2nd Quarter 2017
Global equity markets continued their unrelenting advance in the second quarter led by continued strong performance in European equities and their respective currencies. All four of the Tweedy, Browne Funds were up nicely in the quarter and closed out the first half of the year with strong results, with all but the Value Fund producing double digit returns year-to-date through June 30. In terms of relative results, our best performing Fund during the quarter was the Worldwide High Dividend Yield Value Fund.
According to market observers, we are now over eight years into what has been the second longest bull market in modern history. Absent yield producing alternatives, enthusiasm for equities remains extraodinarily high, market breadth has narrowed considerably, valuations are elevated, and bargains around the world are very hard to come by. While we continue to diligently scour the globe for undervalued equity securities, we are ever mindful of the near-term impact of trading algorithms on daily security prices and the virtual absence of price discovery associated with massive flows into passively managed investment vehicles. Investors should take heed, and should not forget Warren Buffet’s admonition that the market is here to serve us, not to guide us. Despite what might appear to be a rather “goldilocks” global economy (not too cold, not too hot), it is accompanied by capital market behavior that in our view would suggest this is not a time for complacency.
Most stocks and industry groups in our Fund portfolios produced solid returns for the quarter with the most significant exception being our energy related holdings, which followed oil prices down, somewhat restraining the quarter’s robust results. Returns for the quarter were led by a number of the Funds’ financial, industrial, and consumer holdings, including strong results in banks such as HSBC, United Overseas Bank, DBS, and Bank of New York Mellon; industrials such as Safran, 3M, G4S, and Berendsen; and food and beverage companies such as Nestlé, Unilever, and Heineken.
Shareholder activism and buyout bids surfaced once again in the second quarter and had more than just a marginal impact on our Fund portfolios. Nestlé (OTCPK:NSRGY, Financial)’s surge in June was, in part, a response to the news that Daniel Loeb (Trades, Portfolio), the noted hedge fund manager, had taken a position in the company and remarked that despite the company’s long record of success, there was significant room for improvement. Late in June, Nestlé also announced a planned buyback of shares equal to as much as CHF20 billion. Unilever was also up nicely for the quarter, as speculation continued about a possible renewed bid by Kraft. Elis, the French-based uniform, textile and hygiene company, announced a buyout bid for Berendsen, and the two companies reached agreement on a deal at £12.5 per Berendsen share, or a potential 48% premium to our original cost in the shares. As a result, Berendsen was the best performing stock in the Worldwide High Dividend Yield Value Fund. Other stocks that contributed significantly to the quarter’s results included pharmaceutical holdings, Novartis and Johnson & Johnson.
The Funds’ oil & gas related holdings led decliners as news of increasing inventory stockpiles pushed oil prices down, negatively impacting the stock prices of holdings such as Devon Energy (DVN, Financial), Total (TOT, Financial), and Halliburton (HAL, Financial), among others. As we have mentioned in previous letters, this pull and tug between cost lowering technological improvements in shale production and increasing demand for oil will likely lead to continuing volatility near term in the oil sector. We continue to believe that in light of overall supply/demand considerations, the prospects for ongoing Saudi constraint and continued rationalization of capital spending by the oil majors, oil prices should drift higher over the longer term. In the interim, companies such as Total and Royal Dutch continue to pay substantial dividends, which appear safe for the time being while we wait for value recognition in their stock prices.
There were no material changes to the positioning of our Fund portfolios during the quarter. With the continued acceleration in equity valuations, new buys and additions to the portfolios continued to take a back seat to sales and trims. We did take advantage of pricing opportunities and added to our positions in a couple of smaller capitalization companies including a Japanese industrial company and a UK-based car dealership business. We also trimmed a number of our positions including Akzo, Munich Re, and SCOR, and in the Global Value Fund and Worldwide High Dividend Yield Value Fund, sold our remaining shares of ABB, the Swiss power company.
In late May, the Dutch courts denied Elliot Management’s request for a special shareholder’s meeting in order to force out Akzo (HAM:AKZ, Financial)’s Chairman, despite a significant sympathetic outcry from a number of the company’s shareholders, including ourselves. These shareholders represented a meaningful percentage of the company’s capitalization. Tweedy, Browne participated in the case, submitting a stern letter to Akzo’s management calling for engagement with PPG, and had an attorney representing our interests in the courtroom. The requests of the dissenting shareholders were denied by the court, and with the deadline for action on PPG’s bid for the company passing shortly thereafter, no new bid can be presented for at least six months. Shortly after the court’s decision, we decided to take advantage of the recent elevation in Akzo’s shares, and modestly trimmed our position. Despite the setback in the Dutch courts, Akzo’s elevated stock price has held up fairly well, perhaps explained in part by management’s announcement of actions intended to improve profitability, and/or the view that PPG could return with another bid six months hence if management fails to produce the desired results.
Near-term equity market behavior remains somewhat of a conundrum, as market prices, in our view, continue to irrationally and/or algorithmically react to the daily headlines, and discount what appear to be rather benign near-term economic conditions. From our perspective, while we are very comfortable with the current positioning of our Fund portfolios, with valuations in our equity markets rather stretched, we continue to guard against complacency in this environment.
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: July 25, 2017
