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TWEEDY, BROWNE COMPANY L.P.
What Has Worked in Investing
(continued from preceding
page)
The study indicated that the most profitable strategy was investment in the highest yield quartile. The compound annual investment return for the countries with the highest yielding stocks was 18.49% in local currencies and 19.08% in U.S. dollars over the 20-year period, December 31, 1969 through December 31, 1989. The least profitable strategy was investment in the lowest yield quartile which produced a 5.74% compound annual return in local currency (and 10.31% in U.S. dollars). The Morgan Stanley Capital International World Index return over the same period was 12.14% in local currency and 13.26% in U.S. dollars.
Companies Throughout the World: Low Price in Relation to Cash Flow
A. Michael Keppler examined the relationship between price to cash flow ratios and investment returns for companies throughout the world in "Further Evidence on the Predictability of International Equity Returns: The Importance of Cash Flow in Country Selection," Journal of Portfolio Management, Fall 1991. Mr. Keppler's study assumed an equal weighted investment each quarter in each of the following eighteen Morgan Stanley Capital International national equity indexes over the January 31, 1970 through December 31, 1989 nineteen years and eleven months period: Australia, Austria, Belgium, Canada, Denmark, France, Germany, Hong Kong, Italy, Japan, Netherlands, Norway, Singapore/Malaysia, Spain, Sweden, Switzerland, United Kingdom, and the United States. Each quarter, the country indexes were ranked according to the ratio of price to cash flow and sorted into four quartiles. The total investment return was measured for each of the four quartile groups over the subsequent three months. Cash flow was defined as net earnings after tax, minority interests, dividends on preferred stock, and distribution to employees, plus reported depreciation on fixed assets for the latest available twelve month period.
The study indicated that the most profitable strategy was investment in the lowest price to cash flow quartile. This strategy produced a 19.17% compound annual return in local currencies (and 20.32% in U.S. dollars) over the January 31, 1970 through December 31, 1989 period. The least profitable strategy was investment in the highest price to cash flow quartile, which produced a 4.37% compound annual return in local currencies (and 5.63% in U.S. dollars). The comparable return over the January 31, 1970 through December 31, 1989 period for the Morgan Stanley Capital International World index was 12.45% in local currencies and 13.58% in U.S. dollars.
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