Yacktman Q3 Commentary: Finding Value Despite Bull MarketVW Staff
In the third quarter of 2013, Yacktman Focused Fund and Yacktman Fund rose 1.84% and 2.38% respectively, compared to the S&P 500 Index, which appreciated by 5.24%. Year-to-date, Yacktman Focused and Yacktman Fund have appreciated 18.76% and 19.40% compared to the S&P 500’s 19.79% rise.
During the quarter, consumer staples like The Procter & Gamble Company (NYSE:PG), PepsiCo, Inc. (NYSE:PEP) and The Coca-Cola Company (NYSE:KO) were out of favor while the market was propelled higher by more economically-sensitive and, in our opinion, lower-quality securities. Also, some “old tech” positions such as Microsoft Corporation (NASDAQ:MSFT), Cisco Systems, Inc. (NASDAQ:CSCO) and Hewlett-Packard Company (NYSE:HPQ) gave back some of their gains after being up substantially in the first half of the year. They still remain strong performers year-to-date, though they detracted from performance for the quarter.
The Funds’ percentage of cash rose modestly, which should not be surprising to shareholders given the market’s rise. Despite the increase, our current cash level is only slightly higher than the Funds’ average allocation over the past 10 years.
Recently, we announced that Stephen Yacktman became sole Chief Investment Officer of Yacktman Asset Management. Stephen, who previously was Co-Chief Investment Officer since 2006, has long provided the organization with significant leadership with investment ideas, portfolio management and investment team member development. With this announcement nothing changes from a day-to-day standpoint in either our investment process or Don Yacktman’s role at the firm.
In August, we welcomed Adam Sues as the newest member of our investment team. Adam recently graduated with an MBA from UNC’s Kenan-Flagler Business School. Over the past three years, he ran an investing website which focused on value-oriented investment research. After reviewing his work, we thought it was the analysis of a far more experienced analyst and immediately recognized his talent and fit for our organization.
Yacktman Portfolio Review
Top Contributors & Detractors
For the quarter, top contributors to results included Twenty-First Century Fox, Viacom Inc, ConocoPhillips, Oracle Corp and C.R. Bard Inc.
Media stocks continued to perform exceptionally well for our Funds. Twenty-First Century Fox Inc (NASDAQ:FOXA), one of the largest positions in each Fund, had strong performance in the quarter after it was separated from News Corp (NASDAQ:NWSA). Viacom, Inc. (NASDAQ:VIA) rose significantly as investments in quality content resulted in ratings improvements at key networks such as Nickelodeon and MTV. ConocoPhillips (NYSE:COP) was stronger along with energy stocks during the quarter, Oracle Corporation (NYSE:ORCL) rebounded after reporting disappointing results at the end of June, and C.R. Bard, Inc. (NYSE:BCR) rose with a continued rally in health care stocks.
Sysco Corp, Coca-Cola, PepsiCo Inc, Cisco Systems Inc and Microsoft Corp were leading detractors.
As mentioned earlier, consumer staples fell out of favor in the short term after a strong run in the first half of the year. Shares of SYSCO Corporation (NYSE:SYY) fell during the quarter as the company continues to suffer from margin pressures and a delayed SAP system implementation. The company remains a dominant leader in North American food distribution and we have confidence in the investment over time. Microsoft Corp and Cisco Systems Inc both declined for the quarter but are still strong performers for the year. Microsoft Corp announced an upcoming CEO change which we view as a big positive if the right replacement is selected. We increased our weighting in both PepsiCo Inc and Coca-Cola during the quarter.
Looking with a longer-term view often yields a much clearer picture. As an illustration, below is a chart showing the total return (ignoring spinoffs) of selected stocks from 8/31/2010 until 9/30/2013:
Over the last 3+ years, have the business prospects of Fox, MTV, Nickelodeon, cable TV, satellite TV and QVC diverged more than 100% from those of Coca-Cola, Tide, Clorox, Gatorade, Pepsi and Frito-Lay? It is clear that people are paying much higher prices for media companies and much lower prices for consumer companies on a relative basis making consumer stocks much more attractively priced in our view. Dish Network has been sold, and Liberty Interactive is a small position in Yacktman Fund only. The “new” News Corp (NWSA), which consists of Twenty-First Century Fox & News Corp shares, still had a significant weighting at the end of the quarter because the cable content value has grown significantly more in value since 2010. Due to the strong stock price moves, the media position weightings are lower than they were in 2010.
Our goal is to achieve attractive risk-adjusted returns over time. Given the strong results of the past few years, we believe it is important that investors focus on the “risk-adjusted” part of the goal. We are very happy with the results so far in 2013 and will continue to objectively examine the portfolio holdings and potential new opportunities as we seek to produce favorable results with a focus on risk management over the long term. Our team will continue to be patient, diligent and objective when managing the Funds.
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 Yacktman Focused Fund’s holdings may be focused in a smaller number of securities which may place the Fund at greater risk than a more diversified fund.
The performance information shown and Fund inception dates reflect that of the predecessor Funds, The Yacktman Fund and The Yacktman Focused Fund, which were reorganized into the Yacktman Fund, and the Yacktman Focused Fund, respectively, on June 29, 2012, and were managed by Yacktman Asset Management with the same investment objectives and substantially similar investment policies as those of the predecessor Funds.
Funds are distributed by Managers Distributors, Inc., a member of FINRA.