In the third quarter of 2019, the AMG Yacktman Focused Fund (Trades, Portfolio) (Class N) declined slightly, decreasing -0.65% compared to the S&P 500® Index’s 1.7% increase and the Russell 1000® Value Index, which rose 1.36%.For the first nine months of 2019, the Fund has lagged market returns; however, looking back over the last year, the Fund has outperformed both of its benchmarks, increasing 7.17% compared to 4.25% for the S&P 500® Index and 4.00% for the Russell 1000® Value Index.
We continued to rebalance the portfolio in the third quarter, reducing successful investments like Procter & Gamble (P&G) and PepsiCo, and building up newer holdings in out-of-favor stocks such as News Corp and Macy’s Inc. (Macy’s). One of Yacktman’s core beliefs is “it is almost all about the price,” and at times like today it is important to actively reallocate from investments that have worked exceptionally well to those that we think have been unfairly left behind and may possess much better long-term risk/reward due to lower valuations.
Contributors
Consumer staples were top performers in the third quarter with especially strong returns from P&G (PG, Financial), Coca-Cola (KO, Financial) and PepsiCo (PEP, Financial).We continue to be pleased with our investments in P&G, Coca-Cola, and PepsiCo; however, the higher valuations led us to reduce our weighting in consumer staples shares during the third quarter.
Since reaching a low in early May of last year, P&G’s shares have appreciated more than 75% while the S&P 500® Index has risen slightly more than 10%. This is a remarkable change in valuation for a stable company even considering the better business execution the company has delivered in recent quarters. We have reduced the position from 9% to start the year to less than a 5% weighting as of the end of the third quarter.
Detractors
Macy’s (M, Financial), a new holding this year for the Fund, declined during the quarter due to challenging business results and general weakness among many retail stocks. Macy’s currently trades at 5–6 times this year’s earnings and possesses an extremely valuable portfolio of real estate. We are very aware of the challenges retailers face today as well as the difficulty some of Macy’s competitors have had realizing value from properties. As value investors, we are willing to embrace difficult-looking situations if we think the attributes of an individual company warrant the investment. In recent years, this served us well in media, as 21st Century Fox delivered exceptional returns while many peers like CBS, Viacom, Discovery, and AMC struggled.
Our position in Fox (FOX, Financial) was weaker during the quarter as media stocks were generally out of favor. Spinoffs, which Fox became at the closing of the Disney transaction in March, often struggle as the stock needs to find its ownership base. We think the shares are inexpensive and could benefit from a share repurchase, something we believe the company is likely to institute during the fourth quarter.
J&J’s (JNJ, Financial) stock was weaker in the quarter as litigation uncertainty was more of a focus than the company’s strong business fundamentals. We think that J&J will work toward successfully resolving some of the major lawsuits it faces over the next few quarters, and as investor focus returns to business fundamentals, we expect the shares’ price performance will improve.
Conclusion
The third quarter was fairly uneventful both for the Fund and the benchmarks. During the quarter, we continued to shift the portfolio to what we believe will be a better risk/reward position over time by increasing our weighting in new holdings and reducing our allocations to positions that have become more expensive. We will continue to work hard to be objective, patient, and disciplined as we manage the AMG Yacktman Focused 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 Focused Fund (Trades, Portfolio), which was reorganized into the AMG Yacktman Focused 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’s Class N shares on May 1, 1997.
4 Since the inception of the Fund’s Class I shares on July 24, 2012.
5 Effective on October 1, 2018, the Fund added the Russell 1000® Value Index as a secondary benchmark.
The views expressed represent the opinions of Yacktman Asset Management (Trades, Portfolio) LP as of September 30, 2019, are not intended as a forecast or guarantee of future results, and are subject to change without notice.
