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Tweedy, Browne — Why Value Investing Will Continue to Thrive by Robert Huebscher Rency Hedging

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Tweedy, Browne — Why Value Investing Will Continue to Thrive by Robert Huebscher Rency Hedging Tweedy, Browne — Why Value Investing Will Continue to Thrive By Robert Huebscher rency hedging. Please refer to that value mix has always had exposure June 8, 2020 interview for information on those to some higher quality companies topics. that are business compounders, th This year marks the 100 anniver- where the price is still fair in rela- sary of the renowned investment Bob: I’d like to talk about the tion to our estimate of intrinsic val- firm Tweedy, Browne. The firm unique investment and economic ue as well as some economically was originally a broker, and one of climate we are facing. Your fund sensitive businesses. its clients was Benjamin Graham, has done exceptionally well thus co-author and author of the sem- far this year on a relative basis. The financial and energy compo- inal textbooks on value investing: As of May 1, it outperformed the nents of the fund’s portfolio were Security Analysis (1934) and The MSCI ACWI ex-U.S. value index hit hard in March. Many of the in- Intelligent Investor (1949). The firm by 803 basis points and the dustrial companies in our portfolio also had brokerage relationships Morningstar foreign large-value have also been smacked during with Walter Schloss and Warren peer group average by 634 basis this crisis. But we do have some of Buffett. points. To what do you attribute those other high-quality names. that? As of April 30, 2020, its flagship John Spears: It’s hard to compare fund, the Tweedy, Browne Global Bob Wyckoff: It’s sad that it has the fund to those indexes. These Value Fund (TBGVX), has returned come on the heels of a pandem- are stocks that the fund largely 8.17% annually since its inception in ic, but we’re happy that we have doesn’t own. It’s a question per- 1993. That is 261 basis points bet- been able to add some value of taining to a large group of com- ter than the hedged MSCI EAFE late. To a great de- index and 278 basis points bet- gree, the stocks that ter than the foreign stock fund have been smashed average (which is calculated by during this crisis have Tweedy, Browne based on data been the economical- provided by Morningstar and re- ly-sensitive compa- flects average returns of all mutual nies, including some funds in the Morningstar Foreign of the deeply cyclical Large-Value, Foreign Large-Blend, businesses. The high- Foreign Large-Growth, Foreign er quality companies Small/Mid-Value, Foreign Small/ and the interactive Mid-Blend, and Foreign Small/Mid- media and technol- Growth categories). ogy companies that the fund owns have Bob Wyckoff I interviewed six members of held up better. Tweedy, Browne’s investment com- mittee: John Spears, Tom Shrager, The fund has a fairly significant panies, but we’re focusing on one Bob Wyckoff, Roger de Bree, Frank exposure to branded consumer company at a time. We’re buying Hawrylak and Jay Hill. products companies, companies interests in businesses in the stock like Nestle, Heineken, Unilever market. The interview took place on May and Diageo. Those companies in 14, 2020, over Zoom. I previously general have held up better than Bob Wyckoff: Emerging mar- interviewed the members of the the deeply economically sensitive kets have been hit pretty hard. investment committee at Tweedy, businesses. The Tweedy, Browne Global Value Browne, on February 5, 2019, when Fund has approximately 7 to 8% we discussed their investment phi- This has also held true for our phar- of its assets in the emerging mar- losophy, how they differentiate maceutical holdings where the kets. We know our competitors themselves and their views on cur- fund has significant exposure. Our have higher exposure there. That’s 1 another reason why we’ve held up monal treatment. We believe that It has a port business that will be relatively better than many. it’s going to be approved. It could suffering because of the decline be a big drug. in world trade. But a big part of Bob: You wrote in your March the earnings power and value is in 31 commentary, “It may seem The most exciting part of Astel- the telecommunications and the counterintuitive, but at times las’s future could be a drug for dry utilities. There’s debt on the bal- like this, we begin to feel better age-related macular degeneration. ance sheet, but a lot of the debt is about our prospects for future The market for such a drug—and non-recourse, related to those very returns.” What were some of the there is no treatment now—could steady businesses—telecommuni- opportunities you saw following be a minimum of $10 billion. Some cations and utilities, that typically the market decline that began on people put the total market size have debt as part of their capital February 19? higher than that. It’s a new cell structure. The earnings yield is therapy. It has a type of stem cell largely useful free-cash-flow-type Tom Shrager: We found opportu- to use in this treatment that is ex- earnings, and the analyst who val- nities in some smaller companies pected to reduce the chance of the ued the company came up with an in Japan. We got an opportunity to product being rejected. estimated intrinsic value of $108 invest smaller amounts and hope- which is approximately double the Last but not least, we valued the fully there will be bigger opportu- current stock price. nities later. business at 14-times its EBIT and we bought it in the market at Its stated book value is $120 a share Over time, we’ll probably buy around 10-times EBIT. In addition, and it is very interesting to see that more Japanese companies that in over the last couple of years it the insiders are buying millions and our view have rock-solid balance bought back a lot of shares. It is a millions of dollars of the stock. One sheets and significant international of them is the wealth- exposure, and that are cheap on an iest man in Hong absolute basis relative to intrinsic Kong—Li Ka-shing. Li value. Those companies that have Ka-shing and his son a history of paying deference to have been buying their shareholders, either through millions and millions dividends or share buybacks. of dollars of the stock at current prices,— We began looking at Astellas Phar- recently post-coro- ma in the fall of 2019, but got our na and pre-corona. pricing opportunity during the That’s a very good pandemic sell-off in March 2020. It sign statistically. Em- is a story about a couple of drugs, John Spears pirically, a lot of ac- some that are already being sold, ademic studies have like Xtandi, which is a prostate Japanese company that appears to indicated that when insiders buy cancer drug. It has another seven act in the interests of its sharehold- their own company’s stock, the years to run on its patent. Because ers and has been relatively good in stock tends to beat the market. it’s going to be approved and has discovering new drugs. been approved for additional in- Bob Wyckoff: From a big picture dications--the probability is that it John Spears: CK Hutchison Hold- perspective, we’ve been very busy will continue growing. ings is a Hong Kong company. Its for the last eight weeks given the symbol is 1HK and its price is about volatility in the market, particularly Then there is a drug that has been $55. At purchase, the company had during that late-March period when recently approved for bladder can- a 5.7% dividend yield. It’s priced at prices were coming down sig- cer. Bladder cancer is an area of rel- five-times earnings. If we owned nificantly. But we’ve approached atively high need that we believe is the entire business, the reciprocal things thoughtfully, deliberately going to grow. As far as Astellas’s of that five multiple is a 20% af- and incrementally. We don’t know pipeline is concerned, there are a ter-tax earnings yield. The company how long this is going to go on or couple of interesting compounds it is a conglomerate. A large number how deep it will get. is working very hard on. One is a of its businesses are stable—tele- treatment for hot flashes for post- communications and infrastructure, We’ve had a lot of activity on the menopausal women. It’s not a hor- which is a utility businesses. buy side in a short period of time. 2 We’ve also trimmed and sold some sonable. In addition to that, on the bering presentation this year at the securities. Anytime we’re looking buy side, we bought a couple of Berkshire conference. I agree with at a new security, we have to weigh stocks, but we had redemptions. Andrew Ross Sorkin’s comment it against what we already own. Is The fund’s cash went down com- that Warren didn’t seem quite as there something about the new se- pared to the end of 2019 as a per- ebullient, and there’s a tremendous curity we like better? We consider centage of a total portfolio. We amount of uncertainty, health-wise whether we have available cash. will continue to deploy the cash as and for the economy. That was re- opportunities arise. The backlog flected in Buffett’s demeanor. Often during periods like this, we of ideas on the international side add to existing positions that we is still very large.
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