Tweedy, Browne Global Value (TBGVX) rampage

[Nords]

If you look at their portraits you wouldn't normally associate this team of wild-eyed free-wheelin' happy-go-lucky extroverts with the word "rampage", but TBGVX is up 9.5% since January. It shot up almost 0.5%-- 12 cents-- yesterday (Thursday 28 July). It's nearly doubled since its March 2003 low of $13.49. The returns are especially impressive when you consider that TBGVX hedges against the dollar to remain currency-neutral and has a 1.39% ER. Their gains have been completely without any boost from the dollar's drop. Of course if the dollar strengthens then they won't be punished by it either.

In just six months TBGVX has given us an entire year's worth of spending money. Our taxable & IRA holdings make it 35% of our portfolio (up from about 33% in Jan). Our cost basis in the taxable account is $16 and most of the shares have been held for more than five years.

This performance is coming from a fund whose 31 March 2005 annual report is over 20% cash, complaining about reaching full valuation, gloomily grumping about the lack of opportunities, and closing for the first time in 12 years (at >$6B). After TBGVX's 21% cash position most of the fund's money is invested in the Netherlands (15%) and Switzerland (12.5%). Japan is #5 on the list after U.K. & America. They just started buying in South Korea (0.8%, most of it in the KEPCO electric utility) and there's no China holdings. The fund is 14% in food & beverages, another 14% in printing & publishing, 8% in both banking & pharma, and 5% in machinery.

For you expats, their most valuable stock holdings appear to be KBC Groupe SA (Belgium), Kone Oyj (Finland), CNP Assurances (France), Springer (Axel) Verlag AG (Germany), Jardine Strategic Holdings (Hong Kong), Sanyo Shinpan Finance (Japan), ABN AMRO Holding NV & Heineken (Neitherlands), Nestle & Novartis (Switzerland), Altadis SA (Spain), and Trinity Mirror (UK). I didn't run all the tickers, but I know that Jardine was already up 70% before 31 March and has "only" risen another 30% (2% of the fund) while Nestle & Novartis haven't done anything this year. Trinity is up 55% but is only another 2% of the fund.

The last two paragraphs describe what should be one of the world's most boring multi-cap value funds. Does anyone have any idea what's driving this price rise?

Next week we're pulling a year's spending money out of TBGVX, some of which will pay the taxes on a partial Roth IRA conversion (still Tweedy). That will "reduce" TBGVX back to about 33% of our retirement portfolio. We'll be holding the rest of the cash for either iShares' new micro-cap fund or possibly the international ETF EFA. (No, we won't be paying down any mortgages!) My concern is that both funds could be pounded if the dollar surprises everyone by gaining more strength, but we don't have to rush into them.

This sale puts our retirement portfolio at almost 6% cash (plus whatever cash Tweedy's holding). We haven't been this much in cash since summer 2004. Does this make us dirty market momentum timers?

 

[LOL!]

Yawn.

There are many funds and ETFs that are up similar amounts. Yes, TBGVX is a good fund. I'm glad my two managed international funds have done better than TBGVX. But even then the S&P400 Mid-cap index beat them all.

What's driving the price rise? All boats go up in a rising tide. Check out VTRIX vs TBGVX. I do not own VTRIX.

 

[preben]

A bit confused here.... The USD have YTD gained (not dropped) about 10% against the main currencies of the fund (Euro/GBP) - and the European markets have done about 10% return in Euro YTD so a USD hedged fund should actually have done 20% YTD (minus hedging costs of say 1%). Naturally this depends on the specific hedging strategy (currency neutral?).

I hold the unhedged VTRIX which have done 4.3% YTD measured in USD.

Cheers!

 

[Nords]

A bit confused here.... The USD have YTD gained (not dropped) about 10% against the main currencies of the fund (Euro/GBP) - and the European markets have done about 10% return in Euro YTD so a USD hedged fund should actually have done 20% YTD (minus hedging costs of say 1%). Naturally this depends on the specific hedging strategy (currency neutral?).

A bit confusing too. Tweedy, Browne follows a currency-neutral hedging strategy and they shouldn't be affected by a strengthening dollar.

From Tweedy's website on unhedged investments: "While a stock may perform well on the London Stock Exchange, if the British pound declines against the U.S. dollar, your gain can disappear or become a loss."

IOW when the dollar gets stronger, an unhedged (American international) fund should flatten or even drop. Using your example, if the European markets rise 10% and the dollar also strengthens by 10% then the unhedged fund return should be about zero. (Even less after expenses.) The currency-neutral (hedged) (American international) fund should return a bit less than 10%.

So for most American international funds, a strengthening dollar makes life tougher. Currency-neutral hedging can eliminate that effect, yet Tweedy has not only eliminated the effect but has returned nearly double that. Much of that gain has come in the last month. I'm just wondering what's caused this fund of staid, boring investments to suddenly take off. Perhaps it's time to get out while the getting is good before reversion to the mean occurs.

To be fair, Tweedy also points out that hedging only affects volatility and not returns. They say "In summary, over long measurement periods, studies have indicated that the compounded annual returns on hedged foreign stock portfolios have been similar to the returns on unhedged foreign stock portfolios. Hedged equity portfolios have been significantly less volatile than unhedged equity portfolios, and have avoided heart-stopping, multi-year 45% - 58% currency losses." Their point is that their hedging is more expensive but it's paid for by their alpha from finding value investments. Pretty much the expected position of an active manager.

But we're paying a 1.39% ER to carry a bunch of currency contracts that only serve to reduce volatility, which is kinda inconsistent with my claim that our retirement portfolio can handle 40% drops. This is also our only mutual fund and its ER is over three times as high as anything else in our portfolio. Tweedy may have outstanding active managers but LOL makes a very good short-term point about VTRIX. (Over the last decade Tweedy is outperforming by 2x.) Even the international ETF, EFA, is outperforming Tweedy in the short term. I'm no Boglehead but I agree that expenses matter at least as much as returns or volatility.

I think I'm trying to talk myself into ditching Tweedy in favor of an index. That would take care of the expense-ratio issue but it doesn't necessarily replace Tweedy's smaller caps or their value tilt or their tax efficiency. The ideal replacement would be a multi-cap unhedged international value fund with an ER of no more than 0.35 (like EFA) and low turnover.

But I suspect I'd have a hard time finding something that outperforms Tweedy in the long term (decades), despite their expenses. IOW I'm an inconsistent hypocrite who's being well-paid to live with it...

 

[preben]

He,he - Nords, can't blame you, know the feeling.... Cheers!