On the heels of a third rate cut by the U.S. Federal Reserve and an easing of trade tensions, global equity markets had another strong quarter, capping off a year of extraordinary returns led in large part by U.S. equities, more specifically a group of familiar technology stocks. In this robust, “risk-on” environment, the four Tweedy, Browne Funds made substantial financial progress on an absolute basis, finishing the quarter up between 3.07% and 6.52% after fees, but once again trailed their respective benchmark indices. In calendar year 2019, the Funds posted double digit returns between 13.66% and 18.55%, during which the Worldwide High Dividend Yield Value Fund was once again our best performing Fund.
Returns for the quarter were led in large part by strong returns in a number of the Funds’ pharma, interactive media & services (technology), financial, and industrial holdings. This included good performance from companies such as Johnson & Johnson and Roche; Alphabet and Baidu; Berkshire Hathaway, DBS Group, Wells Fargo, and Munich Re; and G4S, Ebara, Krones, CNH, Trelleborg, and Siemens. WPP, the global advertising company, also had strong results for the quarter as its ongoing restructuring has begun to bear fruit. AutoZone, MRC Global, and ConocoPhillips also had strong performance for the quarter.
In contrast, relative performance comparisons continued to be hurt by the Funds’ underweighted positions in Japanese equities, where undervalued securities have been much harder to come by. The Value Fund’s and Worldwide High Dividend Yield Value Fund’s underweighted positions in U.S. equities also negatively impacted performance comparisons.These two countries continued to perform well during the quarter, giving a significant boost to relevant benchmark indices. The Funds’ food and beverage holdings, which tend to hold up well in volatile environments, produced disappointing results in the risk-on fourth quarter. This included declines in companies such as Unilever, Nestlé, Heineken, and Diageo. Safran, the jet engine manufacturer and engine maintenance company, which has produced very strong returns over the last several years, also had a difficult quarter, as Boeing decided to temporarily halt production of the 737 Max. In addition, a few of the Funds’ emerging market holdings, Hyundai Motor (South Korea), Bangkok Bank (Thailand), and Embotelladora Andina (Chile), faced declines in their stock prices during the quarter.
With most equities and markets performing strongly during the quarter, portfolio activity on the buy side was quite modest. We established a position in Coca-Cola FEMSA (KOF, Financial), the Mexican based Coca-Cola bottler, for our unhedged Global Value Fund II. This stock has been held in our hedged Global Value Fund for years, at a varying degree, depending on the price to value relationship. As you may recall, Coca-Cola FEMSA is the world’s largest Coca-Cola bottler by volume. Distribution is in emerging market countries such as Mexico, Brazil, Colombia, Argentina, and Venezuela. The company has a strong financial record, and by our estimates has compounded its intrinsic value at approximately 10% per annum including its dividend. At purchase, the stock (an American Depository Receipt, or “ADR”) was trading at just over 70% of our conservative estimate of its underlying intrinsic value. We also took advantage of pricing opportunities during the quarter to add to our positions in Baidu, the Chinese internet search company, Royal Dutch, Tarkett, and Trelleborg, among others.
On the sell side, we were a bit more active, selling our remaining shares of Buzzi Unicem (MIL:BZU, Financial), the Italian cement and concrete company, whose shares had reached our estimate of intrinsic value; and Avnet (AVT, Financial), the U.S. based semiconductor distributor, that has faced increasing competition from a consolidated competitor. We decided in light of the change in the competitive environment that we would move on, having made only a modest profit in the shares. We also trimmed positions in Safran, Antofagasta, G4S, and Zurich Insurance, among others.
It’s hard to know, but with the aggressive run-up in equity prices this year, particularly in U.S. technology companies, the cork may finally be coming off the champagne bottle. With the prospects for global growth continuing to slow in many parts of the world, stock prices in many instances have begun to become somewhat untethered from underlying fundamentals, particularly in the U.S. In our view, the yellow caution lights should be blinking. We discovered long ago that trying to forecast future returns is near to impossible, but at best it’s hard to imagine another year as good as this past one. That said, with the volatility of the last several years, we continue to find new bargains from time to time, particularly outside the U.S., and believe that we are well positioned for whatever the markets have in store for us. Wayne Gretzky, reputedly the greatest hockey player and scorer of all time, once said in response to a question regarding why he was so good, “I skate to where the puck is going, not to where it has been.” If the past is indeed prologue for the future, we remain confident that the puck will eventually be coming our way.
Two final notes. After a successful 33-year career as a securities’ analyst at Tweedy, Browne, Elliot Larner retired at year-end 2019. Elliot has been a valuable member of our research team over the last three decades as well as a respected friend and colleague, and he will be missed. Elliot’s focus over the last decade was centered on dividend paying equities. The securities that he covered have been re-assigned to other members of our analytical team, and, at this point in time, there are no plans to add an additional analyst.
We are pleased to announce that effective January 1 we have named four employees as Managing Directors. Three are long tenured analysts and members of our investment committee, Roger de Bree, Frank Hawrylak, and Jay Hill. The fourth is Jason Minard, who joined the firm in 1999 and has been responsible for business development and client services. These gentlemen continue to enrich our firm and its well-honed investment approach with their keen and disciplined intellects, and we look forward to continuing to work with them as we head into this next century for Tweedy, Browne.
Thank you for investing with us, and for your continued confidence.
William H. Browne, Roger R. de Bree, Frank H. Hawrylak, Jay Hill, Thomas H. Shrager, John D. Spears, Robert Q. Wyckoff, Jr.
Investment Committee
Tweedy, Browne Company LLC
January 2020
