In the third quarter the AMG Yacktman Fund (Trades, Portfolio) (the Fund) returned -0.54%, underperforming the -0.78% return for its primary benchmark, the Russell 1000® Value Index.
In the third quarter equities were relatively flat, showcasing the first pause since the market bottom in February of 2020. Prices today are high due to a continued economic recovery, significant central banking stimulus, and a lack of attractive investment alternatives that has continued enthusiasm for stocks. Paying high prices will likely produce low real returns over time and could cause significant downside if the current euphoric market conditions wane.
Our results over time will be largely determined by our ability to find standout individual securities which we think can deliver solid returns when adjusting for risk. We remain extremely excited about some of our top positions like Samsung Electronics Co., Ltd. (Samsung) and Bolloré.
Recently we added Adam Sues as a third co-portfolio manager for the AMG Yacktman Fund (Trades, Portfolio). Many of you know Adam from our update calls over the years and are aware of his outstanding skill as an investor and security analyst. We realized Adam’s work was exceptional when we first read his investment blog, Value Uncovered, nearly a decade ago. At the time we were astonished to learnthat Adam was a first-year business school student and immediately reached out to him and persuaded him to join our firm. Adam quickly became a significant contributor of ideas and research, is a partner of the firm, and has significant experience as a portfolio manager already as the manager of the AMG Yacktman Special Opportunities Fund, a fund he has successfully managed for many years.
Contributors
Bolloré’s (XPAR:BOL, Financial) stock appreciated during the quarter and has been a strong performer for the year. In late September following spinoff from Vivendi, Bolloré received approximately 18% of newly public Universal Music Group (UMG), the #1 owner of music content and publishing rights, which are requisite for operating a streaming platform. The new holding in UMG is worth more than Bolloré’s market cap, and remaining businesses like port/infrastructure/logistics and electric vehicle batteries provide substantial opportunity for upside. Recently there have been reports in the press that port/logistic assets are for sale, and if these businesses command the valuations we think they deserve, there could be huge upside from current prices.
Alphabet Inc. (GOOG, Financial) (GOOG) and Microsoft Corporation (MSFT, Financial) contributed to results after posting stellar earnings results. Both companies also benefited from general strength in the technology sector.
Macy’s (M, Financial) stock performed well due to strong earnings. The strength continued in early fourth quarter after an activist investor announced a position in the company and investors began to consider the value of Macy’s significant online business. Last year Macy’s shares collapsed during the pandemic, which allowed us to add to our position and benefit from a recovery in price this year. These events demonstrate how share price movement in shorter periods of time can mean little, which is why we constantly have a long-term focus.
Detractors
Detractors include Samsung Electronics (Samsung) and Associated British Foods PLC (ABF)
Samsung’s (XKRX:005935, Financial) shares were weaker in the third quarter and have lagged in 2021 after producing exceptional returns in 2020. The stock has been out of favor recently due to concerns about a down cycle in the memory semiconductor market in the near term. We believe the valuation of Samsung does not appropriately value its significant memory business, even though it is the #1 producer of memory chips, is highly profitable, and should produce strong growth over time as the world continues to need more processing and storage.
Though ABF’s (LSE:ABF, Financial) shares have also lagged this year, we think it still represents exceptional value. ABF is part food, with products like Ovaltine and Twinings Tea; and part retail, with Primark, a leading fashion retailer with approximately 400 stores in 12 countries. While most retail stocks like Macy’s have experienced huge share price recoveries, ABF’s shares have lagged. Perhaps the challenge has been many investors want more of a pure play company, and not a part-food, part-apparel retailer; but over time we think others will recognize the exceptional value the shares represent.
Booking Holdings Inc. (Booking) (BKNG, Financial) was weaker in the quarter due to reduced travel expectations in Europe as COVID-19 variants delayed travel plans. Over the long term, Booking is an exceptionally well-positioned business with significant scale, strong management, and an innovative DNA that should help drive earnings growth over time.
Hyundai Mobis Co. LTD’s (XKRX:012330, Financial) stock was weaker during the quarter as the semiconductor shortage continued to impact the automotive industry. The shares are exceptionally attractively priced at 3–4 times operating income after adjusting for net cash and a 20% holding in Hyundai Motor Company.
Continental AG’s (XTER:CON, Financial) stock was weaker during the quarter as the semiconductor shortage continued to impact the automotive industry.
News Corp.’s (NWSA, Financial) shares lagged during the quarter after rising significantly in the last year. We think the company is significantly undervalued and—like Bolloré, Samsung, and ABF—trades at a significant discount to its various businesses.
Conclusion
We continue to be pleased with the overall portfolio returns for the year and are optimistic about the opportunities presented by some of our favorite holdings and how they stand out in a high-price investment environment. As always, we will continue to be patient, diligent, and objective when managing the AMG Yacktman Fund (Trades, Portfolio).
1 Returns for periods less than one year are not annualized.
2 The performance information shown for periods prior to June 29, 2012, is that of the predecessor to the Fund, The Yacktman Fund (Trades, Portfolio), which was reorganized into the AMG Yacktman Fund (Trades, Portfolio) on June 29, 2012, and was managed by Yacktman Asset Management (Trades, Portfolio) LP with the same investment policies as those of the predecessor Fund.
3 Since the inception of the Fund on July 6, 1992.
4 Effective June 30, 2020, the Fund’s primary and secondary benchmarks were changed. The Russell 1000® Value Index became the primary benchmark and S&P 500® Index the secondary benchmark; previously the S&P 500 Index was the primary benchmark and the Russell 1000® Value Index was the secondary benchmark.
The views expressed represent the opinions of Yacktman Asset Management (Trades, Portfolio) LP, as of September 30, 2021, are not intended as a forecast or guarantee of future results, and are subject to change without notice.
Disclosure
Investors should carefully consider the fund’s investment objectives, risks, charges, and expenses before investing. For this and other information, please call 800.835.3879 or download a free prospectus. Read it carefully before investing or sending money.
Past performance is no guarantee of future results.
The Fund is 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. 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.
