Donald Yacktman Q2 Fund Commentary
The second quarter of 2013 was strong with Yacktman Focused Fund and Yacktman Fund up 4.0% and 4.2%, respectively, compared to the S&P 500 Index, which appreciated by 2.9%. Year-to-date, Yacktman Focused and Yacktman Fund have both appreciated 16.6% compared to the S&P 500’s 13.8% rise.
During the quarter the percentage of cash rose modestly, which is not uncommon in a rapidly rising market. However, our current level of cash is not significantly higher than it averaged during the prior 10-year period. Even in a rising market environment we can find new investment ideas, and at the end of the quarter, we took a position in Oracle Corporation, which has fallen this year despite the sharp market rise and sells at price levels we consider to be attractive.
During the quarter the percentage of cash rose modestly, which is not uncommon in a rapidly rising market. However, our current level of cash is not significantly higher than it averaged during the prior 10-year period. Even in a rising market environment we can find new investment ideas, and at the end of the quarter, we took a position in Oracle Corporation, which has fallen this year despite the sharp market rise and sells at price levels we consider to be attractive.
Portfolio Review
During the quarter, the top four contributors added 3.08% to Yacktman Focused and 2.94% to Yacktman Fund while the top four detractors reduced results by 0.38% and 0.34% for Yacktman Focused and Yacktman Fund, respectively.
Top Contributors
For the quarter, top contributors to results included Microsoft (MSFT), Cisco (CSCO), News Corp. (NWS) and Viacom (VIA).
Shares of both Microsoft and Cisco Systems rose after reporting solid earnings results. For several years, we have believed the demise of “old tech” has been greatly exaggerated and the valuation for companies like Microsoft and Cisco Systems remain attractive in the current investment environment.
News Corp. and Viacom were also strong contributors to the results during the quarter. At the end of June, News Corp. completed its spin-off. As a result, we now own shares in both 21st Century Fox (“Fox”), which owns an attractive collection of cable, broadcast, film and cable and satellite properties around the world and in News Corp. (retaining the old name), which largely consists of newspapers, book publishing and a collection of Australian assets.
By far our larger investment going forward is in the Fox shares, which we think will be one of the fastest growing media companies. Fox is extremely well positioned for growth, especially internationally, and in the next few months will launch Fox Sports 1, a national sports network which we think could be a significant new growth opportunity domestically.
Top Detractors
During the quarter, Clorox (CLX), Blackberry (BBRY), Sysco Corporation (SYY) and Dell (DELL) were the leading detractors.
Clorox’s shares declined after a sharp rise during the first quarter but continue to be up solidly for the year. Consumer staple stocks in general modestly lagged the market during the quarter after an exceptionally strong start to the year.
Blackberry’s shares, which represent a small position in the funds, fell sharply at the end of June after the company reported sales of its new phones lagged expectations. In the previous two quarters we used the sharp price rise to significantly reduce our holding in Blackberry, which helped cushion the decline.
Sysco Corporation’s stock fell modestly after the company reported weak earnings. Its restaurant clients continue to face slow traffic, which has led to margin pressure for Sysco. We think the shares will respond positively over time as its customers recover and unusually high expenses for an implementation of an SAP software system decline.
Dell’s shares fell modestly as the stock had been trading above the Dell Management takeover price and no new bidders appeared. We think the proposed management buyout is unattractive and are voting against it. Recently, we went on record supporting Carl Icahn and Southeastern Asset Management’s proposal to replace the board and offer a tender to shareholders who wish to sell.
Management at Dell has done a poor job at both business execution and capital allocation. It is sad that having frustrated investors with overpriced acquisitions, ill-timed share repurchase, poor corporate strategy and an accounting scandal that led to a settlement with the SEC, management jumped in to purchase the entire company, with the stock not far from a recent low. We believe other outside proposals would be of much greater benefit to shareholders. We recommend others reject the acquisition proposal and support the Icahn/Southeastern proposal.
New Position
As mentioned earlier, at the end of the quarter we acquired a position in Oracle Corporation. Over the last few years we have purchased many positions in established technology companies where the growth rates have slowed but we believe there is significant free cash flow and the valuation is very attractive. We have referred to these investments as “old tech.” These stocks seem to lack a natural home buyer as they pass from growth managers who often pay high multiples for what they perceive to be long-term growth to value managers who dislike the rate of change that can occur in the technology industry due to innovation and competition.
Portfolio Sale
Pfizer (PFE) was removed from the funds due to price appreciation. The company has struggled to grow over time as it has not has not been able to produce enough new drug revenues to offset major patent expirations like Lipitor. Despite the lack of growth, the stock has appreciated significantly, and we do not think it represents a good value at current prices.
Conclusion
We are happy with results for the quarter. We will continue to objectively examine the Funds holdings and potential new opportunities as we seek to produce favorable results and manage risk over a market cycle. Our team will continue to be patient, diligent and objective when managing the Funds.
Investors should carefully consider the Fund’s investment objectives, risks, charges, and expenses before investing. For this and other information, please call 800.457.6033 or visit www.managersinvest.com to download a free prospectus. Read it carefully before investing or sending money.
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 S&P 500 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.
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 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.
