Jason Stipp: I'm Jason Stipp for Morningstar. Morningstar.com recently went on the road to check in with some money managers. And we spoke with Tweedy Browne's Will Browne and Tom Shrager a little bit about where they are seeing value in the world today, how their dividend fund is run including their dividend strategies, and their preference for strong global brands.
Question: Have you seen a trend to where you are finding opportunities around the globe?
William Browne: When you are in environments where there is a lot of uncertainty, there is an awful lot of correlation, whether it's stocks, commodities, you name it, any kind of financial instrument or asset. They tend to correlate fairly well. And in the past couple of years you've had an enormous recovery from a huge collapse, and I always like to say that over the past couple of years there have been lot of ambitious people getting out of bed every day trying to find opportunities. And things do get picked over reasonably well.
In my own view if there were one particular market where more reasonably valued securities stand up based upon statistics and financial measures and ratios, it's probably still Japan. But Japan is a separate question. It's an issue unto itself because it's just a very different environment, a very different marketplace, and a very different approach to managing businesses. But on average I think that, as Tom said, the tilts been slightly more outside the U.S. than in the U.S., but its not a case of one spot saying, "My goodness, here's the gold mine and isn't that remarkable the world's overlooked it." Not the case.
Q: Do you have a wish list of companies you would like to own?
Browne: We always have a wish list. I mean I can give you a list of a couple of hundred wonderful businesses that have the characteristics we like. Companies that appear to have fairly sustainable demand characteristics to them, that are financially strong, that generate excess cash, that have high switching costs for a customer to get out of the business.
All of these things, which aren't insights we own entirely within this organization, these are characteristics of better businesses. Big intangible assets, and by that I mean brands or something like that that someone can't build a plant and recreate it. There are a number of businesses around the world like that. But our enthusiasm for them is a direct function of the price at which they are available in the market. We can look at a business and say "That's a great business, but its not a great price." We own at this point in time because the world is improved. People's perception of securities are up. We own a lot of businesses that we are enthusiastic about the prospects of them, but to be honest are we as enthusiastic today as we were 12 months ago? No. The ideal world of course, which will never happen, is that everything you want to own and don't yet own will go down and everything you do already own will go up. I've been waiting 40 years for that. I bet I am not going to see it.
Q: Do you still see a lot of value yet to be realized in your holdings?
Browne: Yeah, I think that we sit on a large number of reasonably to somewhat cheap securities. You always have this problem of where were they 12 or 18 months ago, but we own a lot of businesses with very good prospects. But is there a number of new candidates that come up, that we say, "Wow, we've got this huge backlog of things to look at." No, that's not the case. I mean, if I told you that, I'd be lying. That's just simply not the case.
To your other point, we have been trimming positions in businesses. We've been selling off little by little, cutting back on companies such as Linde in Germany, which is an industrial gas business; the stock has done extraordinarily well. Another example is Krones, which sells bottling machinery. Some of these things, they've just done so well that we said it's prudent to own less. We haven't decided to just kick the whole thing out, we just trim them back.
Some of these securities I mentioned, such as Krones, we've owned before. We were in, but it went way out of line in pricing, to the point where we said, now you just don't want to own it. It's discounting too much, someone's fallen blindly in love with it, and we get out. And it's the second cycle for us.
Shrager: You're looking at the pretax yield on average in our portfolio of around 11%. It's still attractive relative to a 10-year government bond at 3.2%, or 2% in certain countries, or 4% in other countries, and so on. But those yields are at this moment artificially low and probably are going to go up.