Small-cap stock valuations are worrying some investors, including top fund manager Donald Yacktman.
Mutual fund manager Donald Yacktman has put up an exceptional track record for more than a decade, and in a recent interview with Canada’s Globe and Mail, he talked about his investment approach and thoughts on the current market.
Yacktman says that the market is not cheap, which is the biggest risk investors face today. He recently had about 20% of his portfolios in cash. “That’s telling you how hard it is to find stocks to buy,” he says, adding that the figure would be even higher if returns on cash weren’t so low right now.
Yacktman says price — buy on the cheap — and time horizon — his is long — are critical to his approach. “We view every stock as if it were a long-term bond,” he says. “And we’re looking at risk-adjusted forward returns. The Cokes, Pepsis and P&Gs become our triple-A bonds. … Companies that tend to have consistently high returns usually have low fixed assets and low cyclicality. You will rarely see things like airlines, automobiles or steel companies or, for that matter, banks in our holdings.”
Yacktman also doesn’t try to catch market tops or bottoms. “In this business, you’re wrong almost all the time,” he says. “It’s just a matter of degree, because nobody buys at the bottom or sells at the top.”
For much of the past few years, top fund manager Donald Yacktman has said high quality stocks had been trading at exceptional discounts to lower quality plays. But in an interview with WealthTrack’s Consuelo Mack, Yacktman says the spreads between high and low quality equities has narrowed dramatically. Yacktman, who focuses on high quality stocks, thus has a higher than average cash position of about 20% (he usually has between zero and 30% of his portfolio in cash). He’s still finding attractive stocks, however, including Coca-Cola, Procter & Gamble, and several “old tech” names. Yacktman also talks about his broader approach, explaining why he favors a relatively focused portfolio, when he decides to sell a stock, and how he uses price to control risk.
Donald Yacktman’s funds have some of the best long-term track records one can find. And in his funds’ 2012 year-end letter, his team talks about a key part of their strategy: position sizing.
“We think position sizing is one of the most important aspects of good portfolio mangement,” the letter states (hat tip to GuruFocus.com for highlighting the letter). “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.”
The Yacktman Focused Fund, which is in the top 1% of funds in its class over the past five years and past ten years, according to Morningstar, had almost 60% of its assets in its top ten holdings at the end of 2012, while for the Yacktman Fund (also in the top 1% of its class in those periods) the figure was over 50%. Both funds had the same top five holdings (though with slightly different orders/weightings): Procter & Gamble Co., News Corp., PepsiCo Inc., Cisco Systems, and Sysco Corp. For both funds, consumer staples was the biggest representative in terms of sector weighting.
As 2013 approaches, top fund manager Donald Yacktman is focusing on high-quality stocks, as well as some much-maligned contrarian plays.
Yacktman tells Forbes that he likes stocks with high returns on assets, which generally means that the businesses have low capital requirements, nice market share, and the ability to fare well in good times or bad. An example is consumer goods giant Procter & Gamble, which makes such well known brands as Tide and Pampers. The firm generates tons of cash and also offers a nice dividend, two key things Yacktman looks for. “We are in an environment where PepsiCo and Procter are like AAA bonds, and the world is not rewarding you enough to go to actual AAA or AA bonds,” he says.
Yacktman also likes contrarian picks like C.H. Robinson, Research in Motion, and Hewlett-Packard. “What we try to do is to find the ideal business, which is like a beachball being pushed under the water, and the water is rising. Then, all you have to do is have patience. Eventually the pressure will come off, but the longer it takes, the bigger the pop when it finally does happen.”
When assessing a business, Yacktman uses a 10-year time horizon. “Most people just aren’t that patient. That’s one of the challenges in the investment business today,” he says. “The average stock market fluctuates about 50% from low to high in 12 months, and lower and lower transaction costs encourage speculation.”
Top mutual fund manager Donald Yacktman says that the short-term “casino” mentality among most investors has actually created more opportunities for long-term value investors. Yacktman tells Morningstar that a decline in trading costs in recent years, coupled with the natural volatility of stocks, has created volatility and the casino mentality. But, he says, “The more volatile, interestingly enough, a situation is, I think, the more attractive it is for value managers, who are long-term investors, because it creates more opportunities.” Yacktman also talks about his approach to selling stocks.
Top fund manager Donald Yacktman says high-quality blue chip stocks continue to trade at incredibly cheap levels. Yacktman tells WealthTrack’s Consuelo Mack that while many high-quality stocks like Procter and Gamble were cheaper on an absolute basis in late 2008/early 2009, they are now even cheaper relative to the broader market. “The cash flows are much higher, they’re much more valuable than they were then,” he says. Yacktman says the overall investment environment is more unpredictable today than it was years ago, but that he’s able to find plenty of individual companies that are producing predicable, strong cash flows. He also talks about why volatility is “the friend of a value investor”, and why his longer time horizon has allowed him to succeed where so many have failed.
Top fund manager Donald Yacktman says that he’s sticking with high-quality stocks. Yacktman tells CNBC that his biggest holdings include Pepsi, News Corp., and Proctor and Gamble. He also says he’d stay away from lower-quality stocks and cyclical firms. He thinks many cyclicals are selling at profit margins that may be unsustainable.
Top fund manager Donald Yacktman says that he can’t remember another time in his 40-plus-year career when he has “seen so many high-quality, profitable businesses selling at prices relative to the market this cheaply.” Yacktman tells WealthTrack’s Consuelo Mack that many stocks are trading at valuations similar to where they were in the late 2008 or early 2009, but are in much better condition today. He’s finding big values in big, steady blue chips like PepsiCo, many of which he says have very predictable cash flows despite the global macroeconomic uncertainty. He says he’s not finding it more difficult to protect clients’ capital in today’s climate.
Donald Yacktman, who for more than a decade has posted one of the best track records of any mutual fund manager, is finding big value in an area he once shunned: tech stocks.
“If someone had told me 10 years ago that these stocks would be in my portfolio, I would have laughed,” Yacktman, who avoided tech stocks during the Internet bubble of the late 1990s, tells BusinessWeek in reference to two of his funds’ biggest holdings, Microsoft and Cisco Systems.
Yacktman keys on firms with strong, predictable cash flows, and shares that trade for less than he estimates those cash flows are worth, according to BusinessWeek. He’s finding a lot of value right now in big, blue chip stocks like Coca-Cola and Johnson & Johnson. “I can’t remember a time when so many quality companies were selling at low prices compared to alternatives,” Yacktman says. He’s avoiding most financials, however, because of the difficulty in analyzing their value.