Why Value Investing Is Facing a ‘Tectonic Shift’

Thomas Shrager, left, and Robert Wyckoff are co-managers of the Tweedy, Browne International Value fund.

Photograph by Zack DeZon

The father of value investing, Benjamin Graham, still looms large over Tweedy, Browne, the New York–based firm that served as his broker back in the early 20th century.

The $5.9 billion Tweedy, Browne International Value fund (ticker: TBGVX) hews to one of the famed investor’s key investing tenets: Buying stocks that trade at discounts to their intrinsic values will build wealth over time.

While Graham’s intrinsic-value principle hasn’t changed in the nearly 100 years since he created it, what’s different now are the metrics used to determine that value, portfolio co-manager Thomas Shrager says. Classic measurements such as book value, he notes, are less useful because markets have become more efficient.

One of the metrics that Shrager, 64, and fellow co-manager Robert Wyckoff, 69, now use in their analysis is enterprise value to earnings before interest and taxes, or Ebit. They look for valuation multiples between 10 and 15, but buy when those multiples are at significant discounts, ideally around 30%. Those types of discounts are similar to what someone who is looking to buy the business outright would want to see, Wyckoff says.

“It just makes sense to try to buy businesses at discounts to real-world observable valuations that have been paid for comparable businesses,” he says.

The co-managers’ conservative strategy has paid off, particularly for long-term investors. For the past 15 years, International Value has ranked in the top 1% of Morningstar’s foreign large value category, with a 3.7% annualized return. Its benchmark index, MSCI EAFE, has returned an annualized 1.6% over the same time frame. In 2011, Morningstar gave the seven-manager International Value team its International Stock Manager of the Year award.

Morningstar rates the no-load International Value a five-star bronze fund, although the 1.37% fee for retail shares is considered high by the research firm.

Value investing should have even brighter days ahead, according to Wyckoff and Shrager. The duo predicts that the trend shift to value that began in the fourth quarter of 2020 is a “tectonic change.” As the global economy began to recover from Covid-19 lockdowns, value stocks started to outperform growth stocks, as they typically do during economic rebounds.

The veteran team expects value’s dominance to accelerate now that the Federal Reserve is set to raise interest rates several times to temper inflation. Higher interest rates weigh heavier on growth stocks because more of their value is tied to earnings in the distant future. Plus, value stocks are simply cheaper than growth stocks after years of underperformance, Wyckoff says.

The pair’s years of experience and the fund’s strong record make their predictions worth considering. Wyckoff and Shrager have helmed the fund since 2007 and 2003, respectively, and have been at Tweedy since 1991 and 1989.

The managers seek to build a portfolio with three types of companies, though all should have strong balance sheets, a diversified customer base, and little debt.

The first are the portfolio stalwarts—high-quality businesses with strong brands and little competition that can compound value over time. That is evident in the fund’s top two holdings, Nestlé (NESN.Switzerland), and Diageo (DGE.UK), each bought more than 20 years ago. It’s those types of holdings that underscore International Value’s 11% portfolio turnover.

The second kind of holding the fund seeks are cyclical companies with average levels of growth; they may hold these shares for three to five years. One example is Swedish manufacturer Trelleborg (TREL-B.Sweden), a stock Wyckoff says remains attractively valued. Rubber seals, one of its predominant products, is an inexpensive but critical component of machines. “A business like that gets pricing power because they’re critical for the ultimate success of the enterprise,” he says.

Lastly, Wyckoff and Shrager are attracted to deep-value companies, especially those where insiders are buying the stock. In February, the fund bought Finnish company Kemira (KEMIRA.Finland), a supplier of chemicals for water-intensive companies, for around 12 euros ($12.63) a share, close to the price insiders paid. That represented a sharp discount to its estimated intrinsic value of €17 a share.

Insider buying also alerted the managers to Haitian International (1882.Hong Kong), Taiwan’s largest maker of plastic-injection molding machines. Supply-chain bottlenecks weighed on the share price, and in January they bought in at around 21 Hong Kong dollars ($2.68) a share, near where insiders bought, a price between five to six times their estimates of normalized Ebit. Wyckoff says that valuation multiple should be at least 10 to 11 times, implying a share value of HK$28 to HK$30.

Tweedy Browne International Value

Total Return
1-Yr 5-Yr 10-Yr
TBGVX -6.3% 3.3% 6.2%
Foreign Large Value -11.6 2.4 4.7
Top 10 Holdings
Company / Ticker % of Assets
Nestle / NESN.Switzerland 5.3%
Diageo / DGE.U.K. 4.6
CNH Industrial / CNHI 3.7
Roche Holding / ROG.Switzerland 3.7
Berkshire Hathaway / BRK.A 3.5
Alphabet / GOOGL 3.3
TotalEnergies / TTE.France 3.1
United Overseas Bank / UOB.Singapore 3.1
GlaxoSmithKline / GSK.U.K. 2.9
SCOR / SCR.France 2.9
Total: 36.1%

Note: Holdings as of March 31. Returns through May 9; five- and 10-year returns are annualized.

Sources: Morningstar; Tweedy Browne

The fund has a 42% exposure to Europe but had little direct exposure to Russia and Ukraine. The war will have an indirect impact on holdings such as Swedish automotive supplier Autoliv (ALV), Shrager says, since Ukraine was a major manufacturer for car harnesses. Higher raw-material costs across the board could eventually flatten operating income for European industrial companies in the near term, he says. In general, Tweedy analysts are still calculating the impact on earnings power from higher input costs on all businesses.

Inflation’s overall impact may be less of a bugaboo for a value fund, since it holds mature companies with cash flows, but it’s still a worry. Shrager says they’re reviewing their holdings to see which companies have the pricing power to pass through higher costs, which should be many of their holdings.

Stock markets are likely to go through some rocky times as they adjust to the Federal Reserve’s rate hikes, Wyckoff says. Yet he notes that when markets falter, the fund’s conservative strategy gains the most ground compared with its benchmark, thanks to the strong balance sheets of its holdings.

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