30 Jul 2012 Tweedy Browne - Q2 2012 Commentary ( Portfolio )
Our returns for the quarter were driven in large part by strong results in beverage stocks such as Arca Continental, Coca-Cola Femsa and Diageo; pharmaceutical holdings such as Johnson & Johnson, Novartis and Roche; and two rail holdings, Norfolk Southern and Union Pacific. In addition, Wal-Mart was also a significant contributor to the returns in the Value Fund, as was Pearson PLC and Kimberly Clark in our Worldwide High Dividend Yield Value Fund.

Our media, oil and gas, and insurance holdings produced disappointing returns for the quarter, leading the overall portfolio into negative territory. The same held true for holdings such as Emerson Electric, ABB, one of our chemical stocks, Akzo Nobel, and the Japanese electronics company, Canon. At the risk of repeating ourselves, we do not believe stock price movements over a quarter are necessarily indicative of specific company performance. In fact, most of these companies continue to make good economic progress.

With the uptick in volatility during the quarter, we established several new positions across our Funds and sold a number of positions that had reached our targets. We also took advantage of price movements, adding to and trimming a number of other positions. Material new purchases in the Funds included Safran, the French aerospace company; Siemens, the German engineering and industrial giant; Vallourec, the French seamless pipe manufacturer; and Google, the US-based information technology company. We also began building a position in HSBC, the UK-based, but largely Asian bank, and in Guoco Group, the Hong Kong- based property company, which we owned successfully in the past. All six of these companies trade at significant discounts from our conservative estimates of intrinsic value, enjoy competitive advantages in their respective industries, have strong balance sheets, and what we believe to be solid growth prospects. We also took advantage of price movements to add to our positions in Total, Bank of New York, ABB, Axel Springer, Novartis and J & J, among others.

In terms of sales, we sold our remaining shares of Linde, AT&T, Genuine Parts and Coca-Cola, all of which had performed well, meeting our intrinsic value targets. We also sold our remaining shares of Mediaset SpA, which had been a disappointment in the wake of continued eurozone instability and economic malaise in Southern Europe. We continued to reduce our positions in the Mexican coca cola bottlers, Arca Continental and Coca-Cola Femsa, and trimmed our positions in Henkel, Kone, Philip Morris International, Diageo, Wal- Mart, and Kimberly Clark, among others as these companies’ equity prices approached intrinsic value, and more attractively priced alternatives became available.

While many of our steadier consumer products company holdings are up in price, and in some instances trading at or near our estimates of intrinsic value, other parts of our portfolio continue to trade at substantial discounts to these estimates. We believe the overall valuation characteristics of our Fund portfolios continue to be quite reasonable-to-attractive, with a forward 2012 weighted average price/earnings ratio for their top 25 holdings ranging from 11.5X to a little over 13X, and a weighted average dividend yield that ranges from 3.2% to 4.6%. These characteristics, we believe, continue to compare quite favorably to benchmark indices and fixed income alternatives, in particular, and should, we hope, lead to attractive but invariably lumpy returns for investors with longer term time horizons.