiples such as price in relation to forward earnings, price in relation to book value, and price in relation to measures of pre-tax operating income. The owner earnings yield, defined as net after tax profit divided by enterprise value, for many, if not most of the new buys for our Funds over the last couple of years, has typically been right around 7-8% or higher which compares quite favorably to most corporate after tax earnings yields.
While the near-term investment environment remains fraught with uncertainty as market prices adjust to reflect the new economic realities, we remain optimistic about our future and equity returns moving forward. We intend to take full advantage of the ongoing “sea change” in our capital markets. We would encourage our shareholders to buckle up for what could be a bumpy, but profitable time ahead for our style of investing. It would indeed appear that price matters again.
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
April 2023
The performance data 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 higher or lower than the performance data quoted. Please visit www.tweedy.com to obtain performance data which is current to the most recent month end.
