Tweedy Browne Fund Inc commentary for the fourth quarter 2014.
H/T Dataroma
Global and international equity market indices (in local currency) moved higher in the 4th quarter despite increasing equity market volatility caused in part by the continued rapid decline in oil prices. With respect to relative performance comparisons, it was a difficult quarter for the Tweedy, Browne Funds largely due to their underweightings in US equities and their overweightings in energy related holdings. The absolute and relative results since inception for all of our Funds remain strong.
Tweedy Browne hurt by oil prices and energy related holdings
Our modestly negative returns for the quarter were largely attributable to the continued decline in oil prices and the corresponding decline in our oil & gas and other energy related holdings. In contrast, we had nice returns in a number of our media, insurance and food stocks, among others, including Axel Springer, Schibsted, Zurich Insurance, Berkshire Hathaway, and Nestlé, but it was unfortunately not enough to overcome the continued pressure on our oil & gas stocks, which included fully integrated holdings such as Total and Royal Dutch; exploration and production companies such as Devon Energy and Pacific Rubiales; Canadian oil sands producers such as Cenovus; and energy service holdings such as Halliburton and National Oilwell Varco.
As we mentioned in our last quarterly update, 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 idea where oil prices will settle in the short run, it remains our view that oil prices cannot stay down at today’s depressed prices for too long, largely due to what we believe to be the relatively modest current level of excess capacity, our expectations of continued growth in demand over time, and the high marginal costs for finding and developing new sources of supply. In our fairly to fully valued equity markets, we believe the oil & gas companies in which we are invested today, most of which are listed above, represent attractive value, have the ability to adapt, have the financial strength to get through a difficult time in our oil markets, and several currently pay attractive and sustainable dividends while we wait for long term value recognition in their shares.
Tweedy Browne: US equities continued strong performance
Another factor playing a role in near term relative return comparisons, particularly with respect to our Value Fund and our Worldwide High Dividend Yield Value Fund, is the continued strong performance of US equities, which today constitute nearly 60% of the total weight of the MSCI World Index. In contrast, US equities make up approximately 48% of the Value Fund and roughly 20% of the Worldwide High Dividend Yield Value Fund. On top of this, the US dollar has been very strong relative to most major currencies since last summer, which has somewhat diluted the near term returns in our two unhedged Funds. Our hedged Funds (Value and Global Value) were of course protected for the most part from declines in foreign currencies relative to the US dollar. While there are no guarantees of course, over time we would expect the currency impact on the long term returns of our Funds, whether hedged or unhedged, to be de minimis, as it has proven to be in the past.
While equity market volatility certainly increased around year-end and has carried over into the New Year, global equity markets aside from a few market segments (oil & gas, mining, certain emerging markets) remain fairly to fully valued, and in some instances overvalued from our perspective. The increase in volatility frequently results in investment opportunities for us; however, it has not yet resulted in enough new idea flow to allow us to put meaningful amounts of our cash reserves to work. As a result, portfolio activity was fairly modest in the 4th quarter with material new positions limited to AGCO, a US-based global farm equipment manufacturer, and Michelin, the large French tire company. Both of these companies at purchase were trading at significant discounts from our conservative estimates of intrinsic value, and Michelin also currently pays us a very attractive annual dividend. We did add to a few of our existing holdings during the quarter including Antofagasta as well as Standard Chartered Bank and Vallourec. We did not add significantly to our other oil related holdings as we felt our overall exposure was quite adequate. On the sell side of our portfolios, we tendered our remaining shares of Banco Santander Brasil, and then sold the resulting shares of Banco Santander Spain. We also sold our remaining shares of Takata, and pared back our positions in Honda and Joy Global.
Difficult quarters go with the territory of being an equity investor, and it is not surprising that global equity markets have faced more turbulence in the last several months as market prices for most equities trade at or above their fair underlying values. As you know, our forward view is informed by valuations, and while there has been no material change in our market views from a valuation perspective, we are encouraged by the recent uptick in equity market volatility, and are hopeful that it will spawn new buying opportunities in the weeks and months ahead.
One final note before we conclude this quarterly update. We are pleased to announce that in early December, one of our longest tenured analysts, Frank Hawrylak, was named to our Investment Committee, which now includes four of our analysts and the four Managing Directors. Frank has been researching both domestic and international equities at Tweedy, Browne for 28 years, and is responsible for a host of successful investments that have made their way into our Fund portfolios over the years. He is an equity stakeholder in our Firm and one of the true guardians of our special culture. Prior to joining Tweedy, Browne in 1986, Frank worked in the investment department at Royal Insurance. He received his B.S. from the University of Arizona and an M.B.A. from the University of Edinburgh, Scotland. We look forward to working more closely with Frank in his expanded role at the Firm, and to his contributions to the continued success of Tweedy, Browne.
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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