Here are excerpt’s from Tweedy, Browne’s Shareholder Annual Report. Enjoy!
Tweedy, Browne On The Market:
Economically, the picture in the United States was better in 2013, but five years plus into an economic recovery with historically low interest rates, many economists have argued the recovery is substandard. This was clearly not an impediment to equity prices. If the only data available to gauge the economic health of developed world economies was the performance of the equity markets in 2013, the conclusion would likely be that those economies are in pretty good shape and their outlook seems promising.
If, on the other hand, the focus was on emerging or developing world equity markets, the data might well lead to the opposite conclusion. Many of these markets declined substantially as projections for future economic growth were reduced. Nonetheless, the bulk of projections still would suggest that most economic forecasters expect higher rates of growth in developing economies relative to developed economies, which we don’t think should be a surprise. Disappointed expectations sometimes translate into unexpected opportunities, and this is still, in a small way, proving to be the case for us.
Comments on Current Opportunity:
Today, we are finding pricing opportunity in markets such as Brazil and Chile beyond just the resource driven companies that make up a considerable amount of the float in these markets. While it may take some time, these are markets with rapidly growing middle classes which we feel will be bigger and stronger over the longer term. While we do not expect to have a significant percentage of the portfolios devoted to emerging market equities, you could see a few more of these companies in our Fund portfolios over the near term if their security prices remain under pressure.
Comments on Portfolio Activity:
While portfolio activity was modest, no one could accuse us of simply “sitting on our assets” over the last six to nine months. We established a number of new positions including a U.K.-based global bank, Standard Chartered Bank, two Hong Kong-based companies, and two Latin American companies. The Hong Kong and Latin American companies are rather thinly traded, so they will remain nameless in this discussion. One of the Hong Kong-based companies is a real estate conglomerate, which has a strong operating record, is in a net cash position, and at purchase was trading at a one-third discount from our conservative estimate of its intrinsic value. After spinning off much of its real estate into two REITS at what we believe were very advantageous prices, it should have the financial flexibility to create additional value should Hong Kong real estate face a downturn. The other Hong Kong-based company is a luxury retailer and a classic Ben Graham net current asset microcap stock, which at purchase was trading at two thirds of its net cash and inventories. The new Latin American holdings include a mining company and a consumer products company, both of which are high quality companies which at purchase were trading at significant discounts from our conservative calculations of appraised value.
…we took advantage of pricing opportunities to add to a number of our pre-existing holdings including Banco Santander Brasil, Bangkok Bank, and DBS Group. All three of these banks operate in faster growing parts of the world, are conservatively financed largely by sticky deposits, are less leveraged than their Western counterparts, have had conservative loan growth, and currently pay handsome dividend yields while we wait for value recognition in their shares. We also added to our position in G4S, which we continue to believe is the dominant and best positioned security firm in a world that is becoming more dangerous by the minute. We also continued to build our positions in Cenovus, Joy Global, National Oil Well Varco, and TNT Express.
On the sell side of the portfolios, we sold our last remaining shares of Arca Continental after a successful decade-long run in this Mexican Coca-Cola bottler. We also took profits in MasterCard, Union Pacific, BAE and Krones, all of which had provided solid returns to our portfolios and were trading at or above our estimate of their respective intrinsic values. We took advantage of the strength of the Japanese market to sell or trim shares in a number of Japanese holdings such as Kaga Electric, Ryoyo Electric, Fujitec and Fukuda Denshi among others. We also pared back our positions in Google, Henkel, Leucadia, Unifirst, Wal-Mart, and Sysco, all of which were trading at, or getting nearer to, estimated intrinsic value.
Comments on Standard Chartered Bank:
The pricing opportunity in Standard Chartered Bank, we believe, came about to a great degree because of its exposure to the emerging markets. Standard Chartered Bank is one of the largest and most global banks in the world with over 1,700 branches in 70 different markets. While it is domiciled in the U.K., it is anything but a British bank. Founded in 1969 through the merger of Standard Bank of British South Africa and Chartered Bank of India, Australia, and China, it is a bank with the bulk of its business coming from Asia, the Middle East, and Africa. The majority of its operating income is derived from wholesale activities such as corporate finance, trade finance, foreign exchange, cash management, and custody.
For example, it provides advice, loans and other services to Indian companies, which are often active investors in African companies, and provides similar services to Hong Kong, Chinese, and Taiwanese companies. Standard Chartered Bank also has a sizable and conservative consumer business with a mortgage portfolio that is very well secured by a loan to value ratio on its mortgages of less than 50%. Furthermore, it is a deposit financed bank that is not dependent on volatile, short term financing, as evidenced by a loan to deposit ratio of approximately 76%. The bank is unique in that it sailed through the financial crisis in 2008 requiring no capital support from governments or central banks. Most of the over-leverage and complexity associated with banks in the U.S. and U.K. was simply not present in Standard Chartered.
During the 2000s, Standard was considered a growth bank riding a wave of Asian growth, and routinely traded at price earnings multiples between 15 and 20 times earnings. Its fortunes began to change in 2011 as economic growth began to slow in a number of its most important markets. Some markets like South Korea have posed even bigger challenges as new regulation impacted the growth prospects and the profitability of virtually all banks doing business in its jurisdiction. These factors, together with what we consider to be misplaced concerns about its capital position under Basel III and a recent management shakeup, have led its stock price to a fall from grace.
This allowed us an opportunity to purchase our initial shares at approximately 9.5 times estimated 2014 earnings, 1.2 times stated book value, and what we believe to be a secure dividend yield today of over 4%. Standard’s management still considers the bank to be a growth bank; however, it acknowledges that near term growth will be lower than that enjoyed in the 2000s. We believe that a conservatively financed global bank that services many of the fastest growing parts of the world where middle classes are on the rise over the longer term and that is priced in the stock market at a significant discount to what we believe is a conservative estimate of its intrinsic value is worth a diversified bet in our Funds’ portfolios.