Tweedy, Browne's New Fund
Tweedy, Browne, a venerable, white-shoes, New York City-based investment manager, doesn't launch mutual funds often. For its entire 87-year history, the highly regarded value shop, which once counted legendary value investors Benjamin Graham and Warren Buffett as clients, has had all of two funds. At least that was the case until last week.
Tweedy, Browne Worldwide High Dividend Yield Value is the firm's first new fund in 14 years. Like other Tweedy, Browne products, the fund, which opened for business on September 5, follows Graham's value-investing principles: hunting for companies with shares selling at a discount to what knowledgeable buyers would pay in an acquisition or buyout. To that, the new fund layers on a requirement for stocks with above-average dividend yields.
The firm has been managing private accounts using a dividend-focused strategy since the late 1970s. "What we've observed over many years is that investing in businesses that have an established history of paying dividends and have above-average yields have produced attractive rates of return over time," says William Browne, one of the fund's five managers.
Aside from generating good long-term returns, stocks with high dividend yields tend to be relatively resilient during market declines. What's more, the reinvestment of dividends from high-yield stocks can also shorten the time it takes to recoup portfolio losses in a down market. Yet another reason to be optimistic about the fund's prospects: new funds tend to beat their rivals during their first 12 months of existence.
The fund's investment team is the same one that runs Tweedy, Browne's other two funds, Value (symbol TWEBX) and Global Value (TBGVX), which is closed to new investors. Unlike Global Value, which keeps a hefty portion of the portfolio in small and midsize companies, Worldwide High Dividend Yield Value (TBHDX) will focus on large firms with long histories of increasing dividend payouts.
Also unlike Global Value, the new fund won't hedge currency risk. Hedging foreign currency exposure has helped keep Global Value's volatility relatively low, but hurts the fund when the dollar weakens by preventing it from reaping currency gains (U.S.-based investors with money in yen, Euros, pounds, etc. earn additional gains when the dollar weakens).
Although stocks with the highest yields tend to be concentrated in sectors such as finance and energy, the managers say they'll strive to diversify the fund's holdings by country and sector. "We're going to own some bank stocks, which are trading at attractive price-earnings multiples and have attractive dividend yields," says manager Bob Wyckoff. "But you'll also see some pharmaceutical, food and beverage, insurance, media, and industrial companies." The fund, which will likely hold 35 to 40 stocks (a relatively small number), will avoid companies in cyclical industries, such as steel and chemicals.
Exposure to emerging markets will be modest, and no stock will account for more than 5% of the portfolio. The fund, which is expected to charge 1.37% for annual expenses, requires a minimum investment of $2,500.
Although the Value and Global Value funds have struggled to keep up with their peers in recent years, both funds have generated decent long-term returns with relatively low volatility. From Value's December 1993 inception to September 1, 2007, the fund returned an annualized 11%, the same as the Standard & Poor's 500-stock index, but with 20% less volatility. Global Value returned an annualized 13% from its June 1993 inception, an average of seven percentage points per year more than the MSCI EAFE index, and with a quarter less volatility.