We're lowering our Analyst Rating to Bronze for Tweedy, Browne Global Value, due to relatively high expenses and some management uncertainty on the horizon.
The following is our latest Fund Analyst Report for Tweedy, Browne Global Value Fund TBGVX.
Tweedy, Browne Global Value's 2017 struggles are largely cyclical, but concerns about the fund's growing expense gap and the team's future composition are long-term issues. Those issues lead to a downgrade of its Morningstar Analyst Rating to Bronze from Silver.
This fund has been on the wrong end of the currency market in 2017. Hedging most of its foreign-currency exposure has helped the fund versus most of its foreign large-value Morningstar Category rivals over the past 10 years, as the dollar has generally appreciated versus most developed currencies during that time. But the dynamic has reversed so far in 2017, with the unhedged MSCI EAFE Index up 17.1% through July versus 9.1% for this fund's benchmark, the MSCI 100% Hedged Index. In that light, the fund's 11.9% year-to-date gain looks quite good. That said, the fund still trails its benchmark by a wide margin over the past five years mainly because of its value orientation, although it beats its typical peer.
More troubling is the growing gap between the fund's expense ratio and what its median peer charges. In 2013, the median no-load foreign large-cap fund charged 1.11%, but that figure has dropped 9 basis points to 1.02%. Meanwhile, this fund's expense ratio has returned to 1.38% per its 2017 prospectus, leaving it 36 basis points more expensive than the median. This is a big hurdle for the fund to overcome year in and year out versus its cheaper peers, especially if the median fee keeps falling.
The four lead managers have shown that they're up to the task over the long run, but it's fair to ask how the team's composition might change in the future. While the managers say they have no plans to step aside, it's tougher to be confident that the lineup won't change at some point in the next five years or so given that Will Browne is 72 years old and John Spears is 68. Three senior analysts are on the investment committee, and they would likely fill any vacancies, but they do not have public records of their own. So, while this remains a very experienced and well-resourced team, there is some uncertainty on the horizon.
Process Pillar: Positive | Kevin McDevitt, CFA 08/23/2017
It will buy deep-value names, but this fund's team prefers to own quality stocks with strong franchises over the long term. The managers often invoke Ben Graham, but their style also incorporates Warren Buffett. They will happily pay a fair price for a good firm such as Nestle NESN. They hold such positions for years, using a long time horizon to their advantage and earning the fund a Positive for Process. Turnover is typically below 15%, partly in an effort to minimize capital gains. The team opportunistically buys lower-quality stocks selling at depressed multiples, too, but these are quickly unloaded once they recover.
The fund's all-cap approach gives another edge. Rather than sticking to the large-cap universe, the team will go up or down the market-cap ladder depending on where it finds the best values. In the late 1990s, more than half the portfolio was in mid- and small-cap stocks. As small- and mid-cap valuations rose over over time, the combined weighting has fallen to 16% of assets.
The team's valuation consciousness and willingness to hold cash have helped make this one of the foreign large-value category's least-volatile funds. The team builds sizable cash stakes when it can't find attractively priced stocks. Hedging the portfolio's perceived economic foreign-currency exposure (sibling Tweedy, Browne Global Value II TBCUX is unhedged) and largely avoiding emerging markets further limits volatility.