Quick Take: Investment styles go in and out of favor, and when undervalued stocks were being shunned by investors in the late 1990s the Yacktman Fund (YACKX) suffered.
But fund manager Donald Yacktman’s love of otherwise unloved companies started to pay off two years ago, when the market again began warming up to the cheap stocks he prefers.
The fund was up 13.5% in 2000 and 19.5% in 2001, putting it ahead of the Standard & Poor’s 500 Index both years. Through June this year, the mid-cap blend fund was up 5.3%, while its peers were down 10%. The fund has also beat its peers over the three-year period ended in June.
Yacktman also oversees the Yacktman Focused Fund (YAFFX), another mid-cap blend fund. It returned 9.3% through the first six month of this year.
The Full Interview:
Donald Yacktman took a beating in the late 1990s. The two mutual funds he manages badly lagged the Standard & Poor’s 500 Index the last three years of the decade as the value-oriented fare he prizes fell out of favor with investors, who preferred to chase high-flying technology stocks.
That led shareholders to abandon the veteran stock picker. The Yacktman Fund saw its assets dwindle to less than $70 million by March 2000, versus $1.1 billion at its peak at the end of 1997, Yacktman says.
Yacktman also had to struggle for control of the funds late in 1998 with dissident trustees, who contended he had changed his investment style. He emerged from the fight victorious.
For the last two-and-a-half years, the funds have been on a winning streak. Both have topped the S&P 500.
Through it all, Yacktman says he never changed the way he ran the portfolios. “There are times in this business when you look smarter than you really are, and there are times you look dumber than you really are,” he says. “It just comes with the territory.”
In essence, Yacktman says he wants to own above-average companies whose stocks are selling at below-average prices. Historically, the price-to-earnings ratio of the Yacktman fund is at a discount to the S&P 500, he explains. He also hunts for companies with high returns on assets, and managements that plow money back into the business.
Yacktman focuses on mid-sized and large companies, but he doesn’t own many at a given time. The Yacktman fund has about 50 stocks now, but Yacktman has no qualms about holding as few as 25-30 in either fund. Contributions from winners are less likely to be diluted in a concentrated offering, he reasons. The Focused fund can buy bigger stakes in individual companies than the Yacktman fund.
The No. 1 stock in the Yacktman fund is Lancaster Colony (LANC), which makes specialty foods, glassware and candles, and automotive products. “About once a decade, they have down earnings,” says Yacktman, who also likes the fact that Lancaster has raised its dividend 39 years straight and has little debt. In addition, Lancaster’s P/E multiple of about 15 times projected fiscal 2002 earnings looks good, Yacktman says.
Yacktman’s shares in the company, which he has owned since late 2000, cost $28.74, on average. The stock, which reached a 52-week high of $41.16 on June 19, closed at $33.26 yesterday.
Yacktman is willing to own companies that are in the midst of turmoil if he thinks their long-term prospects are bright. For example, the fund’s second-largest holding is Tyco Intl (TYC), a manufacturing and service conglomerate. Tyco’s former chief executive, Dennis Kozlowski, faces charges of tax evasion. The company’s accounting practices are also being probed.
Yacktman began investing in the Tyco last month. He says he thinks many of its units are generating “pretty good cash flow,” and he believes the market has “grossly overreacted” to Kozlowski’s indictment. “He’s got the problems, we don’t think the company’s got the problems,” the fund manager says.
Yacktman’s average cost in the stock is less than $10. The shares closed today at $10.65.
Another of the fund’s major holdings is AOL Time Warner (AOL), which has been plagued by management upheaval. Its No. 2 executive, Robert Pittman, resigned recently.
The changes do not faze Yacktman, however. “A manager can make a marginal difference, but he’s not going to be an end-all in changing a business,” Yacktman says, adding that he plans to hold the stock because he sees it as attractively valued.
So far, Yacktman has taken a loss on the company. His average cost in the stock, which he began buying in May, is just under $17. Shares closed at $11.55 yesterday.
A recent addition to the fund is Liberty Media `A` (L), a holding company for media, communications and entertainment units. Among Liberty’s attributes, Yacktman says, is its chairman, John Malone, who is “as smart a guy as there is in the cable business,” the portfolio manager says.
Yacktman began buying the stock this month. His shares cost $8.5 on average. The stock closed yesterday at $6.95.
Though he rarely buys bonds, Yacktman says he has about 7% of the Yacktman fund’s assets in debt securities issued by Qwest Communications Intl (Q).
The bonds carry a 7.9% coupon and mature in August 2010. The securities are essentially junk bonds, which, for all practical purposes, makes them the same as stock, and as such they are trading at a “huge discount” to Qwest’s intrinsic value, Yacktman says.
Yacktman says he bases his buying and selling decisions on his analysis of companies, not sectors. He explains that he generally avoids technology stocks because they tend to be pricey and lack predictable revenue streams. Unpredictable revenues also lead him to ignore cyclical manufacturers, Yacktman says.
Looking ahead, the money manager vows that his investment approach will remain consistent.
“If you’re right at the end of the day, you’re called determined; if you’re wrong, you’re called stubborn,” Yacktman says. “So, hopefully, I’m determined.”