Dear Investor:
Several studies over statistically significant lengths of time, such as twenty yearsor more, have indicated that most equity investment managers have failed to beat theStandard & Poor’s 500 Index. For example, Princeton University Professor BurtonMalkiel found that the S&P 500 beat 70% of all equity managers retained by pensionplans over the 1975–1994 20-year period. Another study by Robert Kirby, formerChairman of Capital Guardian, indicated that out of 115 U.S. equity mutual funds thatwere in business for 30 years or more, only 41 (36%) beat the S&P 500 by some margin,and only 23 of the funds (20%) beat the index by 1% per year or more. Seventy-fourof the funds (64%) failed to produce a record equal to the S&P 500’s 10.25% returnsince 1961. Using information from CDA/Cadence, Tweedy, Browne found that overthe December 31, 1981–December 31, 1994 13-year period, the S&P 500 beat 81% of the surviving equity mutual funds. Before throwing in the towel and indexing yourwhole portfolio, it is important to note that portfolio managers who have been able toadd extra return above the S&P 500 Index return over long periods of time haveoften been able to generate significantly more money for their clients than the S&P500. For example, in Robert Kirby’s 30-year study, an extra return of 1% per yearabove the S&P 500’s 30-year return would have produced 33% more money than theS&P 500 at the end of the period. Seemingly small annual return differences, com-pounded over long periods of time, will result in significant differences in the amountof money at the end of the period. There can be a very large payoff from selecting amanager and a strategy that provide value above the index return over the long run.Thankfully, Tweedy, Browne has been able to add extra return above theS&P 500 Index for its clients over the last 22 years, and with some consistency.Tweedy, Browne’s equity-only returns, after all advisory fees and transaction costs,have beaten the S&P 500 in 70% of the rolling 10-year periods, 67% of the rolling5-year periods, 75% of the rolling 3-year periods and 73% of the 1-year periodsbetween January 1975 and December 31, 1996. This data suggests that the odds of beating the S&P 500 are about 2 to 1 to 3 to 1 in favor of Tweedy, Browne’s stocks.Tweedy, Browne’s equity-only returns beat the S&P 500 in 100% of the rolling 13-yearperiods. Over the 22-year 1975–1996 period, the cumulative advantage provided byTweedy, Browne’s stock selection process, as measured by equity-only returns, hasbeen 5.5% per year in excess of the S&P 500 (21.4% equity-only return versus 15.9%for the S&P 500). This cumulative return advantage provided 180% more money thanthe S&P 500 over the 22-year period.Each $1 million invested in Tweedy, Browne’s stocks increased to $70.6 millionover the 22-year period. By comparison, each $1 million invested in the S&P 500increased to $25.9 million over the same period. This booklet illustrates our list of theten ways that we hope to add value above the index return in the future.
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