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.
The Funds do not impose any front-end or deferred sales charges. However, the Global Value Fund, Global Value Fund II – Currency Unhedged and 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.
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 (XTER:SPR, Financial), Schibsted (OSL:SCH, Financial), Zurich Insurance (JSE:ZSA, Financial), Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial), and Nestlé (NSRGY), 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.
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 (AGCO, Financial), a US-based global farm equipment manufacturer, and Michelin (XPAR:ML, Financial), 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
Dated: January 26, 2015
The MSCI EAFE (in USD) is an unmanaged capitalization-weighted index of companies representing the stock markets of Europe, Australasia and the Far East. The MSCI EAFE (Hedged to USD) consists of the results of the MSCI EAFE Index hedged 100% back into US dollars and accounts for interest rate differentials in forward currency exchange rates. Results for both indexes are inclusive of dividends, net of foreign withholding taxes and do not reflect any fees or expenses.
The S&P 500 Index/MSCI World Index (Hedged to US$) is a combination of the S&P 500 Index and the MSCI World Index (Hedged to US$), linked together by Tweedy, Browne Company, and represents the performance of the S&P 500 Index for the periods 12/8/93 - 12/31/06, and the performance of the MSCI World Index (Hedged to US$) beginning 1/01/07 and thereafter. For the period from the Value Fund's inception through 2006, the Investment Advisor chose the S&P 500 as the relevant market benchmark for the Value Fund. Starting in mid-December 2006, the Value Fund's investment mandate changed from investing at least 80% of its assets in U.S. securities to investing no less than approximately 50% in U.S. securities, and so the Investment Adviser chose the MSCI World Index (Hedged to US$) as the most relevant benchmark for the Value Fund for periods starting January 2007. Effective July 29, 2013, the Value Fund has removed the 50% requirement and continues to use the MSCI World Index (Hedged to US$) as the most relevant index for the Fund.
The S&P 500 Index is an unmanaged capitalization-weighted index composed of 500 widely held common stocks that assumes the reinvestment of dividends. The index is generally considered representative of U.S. large capitalization stocks. The MSCI World Index (in USD) is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. The MSCI World Index (Hedged to USD) consists of the results of the MSCI World Index with its foreign currency exposure hedged 100% back into U.S. dollars. The index accounts for interest rate differentials in forward currency exchange rates. Results for this index are inclusive of dividends and net of foreign withholding taxes.
Investors cannot invest directly in an index. We strongly recommend that these factors be considered before an investment decision is made.
As of December 31, 2014, Tweedy, Browne Global Value Fund, Tweedy, Browne Global Value Fund II – Currency Unhedged, Tweedy, Browne Value Fund, and Tweedy, Browne Worldwide High Dividend Yield Value Fund had each invested the following percentages of its net assets, respectively, in the following portfolio holdings: Axel Springer (2.6%, 3.0%, 1.6%, 3.6%); Schibsted (0.9%, 0.6%, 0.0%, 0.0%); Zurich Insurance (2.2%, 1.9%, 1.9%, 3.4%); Berkshire Hathaway (1.3%, 0.0%, 3.7%, 0.0%); Nestlé (2.3%, 2.3%, 2.8%, 3.0%); Total (2.8%, 2.5%, 3.4%, 3.3%); Royal Dutch (2.4%, 2.2%, 3.3%, 3.6%); Devon Energy (0.9%, 0.0%, 2.8%, 0.0%); Pacific Rubiales (0.4%, 0.5%, 0.4%, 0.0%); Cenovus (0.0%, 1.2%, 0.0%, 0.6%); Halliburton (0.8%, 0.6%, 2.0%, 0.0%); National Oilwell Varco (0.1%, 0.8%, 0.0%, 0.0%); AGCO (0.1%, 0.5%, 0.0%, 0.0%); Michelin (0.0%, 0.0%, 0.0%, 1.1%); Antofagasta (1.3%, 1.8%, 0.0%, 0.0%); Standard Chartered Bank (3.2%, 3.5%, 3.3%, 3.1%); Vallourec (1.3%, 1.3%, 0.0%, 0.0%); Banco Santander Brasil (0.0%, 0.0%, 0.0%, 0.0%); Banco Santander Spain (0.0%, 0.0%, 0.0%, 0.0%); Takata (0.0%, 0.0%, 0.0%, 0.0%); Honda (0.5%, 0.3%, 0.4%, 0.0%); Joy Global (0.6%, 0.7%, 0.6%, 0.0%). The previous portfolio holdings reflect the Funds’ investments on the date indicated and may not be representative of the Funds’ current or future holdings.
Selected Purchases & Sales illustrate some or all of the largest purchases and sales made for each Fund during the preceding quarter and may not include all purchases and sales. Some “undisclosed” names may have been withheld where disclosure may be disadvantageous to a Fund’s accumulation or disposition program.
Current and future portfolio holdings are subject to risk. The securities of small, less well-known companies may be more volatile than those of larger companies. In addition, investing in foreign securities involves additional risks beyond the risks of investing in securities of U.S. markets. These risks include economic and political considerations not typically found in U.S. markets, including currency fluctuation, political uncertainty and different financial standards, regulatory environments, and overall market and economic factors in the countries. Value investing involves the risk that the market will not recognize a security's intrinsic value for a long time, or that a security thought to be undervalued may actually be appropriately priced when purchased. Dividends are not guaranteed, and a company currently paying dividends may cease paying dividends at any time.Investors should refer to the prospectus for a description of risk factors associated with investments in securities held by the Fund.
Although the practice of hedging against currency exchange rate changes utilized by the Tweedy, Browne Global Value Fund and Tweedy, Browne Value Fund reduces the risk of loss from exchange rate movements, it also reduces the ability of the Funds to gain from favorable exchange rate movements when the U.S. dollar declines against the currencies in which the Funds’ investments are denominated and in some interest rate environments may impose out-of-pocket costs on the Funds. Tweedy, Browne Global Value Fund, Tweedy, Browne Global Value Fund II – Currency Unhedged, Tweedy, Browne Value Fund, and Tweedy, Browne Worldwide High Dividend Yield Value Fund are distributed by AMG Distributors, Inc., Member FINRA/SIPC.
This material must be preceded or accompanied by a prospectus for Tweedy, Browne Fund Inc.
