Donald Yacktman
Yacktman Fund
by Marla Brill
MFI Publisher
Part II - Yacktman's Ace-In-The-Hole
Click here for Part I
The beleaguered manager had something
working in his favor, though—a portfolio of incredibly inexpensive stocks of
companies with solid businesses that began looking increasingly attractive
compared to the pricey, overheated technology and growth stocks that had
dominated the market in the late 1990s. Investors took notice, and the fund has
received over $100 million in new inflows from them over the last year.
Yacktman has put that money to work
buying what he considers growth companies at low prices. Corporate
characteristics he looks for include high market share for a principal product
or service line, long product cycles, and unique franchise characteristics.
Managers must show a shareholder orientation by using excess cash to invest in
their businesses, make synergistic acquisitions, or buy back stock.
While the portfolio holds a number of
well-recognized names such as Coca Cola and Tyco, smaller companies such as
Lancaster Colony are also liberally represented. The maker of specialty foods
and glassware, which has a market capitalization of $1.3 billion, has no debt
and managers who have a history of buying back stock.
To fit his pricing parameters, a
company’s stock should sell for less than what an investor would pay to buy the
whole company. The valuations of the stocks in the Yacktman Fund reflect that
view, with the weighted average price-earnings ratio of the portfolio weighing
in at 13.7, compared to 20 for the S&P 500 Index. Because the stock prices of
many companies vary by 50 percent or more from low to high each year, Yacktman
often lurks around until a buying opportunity presents itself.
Such an opportunity arose in June when
Yacktman began buying bonds issued by financially troubled Qwest Communications.
(The fund’s charter allows him to invest as much as 10 percent of assets in
bonds rated below Aa, he says.) Yacktman believes that while the company’s stock
is risky—its price has plummeted from $26 a share to $1.12 over the last year--
its bonds are well-secured by corporate assets. They currently trade at $410,
and mature in 2010.
Yacktman keeps tabs on Qwest and other
holdings with the help of son Stephen, 32, a research analyst. Although the
elder Yacktman says there are no immediate plans for a change in management, he
does sound like someone who has given the matter ample consideration. “If
anything ever happened to me Stephen could take over at the drop of a hat and no
one would notice a change,” he says. He adds that his son “could be given a
larger role at some point,” and does not rule out the possibility that he could
become portfolio manager.
Whether Stephen Yacktman will
successfully fill his father’s shoes remains to be seen. But it is almost
certain that as long as deep value continues to out-perform most other styles of
equity investing, the investment philosophy will gain new fans. In the eyes of
some financial advisors, Yacktman remains one of the best fund managers to carry
it out.
“There will always be a place in
diversified portfolios for good value managers like Yacktman,” says Norman
Fosback, editor of Fosback’s Fund Forecaster newsletter. “I suspect the value
approach will rule the roost for some time to come, beyond its recent
superiority. But the more extreme the investment philosophy deployed within a
general investment category, the more extreme will be the performance. So
eventually, Yacktman will be a poorer-than-average performer again. In the
meantime, now is a good time to be buying Yacktman shares.”
Ron Roge sees better value fund
alternatives out there. “We like Oakmark, First Eagle SoGen Funds, Dodge & Cox,
and Longleaf for deep value,” he says. “They have larger organizations, more
analysts and a deeper bench.”
Then there’s the matter of the
four-year-old board brouhaha that, at least in the minds of some financial
advisors, isn’t going away any time soon. “Any time there is turmoil in any fund
organization it is very distracting to the fund managers and analysts, and we
are out of there as soon as possible,” says Roge.
Yacktman Fund At-A-Glance
Assets: $170 million
Top five holdings: Tyco International,
Lancaster Colony, Qwest Communications (bonds), Liberty Media, Unilever.
Telephone: 800-525-8258
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