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The Broader Lessons of Tweedy, Browne Global Value's Revival

Why a prominent fund lagged, and why patience was called for.

Gregg Wolper, 04/16/2013

Five years ago, Tweedy, Browne Global Value TBGVX was a tough sell. Although it had posted healthy gains as stocks rose around the world, it hadn't kept up with its peers. In fact, through 2007, it had endured five consecutive years in the bottom half of its category (at the time, foreign small/mid-value). In four of those years, this all-cap portfolio had also trailed the foreign large-value category average. Then it struggled in the first quarter of 2008 as well.

But it would have been unwise to give up on the fund at that point. Its managers had built an estimable record prior to that period. Furthermore, their strategy had been laid out clearly, adhered to consistently, and had a logical underpinning. In addition, there were mitigating circumstances for the fund's underperformance relative to its peers. In other words, a close look at the fund might have led one to expect what subsequently occurred: a long stretch of outperformance.

This story illustrates why it makes sense to carefully investigate a fund that's lagging. The context is critical. If you take into account the quality of the fund's strategy and management, along with the investment climate, you may find it easier to hang on through tough times. More broadly, such evaluations can help investors figure out which funds deserve continuing devotion, and which ones don't.

The Background
After the bear market ended in March 2003, global equity markets went on a rampage, piling up stunning gains year after year until the global financial meltdown began in late 2007. During nearly all of that period, Tweedy, Browne Global Value trailed the field. It landed in the bottom half of the foreign small/mid value category in every calendar year from 2003 through 2007.

However, the fund was at a strategic disadvantage during that era. For one thing, because it followed an all-cap strategy, it owned fewer small caps than most foreign small/mid-value funds at a time when small stocks led the way. (In fact, its portfolio began tilting more toward bigger firms in this period, because Tweedy's managers thought such stocks were getting cheaper and cheaper.) Second, the fund always hedges the vast majority of its foreign-currency exposure into the U.S. dollar, while most foreign-stock funds either never hedge or do so only selectively. The dollar was generally weakening during that period, so Tweedy, Browne Global Value did not benefit from the rising values of foreign currencies, while most of its rivals did.

Third, the fund has always been light on emerging markets, and emerging-markets stocks soared from early 2003 through late 2007. Finally, energy stocks, which these managers tend to shy away from, were on a roll.

More in Tune
Eventually conditions changed, though, putting Tweedy's approach more in tune with the overall investment climate. As the global financial crisis deepened in 2008 and early 2009, investors shifted their attention to defensively oriented stocks, and emerging markets fell out of favor. This fund started outperforming by wide margins, even though it did suffer a substantial loss in the crash. From mid-2008 through the first quarter of 2009, the fund's performance was 10 percentage points better than the foreign large-value average (it migrated to that category because its portfolio had shifted toward big firms) and was 14 points ahead of the foreign small/mid-value average.

The fund also held up much better than its rivals in both categories during 2011, a very tough year for international funds. And unlike many funds that showed relative resilience during those two downturns, Tweedy, Browne Global Value also has managed to shine during the rallies of recent years, buoyed by a resurgence in the dollar and investors' liking for consumer-oriented stocks. As a result, its five-year annualized return of 5.6% through April 11 is the second best in the foreign large-value category and crushes that group's average, a 1.5% loss. And even though the fund didn't match the gains of smaller-cap-focused funds in many of this period's rallies, its five-year return far surpasses the foreign small/mid-value group's 1.8% average gain as well.

The Story's Not Over
The lesson here is not simply that Tweedy, Browne Global Value is back, or that having revived, it will stay on top. In fact, given the circumstances outlined above, the fund will inevitably lag again at some point when market conditions become less accommodating.

Rather, the Tweedy story shows that examining the reasons behind a fund's underperformance, rather than making decisions based on low rankings alone, can provide context for a shareholder deciding whether to hang on. And if shareholders do stay on board, they will likely feel calmer, and exhibit more patience, than might otherwise be the case. After all, it's easier to expect a turnaround (and to know under what conditions one would occur) if a fund is trailing because its style is out of favor and its currency policy is holding it down than if, say, the fund had embarked upon a drastic change of direction or key investment personnel had departed.

20/20 Hindsight?
A skeptical reader might say: Sure, this all makes sense now, but can an investor really make these calls at the time, rather than in hindsight? In this case at least, yes. Morningstar.com Premium Members can see in the archived reviews of Tweedy, Browne Global Value that Morningstar fund analysts were advising shareholders in 2007 and 2008 that this fund would almost surely enjoy better times when conditions changed.

For example, in May 2007, senior analyst Bridget Hughes wrote that although the fund's hedging policy had held it back, that stance "will certainly help in the likely event (at some point) that foreign currency trends reverse." And when the fund reopened to new investors in January 2008, she reiterated that its fundamental strengths made it an excellent option for foreign exposure--even though it had just completed its fifth straight year of middling or weak rankings.

The intent here is not to pat ourselves on the back. Such predictions don't always pan out, and those who bought in early 2008 would have seen a deep loss before markets turned around. The point is to demonstrate that it was possible to discern back then that the shortfall owed to temporary if long-lasting market conditions, not to the fund's own deficiencies.

Even the best funds often try shareholders' patience. Shareholders who understand and thoroughly agree with a standout fund's strategy, though, should find it easier to own it for the long term.

Gregg Wolper is an editorial director and senior mutual-fund analyst at Morningstar.

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