Tweedy Browne Q2 letter: Global equity markets continued their advance through April and May, but ran into a wall of worry and volatility in June as concerns arose regarding the prospects for Federal Reserve “tapering” of bond purchases, and increasing evidence that the Chinese economy may be slowing. While our portfolio holdings continued to make economic progress, returns for the Tweedy, Browne Funds on an absolute basis were for the most part marginally negative with the exception of the Value Fund which eked out a slightly positive return for the quarter. Since quarter end, the markets and our Funds have bounced back recovering much of the loss sustained in June.
Returns in our Funds over the last twelve months have ranged from 13.89% to 19.12%, and since the bottom of the financial crisis in March of 2009 have compounded on an average annual basis between 19.27%and 21.07%. Our under performance relative to benchmarks over the last twelve months has been largely due to our increasing level of cash reserves, and our modest exposure to the Japanese market which is up over 50% in local currency (MSCI Japan).
The Adviser has contractually agreed to waive its investment advisory fee and/or to reimburse expenses of the Worldwide High Dividend Yield Value Fund and Global Value Fund II — Currency Unhedged to the extent necessary to maintain the total annual Fund operating expenses (excluding fees and expenses from investments in other investment companies,brokerage, interest, taxes and extraordinary expenses) at no more than 1.37%. This arrangement will continue at least through December 31, 2014 for the Global Value Fund II – Currency Unhedged and will terminate on December 31, 2013for the Worldwide High Dividend Yield Value Fund. In this arrangement the Worldwide High Dividend Yield Value Fund and Global Value Fund II — Currency Unhedged have agreed, during the two-year period following any waiver or reimbursement by the Adviser, to repay such amount to the extent that after giving effect to such repayment such adjusted total annual Fund operating expenses would not exceed 1.37% on an annualized basis. The performance data shown above would be lower had fees and expenses not been waived and/or reimbursed.
§ The Value Fund’s performance data shown above would have been lower had certain fees and expenses not been waived from December 8, 1993 through March 31, 1999.
The Funds do not impose any front-end or deferred sales charge. However, the Tweedy, Browne Global Value Fund,Tweedy, Browne Global Value Fund II – Currency Unhedged and Tweedy, Browne Worldwide High Dividend Yield Value Fund impose a 2% redemption fee on redemption proceeds for redemptions or exchanges made within 60 daysof purchase. Performance data does not reflect the deduction of the redemption fee, and if reflected, the redemption fee would reduce the performance data quoted for periods of 60 days or less. The expense ratios shown above reflect the inclusion of acquired fund fees and expenses (i.e., the fees and expenses attributable to investing cash balances in money market funds) and may differ from those shown in the Funds’ financial statements.
In general, returns in our Funds were led by strong results from several Japanese automotive components companies, i.e. NGK Sparkplug and Takata; two of our media holdings, Mediaset España andthe Daily Mail; several of our pharmaceutical holdings including Johnson & Johnson, Roche, and GlaxoSmithKline; and our two technology holdings, Cisco and Google. A number of our food, beverage and tobacco stocks including Diageo, Nestle and Philip Morris International, among others, produced disappointing results for the quarter, as was the case with a number of our bank stocks including our new Brazilian holding, Banco Santander Brasil, Bangkok Bank and United Overseas Bank. As is often the case inthe short run, we think that these results had more to do with headline macro events around the world than with these companies’ underlying economic performance.
We established a few new positions in our Funds during the quarter including Banco Santander Brasiland National Oil well Varco. In addition, we also sought to take advantage of trading opportunities and purchased shares in Pearson for our two international funds and added Joy Global to the Value Fund. Although Banco Santander Spain is a significant shareholder of Banco Santander Brasil, the Brazilian bank is an independently listed subsidiary with its own management team, board of directors, and capital base. At purchase, Banco Santander Brasil was trading at a discount from book value, below 10 times 2013 estimated earnings, and had a dividend yield of approximately 5%. It has a strong capital position (underleveraged),high net interest margins, and among its three local competitors, it has the highest consumer exposure to the rapidly growing middle class in Brazil. While the company has traded down since our initial purchase, we think largely due to the general sell-off in the emerging markets and the demonstrations in Brazil, we are very positive about the longer term prospects for the company. The other new holding is National Oil well Varco, a leading global manufacturer of drilling rig equipment and consumables to the energy industry.