COMMENTARY
Coming on the heels of one of their best performances in two decades, global equity markets continued their robust advance into the new year and finished the first quarter near their all-time highs. The S&P 500, MSCI World Index (USD), and MSCI EAFE Index (USD) closed the quarter up 10.56%, 8.88%, and 5.78%, respectively, despite facing headwinds on the inflation and interest rate front. In this highly charged, momentum-driven, risk-on environment, the Tweedy, Browne Funds continued to make considerable financial progress but could not outpace their benchmark indices, producing returns between 3.65% and 5.51% for the quarter.
PORTFOLIO ATTRIBUTION
Please note that the individual companies discussed herein were held in one or more of the Funds during the quarter ended March 31, 2024, 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 March 31, 2024.
During the quarter, the Funds earned robust returns from several industrial and materials holdings. Rubis (XPAR:RUI, Financial), the French-based fuel distribution business, was one of our best contributors during the quarter. The company's stock price benefitted when a widely recognized and respected investor, Vincent Bollore, purchased 5% of the company's outstanding shares, which helped fuel public interest in the stock. The Funds continued to have considerable exposure to industrial and materials stocks during the quarter. Aerospace & defense businesses led results, driven primarily by BAE Systems (LSE:BA., Financial), the British defense company; Safran (XPAR:SAF, Financial), the French jet engine manufacturer; and Rheinmetall AG (XTER:RHM, Financial), the German defense company.
Machinery holdings also performed well, with contributions from Sumitomo Heavy Industries (TSE:6302, Financial), the Japanese heavy electric machinery business; Trelleborg (OSTO:TREL B, Financial), the Swedish manufacturer of industrial seals; and Aalberts (XAMS:AALB, Financial), the Dutch-based flow control and piping equipment business. The Funds' positions in Italian industrial gases company SOL (MIL:SOL, Financial) also helped to drive results. The Funds earned strong returns from several financial holdings, including insurers SCOR SE (XPAR:SCR, Financial), Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial), and Muenchener Rueckversicherungs AG (Munich Re) (MURGY, Financial), as well as from National Bank of Canada (TSX:NA).
Quarterly returns for our two currency-hedged Funds, International Value Fund and Value Fund, were partially shielded from return dilution caused by weaker foreign currencies relative to the US dollar. On the other hand, our two unhedged Funds, International Value Fund II and Worldwide High Dividend Yield Value Fund, experienced some modest performance attrition from the same relative dollar strength.
The Funds' healthcare stocks produced disappointing returns during the quarter. Fresenius (FMS), a global healthcare group with products and services related to dialysis, and pharma companies Roche (RHHBY) and Novartis (NVS) were among the most significant detractors from returns. Teleperformance (XPAR:TEP), a "customer experience" business that operates call centers, was the most significant negative contributor to the Funds' returns. Recent market reaction to the potential impact of AI on call center technology and a slowdown of the company's growth since the end of the COVID pandemic has put pressure on Teleperformance's stock price. While several of the Funds' consumer staples stocks performed well, Nestlé and Heineken, among others, did not keep pace.
PORTFOLIO ACTIVITY
Idea flow remains robust, though the pace of new purchases into the Funds slowed as we entered the new year. Among other purchases, we initiated a new position in Envista (NVST), a provider of dental supplies, equipment, and services, and we added to our existing positions in agricultural chemicals company FMC Corp. (FMC) and Canadian food packaging company Winpak (TSX:WPK). We believe these new additions 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.
On the sell side, we sold or pared back several Fund holdings whose stock prices had either reached our estimates of their intrinsic values or had been compromised in some way by declines in our estimates of intrinsic values or future growth prospects. We sold or trimmed some positions to make room for new additions or to generate losses, which we can use to offset the Funds' realized gains.
(A list of selected newly established positions, including additions, sales, and trims of existing positions for each Fund, is included with each Fund's portfolio page, beginning on page 4.)
PORTFOLIO POSITIONING AND OUTLOOK
Portfolio allocations to any single country, industry, or market cap group are a function of the bottom-up, stock-by-stock process we use to build portfolios. Likewise, the amount of cash held in the Funds is a byproduct of our methodical process. Our investments are focused, for the most part, on developed markets but generally have some direct and indirect exposure to emerging markets. The investment team does not consider an index when building portfolios, and, as a result, our Funds look very different from any given index. Our index-agnostic approach, we believe, allows us a potential performance advantage over the long term.
It remains to be seen whether the upward momentum in global equity markets can hold up in the face of a world on fire with conflict, a persistently stubborn rate of core inflation, and the prospect that long-awaited interest rate cuts may be fewer in number and have to be pushed out further than anticipated. Valuation levels could also pose a challenge to the rally. Many of the high-performing constituents in market indices today trade at vertigo-inducing levels. The Shiller cyclically adjusted price-earnings ratio (CAPE) as of March 31 was approximately 34x, a level only exceeded on two other occasions in the history of the return series, which dates back to 18711. Only at the top of the dot-com bubble in December 1999 and the peak of the post -COVID rally in October 2021 were the ratios higher. If high expectations centered around AI technologies fail to materialize, inflation rekindles, and/or a conflict spins out of control, the markets could be in for a serious comeuppance.
Despite these concerns, we take comfort in the fact that the Tweedy Fund portfolios are diversified by issue, industry, country, and market capitalization and consist of an increasing number of smaller and medium capitalization companies that, in our view, continue to meet our value criteria and have strong balance sheets and runways of potential future growth. If, and when, the proverbial music in Wall Street's game of musical chairs stops, we remain hopeful that our shareholders will not be left standing.
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
April 2024
The performance data shown above represents past performance and is not a guarantee of future results. Investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be higher or lower than the performance data quoted. Please visit www.tweedy.com to obtain performance data which is current to the most recent month end.
