18 Jan 2013 Tweedy Browne - Q4 2012 Commentary ( Portfolio )
Global equity markets climbed a wall of “macro worry” in 2012 and finished on a high note in spite of the last minute brinksmanship of U.S. politicians regarding the approaching fiscal cliff. While the economic recovery from the 2008 financial crisis has been less than robust, our portfolio companies continue to make excellent financial progress and for the most part, in our estimation, have grown their underlying intrinsic values. In 2012, that progress was well rewarded in the stock market. All four of the Tweedy, Browne Funds produced very good absolute returns for both the quarter and the year.

While the vast majority of stocks in our fund portfolios had positive returns for the quarter, our best results were produced by a number of our media, beverage, insurance and industrial holdings. This included media companies such as the Daily Mail, Mediaset Espana, Publigroupe, and Schibsted; beverage holdings such as Heineken and Coca Cola Femsa; insurance stocks such as CNP Assurances and Munich Re; and industrials such as Emerson Electric, Safran, Unifirst, Union Pacific, Akzo Nobel and Siemens. We also had very nice returns in Bank of New York Mellon and Baxter International.

In contrast, with the exception of Conoco, and its spin-off, Phillips 66, our oil & gas holdings lagged most other groups during the quarter. This was also largely the case for our tobacco holdings including Philip Morris and British American Tobacco which had produced some of our best results in 2011.

During the quarter, we continued to reduce our positions in tobacco and beverage holdings which were trading at or near our estimate of intrinsic value. We trimmed our positions in British American Tobacco, Arca, and Heineken. We also reduced our position in Krones, the German beverage equipment manufacturer, and sold our remaining shares in SK Kaken, Guoco Group, Mirai Industry Co. and Sinolink Worldwide, as they had reached fair value. We also sold our remaining shares in Katsuragawa Electric, Mondadori, Exelon, and IGM Financial, all of which had produced rather disappointing results.

We established new positions during the quarter in two industrial businesses, an information technology company and a Japanese pharmaceutical company. This included Halliburton, the Houston based global oil service company; Joy Global, the US-based mining equipment manufacturer; Cisco Systems, the global leader in routing and switching technology; and Mitsubishi Tanabe, the Japanese pharmaceutical company. All four of these companies at purchase were trading at significant discounts from our conservative estimates of their intrinsic value, were financially strong and we believe have solid prospects for future growth. In addition to the above new buys, we added to our positions in Devon Energy, Royal Dutch, Scor, HSBC, and Tesco, among others.

In terms of current positioning, our Fund portfolios continue to be multi-cap in character although they have had a larger cap orientation for the last several years. Except for the Value Fund, European securities continue to comprise the largest segment of our portfolios by geography. This categorization is largely a function of where corporate headquarters are located, with most companies having a broad global footprint from an end market perspective. Industry concentrations include food, beverage and tobacco companies, media stocks, insurance companies, pharmaceuticals, and a growing industrial segment. We have also been increasing our commitments to the oil & gas industry and related companies with our recent investments in Halliburton and Vallourec. In general, as we mentioned in our last quarterly report, over the last quarter and year, we have sold or reduced positions in a number of consumer oriented businesses, and established new positions in various industrial-based businesses where we were presented with pricing opportunities. Cash reserves have on average been increasing modestly in our Fund portfolios as equity markets have advanced.

As you know, just after the New Year was welcomed in the U.S., Congress struck a modest, but cliff- avoiding deal that included for the most part tax increases on income and capital for the highest income earners that we think should prove over the longer term to be relatively benign from a tax perspective for investors especially when compared to alternative potential outcomes. While the compromise was heartily, if not irrationally, received by global equity markets on the January opening, we think it leaves the budgetary/financial problems in the U.S. far from resolved which could lead to continued volatility in equity markets until a more comprehensive solution is reached. In the meantime, while the markets’ advance makes new entry points into stocks somewhat more difficult, we believe the portfolios remain reasonably valued and are cautiously optimistic as we head into the New Year.