Tweedy Browne’s commentary for the third quarter 2014.
Volatility returned to global equity markets near the end of the third quarter, helping to drive international and global indices off their previous highs. Largely due to declines in energy related shares, an underweighting in US-based companies, and a strengthening US dollar, all four of our Funds finished the quarter modestly in the red. The US dollar was up against most major currencies between 5% and 8% during the quarter, negatively impacting currency translated returns, particularly into our two unhedged Funds. With the exception of our Unhedged Global Value Fund’s return, which was marginally negative, our other Funds finished the year-to-date period in positive territory. While volatility is unsettling to many, it does carry with it potential opportunities to put some of our cash reserves to work.
§ The Value Fund’s and Worldwide High Dividend Yield 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 (for the Value Fund) and from September 5, 2007 through December 31, 2013 (for the Worldwide High Dividend Yield Value Fund).
The Funds do not impose any front-end or deferred sales charges. However, the Global Value Fund, Global Value Fund II – Currency Unhedged and Worldwide High Dividend Yield Value Fund impose a 2% redemption fee on redemption proceeds for redemptions or exchanges made within 60 days of 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.
Please note that the individual companies discussed herein represent holdings in our Funds, but are not necessarily held in all four of our Funds. Please refer to footnotes on page 12 for the Funds’ respective holdings in each of these companies.
Tweedy Browne’s lackluster results caused by declines in oil and gas related shares
The lackluster results for Tweedy Browne Funds during the quarter were driven largely by significant declines in our oil and gas related shares, as the price of oil as measured by Brent Crude declined approximately 17% during the quarter. While we had some very nice returns in a few of our pharmaceutical, financial and defense holdings, it was not enough to offset the declines in our energy related holdings. With declining oil prices driving oil shares lower, it is easy to lose sight of the longer term fundamental case for oil and gas. While we have no clue as to what will happen to oil prices in the short run, we believe over the longer term, the supply demand equation for oil and gas should remain relatively tight, due to declining production curves, increasing demand, and higher finding and development costs. At the margin, experts suggest that the marginal cost today of finding and developing a barrel of oil is approximately $80 to $100. While Saudi Arabia remains a significant unknown factor in the near term pricing of oil because of its ability to substantially increase or decrease production, longer term trends remain, in our judgment, favorable. Furthermore, the oil and gas companies in our Fund portfolios have significant financial resources, attractive production growth profiles, and generate free cash flow, which is currently being used to pay increasing dividends in many of our holdings as we wait for longer term value recognition in our shares.
Tweedy Browne adds Antofagasta, SCOR SE, Safran and Standard Chartered
Portfolio activity was quite modest. We added to our positions in Antofagasta plc (LON:ANTO) (OTCMKTS:ANFGY), Safran SA (EPA:SAF) (OTCMKTS:SAFRY), SCOR SE (EPA:SCR) (OTCMKTS:SCRYY) and Standard Chartered PLC (LON:STAN), and sold or reduced our positions in several Japanese holdings. We also established new positions in several companies including a small oil equipment company, a Canadian listed South American oil and gas company, and a leading US-based wireless communications company, and we expect to add to these positions in the coming quarter.
As a reminder, in the event that the dollar continues to strengthen against most major currencies, the forward currency contracts in our hedged funds, the Tweedy, Browne Global Value Fund and Tweedy, Browne Value Fund, should provide significant protection against foreign currency declines. If the past is prologue, over the long term, both hedged returns and unhedged returns should come into line with one another. However, there are no guarantees regarding future returns. As always, we do not have a point of view regarding where the dollar will trade going forward against foreign currencies and would caution investors about such views.
While we were somewhat chagrined to see our oil stocks take it on the chin over the last quarter, we welcomed the increase in market volatility. As Warren Buffett has said on numerous occasions, including just the other day, a long term consumer of equity securities should welcome pullbacks in equity markets, which afford them the opportunity to buy interests in businesses at attractive prices. We absolutely concur. While valuations in public equity markets still remain relatively full, we are quite confident that new opportunities will present themselves if we continue to be diligent and remain patient.
Thank you for investing with us and for your continued confidence.
Tweedy, Browne Company LLC
William H. Browne
Thomas H. Shrager
John D. Spears
Robert Q. Wyckoff, Jr.
Dated: October 21, 2014