Tweedy Browne Fund Q2 Commentary
With the VIX (proxy for market volatility) at its lowest level since 2007, it is not surprising that investors’ tolerance for risk appears to be growing, as evidenced by the continued strength in global equities and most other financial instruments. In a fascinating study conducted by John Coates, a research fellow at Cambridge, linking risk taking to physical responses to stress, it was shown that when market volatility is high, cortisol (the “stress hormone”) levels increase, causing investor appetite for risk to decline.
Tweedy Browne Fund: Market volatility
Conversely, when levels of market volatility are low, cortisol levels remain largely unaffected, resulting in a greater willingness on the part of investors to take on risk. One could argue that the complete transparency of central bank monetary policy around the globe, particularly in the United States, has caused the release of “one of the most powerful potential brakes on excessive risk taking in stocks.”
Whether or not we have reached bubble territory is subject to debate, but investors should be cognizant that, if risk is indeed largely predicated on the price one pays for a security, it is no time for complacency. As you well know, we are not about to make forecasts because in our mind, we are not sure from an investment standpoint that they are much better than random guesses. We think of ourselves as being in the business of chasing value, not performance, and we do know that we have to pay, on average, a whole lot more for a dollar of value today. Our experience has taught us that if we keep looking, and exercise some patience, opportunities will turn up.
As you can see from the above chart, the Tweedy, Browne Funds have continued to fare well from a performance standpoint despite carrying above average levels of cash reserves. The Funds were up from 3.3% to as much as 5% during the second quarter. The Worldwide High Dividend Yield Value Fund and our two international funds modestly trailed their benchmarks while the Value Fund modestly outperformed its benchmark.
Tweedy Browne Fund: Portfolio holdings
Returns for the quarter were largely derived from strong results in our oil & gas, financial, pharmaceutical, and consumer staples holdings. Royal Dutch and Total turned in solid performances as these companies have signaled their desire to focus on efficiencies and moderate capital expenditures in an effort to increase profitability and return more cash to shareholders over time. Oil service providers such as Halliburton Company (NYSE:HAL) also produced strong results as did Devon Energy Corp (NYSE:DVN). Banco Santander Brasil SA (ADR) (NYSE:BSBR), our lone Brazilian holding, together with Provident Financial Services, Inc. (NYSE:PFS) and Zurich Insurance Group Ltd (VTX:ZURN) (OTCMKTS:ZURVY) led a solidly performing financial group. Novartis AG (ADR) (NYSE:NVS) and Johnson & Johnson (NYSE:JNJ), two of our big three pharma holdings, continued their advance, and Nestle SA (VTX:NESN) became a portfolio leader again with a strong second quarter return. On the other side of the teeter-totter, our industrial and chemical holdings turned in lackluster results with companies such as ABB Ltd (ADR) (NYSE:ABB), Akzo Nobel N.V. (AMS:AKZA) (OTCMKTS:AKZOY), Vallourec SA (EPA:VK) (OTCMKTS:VLOUF) and Siemens AG (ADR) (OTCMKTS:SIEGY), among others, finishing in negative territory.
Tweedy Browne Fund: New positions
With equity markets gaining strength during the quarter, portfolio activity remained quite modest. In general, recent new positions in the Fund portfolios have been in companies that operate directly in the emerging markets or companies that derive their sales and profits from activities in those markets. This has included new holdings in Chile and Hong Kong. We also added one new Canadian small capitalization company to Global Value Fund II – Currency Unhedged. We have suppressed the names of all of these companies for the time being as we build positions in these stocks. We added to our positions in Standard Chartered PLC (LON:STAN), TNT Express NV (AMS:TNTE) (OTCMKTS:TNTEY) and Vallourec SA (EPA:VK), among others, and reduced our positions in certain holdings, including NGK Sparkplug, Fukuda Denshi, Daetwyler, Henkel and Provident Financial. We also sold our remaining shares in Publigroupe, Hi-Lex and SYSCO Corporation (NYSE:SYY) during the quarter.
Tweedy Browne Cash
We continue to do our best to manage flows into our Funds in this challenging environment. We have established governors in all four Funds which restrict the amount a single investor or financial advisor can invest on a given day: $4 million for the two Global Value Funds and $7 million for the Value Fund and Worldwide High Dividend Yield Value Fund, respectively. Current levels of cash provide more than adequate “dry powder” to take advantage of new opportunities. While we are flattered by the growing interest in our Funds, if cash reserves continue to grow, particularly in our two Global Value Funds, we may have to take additional action to limit new inflows of cash.