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Donald Yacktman's Annual Letter
Posted by: Holly LaFon (IP Logged)
Date: March 13, 2013 08:51PM
Dear Shareholders: In the year ending December 31, 2012, Yacktman Focused Fund (YAFFX) and Yacktman Fund (YACKX) produced returns of 10.6% and 11.5%, respectively, while the benchmark, the S&P 500 Index, returned 16.0%. We are pleased to have delivered solid absolute results last year in a portfolio largely comprised of what we believe to be extremely high quality companies.
Our long-term goal is to achieve solid absolute rates of return over multi-year time periods while managing the overall level of risk in the Funds. Looking at our historical results below, the returns of last year were fairly similar to and consistent with the positive results we have achieved over longer time periods.
The chart assumes an initial gross investment of $10,000 made on 12/31/02.
Returns shown include the reinvestment of all dividends, but do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.
The performance data shown 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 800.457.6033 or visit our Web site at www.managersinvest.com. From time to time the Fund's advisor has waived fees or reimbursed expenses, which may have resulted in higher returns.
Your co-Portfolio Managers have significant personal investments in the Yacktman Focused Fund, and in 2012 made additional contributions to this Fund. Our aggregate holdings in Yacktman Focused Fund now exceed $100 million. We believe that our goals are aligned with the shareholders of this Fund as we and our families have a significant personal stake in our investment decisions. Currently the Portfolio Managers do not hold any shares of the Yacktman Fund.
The top-10 equity positions represented 59%and 51%of net assets at the end of the year in Yacktman Focused and Yacktman Fund, respectively. In a world of extreme uncertainty, we continue to feel confident in the durability and valuation of these companies. A listing of the top-10 equity positions is presented later in this report.
In 2012, News Corp (NWS) was the biggest contributor to Fund returns, appreciating more than 40%. Business execution was strong, especially in the cable content division, and the company continued its shareholder friendly behavior, both repurchasing a significant amount of stock and announcing that it would be splitting the company into two separate entities. We think the split could help the shares continue to deliver strong results as the market more fully appreciates what we see, which is a fast growing cable content division that has had its extraordinary growth obscured by declining newspaper results.
Viacom (VIA) produced strong free cash flow and the stock appreciated solidly last year, though the company struggled with ratings at networks like Nickelodeon and MTV. Viacom has recently stepped-up its investments in new programming which we believe will help results this year. Our position in Comcast also rose sharply in 2012.
Consumer staples shares were generally modest performers during the year as the stocks of high-quality, stable staples businesses were left behind in the broader market rally.
From August 30, 2010 through December 31, 2012, Procter & Gamble (PG), PepsiCo (PEP), Sysco (SYY) and Clorox (CLX) are up 22%, 15%, 22%, and 22% before dividends, compared to the S&P 500's strong 41%. We believe that this underperformance relative to the broader market is more a result of investor sentiment than results and should lead to better than average performance from these companies going forward. We especially like these staples positions because the rates of return we expect over time are especially attractive given the consistency and quality of these businesses.
Avon (AVP)'s shares disappointed in 2012, though we believe Avon's global distribution channel and products have significantly more value than the current share price. We like the management changes that occurred at the company and believe that the shares are very attractive given the expected earnings power of the business.
Many PC-related stocks struggled last year as concerns about the future of the business caused investors to avoid these shares. Our position in Microsoft appreciated only modestly, even though the business executed fairly well. HP declined, though we were pleased to see a much improved management focus. In the latter part of the year we purchased a small position in Dell (DELL). Both Dell and HP (HPQ) have significant business exposure to services and non-PC businesses, which we think have been underappreciated recently. While the challenges these companies face are real, we believe the valuations offer compelling potential over time.
Cisco (CSCO)'s shares performed satisfactorily in 2012. The shares continue to be inexpensive as investors generally are avoiding "old tech" shares, though not to the same extent as PC-related stocks. Our investments in technology companies are more a result of valuation than strong future growth prospects. As we often say, "It's almost all about the price."
Shares in health care stocks were generally stronger in 2012, with medical device stocks like C.R. Bard (BCR), Stryker (SYK) and Covidien (COV) all up solidly. Johnson & Johnson and Pfizer also performed well in 2012.
The financial service sector was the strongest market segment in 2012, rebounding from weakness in 2011. Top contributors to Fund results in the financial area include US Bank, BNYMellon, Goldman Sachs, in both Funds, and Bank of America and Janus in the Yacktman Fund only.
Investments in companies we consider to be special situations - those we think have greater uncertainty coupled with extremely compelling valuation - had mixed results last year. Our investment in Apollo Group (APOL) declined as the business is facing a large number of issues, including enrollment pressures and competitive challenges from other higher education institutions. We think, over the long term, the company's competitive position is solid and the valuation is compelling.
Research in Motion (BB) rallied sharply in the last few months of the year on positive anticipation of its new Blackberry 10 product. The position produced solid results for Fund holders in 2012 even though the stock declined during the year because we took advantage of lower prices to purchase additional shares. As the stock rebounded sharply, more than doubling from the low, we sold some shares to keep the position size as a modest weighting in each Fund.
A Note on Position Sizing
We think position sizing is one of the most important aspects of good portfolio management. We generally take bigger positions in higher quality, diverse companies that we think can acceptably compound capital at attractive rates of returns or securities that are extremely mispriced due to investor perception issues. At times you may see us take surprising positions in companies that have business challenges like Research in Motion, but we use our investment experience to determine when we can take a significant position weighting and when we should not.
We are happy with the returns of 2012. We believe the quality level of the companies in the Funds is extremely high and valuations are attractive.We will work hard to examine current positions and new opportunities and, as always, we will continue to be diligent, objective and patient when managing Yacktman Focused Fund and Yacktman Fund.
This commentary reflects the viewpoints of Yacktman Asset Management LP, as of December 31, 2012 and is not intended as a forecast or guarantee of future results.
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 visitwww.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.
Funds are distributed byManagers Distributors, Inc., a member of FINRA. 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. Nothing contained herein is to be considered an offer, sale or solicitation of an offer to buy shares of any series of the Managers Family of Funds. Such offering is made only by Prospectus, which includes details as to offering price and other material information.
Guru Discussed: Donald Yacktman: Current Portfolio, Stock Picks
Stocks Discussed: BB, YAFFX, YACKX, NWS, AVP, DELL, HPQ, APOL, VIA,