The investment management principles practiced by Tweedy, Browne derive from the work of the late Benjamin Graham, professor of investments at Columbia Business School and author of Security Analysis and The Intelligent Investor. Tweedy, Browne’s research seeks to appraise the worth of a company, what Graham called “intrinsic value,” by determining its acquisition value, or by estimating the collateral value of its assets and/or cash flow. The term “intrinsic value” may also be referred to as private market value, breakup value or liquidation value. The process is more closely related to credit analysis, for as we have said, we are as concerned with the return of our capital as we are with the return on our capital. Investments are made at a significant discount to intrinsic value, which Graham called an investor’s “margin of safety.” Investments are generally sold as the market price approaches intrinsic value, with the proceeds reinvested in other situations offering a greater discount to intrinsic value. Adhering to the principles of intrinsic value and margin of safety results in an investment policy that runs counter to the general market psychology, and seeks to reduce the decision to purchase or sell securities to a discipline rather than an art.
In determining intrinsic value, our research focuses on fundamental principles of balance sheet and income statement analysis, and a knowledge and understanding of actual corporate mergers, acquisitions, and liquidations. From more than 20,000 publicly traded corporations worldwide, we research and select for investment, those issues selling at substantial discounts to our estimate of intrinsic value. To minimize errors in analysis or events which could adversely affect intrinsic values, we adhere to a policy of broad diversification within individual portfolios, with no one issue generally accounting for more than 3% to 5% at cost of portfolio assets, and no one industry group generally accounting for more than 15% to 20% of portfolio value. Portfolios are not constrained by market capitalization considerations with the result that a significant portion of portfolio assets may be invested in smaller (generally under $1 billion) and medium (up to $5 billion) capitalization companies.
Most investments in Tweedy, Browne portfolios have one or more of the following investment characteristics: low stock price in relation to book value, low price-to-earnings ratio, low price-to-cash-flow ratio, above-average dividend yield, low price-to-sales ratio as compared to other companies in the same industry, low corporate leverage, low share price, purchases of a company’s own stock by the company’s officers and directors, company share repurchases, a stock price that has declined significantly from its previous high price and/or small market capitalization. Academic research and studies have indicated a historical statistical correlation between each of these investment characteristics and above-average investment rates of return over long measurement periods.
Period: Q1 2013
Portfolio date: 31 Mar 2013
No. of stocks: 47
Portfolio value: $522,259,000
* Reported Price is the price of the security on the portfolio date. This value is significant in that it indicates the portfolio manager's confidence in the stock at that price and suggests at least some level of undervaluation and/or margin of safety.
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Articles & Commentaries
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.
To say that markets of late have been driven by the actions and comments of central bankers around the world is an understatement. Thanks in large part to their monetary policies, global equity markets posted solid gains for four consecutive months through quarter end. The Tweedy, Browne Funds were up solidly during the quarter producing returns between 4.98% and 6.48%, and are up between 15.76% and 21.79% for the last twelve months ending September 30. Fundamentally, however, in our humble opinion, not much has changed, particularly on the macroeconomic front where uncertainty still looms large. The global economic recovery remains anemic; the eurozone continues to be mired in uncertainty; China appears to be slowing; tensions are escalating in the Middle East; and the U.S. has made little-to-no progress with respect to its own budget crisis. Even corporate performance, which has been surprisingly good, now appears to be weakening somewhat. With bonds at historically high valuations, investment capital, supported by monetary ease, has only just begun to flow back into stocks ever so modestly, which on a relative basis seem to be a much better value, in our estimation.. Although, we are sure our view comes as no surprise.
Our returns for the quarter were driven in large part by strong results in beverage stocks, such as Arca Continental, Diageo, and Heineken Holding; pharmaceutical holdings such as Novartis and Roche; financials such as Provident Financial, Munich Re, and Zurich Insurance Group; and Total and Phillips 66, two oil & gas holdings. In addition, industrial companies such as Kone, Siemens, ABB, Akzo Nobel, and the information technology company, Google, were also significant contributors for the quarter.
Tobacco holdings such as Imperial Tobacco and British American Tobacco, together with a number of our Japanese holdings such as Canon, Honda and Takata produced disappointing returns for the quarter. The same held true for holdings such as G4S, Exelon and Vodafone. 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 stocks on the move, new buys have been scarce of late, and several of our existing holdings are trading at or near intrinsic value. Consequently we have trimmed or eliminated a number of positions in our Fund portfolios including Fraser & Neave, Abbey PLC, Schibsted, Philip Morris International, Heineken Holding, Kone, ADP, and Kimberly Clark, among others.
New additions to the Fund portfolios during the quarter included NGK Spark Plug, Scor, and Lintec. All three of these companies trade at significant discounts from our conservative estimates of intrinsic value, and we believe that they enjoy competitive advantages in their respective industries, have strong balance sheets and solid growth prospects. We also added to our positions in Safran, Total, G4S, HSBC Holdings, Teleperformance, Royal Dutch and Tesco, among others.
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 discounts to these estimates. We believe the overall valuation characteristics of our Fund portfolios continue to be quite reasonable-to-attractive, with forward 2012 weighted average price/earnings ratios for their top 25 holdings ranging from 11.8X to a little over 13X, and a weighted average dividend yield that ranges from 3.1% to 4.4%. 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.† All of that said,bargains are getting much harder to come by and if equity markets continue to march forward in the weeks and months ahead, cash reserves will likely build at the margin in our funds.
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.
The global equity markets’ year-end price momentum carried over rather aggressively into the new year, producing returns for the first quarter that were quite strong, despite what could only be described as incremental improvement at best in the underlying fundamentals of the global economy. In fact, shortly after quarter end, Spanish bond yields spiked, once again heightening fears about a potential unraveling in the eurozone. While the Tweedy, Browne Funds produced very good absolute returns for the quarter, they trailed their respective benchmark indices, which is not surprising in light of the markets’ rather aggressive return to risk. Longer-term comparisons for our Funds remain quite favourable.
Our returns for the quarter were driven in large part by strong results in our financial stocks, and to a lesser extent by very solid results in some of our consumer staples stocks, as well as some consumer discretionary holdings. Among the financials, it was our insurance holdings that led the way with companies such as CNP, Munich Re and Zurich Financial, producing strong double-digit returns. We also had good results in our bank stocks, including Wells Fargo, Bangkok Bank and United Overseas Bank. We had nice returns for the quarter in beverage companies Diageo and Heineken Holdings; Henkel, the household products company; as well as Philip Morris, the tobacco giant. Two of our media holdings, Axel Springer and Schibsted had a strong quarter as well.
As was the case at year-end, very few of our stocks disappointed for the quarter. However, while their underlying businesses continued to make progress, we had negative returns in pharmaceuticals GlaxoSmithKline and Novartis. The same held for a few of our oil stocks including Royal Dutch and Total.
We made very little in the way of substantive changes to the Funds’ portfolios during the quarter but we did have a handful of new purchases and sales, and took advantage of trading opportunities to add to and trim a number of positions. Material new purchases in the Funds included Hays PLC, the UK-based employment firm; HSBC Holdings, the large UK-based bank; and Tesco, the UK-based grocery chain. All three of these companies trade at significant discounts from our conservative estimates of intrinsic value and pay an attractive dividend while we wait for value recognition in the market. We also took advantage of trading opportunities to add to our positions in Royal Dutch, Total, Scor, United Overseas Bank, G4S, Imperial Tobacco, and J & J. In terms of sales, we sold our remaining shares of Daehan City Gas, Carclo, Avatar, and McDonalds, and trimmed our positions in Arca Continental, Coca-Cola Femsa, Kone, Linde, Diageo, Philip Morris International, and Arthur J. Gallagher.
With the rather aggressive advance in global equity prices, bargain hunting became somewhat more constrained during the quarter. That said, we believe the overall valuation characteristics of our Funds’ portfolios remain reasonable to attractive with a forward 2012 weighted average price earnings ratio for the portfolio’s top 25 holdings across all our Funds of approximately 11-13X estimated earnings and a weighted average dividend yield of approximately 3-5%.
Our returns for the year were driven in large part by continued strong results in the traditionally more defensive components of our portfolios, i.e. consumer staples ( food, beverage, and tobacco stocks) and healthcare companies (pharmaceuticals). Top performing issues for the year included stocks such as Philip Morris International, Diageo, Unilever, Johnson & Johnson and Roche. The more cyclical components of the portfolio, i.e. (industrials, financials, oil & gas, and media stocks), which returned to strength in the fourth quarter, struggled for much of the year clouded by growing concerns that the global economy was slowing, and the possibility of a disorderly monetary crisis in the Eurozone. Our fourth quarter results were led by continued strength in consumer staples stocks such as Philip Morris, Diageo, Walmart and Unilever, and a significant uptick in some of our more cyclical holdings including Axel Springer, Total, Royal Dutch, and Union Pacific.
Portfolio activity was modest during the quarter with only a few new buys and complete sales. However, we did take advantage of the volatility to add to and trim a number of portfolio positions. In terms of meaningful new buys, we began building positions in ABB, the German engineering company, United Overseas Bank, the Singapore banking company, and SCOR, the French insurance company. In terms of sales, we sold our position in SK Telecom across all four of our Funds despite its attractive valuation metrics after they decided to go forward with what we felt was an ill-advised acquisition of a company in an entirely unrelated industry. We added to our position in Bangkok Bank, Novartis, G4S PLC, NGK Spark Plug, and Royal Dutch among others, and trimmed our positions in Fraser & Neave, Munich Re, Zurich Financial, and Linde.
All four of our Funds continue in large part to be positioned in larger, more globally diversified, underleveraged businesses that sell a plethora of products that are of growing interest to emerging middle classes around the globe. We continue to maintain significant positions in consumer staples and healthcare stocks, but also have substantial positions in more cyclical areas such as insurance, industrials, energy and media. While the spread in valuation between the more defensive and the more cyclical parts of the equity market has widened of late, the overall valuation for our portfolios remain quite reasonable to attractive with a forward 2012 weighted average price earnings ratio for our Funds’ equities, which range between 11.4X and 12.3X estimated earnings. Also, the equities in our four Funds had an average weighted dividend yield ranging from approximately 3.5% to 4.5%.
n terms of our outlook, we remain cautiously optimistic particularly when we look further out on the investment horizon. In the near term, we are all bobbing around on the macroeconomic pond as issues such as the Southern European debt crisis, accelerating deficits in the U.S., the Arab Spring, and the potential for a slowing China, just to name a few, continue to buffet global equity markets. If you are willing to look out over a reasonable period, say three to five years, we believe we will probably be in a better place, and the businesses we own on the whole should be bigger and stronger.
Uncertainty, in our opinion, is one of the most difficult factors for professional as well as individual investors to deal with, and it is dominating the markets currently. Uncertain markets are characterized by increased volatility and correlation between asset classes, as well as increasingly shorter time frames for investment decisions. None of this, in our opinion, will improve the probabilities of earning a satisfactory return over a reasonable period of time. Rather, we think that in most instances, these will improve the odds of the opposite outcome. Emotional and behavioral biases tend to win out over objectivity. Today’s 24-hour news cycle doesn’t contribute much to rational thinking. The adage in the media industry that “airplanes landing don’t make news” has an element of truth. One relatively new factor contributing to this volatility (and we admit that we do not have a lot of empirical data to back it up) is the impact of algorithm- driven trading which, in the U.S. equity markets, is upwards of 60% of volume. It is largely driven by arithmetic-historical correlations volatility, and holding periods measured in minutes if not seconds. Couple this with day trading and you end up with completely irrational price movements. By way of example, the price range of Bank of America (a stock that we do not own) from its high to its low on August 5th was 11%, and the company had a market capitalization of $90 billion. Yesterday, the stock was down another 20%. Another example is Royal Dutch Shell with market capitalization of almost $210 billion. The price range of the stock from high to low on August 4th was about 5%. It is unlikely that the value of those businesses changed by this much in one or two days, in our judgment. There are numerous other examples, some we own and others we do not. The ability to predict this sort of swing movement is virtually impossible and the ability to explain them is equally so. In order to function and make objective decisions you must have other parameters for decision making.
In our view, it is ultimately the economics that win out, and in our case, the economics of the underlying businesses we own. It certainly has been the case historically, and in our opinion, profits and cash flow will remain the fundamental long term drivers of equity valuations. The probabilities of objectively valuing the economics and sustainability of a business are far better than the alternative of predicting the movement of “markets” over any given time period and we think the empirical evidence supports this view. This is not to say that we simply ignore “global” questions. We do consider how larger trends will ultimately impact the businesses we own. For instance, what do a large emerging middle class or price controls mean for a business, etc?
So while we don’t enjoy this type of environment – to say the least – we keep our focus on trying to buy a good business at a very attractive price. In doing this, we seek to avoid highly leveraged businesses and businesses with obsolescence risk. These environments create some real cognitive dissonance – the ability to buy into a company at a great price usually goes along with having the ones you own go down in price.
Nonetheless, to put it simply, the investment framework at Tweedy, Browne does not change – the number of companies to look at, not surprisingly, has increased and some averaging-in on existing investments is occurring. Most of what we do rests on the process coupled with a realistic time horizon.
As the markets became more volatile over the last three to six months, it was the more traditionally defensive stocks that held up best and produced the best returns in our mutual fund portfolios, i.e., the beverage, tobacco, and healthcare holdings. This included companies such as Coca Cola Femsa, Diageo, British American Tobacco, Roche, and Johnson & Johnson. A number of our industrial holdings also performed well including Kone, the Finnish elevator company, and Krones, the German beverage equipment manufacturer.
As concerns about the Southern European debt crisis and uncertainty surrounding the raising of the debt ceiling in the U.S. resurfaced, the financials began to contract, especially a number of our insurance stocks, such as Zurich Financial, Munich Re, and Berkshire Hathaway. Our media holdings were also down during the quarter, led by Axel Springer and Mediaset Espana. Also, oil & gas stocks were impacted by a decline in oil prices, and by what appeared to be slowing economic growth rates. ConocoPhillips, Devon Energy and Total declined in price during the quarter.
Portfolio activity was once again relatively modest during the quarter with no noteworthy new purchases and sales. We did add to a number of our positions and trimmed a number of others as pricing opportunities presented themselves. Among the securities that we added to were Zurich Financial, Total, Wells Fargo, Metcash and Novartis among others. We trimmed our positions in Jardine Strategic, Kone, Linde, Nestle, Philip Morris International, and Henry Schein.
While it is always impossible to know how markets will perform in the near term, we continue to feel that our portfolios are well positioned, and are cautiously optimistic for their prospects going forward.
British American Tobacco (BATS LN) is the 3rd largest tobacco company in the world. It operates in 180 markets and has 250 brands. It also has a 42% position in Reynolds American (RAI), the 2nd leading US tobacco manufacturer, and a 31% stake in ITC Ltd (ITC IN), the leading cigarette manufacturer in India. BAT is a high-return-on-capital recession-resistant company that at purchase was trading at a discount from our estimates of intrinsic value. The following characteristics made it appealing: consistent earnings pattern even during recession years; high free cash flow; a dividend yield of approximately 4.5%; a history of dividend increases every year since 1999; a history of buying back its own shares; growing volume in key global brands; brand loyalty; and a wide competitive moat.
Cisco Systems (CSCO US) provides routing, data and networking products for the internet. The company’s clients include corporations, public institutions and telecommunications companies worldwide. Cisco is financially strong and we think statistically cheap. It has a dominant market position and has been growing within a category that we believe still has a lot of room for future growth. Perceived competitive threats and concerns about possible slower rates of growth have put pressure on Cisco’s stock price, which has allowed us an entry point in the stock that we believe is at roughly a one third discount from a conservative estimate of the company’s intrinsic value.
Global equity markets have indeed come a long way very fast from the Spring lows of 2009. Economic recovery has begun to accelerate, and while businesses have adjusted well to the new economic realities, governments both in the U.S. and abroad continue to struggle with the difficult choices that need to be made in order to get their fiscal houses in order. Equity valuations are up and bargains in the stock market are much harder to come by. However, we believe that the valuation levels of our portfolios are certainly not at worrisome levels. The top 25 holdings in our Funds’ portfolios were trading on average at approximately 12 to 13x 2011 estimates of earnings, or at a marginal discount from market P/Es.
It is encouraging that the markets continue to climb a considerable wall of worry, and that a mountain of cash remains on the sidelines available for equity investment. We feel our portfolios are well-positioned, and are cautiously optimistic for their prospects going forward.
Portfolio activity was once again relatively modest during the quarter. Among the more noteworthy new buys was Lockheed Martin, the US-based defense contractor, which we purchased for the Worldwide High Dividend Yield Value Fund. Lockheed Martin is the world’s largest defense contractor. It has what we think is a highly desirable product mix (F-35s, missile defense, cyber security) and limited exposure to supplemental defense spending, which will most likely be under pressure going forward due to government budget issues. At purchase,it was trading at roughly 10 times earnings, with a sustainable free cash flow yield excluding pensions of 12 to 13%. It had a dividend yield of 4.2%, and has a record of returning another 1-2% (per quarter) to shareholders in the form of stock buybacks. The dividend has increased by 10% or more over the last eight consecutive years, and the payout ratio is a conservative 42%.
We also added to several of our pre-existing fund positions during the quarter including Telecinco, Provident Financial, Roche, Teleperformance, Total and Zurch Financial among others.
Notable sales during the quarter included Home Depot, Edipresse, Grupo Minerali, and Korea Exchange Bank. We trimmed our position in a number of holdings including Axel Springer, Richemont, Coca Cola Femsa, Embotteladoras Arca, Comcast, Emerson Electric, Henkel, Krones and Linde among others.
In general, overall portfolio positioning has not changed materially for our Funds over the last quarter. Our Fund portfolios continue to be populated in large part by big, globally diversified and dominant businesses with strong competitive positions, often producing a plethora of moderately priced products for a growing middle class around the world. While these companies emerged from the crisis relatively unscathed and have participated in the market’s advance, we believe that they continue to represent good value in the market and trade at reasonable multiples of more predictable cash flows.
One positive outcome of the financial crisis has been the opportunity to increase our exposure to some of the very “best” global businesses, at attractive prices. These businesses operate on a worldwide basis, with globally recognized brands, the financial strength to weather difficult macroeconomic conditions, and a large and growing exposure to the faster growing half of the world. These companies trade at reasonable valuations and many have current yields in excess of 3%.
As bottom-up stock pickers, our forward view regarding equity returns is informed by valuation. With that in mind, global equity valuations, while not extraordinarily cheap, do appear to be quite reasonable. When the fog of uncertainty surrounding the current economic and political climate inevitably clears, we feel that our portfolio will be well positioned to take advantage of a sustainable global recovery.
Today, the 62-year-old is part of a four man management team that includes William Browne, 65, Thomas Shrager, 53, and Bob Wyckoff, 57. They are all devoted to Benjamin Graham’s value-investing principles. If they can’t find real bargains, they will close the fund, as they did in 2005. (They reopened it in 2008.) Global Value will invest in just about any market-cap, but currently is weighted toward large-caps.
A typical by-the-numbers investment is little-followed Tomen Electronics (7558.Japan), a micro-cap semiconductor company, which turns over its inventory eight times a month. “You can buy this whole company and get back your money from income in just 3.6 years,” say Spears. “If you take the current assets alone, that can be converted to cash in one year, after subtracting all liabilities; then, if you divide it by the number of shares, you get 1,775 yen per share,” says Spears. The stock currently trades for 958 yen.
Global Value’s largest current holdings, however, are big, liquid stocks with strong franchises that pay dividends. Among them: Smirnoff vodka maker Diageo, Heineken Holding and the Swiss food company, Nestle.
Volatility returned to global equity markets in the second quarter in large part due to uncertainties surrounding the debt crisis in Greece and Spain and concerns about economic policies in the U.S. and Europe. As a result, the gains of the first quarter were largely erased in the second quarter. While unsettling for many, the silver lining is that volatility often brings with it investment opportunities to those with a longer term perspective. It’s hard to imagine that just a few months back, market commentators were talking about the pricing of oil being changed to Euros, given the rather grim outlook for the U.S. dollar. Instead, the mounting deficits in a number of southern European countries have increased pressure on the Euro, with the currency declining against the dollar by nearly 20% from its previous high late last Fall. Memories are indeed short.
We feel that our Fund portfolios are currently well positioned, particularly in light of some of the macroeconomic challenges we are facing around the globe. Our Fund portfolios have very little direct exposure to the PIIGS (Portugal, Ireland Italy, Greece, and Spain), our financial exposure in Europe is limited to a couple of insurance companies, and we have no investments in European bank stocks at this time. The bulk of our investments today in Europe and elsewhere are in larger, globally diversified, conservatively financed businesses that generate a considerable amount of their sales and profits in the emerging markets, and often pay an attractive dividend. While many of these companies, such as Nestle, Diageo, Heineken, Unilever, Kone, Novartis, and Total, among others, are headquartered in Europe, they are truly global enterprises. In our view, valuations remain reasonably attractive, and business is steadily improving. While many western governments wrestle with how to rein in large deficits, businesses have adjusted relatively well to the new economic realities.
As we mentioned in our last quarterly update, there is a quality bent to the portfolio today reflecting where value is showing up in global equity markets. While higher quality companies performed quite nicely during the last year, the bounce off the recession low was largely driven by lower quality stocks, led by financial, media and small cap securities as well as emerging market equities. The top 20 holdings across our four Funds continue to consist for the most part of larger, globally diversified high return on capital businesses that trade at very reasonable multiples of estimated earnings and have a dividend yield on average of nearly 3%. They generally have strong balance sheets, which should allow them to withstand any economic turbulence we may face, and many of them benefit significantly from sales into the emerging markets. So, while our direct exposure to the emerging markets may be modest, our indirect exposure is quite significant and we think at much better prices than those available investing on a direct basis.
As a value-based, bottoms-up investment manager, our market view is a function of individual security values, and given the advance of global equity markets over the last year, global equities in general are pretty fairly valued today. Finding opportunities as a result has become more challenging. Nevertheless, we are still uncovering opportunities, albeit at a slower pace. Despite the healthy returns we enjoyed over the last year, we feel that our Fund portfolios are still very reasonably valued and well positioned for the future.
Will Browne, Tom Shrager, John Spears and Bob Wyckoff of Tweedy Browne share their perspective on value investing in today's global equity markets (1hr. 32min.)...
With global equity markets up approximately 73%(MSCI World Index) from the market bottom in early March of last year, stocks today in general appear to be fairly to fully valued. That said, from our perspective, it is more a market of stocks and not so much a stock market with some stocks more attractively priced than others. As with previous stock market collapses, the bounce off the bottom was led by lower quality stocks, those that suffered the worst declines during the downturn. While most stocks were up nicely for the year, steadier, higher quality businesses, particularly those that pay a dividend, significantly underperformed lower quality non-dividend paying issues, and today we believe offer investors much better value. For example, in 2009 the 370 stocks in the S&P 500 that paid some kind of a dividend were up 27.7% on average versus a return of 82.4% for the stocks that did not pay a dividend. The same held true for global equities with the stocks that pay a dividend in the MSCI World Index up 32.3% versus a return of 75% for the stocks in the index that did not pay a dividend. In general, the higher the dividend yield the lower the return in 2009. As we got closer to year-end, dividend stocks perked up, and were in part responsible for our Funds’ strong 4th Quarter results.
For the most part, the top 25 holdings in our Funds’ portfolios, which account for approximately 75% to 80% of the portfolios, are chock full of these steadier dividend-paying companies with more sustainable demand characteristics. On average, as of December 31, 2009, they were trading at approximately 15x current year estimated earnings and had a dividend yield on average of over 3%. This compares favorably to indexes such as the S&P 500 and the MSCI World, which were trading at over 17 times earnings. These are companies that are for the most part globally diversified, have solid balance sheets, sell products to an aspiring and growing global middle class, and pay an attractive dividend. Many of these companies such as Heineken, Unilever, Nestle, Diageo, Phillip Morris International, and Novartis, among a host of others, derive a surprising amount of their revenues and profits from the emerging markets, and from our point of view this indirect approach is a cheaper and safer way to invest in these rapidly growing Third World economies. So despite the robust returns we enjoyed in 2009, we feel that our Funds’ portfolios are still relatively well positioned, and attractively valued.
To thrive as a value investor, Christopher H. Browne once said, you have to "risk being called a dummy from time to time."
"Investment management is for us a 'grunt work' business," Mr. Browne wrote in a 2001 letter to shareholders. "Were you to visit our offices, you would be reminded more of the reading room in a college library than some frenetic trading room at a major brokerage firm."
We would like to extend our heartfelt condolences to his family, friends and colleagues at Tweedy Browne.
-- Dataroma team
Many people incorrectly assume that value investors only own the “cigar butts” of the stock market; companies with just one puff left, albeit a free one. That is simply a misconception. As Warren Buffett always says, value and growth are joined at the hip, it is simply a question of price. When given the opportunity, we love to own better quality businesses. Today, our portfolios consist of companies that we believe for the most part can weather virtually any storm and produce products people require as opposed to the “stuff” people desire; products that people eat, drink, smoke, the gas people put in their cars, the medicines they take, etc.
Investment capital has again been flowing aggressively back into the emerging markets, driving some valuations in those equity markets to levels that do not make sense to most value- oriented investors. You might be surprised to learn that our Funds have significant exposure to these faster growing markets. Much of it is indirect and at valuation levels that we believe are more attractive than the majority of opportunities available from most direct investments in these markets.
For those of you who believe more direct exposure to these (emerging) markets would be advantageous, it might surprise you to know what you are getting for the most part when you invest in an emerging market fund, index or otherwise. These markets are emerging, and as a result they generally lack breadth. For instance, in each of the BRIC countries (Brazil, Russia, India, and China), the top five holdings in their constituent indices constitute between 40% and 60% of the index and are largely banks and oil and gas companies. These stocks often sell at premium valuations. Despite this concentration and apparent lack of “value,” from our perspective the BRIC indices have performed extraordinarily well at times. Value investors such as ourselves, however, prefer to pick and choose, and look for value, company by company. Investing indirectly in some of these pricier markets as we described above, is perhaps a safer and cheaper way to participate in the rapid growth in the third world. So despite conventional wisdom that a value investor is not likely to be exposed to the rapid growth of emerging markets, we believe we have a meaningful, if largely indirect, exposure to these areas of the world through the businesses we own.
...the 2nd quarter presented us with a welcome respite from unprecedented equity market volatility and economic turmoil. The snapback in equity markets over the last three plus months has been fast and furious, and was not unlike that which has occurred from past recession lows. That said, the market has come a long way awfully fast despite the continuation of deep economic problems. Should equity market volatility return, we still have a modest level of cash reserves to take advantage of pricing opportunities. While we have no idea what the near term holds in terms of equity market performance - and stocks could certainly go lower before they go higher - we are quite optimistic about the long term, and continue to view this environment as a buying opportunity.