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By Bridget B. Hughes, CFA | 01-04-2012 09:00 AM

Tweedy, Browne: Temperament One of Investors' Biggest Foes

The Tweedy, Browne team, winner of Morningstar's 2011 International-Stock Manager of the Year Award, discusses the role of process and time horizon in the fund's successful long-term track record.

Bridget Hughes: Hi, my name is Bridget Hughes. I’m one of the analysts here at Morningstar, and I’m here this morning with the winners of our International Fund Manager of the Year Award for 2011. They are the portfolio managers of Tweedy, Browne Global Value, as well as the three other Tweedy, Browne mutual fund offerings. And we’ll start here with John Spears, Bob Wyckoff, Will Browne, and Tom Shrager. Thanks, guys, for coming in this morning, and congratulations on the award.

Just to kind of summarize what happened this year, the Global Value Fund did drop about 4% in 2011, but that’s about a third of the loss of the MSCI EAFE Index, and foreign large-value funds on average dropped also about more than 12%. So, you held up well in a tough and rocky, volatile environment, so congratulations on doing that.

I know you don't build the portfolio, construct the portfolio, based on the kind of macro events that drove a lot of the returns in 2011, but what is it about your strategy that sets the fund up nicely time and time again for these times of strife? This isn’t the first time that the fund has been resilient.

John Spears: We’ve always used the same strategy. We’ve been using this same strategy since we ... Will and I have been partners together since the 1970s, and the whole idea is that we are buying shares in a business, not a piece of paper, and if you and I own the whole company, what’s the business worth? We value companies by looking at what similar businesses have sold for, and then we try to buy in at big discounts to that value--typically a third, 40%, sometimes 50%, or less, of that estimated value. And those stocks are often in the lower deciles and quintiles on statistical measures that have been correlated in various empirical studies, stocks that tend to do better like low P/E, low price to book, high dividend yield, ... enterprise value to EBIT, EBITDA, that kind of statistical measure is related to doing better than average.

William Browne: And I'd add to that, I think one of the biggest difficulties anybody has in decision-making, whether it's investing, love, eating, is temperament, and you've got to find some way to deal with temperament. Temperament ... works at cross purposes with good decision-making. I saw a statistic the other day, which said that the average mutual fund, correct me if I am wrong, but over 20 years ending in '08, compounded at about 8%, the average investor in the fund compounded at less than 2%--that's temperament.

And you have to find some way to anchor yourself in some more objective, if you will, measures, so that you can be more rational in your decision-making, and that comes out to process. Process gives you an anchor off from which you can work and make your decisions.

The other thing, I think, that we have which helps us is, we come at this with a very different time horizon than a lot of people. Some say "Well, you did this last year, what are you going to do next year?" I don't know. What's next year going to bring? Not sure. But we do have a sense, one, that some time over the next several years, things will probably begin to get better, but in the meantime, I think it's important to bear in mind that behind every stock price is a business. As John was saying, you focus on how the business is doing. Last year stock prices tracked our businesses a bit better than some other businesses, and we happened to think we were in some pretty good business.

Hughes: So let's talk about one of those businesses. One of the biggest contributors to the fund's performance last year, actually, it wasn't a stock that just held up better, it was a stock that was up almost 40%, and that's Philip Morris International. You bought that very nicely, it looks like, near it's all-time low since the spin-off in early 2009. So what attracted you in the first place to that company and then since the stock has averaged above a 25% return over the past three years, what do you say about its valuation?

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