Donald Yacktman

Yacktman Fund

by Marla Brill
MFI Publisher

Given recent events, Tyco is not the kind of stock that most financial advisors would recommend for a client’s portfolio right now. In June, former chief executive Dennis Kozlowski was indicted on charges of evading more than $1 million in New York State income taxes on $13 million worth of art purchases. Since then, new revelations about the company’s costly junkets and questionable loan programs for top executives have surfaced in media reports. In the last year, the stock has fluctuated between $60 and $7 a share, and was trading at around $14 in mid-August.

But where some investors smell trouble, Donald Yacktman, manager of the $170 million Yacktman Fund, smells opportunity. Yacktman began loading up on Tyco in June soon after the flood of bad news began to break and its price plunged. His average purchase price was just under $9 a share, and he likes the stock so much that it now accounts for about ten percent of fund assets. 

Yacktman believes investors are overreacting to the company’s tribulations. “This is not an Enron,” he says. “This is a conglomerate with real, legitimate businesses whose manager did some dumb things.” By selling off some of its holdings and hiring a new chief executive officer, he adds, Tyco is taking steps that will eventually help bring the stock back into favor.

Controversial bets like Tyco are nothing new to the 61-year-old manager.  For decades, Yacktman has been known for pushing the envelope of value investing by putting money into companies that almost everyone else is ignoring or selling at the time he buys them. And he isn’t afraid to keep ten percent or more of fund assets in stocks that he feels have the greatest potential to come roaring back, adding octane to his deep value investing style. Those looking for an even more concentrated portfolio can invest in the Yacktman Focus Fund, which has just $14 million in assets.

The strategy won respect when Yacktman managed Selected American Shares from 1982 until 1992. In 1991, the year before Yacktman left to launch his own fund, Morningstar named him its Portfolio Manager of the Year.

Over the last two years, as the broad market averages have gone into a tailspin, the Yacktman Fund has been a standout performer. In 2001, the fund gained 19.5 percent, beating the S&P 500 Index by more than 31 percentage points. So far this year it is up 5 percent as of late October, beating the index by roughly 27 percentage points.

Those numbers stand in sharp contrast to 1998, when the fund gained less than one percent. Its 17 percent loss the following year put it behind the performance of the S&P 500 Index by a gaping 38 percentage points, and among the bottom 2 percent of mid-cap value funds, according to Morningstar. 

Performance troughs aren’t terribly unusual among funds that subscribe to a deep value philosophy. In fact, investors in such funds should be willing to wait five to seven years for the strategy to play out, says Ronald W. Roge, CFP, President of R.W. Roge & Company. “In that time frame these funds may not have spectacular relative performance,” he says. “However, when the underlying values are recognized performance is dramatic and may occur in a relatively short period of time.”

What is unusual about the recent fall and subsequent rise of the Yacktman Fund years is both the magnitude of the decent, particularly in 1999, and the very public drama that played out the year before in an industry known for keeping a tight lid on its internal controversies.

In 1998, several members the fund’s independent board of directors waged an aggressive and well-publicized battle to oust Yacktman. Their primary concern was that he had strayed from fund policy by drifting from larger to smaller companies, which were performing poorly at the time. Yacktman countered that he was investing in smaller stocks because larger companies had become overpriced, and that the strategy was consistent with fund policy.  In response, he called for a proxy vote to oust four of the fund’s six directors, and to add three new directors he recommended. Shareholders voted in favor of the proposal.

Yacktman calls the whole dogfight “a pitiful attempt” to gain control of fund management, and believes he had no choice other than to bring it public with a shareholder proxy vote. “There is a narrow difference between determined and stubborn,” he says, referring to his refusal to buy pricier large company growth stocks in the late 1990s that could just as easily apply to the board spat. “If you are proven right, then you are determined.”

Eventually, Yacktman would fit his own definition of determined as fund performance firmed up and the board controversy became a memory. Before that happened, the Yacktman Fund’s assets would plummet from $1.1 billion at the beginning of 1998 to $307 million by the end of the year. By 2000, it had roughly $70 million in its coffers.

Next: Yacktman's Ace-In-The-Hole