Sunday, November 29, 2009

Fortune: Yacktman Fund (YACKX) - Patience & Contrarian Style Pays Off

I always enjoy reading success stories from the "little guy", especially in such a field as mutual funds which are dominated by giants.  [Sep 21, 2009: BW - The Beauty of Small Boutique Mutual Funds]  Further, I am always on the look out for fund managers who employ a completely variant strategy to myself, as (a) it is interesting to read about what they do and (b) they would offer a nice counterweight balance in a portfolio of mutual funds.  "Large cap value" is about as far in the investing spectrum from the strategy I run.  Fairholme Fund [Feb 3, 2009: Fairholme Funds (FAIRX) 2008 Report] is one such, "large cap value" yet "concentrated" mutual fund, as is Yacktman Fund (YACKX) which is the subject of this Fortune story

The father and son team is quite well known if you have been a reader of Money Magazine or Kiplinger's over the years, but I was shocked by the revelation in the story that the board actually tried to oust them in the late 90s since they were not profiting enough from Uncle Alan Greenspan's free money policies mid decade. But this short term focus on results, lost track of golden rule #1 in money management.... attempt to avoid loss of capital; the upside will take care of itself.  In fact, another story in Fortune, focusing on very successful hedge fund manager Chris Pia, reinforces this ethos.  He might have the most strict loss aversion rule I've ever heard of:
  • As a portfolio manager at Moore, Pia delivered a sevenfold return from 1996 to 2008.  In November 2008, Pia left Moore Capital to start his own fund with Joe Niciforo, a former partner of Bacon rival Paul Tudor Jones. And here, speaking publicly for the first time, Pia tells Fortune how he raised $800 million as investors fled hedge funds, the trading lessons he learned alongside Bacon.
  • Pia, now 43, credits Bacon with teaching him the most important skill in trading -- risk management. "Louis taught me to get out when the market moves against you by even a modest amount and to avoid getting emotionally attached to your positions," he says.
  • These days Pia sells any position that drops 3%, even when the fundamentals appear in his favor -- a strategy that helped his fund at Moore thrive in 2008, a year when many hedge funds collapsed.

Turning back to the Yacktman Fund, of course, Don Yacktman now looks like a genius (despite a double digit down year in 2008), with a 3 year annualized return of 6.7%, and 5 year annualized 7.6%.... and one must ask, can the board be ousted? ;)

Yacktman Fund (YACKX) has now grown to $1.3 billion in assets so investors have noticed the long term track record (10 year return in top 1% of all equity funds) [Feb 5, 2009: Mutual Funds Have Tough Decade]  The team runs a concentrated portfolio - as of last report, about 40 stocks in total with over 50% in their top 10 holdings, and has a very low annual turnover of 33%.  Cash is not trash ... the fund currently has 12% of assets in cash which is down from "normal".  While the fund was down 26% in 2008 that was 11% better than the category average and the less you drawdown in a bad year, the easier it is to get back to even. (obviously!)  As noted below, between 2004-2006 (just as in the late 90s) it lagged peers, but its outperformance comes during rough periods in the market.  2009 has been atypical as it is posting stellar returns even in a market that "only goes up".

Current top holdings as of Sep 30, 2009 are:
  1. News Corp (NWSA): 6.7%
  2. Coca Cola (KO): 6.2%
  3. PepsiCo (PEP): 6.2%
  4. Viacom (VIA.B): 5.8%
  5. Procter & Gamble (PG): 5%:  
A snooze fest of holdings?  Perhaps... it certainly would make for a boring blog to focus on such companies - the average market cap is $38 billion in the fund; but bottom line, what they do works over the long run.  There are still some fund managers out there whose idea of "long run" is something in excess of "next week".

Via Fortune:
  • When the herd of investors heads in one direction, count on Don Yacktman to steer his fund the other way.  Now a father-and-son act, the celebrated Yacktman value portfolio has racked up big returns, showing how patience and a contrarian bent can pay off.
  • Back in the late-1990s tech boom, the Yacktman Fund (YACKX) lagged because he favored nontech small-cap stocks. His board tried to oust him, and investors fled. Then the dotcom bubble burst -- and Yacktman looked like a genius, topping the S&P 500 index by 34 points in 2002.
  • When the market started roaring again in 2003, he stuck with consumer stocks and trailed his peers for a few years. But after the market tanked last year, Yacktman, 68, who runs the fund with his son Stephen, 39, triumphed again, beating the index by 11 points in 2008. "Peak to peak, we've shown our stripes," he says.
  • The fund's 10-year annualized return of 12% ranks in the top 1% of all diversified U.S. equity funds, according to Morningstar.
  • Why does the fund fly when others flail? Its managers are happy to wait -- sometimes for several years -- for bubbles to burst before scooping up what they perceive as true values. In the meantime they prefer stable, cash-generating equities, which can result in lukewarm returns when stocks are hot. 
  • Anyone who invests in the fund, he says, should be prepared to stay put for years -- and ride out periods of lagging returns. Don says his team's investing strategy is simple: "Conceptually, we think of what we do as buying bonds," meaning they focus on a company's credit quality, valuation, and future cash flows.
  • "When the market gets roaring -- that's when we have our toughest relative performance," says Don. "We're wired to buy things when they're out of favor."
  • At the beginning of 2008, when many value funds were gorging on financials and turnaround plays, Yacktman's top holdings were blue-chips Coca-Cola (KO) and Microsoft (MSFT); as of March of that year, 25% of the portfolio was in cash.
  • After the market crashed that autumn, the managers swooped in, snagging shares of entertainment company Liberty Media, retailer Williams-Sonoma (WSM), and subprime auto lender AmeriCredit (ACF) at steep discounts.

Some discussion of current top holdings:
  • Ever the contrarians, the Yacktmans are also throwing their weight behind consumer staples stocks, which have lagged during this rally. Two of their biggest positions are in Coca-Cola (KO) and Pepsi (PEP). Stephen says he likes the beverage makers' business models, which enable them to retain large chunks of their profits.  "The average company has to reinvest half of its earnings," he says. "When [Coke and Pepsi] earn a dollar, they get to keep 90¢." He also expects continued weakness in the dollar to boost their international profits.
  • The managers' riskier bets include News Corp. (NWS) and Viacom (VIA.B), both top holdings that they beefed up last year. The Yacktmans view the companies as the best names in troubled industries. Stephen says it doesn't matter whether advertising bounces back soon: Both businesses' earnings are strong enough to justify their stock prices.
  • Similarly, he thinks cable TV provider Comcast (CMCSA) is cheap, given its high free cash flow. "The primary concern there is a stupid acquisition," he says, obliquely referring to the company's anticipated buyout of NBC Universal. "But that's factored into the price."

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