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Investment

Buying Tweedy Browne Global Value Fund

28 Nov 2014 by Jim Fickett.

This week I put 2% of the portfolio into the Tweedy Browne Global Value Fund (TBGVX).

My first goal in making this purchase is to have greater exposure to European stocks because, while American stocks are, in general, quite overvalued, European stocks are not. The table below gives the top 6 country allocations in the fund, with recent CAPE (Shiller Cyclically Adjusted Price Earnings) information from Research Affiliates (many thanks to Rich Toscano of Pacific Capital Associates for pointing out the Research Affiliates site to me):

Country UK Switzerland France United States Netherlands Germany
Allocation 14.5% 13.7% 11.7% 9.5% 7.8% 7.0%
Historic Median CAPE 14.7 19.3 19.3 15.9 17.8
Current CAPE 12.5 22.6 14.3 26.3 16.4

Research Affiliates does not cover the Netherlands. Older data indicates a severely undervalued market (see Belgium, France, Germany and the Netherlands have attractive CAPE; at that time CAPE was about 10 compared to a long-term average of about 16). The market has risen about 50% since then, but is probably still close to fair value (see also this page). The picture for CAPE is not perfect. TBGVX is holding stocks from one very overvalued market (the US) and one slightly overvalued market (Switzerland). The main CAPE point is that the fund is concentrated on countries where stocks are reasonably valued.

My second goal in buying TBGVX is to have more help from others in locating good companies. Bonds, still widely considered the safe alternative, are in fact very risky. I want quite a large fraction of my portfolio in stocks. Stocks are, of course, quite volatile, and the stock market as a whole can lose money for many years. But value stocks almost always make money within, say, five years. So a value portfolio is not too dangerous even for an older investor. I want to move more money into stocks, but do not have time to research individually a large number of companies, especially foreign companies, where it is more difficult to track down the necessary information.

Tweedy Browne are value investors, and are fully informed on value measures, different styles, and the history of the field. They do not say exactly what their methodology is, but their mode of operation is fairly clear from looking at their research papers (see the recent post A helpful summary on value strategies from Tweedy, Browne), their quarterly commentary, prospectus, and annual report on their website, and a video of a recent talk by the senior managing director, William H Browne. My take is that they do not find enough bargains using simple measures like price-to-book, but make every effort to understand the true intrinsic value of future income streams, and to buy stock in companies that (1) have conservative capital structures and (2) are bargain priced relative to intrinsic value. I'm sure I would disagree with some of their decisions; in fact they own one stock I sold as fully valued – J&J – but I think they probably do find solid value on the whole.

Their record is good. They have done better than the closest benchmark, the MSCI EAFE, over the long haul, and have averaged 9.7% annual return over the last 20 years.

Some other points. First, on the plus side:

  • The managing directors and other employees have substantial amounts invested alongside you.
  • Tweedy Browne manages five funds; they invest their own money most heavily in the global value fund.
  • Average 12-month turnover is only 4.1%, so you are not losing a lot of money to transaction costs.
  • The total expense ratio is 1.38%.

On the negative side, they seemingly did not fully recognize the nature of the developing crisis in 2006 and 2007. Near the top they owned ABN Amro, AIG, MBIA, and Freddi Mac, all companies with severe credit problems. The last two they did sell before the crash. My impression is that they kept to their standard approach and, though they recognized the overall inflation of easy credit, they did not try to go deeply into the developing problems with credit default swaps and securitized debt. If that is right, it is both a strength and a weakness. A weakness because one may miss an important danger sign; a strength because it is good to keep your investing approach as simple as possible. My own conclusion is that I will reserve judgement on this point, watch the overall trends in the market, occasionally review TBGVX holdings in light of those trends, and possibly sell at times of excessive exuberance. Since they are careful not to buy companies with too much debt, and I expect the next crisis to be centered around a corporate credit crisis, I'm not too worried about the possibility that they will lose more than temporary value in the next bear market.

On the whole I think TBGVX is competently managed, with goals quite close to mine, and I am happy to turn over a small (for now) part of the job to them.