Tweedy, Browne – Why Value Investing Will Continue to Thrive

This year marks the 100th anniversary of the renowned investment firm Tweedy Browne. The firm was originally a broker, and one of its clients was Benjamin Graham, co-author and author of the seminal textbooks on value investing: Security Analysis (1934) and The Intelligent Investor (1949). The firm also had brokerage relationships with Walter Schloss and Warren Buffett.

As of April 30, 2020, its flagship fund, the Tweedy Browne Global Value Fund (TBGVX), has returned 8.17% annually since its inception in 1993. That is 261 basis points better than the hedged MSCI EAFE index and 278 basis points better than the foreign stock fund average (which is calculated by Tweedy, Browne based on data provided by Morningstar and reflects average returns of all mutual funds in the Morningstar Foreign Large-Value, Foreign Large-Blend, Foreign Large-Growth, Foreign Small/Mid-Value, Foreign Small/Mid-Blend, and Foreign Small/Mid-Growth categories).

I interviewed six members of Tweedy, Browne’s investment committee: John Spears, Tom Shrager, Bob Wyckoff, Roger de Bree, Frank Hawrylak and Jay Hill.

The interview took place on May 14, 2020, over Zoom. I previously interviewed the members of the investment committee at Tweedy Browne, on February 5, 2019, when we discussed their investment philosophy, how they differentiate themselves and their views on currency hedging. Please refer to that interview for information on those topics.

I'd like to talk about the unique investment and economic climate we are facing. Your fund has done exceptionally well thus far this year on a relative basis. As of May 1, it outperformed the MSCI ACWI ex-U.S. value index by 803 basis points and the Morningstar foreign large-value peer group average by 634 basis points. To what do you attribute that?

Bob Wyckoff: It’s sad that it has come on the heels of a pandemic, but we're happy that we have been able to add some value of late. To a great degree, the stocks that have been smashed during this crisis have been the economically-sensitive companies, including some of the deeply cyclical businesses. The higher quality companies and the interactive media and technology companies that the fund owns have held up better.

The fund has a fairly significant exposure to branded consumer products companies, companies like Nestle, Heineken, Unilever and Diageo. Those companies in general have held up better than the deeply economically sensitive businesses.

This has also held true for our pharmaceutical holdings where the fund has significant exposure. Our value mix has always had exposure to some higher quality companies that are business compounders, where the price is still fair in relation to our estimate of intrinsic value as well as some economically sensitive businesses.

The financial and energy components of the fund’s portfolio were hit hard in March. Many of the industrial companies in our portfolio have also been smacked during this crisis. But we do have some of those other high-quality names.

John Spears: It’s hard to compare the fund to those indexes. These are stocks that the fund largely doesn't own. It's a question pertaining to a large group of companies, but we're focusing on one company at a time. We're buying interests in businesses in the stock market.

Bob Wyckoff: Emerging markets have been hit pretty hard. The Tweedy Browne Global Value Fund has approximately 7 to 8% of its assets in the emerging markets. We know our competitors have higher exposure there. That's another reason why we've held up relatively better than many.

You wrote in your March 31 commentary that, “It may seem counterintuitive, but at times like this, we begin to feel better about our prospects for future returns.” What were some of the opportunities you saw following the market decline that began on February 19?

Tom Shrager: We found opportunities in some smaller companies in Japan. We got an opportunity to invest smaller amounts and hopefully there will be bigger opportunities later.

Over time, we'll probably buy more Japanese companies that in our view have rock-solid balance sheets and significant international exposure, and that are cheap on an absolute basis relative to intrinsic value. Those companies that have a history of paying deference to their shareholders, either through dividends or share buybacks.

We began looking at Astellas Pharma in the fall of 2019, but got our pricing opportunity during the pandemic sell-off in March 2020. It is a story about a couple of drugs, some that are already being sold, like Xtandi, which is a prostate cancer drug. It has another seven years to run on its patent. Because it's going to be approved and has been approved for additional indications--the probability is that it will continue growing.