Tweedy Browne Fund commentary for the fourth quarter ended December 31, 2016.
Global equity markets unexpectedly gathered steam after the U.S. Presidential election, catalyzed in part by positive perceptions of a more pro-business administration and prospects for lower corporate and individual taxes, less regulation, and much anticipated infrastructure spending. It remains to be seen if perception indeed becomes reality in the weeks and months ahead. Valuations, which were already high prior to the advance, for the most part, are now higher around the globe, and despite the enthusiasm, one would have to concoct a set of “alternative facts” to conclude that there are a lot of bargains to be found in public equity markets. Nevertheless, correlations have begun to break down over the last year and a half and the resulting increase in volatility has given us opportunities at the margin in our Funds. If this persists as we suspect it will, we are ready to take advantage. As one might expect in this environment of high valuations and increased momentum, our Funds lagged their respective benchmarks for the quarter.
The so called “Trump rally” helped to drive up equity prices fairly aggressively near year-end and into the new year, particularly in more economically sensitive, cyclical issues. In turn, returns in our Fund portfolios for the quarter were led by their financial and energy holdings with a modest assist from several of the Funds’ auto-related and industrial holdings. We had particularly strong results in banks such as DBS Group, HSBC, Wells Fargo, and Bank of New York Mellon, as well as insurance holdings such as CNP Assurances, SCOR, and Zurich Insurance. The robust results in our oil & gas related holdings were driven in large part by OPEC’s announcement in late September that they would consider production cuts, which they, along with non-OPEC countries like Russia, ultimately agreed to in early December. This helped to send oil prices higher, which led to strong returns in all of our oil & gas holdings including Halliburton, MRC, Royal Dutch and Total, among others. There is evidence to suggest that through technological advances, shale producers have been able to significantly bring down their costs, allowing them to increase drilling activity and well completions in what has been an extraordinarily challenging pricing environment. This could mean that even if by some chance in this recently improved environment oil prices back up a bit as the year progresses, shale producers could still be able to be active in the oil patch. Both MRC and Halliburton feel their U.S. onshore businesses have bottomed, and are anticipating significant increases in drilling activity in the year ahead. MRC gained considerable market share during the period of declining oil prices as a number of its competitors went out of business, and also significantly reduced its net debt. There is no doubt that some, if not a good bit, of this positive outlook is already reflected in MRC and Halliburton’s current stock prices.
We also had nice returns during the quarter in a number of our auto-related and industrial holdings, and in our sole mining company investment. This included strong results in companies such as NGK Spark Plug, Honda, Hyundai Motor, BAE, Safran and Antofagasta, which rebounded nicely as copper prices rose late in the year. In contrast, our consumer staples (food, beverage and tobacco), pharmaceutical, and a number of technology holdings all finished modestly lower for the quarter (in local currency). Core long term holdings such as Heineken, Diageo, Nestlé and Henkel had modest declines in their stock market valuations. The same held for key pharma holdings such as Glaxo, Johnson & Johnson, Novartis and Roche, as concerns continued to arise about possible legislative interference with drug pricing. Results for the technology component of our Funds were mixed, with IBM and Avnet getting a boost in their stock prices during the quarter, while Cisco and Alphabet (Google) were under pressure. In addition, our cash position and general underweighting in Japanese securities negatively impacted relative returns for the quarter. In the Value and Worldwide High Dividend Yield Value Funds, an underweight in U.S. securities also detracted from relative performance.
Portfolio activity during the quarter was quite modest. In our two Global Value Funds, we established a new position in LG Corporation, a Korean holding company with interests in cosmetics, chemicals, and electronics. At purchase, it was trading at approximately two-thirds of our rather conservative estimate of its intrinsic value, and approximately 75% of book value. We also established a new position in Williams-Sonoma in our Worldwide High Dividend Yield Value Fund. Williams-Sonoma (WSM) is a leading omni-ch nnel specialty retailer for home furnishings operating across eight different brands with the largest being Pottery Barn, Williams-Sonoma, and West Elm. WSM has one of the highest e-commerce penetrations among retailers, and has had solid margins in its direct-to-consumer business. Its strong brands and huge customer database which enables it to cross-market at a low cost, represent what we believe to be sustainable competitive advantages, which have allowed it to compound its intrinsic value at over 8% for the last decade. At purchase it was trading at roughly a 20% discount from our conservative estimate of its intrinsic value, had a dividend yield of approximately 3%, and an additional 4% upside from prospective share repurchases, for a total estimated shareholder yield of 7%. Also, we added to both Global Value Funds two new smaller capitalization companies ($200mm and $620mm) that are in the automobile dealership business that at purchase were trading at between 7 and 8 times earnings and paid attractive dividend yields.
We also took advantage of pricing opportunities in Nestlé (Global Value) and Kia (Global Value and Value), and added to our positions. In terms of portfolio sales, we sold shares of Mediaset Espana, Pearson (Global Value II) and UniFirst (Value), and trimmed our positions in Hays, Headlam (Global Value), Halliburton (Value), Johnson & Johnson (Global Value II and Value), CNP Assurances, G4S, HSBC, UOB, Verizon and Siemens (Worldwide High Dividend Yield Value), among others.
Our four Funds continue in large part to be positioned in what we feel are more globally diversified, underleveraged businesses that sell a plethora of products and services that are of increasing interest to emerging middle classes around the globe. Taken as a whole, they are currently invested across 21 different countries in more than 40 different industry groups, and have a larger capitalization orientation. Geographically, the focus has largely been in developed markets and the more developed of the emerging markets. This includes South Korea, where we have been more active of late. With respect to sectors and industry groups, in general, we continue to maintain overweighted positions in consumer staples (food, beverage, tobacco, etc.) as well as financials (insurance), pharmaceuticals and energy related businesses. We are underweight technology and materials stocks. As of December 31, 2016, the top twenty-five holdings in our Fund portfolios on average paid dividend yields overall of between 2.7% and 4%, had weighted average price/earnings ratios that ranged between 14 and 17 times 2017 estimated earnings per share, and carried cash reserves that varied between 9% and 17% of total assets. (Please note that the range of weighted average dividend yields shown above is not representative of a Fund’s yield, nor does it represent a Fund’s performance. The figures solely represent the range of the average weighted dividend yields of the top twenty-five common stocks held in the Funds’ portfolios. Please refer to the 30-day standardized yields in the performance chart on page 1 for each of the Fund’s yields.)
While we are ever vigilant in our search for undervaluation, the continued run-up in equity valuations post election has made bargain hunting in the new year more challenging. That said, with interest rates and inflationary expectations on the rise, we suspect that we have not seen the end of market volatility, which could lead to attractive pricing opportunities in the weeks and months ahead.
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.
Tweedy Browne Fund – Quarterly Equity Performance Attribution
Factors with the largest impact on portfolio return, on an absolute basis, and measured in local currencies.
- Insurance, oil & gas, banks, defense, and mining companies were among the leading industries while the Fund’s beverages, pharmaceuticals, tobacco, food, and household products companies underperformed.
- Top performing countries during the quarter included France, the U.S., Chile, Singapore, and Japan. Holdings from Norway, Mexico, Switzerland, Thailand, and Sweden declined during the quarter.
- Top contributing holdings included Total, Royal Dutch, SCOR, Antofagasta, Zurich Insurance, and CNP Assurances. Declining stocks included Heineken, Unilever, Nestle, Diageo, Henkel, and GlaxoSmithKline.
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