Tweedy Browne Fund commentary for the second quarter ended June 30, 2016.
H/T Dataroma
Having regained their footing in mid-February, global equity markets continued to advance during the 2nd quarter right up until the Brexit vote in late June. Despite the turbulence produced by the surprise vote, it was not enough to erase what turned out to be a modestly positive quarter in terms of returns. We are pleased to report that all four of the Tweedy Browne funds finished the quarter in positive territory, and well ahead of their respective benchmark indices.
While the Brexit decision sent shockwaves temporarily through markets, the downside volatility has turned out to be short-lived (at least so far) as investors appeared to re-focus on what this means for interest rates and future central bank behavior. Much of the ground that was lost in equity markets in the couple of days after the vote has now been recovered, particularly in the United States. What Brexit means longer term for the UK, the European Union (EU), and our markets, only time will tell. As investors, we should not lose sight of the fact that businesses are a mix of human, physical, and intellectual capital, and have a remarkable ability to adapt to changes in the economic and regulatory environment. Many, if not most, of the businesses in our Tweedy Browne Fund portfolios are large, multi-product businesses that operate on a global basis in a host of markets and currencies. Their success is not overly dependent on the outlook for the European economy. While the near term volatility could remain high in the days and weeks ahead, from our view this is certainly not an end of days scenario for our global markets, but rather something that should lead to opportunities for price-disciplined value investors.
When it comes to market leadership, the screw does indeed appear to be turning in global equity markets. Many of the factors that negatively impacted our absolute and relative results last year are now working in our favor. For example, through June 30, value stocks this year outperformed their more growth oriented brethren. The so called FANG stocks (Facebook, Amazon, Netflix, and Google) have not been driving global equity markets as they did in 2015. Japanese stocks, which constitute a substantial portion of both the MSCI World and MSCI EAFE indices (our benchmarks), have gone from market leaders to significant laggards over the last year, and are now negatively impacting index returns. Our exposure today to Japanese equities is quite low, having sold many of our Japanese stocks into their market’s strength over the last several years. Oil prices have rebounded positively this year, reversing the near term fortunes of our energy related holdings. In addition, eurozone bank stocks have on the whole faced significant declines this year, particularly after the Brexit vote. We do not have investments in any eurozone banks in our Fund portfolios. And our cash reserves, which were a drag on our results last year, are this year helping to provide a buffer against declining non-U.S. equity prices.
Tweedy Browne Fund – Portfolio Review
Leading the advance in our Tweedy Browne Fund portfolios during the 2nd quarter were our pharmaceutical holdings, GlaxoSmithKline, Johnson & Johnson, Roche and Novartis. With oil prices bouncing around $50 per barrel during the latter part of the quarter, up from a low in the high $20s in mid-January, oil stocks advanced nicely and our over-weighted position paid significant dividends with Royal Dutch Shell, Total, and Devon Energy leading the group. The consumer staples stocks also had strong returns for the quarter, including food, household products, beverage and tobacco stocks such as Nestle, Henkel, Diageo, Heineken, and British American Tobacco, which advanced solidly. In addition, we also had nice returns in two of our financial holdings, Standard Chartered and Zurich Insurance. While there was little in the way of significant price disappointment during the quarter, we did experience downward price action in several of our holdings, including automobile holdings, Hyundai Motor and Kia, the Daily Mail, Antofagasta, Munich Re, SCOR, Emerson Electric, and Akzo Nobel, among others.
In terms of portfolio activity during the quarter, we established new positions in BAE, the UK-based defense contractor; Michelin, the French tire manufacturer; and a Taiwanese company, which provides software and hardware that manages and controls manaufacturing facilities. All three companies in our opinion have solid prospects for growth, currently pay an attractive dividend yield, and traded at a discount from our estimate of intrinsic value at purchase. In addition, we added to a number of pre-existing holdings including the Daily Mail, Hang Lung, Linde, SCOR, Hyundai Motor, HSBC and Safran. A number of these additions were made as markets traded off just after the Brexit vote. We sold our remaining shares of Loeb and Wal-Mart, and trimmed our positions in Daetwyler, Baxter, Philip Morris, and Johnson & Johnson, among others.
As value investors, we are encouraged by the increase in market volatility over the last year and the apparent change in market leadership away from momentum and back to securities with a more rational price to value relationship. While the recent volatility in equity markets has begun to present opportunities for us, we believe valuations still remain full to high for the most part, particularly in the U.S. There continue to be a host of macroeconomic worries around the globe, not the least of which is the unprecedented phenomenon of negative interest rates which can now be found in 13 different countries and in over $13 trillion of sovereign bonds. We suspect that the combination of anemic economic growth, negative rates and high equity valuations will likely lead to additional volatility in the days and weeks ahead. We hope to take full advantage, and while caution is warranted in this environment, we will continue to keep our noses to the grindstone in our continuous pursuit of companies trading at reasonable discounts from our conservative estimates of intrinsic value.
On a final note, we welcomed two new analysts to our investment team this summer, Amelia Koh and Andrew Ewert. As you will recall, we began a search for additional analysts approximately one year ago. Both of these individuals received their MBAs from the Columbia Business School and were part of, or took courses in, the school’s Ben Graham value investing program. They both are steeped in “value,” bring business and investment experience to our firm, and have hit the ground running. We also bid farewell to our youngest analyst, Will Browne, in mid-May as he decided to join his brother in establishing a new hedge fund. 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.
Managing Directors
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