Tweedy, Browne Fund commentary for the third quarter ended September 30, 2016.
Global equity markets continued to gain strength in the third quarter off their Brexit lows back in late June, shrugging off worries about the impact of negative interest rates, anemic global growth, currency volatility, and pre-election jitters. Despite continuing to carry above-average cash reserves, the Tweedy Browne Funds also produced solid absolute returns in this buoyant environment, and three out of our four Funds are besting their benchmark indices year-to-date.
Tweedy Browne Fund – Portfolio Review
Leading the advance during the quarter were the Funds’ financial, technology and industrial holdings, including strong returns from companies such as HSBC, Standard Chartered, National Bank of Canada, CNP Assurances, Munich Re, Zurich Insurance, Cisco, Alphabet (Google), IBM, Siemens, Safran, and Linde, which announced that it was in discussions to combine with Praxair, a merger that would create the world’s largest supplier of industrial gas. As we write, the prospective merger appears to be off, and it remains to be seen if the two companies will re-engage. The Funds’ portfolios also benefited from their over-weighting in UK-based companies, which rallied aggressively off their Brexit lows, catalyzed in part by the collapse of the British Pound. We also had a nice bounce in G4S, and continued strong results in ABB, Teleperformance, and the Daily Mail.
In contrast, the portfolios’ oil & gas and pharmaceutical holdings experienced declines in their per share prices during the quarter although their underlying businesses for the most part continued to make financial progress. In a surprise to the energy sector, late in September, OPEC announced that it would consider production cuts at its next meeting. That is a significant change in thinking on OPEC’s part and helped to move oil prices and energy related stocks higher around quarter end. They have continued to gain momentum in October. The market prices of our pharmaceutical holdings, on the other hand, remain under pressure as politicians continue to attack high drug prices on the eve of our elections here in the US.
With the market’s rather strong move forward during the quarter, bargain hunting was constrained, and portfolio activity in our Fund portfolios was very modest. Sales and cut backs in existing positions outweighed new purchases and additions. While there were no material changes to our Fund portfolios, we did establish two new positions in smaller capitalization Asian companies: a Japanese manufacturer of power switchboards; and a South Korean holding company with subsidiaries that manufacture auto parts, motorcycles and industrial equipment. We also added modestly to our holdings of AGCO, the global farm equipment manufacturer. In one or more of the Funds we sold shares of Daegu, the Korean department store, and Philip Morris, and trimmed our positions in Hengdeli, T. Hasegawa, Teleperformance, Henkel, and Halliburton.
While our Fund portfolios continue to trade for the most part at reasonable to full valuations, we believe they are still at modest discounts from the overall market. Cash reserves in our Funds have come down at the margin over the last year as market volatility increased, and now range from 8% in the Worldwide High Dividend Yield Value Fund to 17% in our Global Value Fund.
Despite growing macroeconomic uncertainty, stemming from interest rates, oil prices, terrorist activity, the Syrian civil war, an adventuresome Russia, volatile currencies, elections, and continued sluggish underlying growth, investors continue to prefer equities over low-to-negative yielding fixed income instruments. As a result, equity valuations remain high in virtually all equity oriented asset classes, in our view, and bargain hunting continues to be challenging for price disciplined investors.
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 26, 2016
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