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Investing in Consistent Companies at the Right Price
STEPHEN YACKTMAN is Chief Investment Officer and Portfolio Manager of
Yacktman Asset Management. He joined Yacktman Asset Management in April
1993 from Brigham Young University, where he earned his B.S. in economics
with a minor in math and an MBA.
SECTOR — GENERAL INVESTING
TWST: Can we please begin with an overview of the funds
that you manage?
Mr. Yacktman: The main funds that we manage are AMG
Yacktman Focused Fund, AMG Yacktman Fund and Heptagon Yacktman
U.S. Equity Fund, a UCITS fund.
TWST: And how do the funds differ in terms of their assets
under management and investment objectives?
Mr. Yacktman: Assets at the end of the most recent quarter
were in excess of $11 billion for AMG Yacktman Focused Fund and $13
billion for AMG Yacktman Fund. Heptagon Yacktman U.S. Equity Fund
had nearly $2 billion in AUM as well.
The investment objectives are similar across the funds, but
AMG Focused Fund allows for greater flexibility in portfolio construction,
including the ability to concentrate more in our top ideas. This
concentration allows us to size positions in a more optimal way, including
the ability to buy more as a position falls, without running into
diversification restrictions.
TWST: How many companies do you own in the Focused
Fund compared to your two other funds?
Mr. Yacktman: As of the end of the first quarter, AMG
Yacktman Focused Fund had 38 positions, while AMG Yacktman Fund
had 44 positions. However, the number of positions is not always the best
indication of concentration. The AMG Yacktman Focused Fund ends up
with a significantly greater percentage of total assets in its largest
positions, hence the “Focused” name.
TWST: You reported assets under management that grew to
over $24 billion last year. How does that break down among your
funds? And how do the performances of the three funds compare?
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Mr. Yacktman: The assets under management are approximately
$30 billion. The lower number probably comes from a SEC Form 13F
filing, which reports invested assets and equities in certain 13(f) securities.
With the addition of an approximate 17% cash across firm-wide assets, the
total AUM comes in at the $30 billion number versus $24 billion. At the end
of the year, the firm made the decision to close the AMG Yacktman Focused
Fund and AMG Yacktman Fund to new investors.
On a relative basis, the performance record of each fund has
tracked fairly closely over the last couple of years. Historically, the
greatest divergence in performance occurs during volatile markets,
such as 2008 and 2009, where the concentration level in AMG
Yacktman Focused Fund showcased its benefits. Positions often
overlap between the two AMG Yacktman Funds, although the levels
of concentration will differ.
TWST: I believe you mentioned that you’re currently
holding about 18% in cash, and I’m wondering how this compares
historically with — if there is such a thing — your typical cash
holdings over the past three to five years? Are you optimistic about
the market going forward?
Mr. Yacktman: Our cash position across the funds has
averaged in the high teens since 2000, so today’s cash levels are right
around the average. However, during this period there were times when
we had almost no cash and times when we carried significantly more
cash. For example, we were fully invested in the late 1999-2000 period,
despite the extreme levels of the market, as there were still bargains
available which met our hurdle rate. Ultimately the level of cash we hold
is based on the individual investment opportunities and not the overall
level of the market. With that said, it is much easier to find lots of good
opportunities in cheaper markets.
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MONEY MANAGER INTERVIEW —— INVESTING IN CONSISTENT COMPANIES AT THE RIGHT PRICE
TWST: Can you share some of your career highlights and
My experience with 1-800 CONTACTS started in the midsteps that led you to your current position which have been kind of
1990s, and in 1998 the company went public. This was right as the
unusual in that your father is so well-known? What has it been like
market entered the Internet bubble, and value investors like us didn’t
to follow in his footsteps?
look so good while things were flying high. So
Mr. Yacktman: I started investing
I experienced both the positives of a successful
Highlights
when I was in high school. I had a small stock
business and the challenges of a stock market
fund where I could do my own stock selection.
which did not favor value investors at the same
Stephen Yacktman discusses his firm’s
Of course at that time I didn’t know nearly as
time. Knowing how to operate a business
funds and investment philosophy. Mr.
much about what I was buying.
really helped me understand what a good value
Yacktman shares how his investing and
The first stock I purchased was
represents, and I have been able to apply these
business backgrounds have molded
Sears (SHLD). I came home and watched the
lessons to stock selection.
this philosophy, which has evolved to
tickers as they crossed the television during
In 2002, I was added as a Portfolio
focus on buying consistent businesses
my lunch break. That was my high school
Manager of the Yacktman Funds, partly in
at the right price. Many of his top
lunch activity, which is kind of strange, but
recognition for my investment ideas which
holdings now are household names,
normal in our household. So when my Dad
had been key to our strong performance. I
with the exception of some less familiar
went to buy Sears for me, I remember calling
also recruited Russell Wilkins in 1998 and
names in media, food distribution and
him excitedly because the market was down a
Jason Subotky in 2001. The three of us made
medical devices. Mr Yacktman also likes
little bit. It was a Monday in October of 1987,
up the next generation of the investment team
the “old tech” companies, which have
and he said, “I have some good news and
at Yacktman, and we have now worked
strong balance sheets, diverse
some bad news,” I asked, “What’s the good
together for a long time.
businesses, and sell at low multiples.
news?” He said, “Well, you gave me an order
TWST: Has the underlying
Companies discussed: Sears Holdings
to buy Sears at $40 and the good news is I got
Yacktman philosophy evolved since the late
Corporation (SHLD); Pepsico (PEP); The
it for you.” I think my purchase price was at
1990s? Or have your stock selection process
Procter & Gamble Company (PG);
$34 or $32. But then I asked, “What’s the bad
or evaluation methods changed at all?
Anheuser-Busch InBev SA/NV (BUD);
news?” And he told me “It’s now trading at
Mr. Yacktman: There’s been some
News Corporation (NWS); Viacom (VIA);
$30.” Of course that day ended up being
change, but also much has stayed the same. We
Liberty Media Corporation (LMCA); CR
known as Black Monday.
have always looked for a good business, run by
Bard
(BCR); Twenty-First Century Fox
So my first lesson in buying stocks
good management, trading at a good purchase
(FOX); Sysco Corporation (SYY); CBS
was that things can always get cheaper, and
price. Today, while we still seek a combination
Corporation (CBS); Cisco Systems
that lesson kind of stuck with me. Going
of those three elements, we like to say, “It’s
(CSCO); Microsoft Corporation (MSFT);
through college, investing was something that
almost all about the price.” We still want a
Oracle Corporation (ORCL); Intel
was always on my mind, and I was always
good business and good management, but there
Corporation (INTC); Apple (AAPL);
looking at stocks. While still in business
may be times when a cheap price allows us to
Amazon.com (AMZN) and The Cocaschool, I helped my father set up Yacktman
invest somewhere else.
Cola Company (KO).
Asset Management. I ended up joining the firm
In 2006-2007, we owned a lot of
after I graduated with my MBA.
quality businesses that fit right into the
Around the same time, one of my close friends from business
historical Yacktman motto from the mid-1990s. We owned Pepsi
school started his own business. I admired him greatly, and eventually I
(PEP) and Procter & Gamble (PG) — we still do today — but also
took all my savings and bought a position in a company called 1-800
names like Wrigley and Budweiser (BUD), because consumer
CONTACTS. This was an important step in my career, as the experience
staples offered strong predictability at a fair price. But in 2008, we
“We have always looked for a good business, run by good management, trading
at a good purchase price.”
with 1-800 CONTACTS gave me real-life business experience as
opposed to just passive investing. So at the same time I was working for
my father’s company, I was helping to run marketing and finance for a
rapidly growing startup.
On the marketing side, I helped with measuring results
from our various campaigns and translating those results on the
finance side into income and cash flows to see what worked and
what didn’t. Although I still worked at Yacktman full time, I was
acting as a quasi-CFO. So I built my career by looking at stocks
during the day, but understanding the ins and outs of operating a
business on nights and weekends.
added positions in media companies, retailers and other more
cyclical businesses because those stocks had fallen significantly
during the market crash. On the other hand, consumer staples had
held up well. For example, the stock price of Procter & Gamble
from mid-2007 through October of 2008 was flat. The spread
between the somewhat more cyclical companies we were buying
and the staples we had owned became enormous, so we were willing
to rotate away at the right price.
The philosophy of “buying a good business and holding it
forever,” became “buy a good business, and if there is something that’s
a much better deal, sell it and go buy that instead.” And it was this
MONEY MANAGER INTERVIEW —— INVESTING IN CONSISTENT COMPANIES AT THE RIGHT PRICE
change in philosophy which led to really good performance in 2009, as
recently purchased companies like News Corp. (NWS), Viacom (VIA)
and Liberty Media (LMCA) took off from the bottom.
TWST: Currently most of your top holdings are household
names, but some are less familiar.
Mr. Yacktman: We’ve come full circle, because many of
the top holdings in the portfolio look very similar to the portfolio in
2007. Since 2007, we’ve rotated out, but have now rotated back to
a large degree.
TWST: Can you can give us a view to some of those less
familiar names? What has attracted you companies like C. R. Bard,
21st Century Fox, or Sysco?
Mr. Yacktman: 21st Century Fox (FOX) recently split off
from News Corp. We bought News Corp. in early 2009, and later when
the company was in the middle of the phone hacking scandal. The stock
has performed extremely well for us. We sold the News Corp. shares
after the split, but continue to hold 21st Century Fox.
Fox’s primary business is cable and broadcast content. They
also have 21st Century, which has production and distribution across
both movies and television. But the piece of the business that really
attracted us to Fox was the cable media side, which was a much
smaller business when we started buying the stock. Cable advertising
had historically been underpriced, a leftover view I’d picked up from
my days running media and advertising for 1-800 CONTACTS. And
so Fox has been able to raise rates and continue to take market share.
It’s just a really good business.
Moving down the list, Sysco Corporation (SYY) is the
leading distributor of food products for restaurants, health care and
educational facilities. Looking at the broader restaurant industry, we’re
not really attracted to the restaurant business itself. It can be quite
faddish in that popular restaurants today may not have visitors in 10
years. But the companies who are supplying the restaurants don’t change
very often. In fact, Sysco is combining with US Foods, one of its only
remaining major competitors. And together, they will be the largest, by
far, of any restaurant supplier. So Sysco ends up in the position that if
people go out to eat more, the company benefits, regardless of which
particular restaurant proves to be popular.
During a recession, households struggle and people cut back on
eating out. This pullback flowed through to Sysco, which saw margins
compress and weak revenue growth. However, the company continues to
have a dominant position in the industry, a position which will only
increase if the proposed merger with US Foods is completed. It really
follows our principles of what makes up a good business. We feel the
management is fairly solid, and it sells at an attractive valuation.
The third stock, C.R. Bard (BCR), is a diversified medical
device company. The company’s medical device products are largely
disposable, with most priced below $500. Unlike other medical device
companies where products retail for tens of thousands of dollars, C.R.
Bard is more like the consumer product company of medical devices.
It’s a very consistent business.
One of the pieces of the investment thesis on C.R. Bard versus
other device companies was that we felt they had unrecognized value
“The philosophy of ‘buying a good business and holding it forever,’ became ‘buy
a good business, and if there is something that’s a much better deal, sell it and
go buy that instead.’”
1-Year Daily Chart of Twenty-First Century Fox
Chart provided by www.BigCharts.com
One of the interesting things about news media is there are a lot
of broadcasters — ABC, CBS (CBS), NBC — that people would
characterize as having a liberal bent. And then there is Fox News, which
obviously has a conservative bias. The genius in Fox is there is no major
competitor on the conservative side, so they have that area of the
marketplace locked up, which results in high market share and a valuable
channel for advertising. If companies want to reach that demographic, Fox
is a good way to do it. And so it creates a good value for advertisers.
from a long-running patent lawsuit. The lawsuit was settled successfully
for C.R. Bard, and management has been reinvesting those proceeds
into share repurchases and growth projects. These investments should
allow the company to grow faster than other medical device businesses
which have not invested as much in R&D and acquisitions. And so much
of the industry is facing headwinds from the medical device tax, C.R.
Bard has invested strongly in the face of these industry challenges.
TWST: What are some of your more recent additions to the
portfolio that might have a long runway of growth ahead?
Mr. Yacktman: Another area we like is what we call “old
tech.” And by old tech we mean Cisco (CSCO), Microsoft (MSFT) and
Oracle (ORCL). It is not so much about the growth as it is about the
valuation. All of these companies have strong balance sheets, diverse
businesses, and sell at low multiples.
TWST: Many analysts and traders were reportedly caught
by surprise at the strength names like Microsoft, Oracle and Intel
recently have shown. Why do you continue to hold Microsoft but not
Apple; Oracle but not Amazon?
Mr. Yacktman: We prefer Microsoft to Apple (AAPL)
because we do not think Apple’s margins are sustainable. We would
not even consider Amazon (AMZN) because of the high multiple
today, but think Oracle is attractively priced. Ironically, these old tech
companies started out as “new tech” and sold at high multiples during
the company’s high-growth days.
MONEY MANAGER INTERVIEW —— INVESTING IN CONSISTENT COMPANIES AT THE RIGHT PRICE
As investor sentiment changes, many of today’s hot
technology stocks will become old tech 10 years from now, and they
will likely go from very high multiples to low multiples. So although a
company may be growing rapidly, if the multiple compresses from 20
times operating income to five times operating income, the business
has to quadruple in size just to stay even. And so we believe that the
growth rates in many of these new technology companies aren’t high
enough to offset the valuation gap.
1-Year Daily Chart of Microsoft Corporation
Chart provided by www.BigCharts.com
If you go back to 1999-2000, some of these old tech companies
were actually the new tech of their day. Cisco’s stock price is below
where it traded in 2000, even though the business has grown significantly
since then. You can say the same thing about Microsoft and Oracle. And
so we always ask ourselves, what’s the value that we are getting versus
what we are paying? And that is where I think people will see a
difference.
TWST: So as we look ahead to the second half, where is
your strongest conviction in terms of current holdings or future
holdings?
Mr. Yacktman: Given that margins for most businesses are at
all-time highs today, we are seeking out companies which can sustain or
even still increase their profit margins. Looking at the last few years,
when the market goes from the cyclically low margins of 2009 to where
they are today, it makes many companies look like they are growing
really fast. So people end up paying high multiples for peak earnings,
and that usually doesn’t end very well.
And so when we construct our portfolio, many of our holdings
are defensive names where margins are slightly below their long-term
average, giving them room to expand. This means that our stocks have
realistic valuations on margins that aren’t overstated. And so on a
forward-looking basis, we think owning businesses which satisfy this
criteria is a significantly better risk/reward than to own something with
unrealistically high expectations.
TWST: What’s your best advice overall for the average
investor who wants to participate in the market in the near term? Do
you have one or two stocks that you would recommend?
Mr. Yacktman: Obviously our top holdings are the names that
we favor the most in terms of risk and reward. If you are an investor right
now, the biggest consideration is to avoid trying to find the latest or
greatest, because the valuation is probably extremely high already.
Rather, it is better to find consistent businesses at the right price, as these
types of investments will generally have the best valuation when viewed
on a risk-adjusted forward rate of return. Example companies would be
Pepsi, Procter & Gamble and Coca-Cola (KO).
TWST: Do you see any macro trends on the horizon that
could disrupt the current bullish market?
Mr. Yacktman: My undergraduate degree is in economics and
it’s interesting to look at macro, but we spend most of our time
understanding the businesses where we invest. Macro entails a great deal
of work, yet often normalizes out over long periods of time, so we don’t
find many conclusions useful. So we don’t try to predict the direction of
the market, but focus on the attributes of the investments we make.
TWST: To conclude, is there anything else that you’d like
investors to know about Yacktman Asset Management? Any topics
we’ve missed?
Mr. Yacktman: We think our investment approach works over
a full market cycle, and fits well for long-term investors who do not
focus much on short-term comparisons to a benchmark. We think risk
management is important and that investors should focus on how a firm
manages risk over time. Ultimately, how investment results are achieved
is almost as important as what results are produced over time. We believe
that our process is sustainable, and will continue to work hard for our
shareholders.
TWST: Thank you. (VSB)
STEPHEN YACKTMAN
Chief Investment Officer & Portfolio Manager
Yacktman Asset Management
6300 Bridgepoint Parkway
Building One
Suite 500
Austin, TX 78730
(800) 835-3879 — TOLL FREE
www.yacktman.com
Investors should carefully consider the Funds’ investment objectives, risks, charges and expenses before investing. For this and other information,
please call 800.835.3879 or visit www.amgfunds.com for a free prospectus. Read it carefully before investing or sending money.
The performance data discussed represents past performance. Past performance is not a guarantee of future results. Current performance may be
lower or higher than the performance data quoted. The investment return and the principal value of an investment will fluctuate so that an investor’s
shares, when redeemed, may be worth more or less than their original cost. For performance information through the most recent month end, please
call 800.835.3879 or visit our web site at www.amgfunds.com.
MONEY MANAGER INTERVIEW —— INVESTING IN CONSISTENT COMPANIES AT THE RIGHT PRICE
Top ten holdings in the Yacktman Focused Fund (YAFFX) are: PepsiCo Inc 10.58%, Procter & Gamble 7.73%, Coca-Cola 6.62%, Twenty-First
Century Fox 6.18%, Cisco Systems Inc 4.79%, Microsoft Corp 4.21%, Sysco Corp 3.99%, Oracle Corp 3.93%, Stryker Corp 3.35%, Johnson &
Johnson 3.20%.
Top ten holdings in the Yacktman Fund (YACKX) are: PepsiCo Inc 7.97%, Twenty-First Century Fox 6.54%, Procter & Gamble Co 6.35%, Coca-Cola
4.79%, Microsoft Corp 4.59%, Cisco Systems Inc 4.49%, C.R. Bard Inc 3.69%, Oracle Corp 3.58%, Sysco Corp 3.55%, Viacom Inc, Class B 2.93%.
Additionally the Yacktman Focused Fund (YAFFX) holds 2.18% in Viacom Inc. and the Yacktman Fund (YACKX) holds 0.43% in Intel Corp.
The Funds are subject to the risks associated with investments in debt securities, such as default risk and fluctuations in the perception of the debtor’s
ability to pay its creditors. High-yield bonds (also known as “junk bonds”) are subject to additional risks such as the risk of default. Changing interest
rates may adversely affect the value of an investment. An increase in interest rates typically causes the value of bonds and other fixed income securities
to fall. Investments in international securities are subject to certain risks of overseas investing including currency fluctuations and changes in political
and economic conditions, which could result in significant market fluctuations. These risks are magnified in emerging markets.
The Funds can invest in securities of different market capitalizations (small, mid and large capitalizations) and styles (growth vs. value), each of which
will react differently to various market movements. A greater percentage of the Funds’ holdings may be focused in a smaller number of securities,
which may place the Funds at greater risk than a more diversified fund.
The S&P 500 Index is capitalization-weighted index of 500 stocks. The S&P 500 Index is designed to measure performance of the broad domestic
economy through changes in the aggregate market value of 500 stocks representing all major industries. Unlike the Fund, the Index is unmanaged, is
not available for investment and does not incur expenses.
The S&P 500 Index is proprietary data of Standard & Poor’s, a division of McGraw-Hill Companies, Inc. All rights reserved.
Any sectors, industries, or securities discussed should not be perceived as investment recommendations. Any securities discussed may no longer be
held in an account’s portfolio. It should not be assumed that any of the securities transactions discussed were or will prove to be profitable, or that the
investment recommendations we make in the future will be profitable.
Funds are distributed by AMG Distributors, Inc., member FINRA
RE032-0514
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