After a comeuppance in May purportedly associated with the breakdown in U.S./Chinese trade negotiations, global equity markets regained their footing and continued their seemingly inexorable advance, reaching record highs shortly after quarter end. In this rather volatile and yet robust environment, the Tweedy, Browne Funds once again made substantial financial progress, with three out of four Funds besting their respective benchmark indices for the quarter. All four Funds produced double digit returns year-to-date through June 30 of between 11.49% and 13.09%.
Returns for the quarter were in large part a product of strong results in a number of the Funds’ media, auto, food beverage, and financial holdings. This included strong returns in media companies such as WPP, the Daily Mail, and Axel Springer. As we write, Bain Capital has just agreed to buy 60% of WPP’s market research unit, Kanter, bringing WPP approximately $3.1 billion in cash proceeds, which the company can use to pay down debt and fund share buybacks. Axel Springer (XTER:SPR, Financial) was also the subject of a buyout proposal during the quarter. The company’s board formally endorsed a deal after quarter end agreeing to a buyout of Axel Springer’s minority shareholders by KKR Co. (KKR, Financial) at a price of €63 in cash. This price represents approximately a 40% premium to the stock’s closing price on May 29, 2019, the day prior to the announcement that deal negotiations were underway, and up to a 208% premium to the Funds’ weighted average cost.1 The deal is contingent on KKR receiving a minimum tender of 20% of the shares outstanding. Friede Springer (the widow of the company’s founder) and Mathias Döpfner (the company’s CEO), who together either directly or indirectly control approximately 45% of the company’s shares, will retain their shares and continue to be involved with the company.
The Funds’ South Korean auto holdings, Hyundai Motor, Hyundai Mobis and Kia Motors, produced attractive returns during the quarter, as did AutoZone, the auto parts retailer, and food & beverage holdings, Nestlé, Unilever, Diageo and Heineken. The Fund’s bank and insurance holdings, including DBS, HSBC, Standard Chartered, United Overseas Bank, Berkshire Hathaway, SCOR and Zurich Insurance Group, were also strong performers during the quarter.
In contrast, a number of the Funds’ technology-related communication services holdingsand energy holdings produced disappointing results. This included companies such as Alphabet (Google), which is facing antitrust scrutiny; and two Chinese internet companies, Baidu and Sina, both of which reported slowing growth largely due to macroeconomic and industry headwinds, regulatory impacts, and near term competitive pressures. As oil prices continued to be volatile, trending down during the quarter, the stock prices of Halliburton and ConocoPhillips followed suit. In addition, Hong Kong-based developer, Hang Lung, UK-based auto distributor, Lookers, U.S.-based 3M, and Bank of New York Mellon all faced price declines during the quarter.
With the exception of the Global Value Fund II – Currency Unhedged, which had positive net cash flows during the quarter, the Funds were net sellers in what was a rather modest quarter in terms of purchases and sales. We sold Alcon, the Novartis spinoff, from the Global Value Fund and Worldwide High Dividend Yield Value Fund; and Honda, which was held in the Value Fund. Both stocks were trading at or near our estimates of intrinsic value at the time of sale. In the Global Value Fund, we sold our remaining shares of Halliburton, the U.S.-based oil service company, whose near-term price performance had been a disappointment, as well as our remaining shares of Cloetta, the Swedish confectionary company, which had appreciated to price levels that were at or near our estimate of intrinsic value. We trimmed a number of other positions in the Funds that were trading at or above our estimates of intrinsic value, including, Safran, AutoZone, MasterCard, AGCO, and Zurich Insurance, among others. We also began to trim back our Axel Springer position in the Global Value and Worldwide High Dividend Yield Value Funds after Axel Springers’s deal announcement with KKR, at prices very near the anticipated buyout price.
On the buy side, the Global Value Fund II established a position in BASF (XTER:BAS, Financial), a company that the Worldwide High Dividend Yield Value Fund has held since last December. As explained in our recent Letter to Shareholders, BASF is a German-based global chemicals company with over 120,000 employees operating in over 80 countries around the world. It is perhaps best known for its “Verbund” business model, which combines much of the chemical value chain into a single large facility allowing for easy transportation of feedstocks and intermediate chemicals, as well as efficient power generation — all of which saves the company money. The company has stated that in roughly 75% of its businesses, it is in the first, second or third position in terms of market share. At purchase, BASF was trading at a significant discount from our estimate of intrinsic value, and paid a well-above-average annual dividend yield of 4.5%. In addition to BASF, we took advantage of pricing opportunities during the quarter, adding to our Funds’ positions in Baidu, CNH, Sina, Tamedia, Tarkett, Babcock International, Vertu, Carnival Corp., and United Overseas Bank (UOB), among others.
Over the last couple of years, there have been brief periods of enhanced price volatility in global equity markets, which have presented pricing opportunities that allowed us to put some of our cash reserves to work. This, together with some net redemptions in all but the Global Value Fund II, have in part helped to bring down our overall level of cash reserves in the Funds to between approximately 7% and 10% at quarter end. The Funds continue to be multi-capitalization in character and are invested in large, medium and smaller capitalization companies. A number of the new ideas that have made their way into the Funds’ portfolios of late have been smaller or medium sized. As for the Global Value Fund and Global Value Fund II, roughly 11-12% of equity assets are now invested in the more developed of the emerging markets in countries such as China, South Korea, Chile, Mexico and Thailand, among others. Over time, technology-related companies have also found their way into the Funds’ portfolios, but only when their prices were at reasonable discounts from our rather conservative estimates of underlying intrinsic value. Examples of these companies include Alphabet (Google), Baidu, Sina, Cisco, and MasterCard, among a few others. Also in Global Value and Global Value II, we continue to be overweighted in European equities in countries such as the UK, France, Switzerland, and the Netherlands, and significantly underweighted in Japan, where bargain hunting has been more challenging. While our Funds remain diversified by issue, country, industry group and market cap, they continue to bear little resemblance to their respective benchmark indices, as reflected in high active share measures for all four Funds. As you may know, active share is a measure of the percentage of stock holdings in a portfolio that differs from the benchmark index. As we have always said, if you hope to add value relative to a benchmark index over time, you cannot look like the benchmark index.
As we write, major monetary authorities, among the most important being the U.S. Federal Reserve, have signaled what appears to be a willingness to return to an accommodative posture to protect against the uncertainty posed by slowing global growth and fitful Chinese/American trade negotiations. Whether this will be enough to support escalating global equity market valuations is anyone’s guess. Equity market valuations remain full-to-high, particularly in higher quality businesses and in U.S. equities; however, a significant number of equities have not participated in this year’s rebound. With many global equity share prices down over the last year, idea flow continues to pick up and a number of new ideas are under current consideration.
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
July 2019
