Tweedy Browne Funds Q1 Letter To InvestorsVW Staff
All four of the Tweedy Browne Funds made financial progress in the first quarter as global equities, particularly European equities, surged forward after the year-end turbulence associated with the collapse in oil prices. However, it was a challenging quarter for relative returns, and bargain hunting remains severely constrained by equity valuations that are now well above average.
Results during the quarter were largely driven by strong returns in our European holdings, most notably several of our consumer staples holdings and a number of our insurance stocks. Companies such as Heineken, Unilever, Henkel, Munich Re, and SCOR had a strong quarter as did media stocks such as Axel Springer, Mediaset, and Tamedia. Two of our aerospace and defense holdings, Safran and BAE, also were strong contributors to the quarter’s returns.
Tweedy Browne Funds’ bank holdings
In contrast, most of our bank holdings including DBS, UOB, HSBC, and Bangkok Bank had disappointing results. The lone exception in the group was Standard Chartered, the UK-based global bank, which was up nicely during the quarter as they announced a change in CEO that appeared to be favorably received by equity markets. The stock prices of a number of our oil & gas holdings, including Cenovus, the Canadian oil sands company; Pacific Rubiales, the Columbian heavy oil specialist; and National Oil Well Varco, a premier offshore oil service company, continued to be weak. On the other hand, the large fully integrated oil companies, Total and Royal Dutch, had solid returns for the quarter.
Portfolio activity was relatively modest during the quarter. Just prior to quarter end, we established positions for both Global Value Fund and Global Value Fund II – Currency Unhedged in Hyundai Mobis, which is the after-sales, module, and core parts business for Hyundai and Kia automobiles. Hyundai Mobis has had a good record of compounding its intrinsic value over the last ten years, and at purchase was trading at less than ten times earnings, and less than 60% of our estimates of the company’s intrinsic value. In addition, we added to a number of positions across our Fund portfolios including Antofagasta, the Chilean mining company, HSBC, and Standard Chartered.
Tweedy Browne Funds: Sold positions
On the sell side, we sold our remaining shares of Fujitec, Joy Global, and Kone, and decided to take a tax loss in Pacific Rubiales, whose stock price had declined precipitously after oil prices collapsed around year-end. We also trimmed back our position somewhat in Munich Re as well as in Axel Springer, G4S, Novartis, and Zurich Insurance.
Just after quarter end, Federal Express announced that it would be acquiring TNT Express, the Dutch parcel company, one of our holdings in both the Global Value Fund and Global Value Fund II – Currency Unhedged, in an all cash offer of eight euros a share, or a 37% and 39% premium over our cost in the shares. As you will recall, we purchased TNT a couple of years back after their previously proposed merger with UPS fell apart when European regulators failed to approve the deal, feeling it would be anti-competitive. We believe there should be no competitive issues with Federal Express this time, as their footprint in Europe is much smaller than that of UPS. They were able to use a strong currency, the US dollar, and extremely lowcost debt to secure a deal that is attractive for all parties to the transaction.
Tweedy Browne Funds: Foreign currencies
Foreign currencies continued to be quite volatile during the quarter as the euro continued its slide against the US dollar in the face of quantitative easing in the Eurozone, while the Swiss Franc surged in value relative to most currencies, particularly the euro, as Swiss central bankers removed the cap they had been maintaining against the euro. Our currency hedges on both the Global Value Fund and the Value Fund continued to protect us from the bulk of this volatility.
The S&P 500, the Dow Jones Industrial Average, and the MSCI World Index all climbed to record highs during the quarter. The MSCI EAFE Index is just marginally below its all time high as well. Equity valuations as a result are now well above average with the exception of some commodity-based businesses, and the bulk of those do not trade at prices that we feel offer adequate compensation for the risks assumed. Cash reserves as of March 31 were approximately 26% in Global Value, 19% in Global Value Fund II – Currency Unhedged, 15% in Value, and 12% in the Worldwide High Dividend Yield Value Fund. Global Value Fund II – Currency Unhedged remains closed to new investors, and we are diligently managing daily inflows into our other three Funds. With little to no yield to be found on cash, it has become the ultimate contrarian investment. As we have said in previous updates, if global equity markets continue their advance in the weeks and months ahead, we believe our shareholders should participate in the advance, but will likely trail most fully invested benchmark indices. On the other hand, if volatility returns to equity markets, or we get a long overdue correction in stock prices, our Funds are well positioned with plenty of dry powder to take advantage.
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.
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