Contrarian Fund Bets on Europe - and Wins Big
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There's no secret to Tweedy Browne's success. For decades this respected investment-management firm has sought out underappreciated stocks and held them until other investors eventually came around.
This explains why the four managers of the firm's foreign-stock fund (who declined to be interviewed) are willing to keep far more assets in troubled Europe than their competition does.
Yet despite this, Global Value has generated annual returns of 12% for the past three years, vs. less than 4% for the MSCI EAFE index of foreign shares.
A big bet on Europe
How has Global Value beaten 98% of its peers over the past five years while investing so much in recession-racked Europe?
First, it has largely stayed away from the region's worst debtors, the PIIGS: Portugal, Italy, Ireland, Greece, and Spain. Its biggest stakes are in Switzerland, the U.K., and the Netherlands.
The fund also favors multinationals with emerging-market ties.
Last year nearly a quarter of sales of top holding Nestlé came from fast-growing Asia Pacific and Africa. And the fund tilts toward defensive consumer stocks, led by recession-proof brewer Heineken. Consumer staples make up 31% of the fund, vs. 10% for its peers.
Of course, says Todd Rosenbluth, an analyst at S&P Capital IQ, "it's a risk if consumer staples begin to lag."
As the dollar goes ...
Tweedy Browne plays defense in other ways. The managers are holding nearly 15% of assets in cash. When they buy foreign currencies to invest abroad, they offset that through forward currency contracts that effectively expose the fund to an equivalent amount in dollars.
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With the buck thriving lately, this strategy has bolstered returns.
Over the past three decades, though, the dollar has fallen more than it has risen, which has been a drag on the portfolio at times. The firm launched a version of the fund that doesn't hedge. But by going unhedged, you'd be exposing yourself to currency risk, says Morningstar analyst Kevin McDevitt. You'd also be betting even more on Europe, since that fund would benefit if the euro rebounds.
Lower highs, higher lows
This fund, which has ranked in the top 1% of its peers during the past 15 years, may seem like a no-brainer.
But Lipper analyst Tom Roseen notes that Global Value's annual fees of 1.4% are "only mediocre" within its category. (The average, in fact, is 1.4%.) And though Global Value has thrived over the long run, there have been shorter periods when it has lagged.
Analysts liken Tweedy Browne's approach to that of Warren Buffett's. Both search for deeply undervalued stocks that may be overlooked for years. Sounds great, but when the markets sizzle, Global Value -- like Buffett -- can underperform. Between March and December 2003, for instance, when foreign stocks soared nearly 49%, Global Value trailed by 14 percentage points.