Quick Take: The managers of Tweedy Browne Global Value Fund (TBGVX) stick to Benjamin Graham’s classic value strategy: buy stocks at large discounts relative to their intrinsic values that have strong business models and carry low debt. With the entire planet as its backdrop, the $3.9-billion fund is free to pick stocks without regard to size or location, although the managers favor the developed markets.
For the three-year period ended March 31, Tweedy Browne Global Value fell an annualized 6.3%, while the average global fund dropped 19.3%. For the five-year period ended March 31, the fund gained an average annualized 0.64%, while the peer group lost 5.0%.
The fund’s management team comprises Christopher H. Browne, John D. Spears, William Browne, Tom Shrager, and Robert Wyckoff. Based on quantitative and qualitative criteria, including risk-adjusted returns and skill in navigating the markets, the team was selected as one of 10 winners of the first annual Standard & Poor’s/BusinessWeek Excellence in Fund Management Awards. Messrs. Wyckoff and Shrager participated in this interview.
The Full Interview:
S&P: How many stocks are currently in your portfolio and where are you finding additions?
WYCKOFF: We currently have 189 holdings. We like to be diversified, and we’ve found many attractive, cheaply-priced international stocks, particularly in Europe. We have been able to take modest positions in an increasing number of companies.
S&P: You select individual stocks on a purely bottom-up basis. However, do you ever have to make top-down, macro-economic decisions based on the economic outlook of specific countries and regions?
WYCKOFF: Macro-economics do not play a significant role in our stock-picking process; however, we adhere to some top-down risk-control measures. For example, we don’t allow any one holding to occupy more than 3% or 4% of total assets, and we don’t want any individual industry to represent more than 20% of assets. In addition, we typically will not allow any one country to account for more than 25% of assets. Aside from these self-imposed constraints, our stock selection process is purely bottom-up.
S&P: What are your largest individual holdings?
WYCKOFF: Our top ten holdings as of March 31: Nestle SA (3.41%); Panamerican Beverages (3.15%); Merck KGaA (3.02%); Pharmacia Corp. (2.82%); Kone Corp. (2.61%); Unilever (2.42%); Novartis AG (2.30%); Trinity Mirror PLC (2.09%); ABN Amro Holding NV (ABN) (2.08%); and CNP Assurances (2.07%).
SHRAGER: These 10 holdings accounted for nearly 26% of the fund’s total assets.
S&P: Where are your largest country allocations?
WYCKOFF: As of March 31: Switzerland, 12.8%; U.S., 11.2%; U. K., 10.9%; Netherlands, 10.6%; Japan, 9.2%; Germany, 7.7%; Mexico, 4.6%; Finland, 4.0%; France, 3.9%; Singapore, 3.8%; Hong Kong, 3.2%; Belgium, 1.5%; and Canada 1.4%.
S&P: You invest primarily in the developed markets. But, given how well the emerging markets have performed the past few years, don’t you feel compelled to look there?
WYCKOFF: Our focus remains the developed markets. Although we currently hold a few stocks in emerging markets, we don’t generally invest there because we like countries that have well-developed legal systems, where foreigners have the same stock-purchase rights as local investors, where the flow of corporate information is adequate, and where we can hedge the currency back to the U.S. dollar.
SHRAGER: These and other criteria disqualify such markets as China and Russia. Although they have performed well in recent years, it must be remembered that these markets are small, often highly illiquid, and usually dominated by one or a handful of large firms. In addition, these companies typically have poor corporate governance. In fact, many Russian companies are owned by crooks.
WYCKOFF: I think most people who invest in the emerging markets are simply trying to participate in projected above-average GDP growth. One exception might be South Korea, which has made great strides in terms of corporate governance and has performed very well.
S&P: As a global fund, you have the latitude to invest in U.S. stocks. How much of an exposure have you typically kept in domestic equities?
WYCKOFF: We have purposefully kept a low exposure in the U.S. When we started the fund, we wanted the flexibility to invest in the U.S. in case valuations overseas became too expensive. However, we have typically kept less than 15% of the fund’s assets in U.S. companies.
One thing to also remember is that some companies, which are based in the U.S., generate most of their business overseas. For example, we own Hollinger International Inc. (HLR), which is Conrad Black’s media publishing empire. Though it’s based in Chicago, it owns newspapers all over the world.
S&P: The euro has just reached a four-year high against the dollar. Has the euro accelerated the pace of corporate activity and restructuring in Europe?
WYCKOFF: No, it hasn’t; but we would attribute that more to the weakness in the global economy the past three years.
S&P: What is your view on Japan, which has been in a deep recession for more than a decade?
SHRAGER: Our view on Japan has subtly changed over the past few years. We currently have about 9% of our assets in Japan, but that weighting comprises 53 individual holdings, by far, the largest number of stocks for any country in the fund. Many of these equities are micro-cap companies.
WYCKOFF: We were very attracted to Japanese stocks five or six years ago because we found many companies trading at classic `Ben Graham type’ of valuations — discount to net current assets, etc. Mr. Graham espoused high diversification when buying such `deep-value’ stocks.
Despite these low valuations, Japanese corporate culture did not embrace M&A activity, and takeovers just did not happen. As a result, our focus on Japan switched to companies with strong business models, above-average margins, and high insider ownership.
We also want to be very diversified in Japan, as their economy is in a period of transition. We don’t want to take too big a position in any one Japanese stock, since we can’t predict how this transition will affect individual companies. We put a lot of effort into meeting with Japanese managements to gain insight on their strategies, and how committed they really are to their shareholders.
S&P: A number of Eastern European countries have been approved for inclusion into the EU. As a stock picker, will this make companies in those regions more attractive to buy?
SHRAGER: Yes. We may look to invest there, but they still have to adopt laws and regulations to conform to established Western economic and financial systems.
S&P: Tell me about your largest holding, Nestle. They recently failed in a bid with Cadbury Schweppes to acquire Hershey (HSY) Foods. Were you disappointed by that?
WYCKOFF: Nestle is a large-cap company, which we have owned for about ten years. It has provided steady growth and has ascended to the top spot in our fund through price appreciation. When we first purchased the stock it was trading at a P/E of only 10. Even after ten years of steady growth, it still remains undervalued.
SHRAGER: They have dominant brand products in coffee, water, ice cream, and pet foods, among others. They have been delivering a 5% normalized rate of annual sales growth, and we feel they will push up margins from 10% to 14% in a few years. The business outlook improves every year; and already 30% of their business is in the emerging markets, so they will continue to participate in that growth.
We were happy they didn’t acquire Hershey, because it was too expensive. It would’ve taken Nestle years to recoup their investment.
S&P: What’s the fund’s turnover rate?
SHRAGER: Our turnover has always been low, typically below 15% and never above 25% or 30%.
WYCKOFF: We expect to hold onto our stocks for the long term, and we focus on tax efficiency. We sell our stocks when the price reaches intrinsic value.
S&P: This is one of the few global funds which hedges back to the U.S. dollar. Do you base this on the assumption that the dollar will be the pre-eminent global currency for the foreseeable future?
WYCKOFF: No. We hedge back to the dollar in order to eliminate the influence of foreign currency fluctuations, which can be extremely volatile. As a result, our fund’s returns purely reflect the performance of overseas equity markets. We consider the currency investment to be a speculative component of return, and it is completely unpredictable.
Back when we started the fund, hedging back to the dollar was unconventional, but now more managers are doing it. We decided then that we didn’t want to earn the currency return or face the losses incurred in translation when the dollar is strong.
S&P: Will you maintain this practice even if the dollar weakens against the euro or the yen over an extended period?
WYCKOFF: Yes. Our premise is that over the long-term, the ups and downs of currency movements eventually wash out. It’s true that the euro had a strong run the past 18 months, and has just reached a four-year high, so we haven’t participated its appreciation. Then again, if and when the euro declines, we won’t suffer any losses ether. The cost of hedging back to the dollar is actually quite minimal over the long term.
S&P: Given the market sell-off on both sides of the Atlantic, how do U.S. stock valuations compare with those of Europe?
WYCKOFF: U.S. stocks are now probably reasonably valued, in light of low interest rates, with some pockets of under valuation. The European markets, on the other hand, are really cheap at the moment. Europe has been beaten up to a greater extent than the U.S., especially Germany and The Netherlands, which have got hammered. Many stocks there are trading at single-digit P/E ratios. There are many buying opportunities in Europe now.