After an unsettling amount of turbulence at year-end, albeit brief, global equity markets turned on a dime in early January and headed due north. This was coincident with Federal Reserve Chairman Jay Powell’s reassurance that the Fed would remain patient and flexible when considering future rate hikes, and early indications that progress was being made in the ongoing trade negotiations between the U.S. and China. Global and international developed market indices finished a remarkably strong quarter up between approximately 10% and nearly 14% despite increasing evidence of slowing economic growth in the U.S. and abroad. In this “risk on” environment for equities, all four of the Tweedy, Browne Funds made significant financial progress on an absolute basis, but trailed their respective benchmark indices for the quarter.
The U.S. Federal Reserve’s pivot to a more dovish approach to near-term monetary policy, in part, led global equity markets to do an about-face in the first quarter of 2019 as most developed market countries, and virtually all sectors and industry groups finished the quarter substantially in the black. The Funds’ returns for the quarter were led in large part by their industrial, consumer staples, healthcare, and information technology holdings. This included strong returns from companies such as Safran, Heineken, Nestlé, Novartis, Roche, Cisco, Avnet, and MasterCard, among a plethora of others. With oil prices ticking up, the Funds also had solid results from a number of energy related holdings including MRC, Total, and Royal Dutch. In contrast, the Funds had disappointing market results in several financial and media-related holdings, including securities such as Axel Springer, WPP, HSBC, G4S, and SCOR, among others. In general, it was the significant underweighting in U.S. (particularly FAANG stocks) and Japanese equities, weak relative results from a few financial holdings, and declines in two media holdings that accounted for the bulk of the Funds’ relative underperformance for the quarter.
In terms of portfolio activity, with the exception of the unhedged Global Value Fund II, which had strong positive fund flows, we were net sellers during the quarter, trimming a number of portfolio positions that were trading at or around our estimates of intrinsic value. This included modestly paring back positions in AutoZone, Safran, Novartis, and MasterCard, among others. We also pared back positions in Hyundai Motor and Kia, which rallied nicely during the quarter. In addition, we took advantage of trading opportunities to sell the Funds’ remaining shares of Daegu Department Stores, Honda, and, in the case of the Worldwide High Dividend Value Fund, G4S.
On the buy side, only one new position was established during the quarter, and that was in a Chinese spirits company called Wuliangye Yibin in Global Value Fund II. Wuliangye Yibin manufactures and markets a series of popular premium baijiu liquors in China. Its strong brand, supported by 600+ years of history and unique brewing techniques, has enabled the company to have substantial pricing power. At purchase, it was trading at a significant discount to our conservative estimate of its intrinsic value, and at an even greater discount to the valuations of comparable spirits companies around the world, and we believe it has strong prospects for continued future growth. In addition to this new position in Global Value Fund II, we added to a number of other positions in the Funds, including Standard Chartered, Sina, Baidu, CNH, Inchcape, Axel Springer and Bollore, among others.
As we mentioned in last quarter’s update, the market turbulence at year-end, although short-lived, spawned a significantly improved opportunity set for price driven investors such as ourselves, particularly in non-U.S. equities. However, valuations are once again on the rise, and there is evidence of an escalation in risk taking on the part of investors. With economic growth and, in turn, corporate profitability slowing in many, if not most, parts of the world, accommodation by central bankers may or may not be enough to support higher valuations. We continue to believe that our Fund portfolios are not only well positioned to benefit on an absolute basis should the market continue its seemingly inexorable advance, but should also hold up well on a relative basis if we have a return to the volatility experienced late last year.
Thank you for investing with us, and for your continued confidence.
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
Dated: April 2019