Tweedy Browne Global Value Fund
by Harold Goodman
July 17, 2003

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The Tweedy Browne Global Value Fund management team draws on the value investing habits of Berkshire Hathaway founder Warren Buffet, Columbia Business School professor Benjamin Graham and other noted stock market analysts for guidance and has taken that tutelage to new heights. Touted as a premier foreign value stock fund by Morningstar, Tweedy Global Value consistently beats its EAFE benchmark without technology companies or big bets on foreign currency. Tweedy Browne managing director Robert Wyckoff Jr. explains that macro-economic trends have very little influence on the fund’s dogged approach to seeking out undervalued companies in developed countries.

FundEmail: Let’s begin with an overview of the climate for foreign investing. China leads the region of formerly known “Tiger Countries” in volatility and explosive potential while Taiwan and the Philippines continue to languish in uncertainty. Severe Acute Respiratory Syndrome (SARS) is a thing of the past and the European Union finished the first draft of its constitution last week, choosing the slogan “United in Diversity.” Is there a state of relative calm that is ripe for forward movement?

Robert Wyckoff: We would never suggest that some macro-economic calmness is going to lead to more investment abroad. Obviously we’ve had a significant turn in global equity markets over the last three months with a significant upward bounce in Europe and Japan. It seems as if investors have grater confidence, and maybe this something to do with economic recovery around the globe. Perhaps it has something to do with the fact that the Iraq war ended more quickly than most people anticipated. We don’t know if that’s why equity markets rebounded.

We don’t concentrate our issues [in sectors or geographic regions]. We are diversified by issue, company and value. We’re invested in 24 countries-- including the U.S. Most of those countries are developed countries, and while we’re not oblivious to what’s going on in China, that’s not a country in which we invest.

We are a bottom-up, stock by stock, brick-by-brick investment manager and we do not overlay on the process any kind of thematic orientation. We don’t develop some theory that Europe is more attractive than the Far East. We go at our work bargain by bargain looking for good companies in developed markets around the globe. The things that get our attention is when we find a publicly traded security that looks at if it has been incorrectly priced in the stock market, then we than put it under the microscope and do a tremendous amount of qualitative research to determine if we want to own that security. At the end of the day, what drives the process is valuation. We hope to be able to buy a publicly traded company at a one-third to a 40% discount of what the company would sell for if it were acquired outright in an arm’s-length transaction.

The way we arrive at the real world buyout value is studying comparable transactions in the stock market. If we’re looking at a publicly traded newspaper company we would study what has been recently paid for other publicly traded newspapers in that market-- and by studying those you come up with multiples of operating income to the particular security you’re studying. If it’s trading in the stock market relative to that value then you have a bargain.

FundEmail: That said, where are the overseas bargains for U.S. value investors?

Particularly equities in Europe were undervalued from our point of view. Stocks in the Netherlands were driven down in the first quarter of this year to levels that had become very interesting to value investors such as ourselves. Perhaps the rally that occurred in the second quarter was not only related to improving the macro-economic outlook-- perhaps stocks just got too cheap. Macro-economics change overnight, and macro-economics forecasts are fraught with error, so we stick to our knitting and focus on valuations.

In the first quarter of this year, there were significant opportunities internationally in terms of bargain opportunities more so than we’re able to find in America. Developed markets in Europe offered a significant number of opportunities where we bought a number of companies in Switzerland and added to positions in Germany and The Netherlands. One company that we have been buying of late is Heineken Holdings. From the way we look at it, Heineken appears to be trading at 11 times earnings and about 55% of what we think would be a reasonable valuation of if the company were to be acquired because we studied other beer distributors around the globe. The number 11 comes up again when beer acquisitions take place. It looks as if companies paid 11 times operating income for companies that are similar to Heineken, which means you come up with a valuation of about 45 euros per share, and the stock [Heineken] is trading about 25 Euros per share.

FundEmail: If there is a viper in the garden for foreign investors, and does it have a contagious effect that you monitor?

There are lots of reasons to be concerned about European economies. The euro has been appreciating against the dollar for the past year and a half. It was on a tear prior to the last couple of weeks. With a significantly appreciating security, you have to wonder what that will do to trade in Europe-- it impacts pricing and demand. You’ve got labor markets that are very rigid and Europe is facing pension reform. There’s a lot of squabbling between European governments and labor.

We think the securities that we get into are priced to warrant investment. If you’re a value investor I don’t think there’s a viper in the garden. Europe doesn’t have the pedal to the metal capitalism that we have here in the U.S., but it’s not bad. We’re very comfortable with what we own and very optimistic about the future.

FundEmail: This fund has its largest holdings in the financial and consumer services sectors and reportedly avoids technology and media companies, but what about the lost opportunity cost of staying away from companies like Yahoo and Amazon.com that are thriving at the moment?

No, I don’t think there’s a lost opportunity. We don’t stay away from media. We own newspaper and publishing businesses all over the globe. In terms of technology companies, we have no exposure to high-technology, and the reason is twofold. One is valuation. The stocks from our point of view are rarely cheap enough to their earnings and cash flow. Number two is the rate of change in technology is so rapid and unpredictable that it’s hard to develop confidence that the company in which you’re investing will have a stable flow of earnings in the future. There is a high obsolescence factor associated with technology. By the time you feel strongly that a company has an earnings stream that is sustainable, the price of entry is enormous price relative to the its fundamentals.

The problem is that kind of company can be leapfrogged by another newly developed technology down the road. One of our competitors did a study comparing the growth rate of technology companies to pharmaceutical companies and found the growth rates on a long-term basis were quite similar. But the study found that over the period of time only one technology company was still in existence, which was IBM, but you could have invested in many pharmaceuticals and still made money. The difference in technology is that the survivorship is far less. So you won’t find many technology companies in the portfolio and we don’t’ think that puts us at a disadvantage.

You will find many pharmaceuticals in the portfolio, such as Merck KGAA, a German pharmaceutical, and Novartis AG in Switzerland. While we don’t own technology, which people associate with high rates of growth, we have very attractive companies with strong growth prospects in our portfolio, like Nestle and some of financials. We think there is a misconception out there that the value investors can only own the hospice patients of the investments world and the growth guys get all the new businesses. Value guys like us want to own growth stocks but at a discounted price.

FundEmail: Can you explain how the fund’s hedging policy works and why it has helped control volatility without compromising performance?

This is a complex subject. We came at it from the simple notion that we looked at data that showed us you didn’t make money in the long term as a buy-and-old investor in currency. There were studies we were privy to that showed the returns of the EFAE [Morgan Stanley Capital Index: Europe Australia and Far East] Index -- both hedged and un-hedged -- over 20 year periods. There returns were virtually identical for both portfolios, which suggested to us that currency was not an additive but was a wash. At the end of the day you don’t make money in currencies unless you can predict when to be long or short, which we didn’t think we could do and get right. We took the position that since we’re bottom-up stock pickers we would try to set aside the currency risk by hedging our foreign currency exposure into the U.S. dollar. There is no need to be exposed in foreign currency, so we set it aside through hedging. That gives our investors the local return in the stocks they own as if they were investors in those local markets.

We also feel that over long periods there is little or no cost to being hedged. We enter into one-year forward agreements to hedge our currency exposure in the interest rate differential in the county you’re hedging versus one-year rates in the U.S., and when U.S. one-year rates are higher than foreign one year rates you actually get paid to take a position in the currency. When the opposite is true, you pay the differential to take a hedge in that currency. And there were a number of years prior to Sept. 11 when were we were paid to take a position on our basked of currencies. Today you pay a little to take a hedge position in Europe because European interest rates out one year are higher than one-year U.S. interest rates.

FundEmail: As Morningstar points out, normally low turnover rates for the fund have risen this year. Does this mean the fund’s management policy is changing or that its managers see more bargains to buy?

The fund hasn’t changed its policy. I think turnover will tend to be lower, both in our U.S. and international fund, with respect to the average mutual. I think it’s reflective of the fact that is there have been a select number of opportunities. We analogize it to pigs at a trough that nudge the weaker pigs out of the way. When we’re presented with an attractive holding it will nudge an existing holding out of the way.

FundEmail: It is also evident that only one of the fund’s top 20 holdings is in Asia, Singapore to be exact. Does this represent a lack of confidence in Asian stocks or a consistent reluctance to buy blue-chip companies that often dominate markets in Korean, Singapore and China?

I don’t think it really has to do with our feeling a lack of confidence in Asian securities. It has to do with where we are finding a greater number of bargains. Our weighting in Japan is about 9% and 3% in Singapore. The weightings in the Far East have been higher back in 1998 when you had a currency crisis going on in Indonesia and the Russians were defaulting on their bonds. The emerging markets were in a state of high anxiety and we were presented with a number of attractive bargains and I remember having as much as 30% in the far east. The reason the number is lower today is valuations. Stocks were cheap and opportunities were presenting themselves. We sold a number of Japanese stocks into the rally in the first half of 1999. We have slowly over time rationalized our Japanese position by trying to focus on companies in Japan where we feel there is at least some shareholder focus.

Also, the difficulty in Japan is cultural. They are a huge economy, and they’re terrific manufacturers but one of the things that is difficult for value investors is that companies don’t have to be fearful of the threat of a takeover. In Japan and the notion of a hostile takeover is highly unusual. It’s not something the Japanese are comfortable with and Japanese companies are often run for the benefit of executives instead of shareholders. If those kinds of companies existed in America, they would be subject to takeovers that would force action that was in the best interest of shareholders, such as paying out dividends or buying in shares with cash on hand. We focus on companies that are often started by entrepreneurs in Japan that demonstrate an interest in the value of their share prices. We also hired a new analyst about seven months ago who is fluent in Japanese and is assisting us in reviewing the stocks we own, and I anticipate we will add to the shares we own in Japan, as well as Singapore and Hong Kong.

FundEmail: I also noticed that this is one of many foreign stock portfolios that invest in Heineken Holdings. I’ve always wanted to ask about the wisdom of buying a different beer distributor, such as Guinness, which also has excellent brand recognition and appears in fewer portfolios.

For us it’s all about valuation and the strength of the Heineken brand. You can go into a bar anywhere in the world and find a Heineken. Why is the stock cheap? Anheuser-Busch in the U.S. trades at a price to earnings ratio that is almost twice that of Heineken. Heineken has the No. 2 market share after Anheuser Bush and trades at a much lower valuation. Anheuser Bush is also starting to make beer in little green bottles with ingredients imported from various parts of the world. I wonder why.

FundEmail: Brothers William and Christopher Browne are co-managers of the fund and managing directors at the management company, Tweedy Browne Co., LLC. Do you find that all of the partners have an equal say in making decisions?

There are five us who are partners at Tweedy Browne. We are the management team at Tweedy and it’s a team effort. It’s about a very rigorous process, not about an individual. Generally there is a consensus about whether we ought to own a stock or not. It’s also a terrific culture. It feels like a small, cohesive and intimate environment. We all share a philosophic point of view and we’re passionate about it. No partner at Tweedy has ever left to take another job. I got to Tweedy in 1991 and became a partner in 1997.

FundEmail: Can you tell us a bit about yourself?

When I’m not working at Tweedy I play sports. I am a golfer and play platform tennis during the winter. I play court tennis, which is the original version of tennis that was played by monks hundreds of years ago. I have 3 and-a-half year old twins – a boy and a girl – who keep me busy.

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