Tweedy, Browne Shields Investors From Downturn

(Editor's note: TheStreet today named 82 mutual funds and exchange traded funds, or ETFs, winners and runners-up in its second annual awards ceremony. A list of the funds and related articles can be found on the awards page.)

NEW YORK (TheStreet) -- With investors unnerved by the euro crisis, foreign stocks around the globe sank in 2011. The average foreign large value fund lost 12.9%, while diversified emerging markets funds dropped 19.9%, according to Morningstar.

But through all the rough times, Tweedy, Browne Global Value (TBGVX) proved relatively resilient. The fund lost only 4.1%, outperforming 95% of its peers in the foreign large value category.

Besides showing strength in the downturn, Tweedy, Browne also beat most peers during the rallies of 2009 and 2010. The returns are particularly noteworthy because the fund has long ranked as one of the least risky members of its category. That performance enabled Tweedy, Browne to win the TheStreet's Best Funds 2012 award in the category of international core stock.

John Spears, Bob Wyckoff, Tom Shrager and Will Browne oversee the top-ranked Tweedy, Browne Global Value Fund.

The successful fund is run by a team of four diehard value managers who have all been at their firm for more than 25 years. The managers seek stocks that sell for about 40% discounts to their fair values. To avoid blow-ups, Tweedy, Browne favors companies with strong balance sheets and sound businesses. "We try to find depressed stocks that have the ability to increase earnings," says manager Tom Shrager.

Shrager says that the solid stocks in the portfolio tend to be relatively stable in downturns. During the market decline of 2011, the fund did particularly well because it avoided companies with questionable finances, including European banks. Instead Tweedy, Browne had big positions in consumer staples such as Dutch giant Unilever (UN), maker of Knorr soup and Dove soap, and Diageo (DEO), the U.K. producer of Johnnie Walker scotch and Smirnoff vodka. The consumer stocks climbed as investors sought safety in businesses that could deliver steady earnings in hard times.

The Tweedy, Browne managers have long been partial to tobacco companies. Big holdings include British American Tobacco (BTI) and Philip Morris International (PM), a U.S. company that derives all its sales overseas. The tobacco companies deliver rich cash flows, and they sell at low prices because investors worry about the risks of litigation and government regulation.

While the portfolio managers are generally wary of banks, they are willing to buy shares of rock-solid institutions. Recently the fund bought United Overseas Bank, a Singapore institution with a strong balance sheet. Shrager says the bank has grown steadily at an annual rate of 7%. "This is a very conservative institution, and the shares only sell for 10 times earnings," he says.

For protection, the Tweedy, Browne managers focus on the most stable countries. More than 90% of assets are in Western Europe, Japan and North America. The fund does have limited stakes in the strongest emerging markets, including Mexico and South Korea. But you will not find Tweedy, Browne buying stocks in volatile countries, such as Nigeria or the Ukraine. In contrast, many international funds have big stakes in a range of emerging markets, a strategy that has resulted in big gains and sharp losses.

Another reason for the stability of Tweedy, Browne is its policy of hedging currencies. When foreign currencies sink against the dollar, the value of foreign stocks declines for U.S. investors. Currencies had a particularly big impact in the last half of 2011 when the euro fell about 12% against the dollar. During that time, most international funds saw the value of their European stocks drop sharply.

But Tweedy, Browne was protected because it hedged away its foreign currency exposure. "We want to earn our returns from the stocks and not from the currencies," says portfolio manager Bob Wyckoff.

Currency hedges do not boost returns every year. In 2009, the euro climbed against the dollar, and Tweedy, Browne was at a disadvantage. Wyckoff argues that the currency gains and losses tend to balance over time. By hedging, the Tweedy, Browne fund delivers smoother results.

When they can't find stocks to buy, the portfolio managers hold cash. The fund currently has 11% of assets in cash, which serves as a cushion in downturns and helps the fund deliver the kind of steady returns that shareholders have come to expect.

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1. To be eligible for consideration, an open-end mutual fund needed at least a three-year history on Dec. 31, 2011, and still be accepting new assets from retail investors; for exchange traded funds, a one-year history.

2. Half of the rating is based on performance metrics, including total return minus expenses, with a weighting to give long-term performance greater emphasis.

3. The other half of the rating is based upon risk metrics, including standard deviation, size of trough-to-peak (drawdown factor), semi-standard deviation and beta. The lower the risk, the better.

4. Top and runner-up funds and ETFs were selected in a variety of categories (funds and ETF were placed in categories via Lipper data).

Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.