Our Fund Portfolios

Please note that the individual companies discussed herein were held in one or more of the Funds during the year ended March 31, 2020, but were not necessarily held in all four of the Funds. Please refer to footnote 6 at the end of this letter for each Fund’s respective holdings in each of these companies as of March 31, 2020.

While virtually no stock, industry group or country in the global economy fully escaped the impact of the coronavirus pandemic, it was largely the economically sensitive component of the global equity market that bore the brunt of the stock markets’ collapse. This also held true for our Funds, as the financial, media, energy related, and industrial cyclical stocks faced the steepest declines. This included companies such as Bangkok Bank, Wells Fargo, SCOR, WPP, ConocoPhillips, Total, Royal Dutch, Safran, G4S, and CNH Industrial, among a host of others. In the energy sector, the damage was compounded by an oil price war that erupted between Saudi Arabia and Russia, which flooded the market with cheap oil as near-term demand melted away. While the Saudis and Russians recently reached an agreement to limit production in an attempt to bring some relief to the oil markets and to their struggling economies, their efforts largely fell on deaf ears as demand for oil continued to wane in the face of a worldwide economic shut-down. At one point over the last few weeks, oil prices temporarily drifted into negative territory as producers had no place to store the excess oil, and costs of storage soared. If the pandemic extends longer than anticipated, and the recession deepens, these extraordinarily low oil prices could be catastrophic for the U.S. shale industry. While most all of these economically sensitive companies have faced undue near-term hardship, when the virus abates and demand returns, we would expect the bulk of these companies and their respective stock prices to recover. As to when that happens, and by how much, we cannot know. We have full confidence, however, that our patience will likely be rewarded.

In terms of good news, at least in the near term, there has been very little. However, some of our portfolio holdings declined less than others. This included a number of the Funds’ food and beverage holdings such as Nestlé, Unilever, and Diageo; pharmaceutical holdings such as Johnson & Johnson, Novartis, and Roche; and technology holding Alphabet (Google).

With large swaths of the global economy shut down, some of our dividend paying companies have come under pressure to reduce or suspend their dividends. Our Tweedy, Browne Worldwide High Dividend Yield Value Fund purchases fractional interests of enduring businesses that generate sustainable free cash flows from which stable and growing

dividends have historically been paid. A fundamental pillar of our investment process is to exclude businesses with excessive leverage. While leverage has the ability to fuel returns during bull markets, the lack thereof provides a significant layer of financial security during a crisis like the one currently unfolding with regard to COVID-19, and the economic consequences resulting from the efforts to curtail the pandemic’s spread.

As of April 20, 2020, over 71% of Worldwide High Dividend Yield Value Fund’s holdings are paying their regularly scheduled dividends in a timely manner. A further 9% have committed to paying their dividends, with a single dividend payment being temporarily postponed. Other cases fall into three distinct buckets. The first reflects companies that have reduced their dividends, Michelin and Royal Dutch Shell. The second includes companies with more cyclical exposure, like Safran or Autoliv, that have temporarily suspended their dividends to preserve cash. The third includes companies who, although well-capitalized, are being asked by regulators to temporarily suspend dividend payments, like CNP and possibly SCOR. These businesses are critically important, and we expect them to continue paying dividends in a timely manner once this crisis has subsided. Automakers will still need airbags and airplane engines will continue to need maintenance shop visits.

Our initial analysis of any company always considers the ultimate risk of investing, the risk of permanent capital loss. We look hard at balance sheets, and stay far away from highly leveraged businesses. This is especially true during periods of deep economic uncertainty like the one we are in now. Many of our portfolio companies are in a net cash position, which means they have enough current cash to pay off all of their indebtedness. When screening for new investments, we often limit our consideration to companies that carry net debt to earnings before interest, taxes, depreciation and amortization of 2.5 times or less, which means that the company theoretically could pay off all of its debt with just 2.5 years of pre-tax cash flow. During times like this, we spend an inordinate amount of time re-examining the balance sheets of current and prospective holdings to reassure ourselves as best we can that our portfolio companies can weather the crisis. This involves an examination of bank covenants, debt repayment schedules, credit market access, and cash flows. We believe our focus on seeking to reduce the risk of permanent capital loss translates into a risk profile for our Funds that connotes resilience and sustainability.

As you might imagine, we have been very busy of late, particularly as we approached fiscal year-end, combing through the balance sheets and income statements of a plethora of new ideas. We have tried our best to be

 

thoughtful, deliberate, and somewhat incremental during the market chaos that has prevailed over the last month or so. That said, we have made considerable progress putting some of our cash reserves to work in new and compelling opportunities. Over the last several weeks, we’ve established new positions in companies such as Autoliv, a Swedish company that is an industry leader in passive safety products (airbags and seatbelts) for the automobile industry. Autoliv currently has a 50% market share of global passive safety orders and has been increasing its market share in part due to the bankruptcy of its Japanese competitor, Takata. These safety products are increasingly mandated by regulators, and make up on average $235 in value per vehicle globally, which is up 50% since 2001. Unlike most auto suppliers, Autoliv is not directly exposed to challenging secular issues facing the automobile industry such as electrification and autonomous driving. The company typically has generated solid operating margins of 9% to 10% and a return on equity of over 20%. It has a solid balance sheet, carries net debt to EBITDA of 1.7x with no financial covenants, and has historically converted over 80% of its net income into free cash flow. At purchase, we paid a little over $41 per share, or 7 times EBITA (earnings before interest, taxes, and amortization) of depressed 2019 earnings, and approximately 55% of our estimate of its intrinsic value ($75 per share).

In addition to Autoliv, we also established a new position in Shanghai Mechanical, an electrical and mechanical manufacturing business, which includes a valuable Chinese elevator company. For the first time in a long time, we were able to uncover a number of new bargains in Japan, including Astellas Pharmaa, Yamaha Motor Company, Kuraray, and ADEKA Corporation. We also purchased new or added to a number of positions, including Babcock International, BASF, CNH, Coca-Cola FEMSA, Krones and Trelleborg. All of these new positions and additions to holdings were made at prices that reflect significant discounts to our conservative estimates of the companies’ underlying intrinsic values. In addition to the newly established positions mentioned above, we are currently studying several new candidates, some of which will likely be purchased if they meet our price targets.

During times of great market volatility and pricing opportunity, we are constantly weighing new ideas against companies we already own. Sometimes we reduce or trim positions to make room for new ones. With the exception of a few names, including Carnival Corp. and Halliburton, we did very little outright selling during this crisis; however, in some Funds, we did trim our positions in Antofagasta, G4S, Standard Chartered, and HSBC, among others. In several instances these sales allowed us to realize losses that could be used to offset distributable capital gains that, in large part for Global Value Fund and Value Fund, were the result of gains in our currency hedging contracts due to the strength of the U.S. dollar. Over the fiscal year, the Value and Global Value Funds’ use of currency hedging contracts was a significant contributor to performance.

Many of the new businesses in which we are investing are facing significant challenges to their near-term earnings power that we believe are likely to be temporary. When analyzing these companies, we focus our attention on more

“normalized” earnings power, asking ourselves what the company will likely be earning two to three years out when we believe things are apt to recover. Can it get back to its normalized earnings power? Does it have a balance sheet that allows it to weather the current crisis, and are we being offered a price that affords us an acceptable margin of safety in light of enhanced levels of uncertainty?

When researching new ideas, we have also been spending a good amount of time studying the purchase and sale behavior of knowledgeable insiders, i.e., officers (CEOs/CFOs), directors, 5% position holders, and the company itself (buyback activity). Their actions using their own money will often tip us in terms of our decision-making, particularly when near-term uncertainty is high.

Reducing Our Fees

We have decided to make an additional fee accommodation for our Fund shareholders. As you may remember, in late 2017, we established a breakpoint of 0.75% in our fee schedule on all assets greater than $10.3 billion in the Global Value Fund. This equated to a 40% reduction in fees on assets greater than $10.3 billion. We further agreed to waive expenses on the Value Fund, Global Value Fund II – Currency Unhedged, and Worldwide High Dividend Yield Value Fund to keep their expense ratios in line with that of the Global Value Fund. Unfortunately, the Global Value Fund’s assets under management have declined since then, and the breakpoint level has not been reached in some time.

After the recent stock market decline associated with the pandemic, the Global Value Fund’s assets today total a little over $6 billion. Effective May 22, 2020, we have decided to waive our fees whenever the Global Value Fund’s average daily net assets (“ADNA”) exceed $6 billion as follows:

 

Average Daily Net Assets		Advisory Fee
On the first $6 billion			1.25	%
On the next $1 billion
(on ADNA over $6 billion and up to $7 billion)			0.80	%
On the next $1 billion
(on ADNA over $7 billion up to $8 billion)			0.70	%
On the remaining amount, if any
(on ADNA over $8 billion)			0.60	%

The Global Value Fund II, Value Fund and Worldwide High Dividend Yield Value Fund are also expected to benefit from this waiver, as the adviser continues to waive fees on those Funds to keep their expense ratios in line with that of the Global Value Fund.

Going forward, as the Tweedy, Browne Global Value Fund recovers from the impact of the pandemic (as we are confident it will), so will our shareholders, and we hope at a faster pace than would have been the case before the adjustment.

Footnotes:

 

(1)	Indexes are unmanaged, and the figures for the indexes shown include reinvestment of dividends and capital gains distributions and do not reflect any fees or expenses. Investors cannot invest directly in an index.

 

(2)

The MSCI EAFE Index is a free float-adjusted, market capitalization weighted index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index (in U.S.$) reflects the return of the MSCI EAFE Index for a U.S. dollar investor. The MSCI EAFE Index (Hedged to U.S.$) consists of the results of the MSCI EAFE Index hedged 100% back into U.S. dollars and accounts for interest rate differentials in forward currency exchange rates. Results for each index are inclusive of dividends and net of foreign withholding taxes.

 

(3)

Inception dates for the Global Value Fund, Global Value Fund II, Value Fund and Worldwide High Dividend Yield Value Fund are June 15, 1993, October 26, 2009, December 8, 1993, and September 5, 2007, respectively. Prior to 2004, information with respect to the MSCI EAFE and MSCI World Indexes used was available at month end only; therefore, the since-inception performance of the MSCI EAFE Indexes quoted for the Global Value Fund reflects performance from May 31, 1993, the closest month end to the Global Value Fund’s inception date, and the since inception performance of the MSCI World Index quoted for the Value Fund reflects performance from November 30, 1993, the closest month end to the Value Fund’s inception date.

 

(4)

The S&P 500/MSCI World Index (Hedged to U.S.$) is a combination of the S&P 500 Index and the MSCI World Index (Hedged to U.S.$), linked together by Tweedy, Browne, and represents the performance of the S&P 500 Index for the periods 12/8/93 – 12/31/06 and the performance of the MSCI World Index (Hedged to U.S.$) beginning 1/1/07 and thereafter (beginning December 2006, the Fund was permitted to invest more significantly in non-U.S. securities). The S&P 500 Index is a market capitalization weighted index composed of 500 widely held common stocks that assumes the reinvestment of dividends. The index is generally considered representative of U.S. large capitalization stocks.

 

(5)

The MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. The MSCI World Index (in U.S.$) reflects the return of this index for a U.S. dollar investor. The MSCI World Index (Hedged to U.S.$) consists of the results of the MSCI World Index with its foreign currency exposure hedged 100% back into U.S. dollars. The index accounts for interest rate differentials in forward currency exchange rates. The MSCI World High Dividend Yield Index reflects the performance of equities in the MSCI World Index (excluding REITs) with higher dividend income and quality characteristics than average dividend yields that are both sustainable and persistent. The index also applies quality screens and reviews 12-month past performance to omit stocks with potentially deteriorating fundamentals that could force them to cut or reduce dividends. The MSCI World High Dividend Yield Index (in U.S.$) reflects the return of the MSCI World High Dividend Yield Index for a U.S.

dollar investor. Results for each index are inclusive of dividends and net of foreign withholding taxes.

Current and future portfolio holdings are subject to risk. Investing in foreign securities involves additional risks beyond the risks of investing in U.S. securities markets. These risks include currency fluctuations; political uncertainty; different accounting and financial standards; different regulatory environments; and different market and economic factors in various non-U.S. countries. In addition, the securities of small, less well known companies may be more volatile than those of larger companies. Force majeure events such as pandemics and natural disasters are likely to increase the risks inherent in investments and could have a broad negative impact on the world economy and business activity in general. Value investing involves the risk that the market will not recognize a security’s intrinsic value for a long time, or that a security thought to be undervalued may actually be appropriately priced when purchased. Dividends are not guaranteed, and a company currently paying dividends may cease paying dividends at any time. Diversification does not guarantee a profit and does not protect against a loss in a declining market.

An outbreak of infectious respiratory illness caused by a novel coronavirus known as “COVID-19” was first detected in China in December 2019 and has now been detected globally. The current economic situation resulting from the unprecedented measures taken around the world to combat the spread of COVID-19 may continue to contribute to severe market disruptions, volatility and reduced economic activity. Furthermore, measures taken to battle COVID-19 may have long term negative effects on the U.S. and worldwide financial markets and economies and may cause further economic uncertainties in the United States and worldwide. It is difficult to predict how long the financial markets and economic activity will continue to be impacted by these events and the effects of these or similar events in the future on the U.S. economy and financial markets. These events could have a significant impact on the Funds’ performance, net asset value, income, operating results and ability to pay distributions, as well as the performance, income, operating results and viability of issuers in which each Fund invests.

Please refer to the Funds’ prospectus for a description of risk factors associated with investments in securities which may be held by the Funds.

Although the practice of hedging against currency exchange rate changes utilized by the Tweedy, Browne Global Value Fund and Tweedy, Browne Value Fund reduces the risk of loss from exchange rate movements, it also reduces the ability of the Funds to gain from favorable exchange rate movements when the U.S. dollar declines against the currencies in which the Funds’ investments are denominated and in some interest rate environments may impose out-of-pocket costs on the Funds.

Stocks and bonds are subject to different risks. In general, stocks are subject to greater price fluctuations and volatility than bonds and can decline significantly in value in response to adverse issuer, political, regulatory, market or economic

 

developments. Unlike stocks, if held to maturity, bonds generally offer to pay both a fixed rate of return and a fixed principal value. Bonds are subject to interest rate risk (as interest rates rise bond prices generally fall), the risk of issuer default, issuer credit risk, and inflation risk, although U.S. Treasuries are backed by the full faith and credit of the U.S. Government.

Earnings before interest and tax (or EBIT) is an indicator of a company’s profitability, calculated as revenue minus expenses, excluding tax and interest. Earnings before interest, taxes and amortization (or EBITA) is used to gauge a company’s operating profitability (earnings before tax + interest expense + amortization expense). Earnings before interest, taxes, depreciation and amortization (or EBITDA) is used to gauge a company’s operating profitability, adding back the non-cash expenses of depreciation and amortization to a firm’s operating income (EBIT + depreciation + amortization expense). Return on Equity (ROE) is a measure of financial performance calculated by dividing net income by shareholders’ equity. Total Shareholder Yield ((Dividends Paid + Net Share Repurchases + Net Debt Reduction) /

Market Capitalization) reflects the combination of dividends received, the net increase in ownership of the business as a direct result of net share repurchases (the figure represents net share repurchases to incorporate dilution from employee share compensation), and the increase in ownership of the business as a result of changes to the capital structure. Bondholders are senior to equity holders in the capital structure and if net debt is paid down, then the value of the equity holders’ stake increases.

Tweedy, Browne Global Value Fund, Tweedy, Browne Global Value Fund II – Currency Unhedged, Tweedy, Browne Value Fund, and Tweedy, Browne Worldwide High Dividend Yield Value Fund are distributed by AMG Distributors, Inc., Member FINRA/SIPC.

This material must be preceded or accompanied by a prospectus for Tweedy, Browne Fund Inc. You should consider the Funds’ investment objectives, risks, charges and expenses carefully before investing. The prospectus contains this and other information about the Funds. The prospectus should be read carefully before investing.

 

A shareholder of the Global Value Fund, Global Value Fund II – Currency Unhedged, Value Fund or Worldwide High Dividend Yield Value Fund (collectively, the “Funds”) incurs two types of costs: (1) transaction costs and (2) ongoing costs, including management fees and other Fund expenses. The Example below is intended to help a shareholder understand the ongoing costs (in U.S. dollars) of investing in the Funds and to compare these costs with the ongoing costs of investing in other mutual funds.

The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period of October 1, 2019 to March 31, 2020.

Actual Expenses. The first part of the table presented below, under the heading “Actual Expenses,” provides information about actual account values and actual expenses. The information in this line may be used with the amount a shareholder invested to estimate the expenses that were paid by the shareholder over the period. Simply divide the shareholder’s account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses paid during this period.

Hypothetical Example for Comparison Purposes. The second part of the table presented below, under the heading “Hypothetical Expenses,” provides information about hypothetical account values and hypothetical expenses based on each Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not each Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses paid by the shareholder of the Funds for the period. This information may be used to compare the ongoing costs of investing in the Funds to other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.

Please note that the expenses shown in the table below are meant to highlight a shareholder’s ongoing costs only. There are no transactional expenses associated with the purchase and sale of shares charged by any of the Funds, such as commissions, sales loads and/or redemption fees. Other mutual funds may have such transactional charges. Therefore, the second part of the table is useful in comparing ongoing costs only, and will not help a shareholder determine the relative total costs of owning different funds.

 

In accordance with rules and guidelines set out by the United States Securities and Exchange Commission, we have provided a comparison of the historical investment results of Tweedy, Browne Global Value Fund to the results of the MSCI EAFE Index (hedged to US$) and the MSCI EAFE Index (in US$) (non-U.S. currencies are unhedged). Although we believe this comparison may be useful, the historical results of the MSCI EAFE indexes in large measure represent the investment results of stocks that we do not own. Any portfolio that does not own exactly the same stocks in exactly the same proportions as the index to which the particular portfolio is being compared is not likely to have the same results as the index. The investment behavior of a diversified portfolio of undervalued stocks tends to be correlated to the investment behavior of a broad index; i.e., when the index is up, probably more than one-half of the stocks in the entire universe of public companies in all the countries that are included in the same index will be up, albeit in greater or lesser percentages than the index. Similarly, when the index declines, probably more than one-half of the stocks in the entire universe of public companies in all the countries that are included in the index will be down in greater or lesser percentages than the index. But it is almost a mathematical truth that “different stocks equal different results.”

We believe that favorable or unfavorable historical investment results in comparison to an index are not necessarily predictive of future comparative investment results. In 1986, V. Eugene Shahan, a Columbia University Business School alumnus and portfolio manager at U.S. Trust, wrote Are Short-Term Performance and Value Investing Mutually Exclusive? In this article, Mr. Shahan analyzed the

investment performance of seven money managers, about whom Warren Buffett wrote in his article, The Superinvestors of Graham and Doddsville. Over long periods of time, the seven managers significantly outperformed the market as measured by the Dow Jones Industrial Average (the DJIA) or the S&P 500 Index (the S&P 500) by between 7.7% and 16.5% annually. (The goal of most institutional money managers is to outperform the market by 2% to 3%.) However, for periods ranging from 13 years to 28 years, this group of managers underperformed the market between 7.7% and 42% of the years. Six of the seven investment managers underperformed the market between 28% and 42% of the years. In today’s environment, they would have lost many of their clients during their periods of underperformance. Longer term, it would have been the wrong decision to fire any of those money managers. In examining the seven long-term investment records, unfavorable investment results as compared to either index did not predict the future favorable comparative investment results that occurred, and favorable investment results in comparison to the DJIA or the S&P 500 were not always followed by future favorable comparative results. Stretches of consecutive annual underperformance ranged from one to six years.

Mr. Shahan concluded:

Unfortunately, there is no way to distinguish between a poor three-year stretch for a manager who will do well over 15 years, from a poor three-year stretch for a manager who will continue to do poorly. Nor is there any reason to believe that a manager who does well from the outset cannot continue to do well, and consistently.