Tweedy Browne Fund Fourth Quarter 2013 CommentaryVW Staff
Global equity markets shrugged off concerns about central bank tapering and continued to gain momentum in the fourth quarter, capping off another excellent year for equity returns. Despite carrying cash reserves that ranged from approximately 10. 9% to as much as 20.3%, a ll four of the Tweedy, Browne Funds finished the quarter and year on a strong note, producing annual returns between 18.77% and 22.68%.
As we write, the S&P 500 and the MSCI World Index are near or at all-time highs; the cyclically adjusted Shiller P/E is at 26X earnings versus 15. 9X earnings for its long term median; global IPO markets are heating up; corporate lending standards are once again deteriorating (covenant-lite loans are back); and many of the stocks we own and follow ar e now trading at or near our estimates of intrinsic value. That said, we are comfortable with our port folios' current holdings, and continue to search the globe for individual securities that fit our demand ing criteria. While bargain hunting is currently challenging, we remain confident that our patience will be rewarded.
* The Adviser has contractually agreed to waive its investment advisory fee and/or to reimburse expenses of the Global Value Fund II — Currency Unhedged to the extent necessary to maintain the total annual fund operating expenses (excluding fees and expenses from investments in other investment companies, brokerage, interest, taxes and extraordinary expenses) at no more than 1.37%. This arrangement will continue at least through December 31, 2014. Prior to January 1, 2014, the Adviser had also agreed to waive its investment advisory fee and/or to reimburse expenses of the Worldwide High Dividend Yield Value Fund to the extent necessary to maintain the total annual fund operating expenses (excluding fees and expenses from investments in other investment companies, brokerage, interest, taxes and extraordinary expenses) at no more than 1.37%. That arrangement terminated on December 31, 2013. The Worldwide High Dividend Yield Value Fund and Global Value Fund II – Currency Unhedged have each agreed, during the two-year period following any waiver or reimbursement by the Adviser, to repay such amount to the extent that after giving effect to such repayment the Fund's adjusted total annual fund operating expenses would not exceed 1.37% on an annualized basis. The performance data shown above would be lower had fees and expenses not been waived and/or reimbursed.
§ The Value Fund's performance data shown above would have been lower had certain fees and expenses not been waived from December 8, 1993 through March 31, 1999.
The Funds do not impose any front-end or deferred sales charge. However, the Tweedy, Browne Global Value Fund, Tweedy, Browne Global Value Fund II – Currency Unhedged and Tweedy, Browne Worldwide High Dividend Yield Value Fund impose a 2% redemption fee on redemption proceeds for redemptions or exchanges made within 60 days of purchase. Performance data does not reflect the deduction of the redemption fee, and if reflected, the redemption fee would reduce the performance data quoted for periods of 60 days or less. The expense ratios shown above reflect the inclusion of acquired fund fees and expenses (i.e., the fees and expenses attributable to investing cash balances in money market funds) and may differ from those shown in the Funds' financial statements.
? Please note that the individual companies discussed herein represent holdings in our Funds, but are not necessarily held in all four of our Funds. Please refer to footnotes on page 12 for the Funds' respective holdings in each of these companies.
Returns for the quarter were driven by strong gai ns in our media and insurance stocks, and solid results in our energy related, industrial and inform ation technology holdings. This included, among others, companies such as Axel Springer, Daily Mail and General Trust, Munich Re, Zurich Insurance, SCOR, American National Insurance, Total, Royal Dutch, ABB, Emerson Electric, Teleperformance, MasterCard, and Google. There were very few di sappointments; however, we did experience negative returns in a few of our beverage holdings, including Arca Continental and Heineken, as well as in a few of our bank stocks, including Banco Santander Brasil, HSBC and Bangkok Bank. In general, as equity markets have gained momentum and valuations have climbed, it has been the more cyclical components of the portfolio that have been driving returns, i.e. media, insurance, energy, industrial and information technology stocks, as opposed to the steadier , branded consumer products companies.
Portfolio activity was once again modest duri ng the quarter. Only one new position was established: Antofagasta (LSE:ANTO), a UK-listed Chilean coppe r mining company. The company owns majority interests in five copper mines in Chile and a railw ay, and we believe is a we ll run, low cost copper producer with a strong balance shee t. The company is profitable, gene rates free cash flow, and pays a dividend. While it is difficult to predict the direction of copper prices with any degree of certainty, declining ore grades and mine clos ures across the world should have a meaningful effect on supply over the next several years, resulting in better pricing in the future. At purchase, Antofagasta was trading at approximately 6.2 times enterprise value to EBIT (earnings before interest and taxes), which was near its 52-week low, was in a net cash positi on and paid a dividend yield of 1.6% . We also added to a number of pre-existing positions in our Funds, including DB S Group, GlaxoSmithKline, HSBC, TNT Express, and G4S.
In terms of all out sales in our Funds, we sold our remaining shares in Hanil Cement (Global Value), Arca Continental (Global Value II), Krones (V alue), and Tesco (Worldwide High Dividend Yield Value). We took advantage of the strength in the Japanese equity market to trim a number of Japanese stocks, including Fujitec, Fukuda Denshi, Hi-Lex and Ku roda Electric. We also trimmed our positions in BAE Systems, Google, Leucadia National, Total, Un ifirst, Daily Mail and General Trust, Union Pacific and Pearson.
The fundamental character of our Fund portfolios did not change materially during the quarter. That said, we are beginning to uncover opportunities in some of the more developed of the emerging markets, i.e. Brazil and Chile, but the commitment to date is rather modest. While we had a little more volatility in late summer and at the start of the new year, it was not nearly enough to improve bargain hunting, which remains very challenging.
Thank you for investing with us an d for your continued confidence.
William H. Browne
Thomas H. Shrager
John D. Spears
Robert Q. Wyckoff, Jr.
Dated: January 28, 2014