COMMENTARY
Beginning in late July, a rekindling of inflation worries and a corresponding rise in bond yields took the steam out of what had been a rather aggressive technology-led, market advance, causing global equity markets to finish in the red for the quarter. In this more challenging environment, all four of the Tweedy, Browne Funds faced modest declines, however, three of the Funds outperformed their benchmark indices during the quarter. During this period of U.S. dollar strength, the Tweedy, Browne International Value Fund marginally underperformed its hedged benchmark index, while outperforming the unhedged index.
The rise in bond yields during the quarter occurred despite a well telegraphed pause by the Fed with respect to further interest rate increases, causing some market commentators to query whether the Fed was no longer in control of the bond market. A surprisingly strong economy, a stubbornly persistent level of core inflation, concerns about large budget deficits, and the corresponding rise in new bond issuance would appear to be putting upward pressure on interest rates and bond yields. While we cannot know for sure, an environment where interest rates remain higher for longer, should in our view, over time, inure to the benefit of price sensitive investors.
PORTFOLIO ATTRIBUTION
Please note that the individual companies discussed herein were held in one or more of the Funds during the quarter ended September 30, 2023, but were not necessarily held in all four of the Funds. Please refer to each Fund's portfolio page, beginning on page 4, for selected purchase and sale information during the quarter and the notes on page 13 for each Fund's respective holdings in each of these companies as of September 30, 2023.
Leading returns for the Tweedy Funds during this challenging quarter were a number of the Funds' financial, aerospace & defense, interactive media, commercial services & supplies, oil & gas, and healthcare holdings. This included strong returns in the Funds' two Singapore-based banks, DBS Group (SGX:D05, Financial) and United Overseas Bank (SGX:U11, Financial); insurance related holdings such as SCOR, Munich Re, National Western Life (NWLI, Financial), and Berkshire Hathaway (BRK.A, Financial); aerospace & defense companies, Safran (XPAR:SAF, Financial) and BAE Systems (LSE:BA., Financial); mega cap technology holding, Google (GOOG) (Alphabet); UK-based commercial services companies, Babcock International (LSE:BAB, Financial) and Johnson Service (LSE:JSG, Financial); TotalEnergies (TTE, Financial), the France-based oil & gas company; and healthcare companies such as Fresenius SE & Co. (XTER:FRE, Financial), and Ionis Pharmaceuticals (IONS, Financial). Ubisoft (XPAR:UBI, Financial), the France-based video game producer; Autoliv (ALV, Financial), the Swedish airbag and seatbelt manufacturer; and Kuraray (TSE:3405, Financial), a Japanese chemicals company, also solidly contributed to the Funds' returns during the quarter.
In contrast, the Funds' consumer staples and industrials segments, including a few of their beverage, machinery, and chemical holdings, produced disappointing results during the reporting period. This included declines in long term beverage holdings such as Diageo (DEO, Financial) and Heineken (XAMS:HEIO_; machinery companies such as CNH (CNHI, Financial) and Krones (XTER:KRN, Financial); and chemical companies such as FMC Corp. (FMC). FMC, the global crop protection company, suffered declines in its stock price during the quarter as it faced inventory destocking issues, which impacted near-term earnings power, and it also became the target of a short seller's report with whose conclusions we disagree. The Funds also faced declines in Teleperformance (FRA:RCF), the France-based call center company, which has been impacted by concerns that ChatGPT could materially disrupt its business. We disagree with this assessment and continued to add to our position during the quarter.
PORTFOLIO ACTIVITY
With equity markets on the rise for much of the year, and valuations more elevated, new idea flow slowed somewhat in the Third Quarter. We established one new position in our International Value Fund and International Value Fund II, two new positions in the Value Fund, and four new positions in the Worldwide High Dividend Yield Value Fund. This included a Japanese electronics manufacturer, a US-based manufacturer of industrial filtration solutions, a Hong Kong-based manufacturer of plastic injection molding machines, a Japan-based chemical producer, a France-based global provider of business optimization and back office services, and a US-based producer of targeted crop protection chemicals. All of the new additions, in our view, were purchased at prices that represented significant discounts from our estimates of their underlying intrinsic values, were financially strong, and had attractive runways for potential future growth. Additions were also made to a handful of the Funds' pre-existing positions.
On the sell side, a number of Fund holdings were sold or pared back. The stock prices of these businesses had either reached our estimates of their underlying intrinsic values or had been compromised in some way by virtue of declines in our estimates of their underlying intrinsic values and future growth prospects. Or, they may have been sold or trimmed to make room for new additions or to generate losses, which could be used to offset realized gains. (A list of selected newly established positions, including additions, sales, and trims of existing positions for each Fund is attached hereto.)
PORTFOLIO POSITIONING AND OUTLOOK
Despite this year's rebound of the “Magnificent 7” and their impact on capitalization- weighted indices, we continue to believe that we are in the midst of a tectonic shift in markets, catalyzed in part by the war in Ukraine and pandemic-related supply shocks, but driven primarily by a stubbornly persistent level of core inflation and interest rates that over time are likely to normalize higher than the zero bound levels of the last decade. Evidence of this shift sparked a pullback of both technology shares and market indices in the third quarter as Fed officials reaffirmed that interest rates are likely to remain higher for longer. By quarter end, the yields on six-month to two-year treasuries had risen to between 5.0% and 5.6% while the 10-year was at 4.6%. With low-risk treasuries now presenting a meaningful investment alternative to previously yield-starved investors, incentives to take equity risk, particularly in high technology shares where valuations appear to be stretched, may begin to lessen. As we have said in past commentaries, in such an environment, price matters again, which we believe over time should augur well for active equity investment.
Thank you for investing with us.
Roger R. de Bree, Andrew Ewert, Frank H. Hawrylak, Jay Hill, Thomas H. Shrager, John D. Spears, Robert Q. Wyckoff, Jr.
Investment Committee
Tweedy, Browne Company LLC
October 2023
