Few money managers have the value-investing pedigree of Tweedy, Browne. Christopher and William Browne, who are brothers, and their colleague John Spears have been investing in stocks they consider undervalued for more than 30 years. Warren Buffett bought most of Berkshire Hathaway, the clothing firm that became the basis of his investment holding company, with the help of the Browne brothers' father at the Tweedy, Browne brokerage in early 1960s. Benjamin Graham, Buffet's mentor and the intellectual founder of value investing, kept an office down the hall from Tweedy, Browne headquarters.
The Brownes and Spears have followed Graham's investment principles in their management of Tweedy, Browne Value (symbol TWEBX; 800-432-4789). The fund invests in companies of all sizes that the managers consider good bargains. In May 2005, the managers closed the fund to new investors because they saw a lack of cheap stocks and the fund's cash stake had grown to more than 10% of its assets. In addition, the managers changed the fund's mandate to allow them to invest up to 50% of its assets in foreign stocks. (Before the change, 20% was the limit on overseas stocks in the fund.) The moves have reduced cash and given the managers a bigger pond in which to find stocks that they think sell at significant discounts to the intrinsic value of the underlying companies. As a result, the $512-million fund will re-open to new investors May 15.
Tweedy, Browne Value has struggled to live up to its reputation recently. It returned an annualized 7% over the past five years through May 11, according to Morningstar. That record lags the performance of Standard & Poor's 500-stock index, the fund's stated benchmark, by an average of three percentage points a year. The fund's bloated cash holdings and managers' bias against stocks of cyclical businesses, such as those in the energy and materials sectors, hurt performance.
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The fund's longer-term record looks better. Since its 1993 inception, it has posted an annualized return of 11%, which beats the SP 500 by an average of one percentage point a year. And the fund fared better than its benchmark during the 2000-02 bear market, losing only 12%, compared with a 47% drop in SP 500. The veteran managers have shown they will stick to Graham's philosophy even when it's out of fashion. And they eat their own cooking -- managers, employees and their families have more than $46 million of their own money invested in the fund.
The fund's increased exposure to foreign stocks has helped boost performance. About 27% of its holdings consist of overseas stocks, including Nestle, Heineken, Unilever and ABN Amro. The fund has an expense ratio of 1.36%.
As an alternative to Tweedy Brown Value, consider Fairholme, which is a member of the Kiplinger 25. Fairholme (FAIRX; 866-202-2263) aims to follow the Buffett philosophy of investing, which is to buy good businesses that sell at cheap prices and that are run by outstanding managers. Like Tweedy Browne, Fairholme holds relatively few stocks (21 versus 41 for Tweedy). Fairholme has returned an annualized 16% over the past five years, which beats similar funds by an average of four percentage points per year, and charges just 1% a year for expenses.
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