The $9 billion Yacktman Focused fund pushes back hard against the notion that active management can’t win over the long-term. Lead manager Don Yacktman has delivered an 8.5% annualized return over the past 15 years compared to 4.3% for the S&P 500. And this isn’t a case of coasting on some outsize past performance. The tight portfolio of three dozen or so stocks -- Procter & Gamble (PG), News Corp (NWSA) and PepsiCo (PEP) account for nearly one-third of investments -- is up an annualized 14.7% over the past five years, nearly 8 percentage points ahead of the market benchmark. For the short-term minded, the fund’s 14% gain so far in 2013 also outpaces the S&P 500. (Yacktman would be the first to tell you he’s focused on full business cycles, not quarters.)
That track record is good enough reason to spend time parsing the team’s recent portfolio moves; but it’s especially timely now when PE multiples are expanding. The Yacktman process is old-school GARPish (growth at a reasonable price). The managers look for solid growth opportunities from market-dominating companies with strong balance sheets spitting out boatloads of cash that are selling at what the team deems to be discounted values.
When the growth-at-a-reasonable price pickings are slim, Yacktman will sit in cash rather than pay up. In 2007 about one-third of assets was sitting in cash; when the markets cratered a year later the team was able to scoop up the quality blue chips they crave at fear-induced valuations. The current 15% cash position is more than triple the norm for large-cap funds, but not particularly bearish for the Yacktman process.
Dividend payouts aren’t a top tier consideration for the Yacktman team, but given its focus on cash-generating juggernauts among market leaders the portfolio tends to be chock full of dividend yield stalwarts. In addition to Procter & Gamble and PepsiCo, the 10 largest holdings also include Microsoft (MSFT), Sysco (SYY) and Johnson & Johnson (JNJ).
PG Dividend Yield Chart
So what’s a patient, long-term focused (and successful) investment team doing these days? Well, for starters. it’s letting its two largest holdings, Procter & Gamble and News Corp (both about 11% of assets) continue to run. Both holdings were given a slight trim in the quarter, but that’s clearly about keeping them from growing to even bigger pieces of the Focused Fund’s pie, as both had strong first quarters:
PG Total Return Price Chart
A quick window into classic Yacktman analysis: Back in the summer of 2011 when NewsCorp’s hacking scandal hit, the team used the headline-driven pullback as an opportunity to buy more, a move that has paid off in spades, as seen in a stock chart.
NWSA Chart
At the beginning of 2013 the fund owned two of the biggest (and longest running) tech value plays: Intel (INTC) and Microsoft. But in the first quarter Yacktman bailed on its Intel stake -- completely selling out – while increasing the fund’s Microsoft stake by 35%. At 6% of assets, Microsoft is now the fund’s fourth largest holding. Granted, that move was made before the mid-April industry reports detailing the precipitous decline in personal computer demand. But in an early April conversation with Forbes Yacktman was already looking past the PC element,. “….while the PC business may be in unit decline, there are a lot of other things that are moving in to take their place, which will utilize a lot of the software they have. And some of the other component parts of the company continue to be very strong. So, it’s really very, very cheap,” Yacktman told Steve Forbes.
It’s not often you can find a company with a consistently growing cash flow and a PE ratio 40% below the market price earnings multiple (and about 25% below the tech sector average.)
MSFT Free Cash Flow Yield Chart
While Yacktman Focus didn’t change its PepsiCo holding (10% of assets) in the first quarter, it increased its Coca-Cola (KO) stake by two-thirds, bringing the Coke stake to 5% of assets. While Coca-Cola is rarely ever mentioned as cheap -- the forward PE ratio is 19.7 -- late last year its price to cash flow valuation took a much steeper tumble than the stock price.
KO Chart
Coke’s price/cash flow rebounded throughout the first quarter, but at 23.55 it is about where it was in early 2011, and still 11% below its summer 2012 level.
A 22% increase in the fund’s Johnson & Johnson stake was the other sizable move among the largest holdings. The 4.2% position makes the rebounding pharma giant the 10th largest position for the portfolio.
For all its litigation and recall missteps in recent years, Johnson & Johnson remains the pre-eminent diversified global pharma company in a sector where projecting long-term growth prospects -- another Yacktman tool -- is aided by the powerful demographics of aging populations here and consumers with more disposable income (and access to health care) in developing economies. There’s still plenty of ground to make up for the missteps, but so far in 2013, Johnson & Johnson cash flow is moving in the right direction.
JNJ Free Cash Flow Per Share TTM Chart
Both Coca-Cola and Johnson & Johnson recently reported first-quarter results that exceeded Street expectations and sent the stock prices higher. To be sure, the Yacktman team is far more interested in their estimation that both companies have strong stories going out years, not just quarters. In a world where stocks get flipped as frequently as burgers at McDonald’s (MCD), annual turnover in this fund is less than five percent.
Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at editor@ycharts.com.
