Tweedy, Browne Funds’ commentary for the fourth quarter ended December 31, 2023.
Sparked by improving inflation data and increasing market optimism around the prospects for interest rate cuts early in 2024, global equity markets gained considerable momentum on the upside in Q4 2023 and finished the year with a “Santa Claus” rally that drove equity valuations materially higher. In the roughly eight-and-a-half-week period between October 27th and year-end, the MSCI EAFE and World Indexes were up approximately 15% and 16%, and finished the full quarter up 10.42% and 11.42%, respectively.
Q4 2023 hedge fund letters, conferences and more
In this highly charged, momentum-driven, risk-on environment, the Tweedy, Browne Funds made considerable financial progress, but as one might expect, trailed their benchmark indices, producing returns between 5.71% and 9.41% for the quarter, and between 12.37% and 15.20% for the full calendar year.
Portfolio Attribution
Please note that the individual companies discussed herein were held in one or more of the Funds during the quarter ended December 31, 2023, 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 December 31, 2023.
With the global economy continuing to hold up rather well in the face of higher interest rates, it was the more economically sensitive components of the Tweedy, Browne Funds’ portfolios that continued to lead the Funds’ returns in the 4th quarter. This included strong results in several of the Funds’ industrial segments, more specifically the Funds’ aerospace & defense, machinery, and chemical holdings, such as Safran (EPA:SAF), the French aircraft engine and maintenance company; BAE (LON:BA), the UK-based defense contractor; Aalberts (AMS:AALB), the Dutch industrial conglomerate; Haitian (HKG:1882), the China-based manufacturer of plastic injection molding machines; and Trelleborg (STO:TREL-B), the Swedish developer of engineered polymer solutions that seal, damp, and protect critical industrial applications.
In addition, companies such as ADEKA (TYO:4401), Japan’s leading chemical company; Kemira (HEL:KEMIRA), the Finnish chemical company that serves customers in water intensive industries; Brenntag (ETR:BNR), the German-based leader in global chemical distribution (held by each Fund other than the Worldwide High Dividend Yield Value Fund (“Worldwide Fund”)); and SOL SpA (BIT:SOL), the Italian producer and distributor of industrial gases (held by the International Value Fund and International Value Fund II), were also positive contributors to the quarter’s returns.
Other companies producing solid returns for the quarter included (NYSE:ALV), the Swedish auto safety company; US banks such as Wells Fargo (NYSE:WFC) (held only in the Value Fund), Bank of America (NYSE:BAC) (held in the International Value Fund and the International Value Fund II), and Truist (NYSE:TFC); Progressive, the US-based auto insurer (held only in the Worldwide Fund); U-Haul, the US-based moving and storage company (held by the Value Fund, International Value Fund, and International Value Fund II); and beverage-related companies such as Coca-Cola FEMSA (NYSE:KOF) and the Canadian juice company, Lassonde (TSE:LAS.A) (which is not held by the Worldwide Fund). Deutsche Post (ETR:DHL), the German-based airfreight, parcel delivery, and mail company; Ionis Pharma (NASDAQ:IONS), a US-based pharmaceutical company (held by the Value Fund, International Value Fund, and International Value Fund II); and Vertex (NASDAQ:VRTX), the US-based biotech company, were also positive contributors for the quarter.
In contrast, several of the Funds’ communication services, healthcare, food, energy and real estate-related holdings produced disappointing returns for the quarter. This included declines in the stock prices of companies such as Baidu (NASDAQ:BIDU), the Chinese internet search provider and Ubisoft (EPA:UBI), the French video game developer (held by each Fund other than the Worldwide Fund); Dentsu (TYO:4324), the Japanese advertising company; Novartis (NYSE:NVS) and Roche (SWX:ROG), the Swiss pharma companies; Fresenius (NYSE:FMS), the German healthcare conglomerate; Nestlé (SWX:NESN), the Swiss food company; TotalEnergies (NYSE:TTE), the French oil company (not held by the Worldwide Fund); Enterprise Products (NYSE:EPD), the US-based oil & gas pipeline company (held by the Value and Worldwide Funds); and Hang Lung (HKG:0101), the Hong Kong real estate development company (held by each Fund other than the Value Fund). In addition, FMC, the US-based crop chemical company; SCOR (EPA:SCR), the French reinsurer; and Diageo (LON:DGE), the UK spirits company, had a difficult quarter in terms of returns.
Portfolio Activity
Portfolio activity was a bit more muted than in recent quarters. That said, new positions established during the quarter included DB Insurance Co Ltd (KRX:005830), the Korean non-life insurance company (established for all but the Worldwide Fund); Hosokawa Micron (TYO:6277), the Japan-based industrial process machinery manufacturer; and Nippon Express Holdings Inc (TYO:9147), the Japanese transport and logistics company (held in the Worldwide Fund).
We also added Aalberts NV (AMS:AALB), the Dutch engineering company, to the Worldwide Fund (Aalberts was a holding in our other Fund portfolios). All these additions, in our view, were purchased at prices that represent a significant discount from our estimate of their underlying intrinsic values, were financially strong and had attractive runways for potential future growth.
Lastly, additions were made to a handful of the Funds’ positions including, among others, companies such as FMC NYSE:FMC, Sealed Air NYSE:SEE, and Teleperformance (EPA:TEP) (held by each Fund) and U-Haul (NYSE:UHAL), Alten (EPA:ATE), and Brenntag (ETR:BNR) (held in each Fund other than the Worldwide Fund).
On the sell side, several Fund holdings were either eliminated or pared back. The stock prices of these businesses had either reached our estimates of their underlying intrinsic values or had been compromised in some way by virtue of declines in our estimates of their underlying intrinsic values and future growth prospects.
Or, they may have been sold or trimmed to make room for new additions or to generate losses, which could be used to offset 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 hereof.)
Portfolio Positioning And Outlook
While market indexes rebounded rather aggressively during the quarter and for the full year, the advance was quite narrow in certain markets, particularly in the US where the bulk of the return of the S&P 500 was produced by a handful of tech-related companies known as the “Magnificent 7.” Aside from this group, the average company did not perform nearly as well.
Non-US equity markets, as represented by the MSCI EAFE Index, had broader participation, and performed quite well and have slowly been gaining ground on US equity markets. We are encouraged by this improvement in the performance of international equities and have continued to uncover new opportunities at home and abroad, particularly in smaller and medium capitalization industrial companies.
The Japanese component of our Fund portfolios has also been increasing over the last couple of years as real change seems to be afoot in Japan. The investment focus across all of our Funds has been largely on companies meeting the Funds’ investment criteria that we believe have competitive moats, pricing power, and strong balance sheets, and/or where knowledgeable insiders have been purchasing shares at or around prices we feel represent attractive value.
We still believe we are in the midst of a material shift in markets largely driven by stubbornly persistent inflation and interest rates, which we think will likely normalize over time at levels well beyond the zero bound of the last decade plus. As we have contended in numerous commentaries over the last couple of years, in such an environment, we believe price matters again, and we are highly optimistic about the future for price-sensitive strategies like ours.
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
Read the full commentary here.
