VIC — Donald Yacktman

Notes from a Value Investing Congress presentation by a legendary mutual fund manager

By Travis Johnson, Stock Gumshoe, September 16, 2013

Donald Yacktman is a legendary value investor who runs two excellent mutual funds, Yacktman Fund and Yacktman Focused Fund. They’re one of the many funds affiliated with Affiliated Managers Group (AMG).

What is unique about him? He thinks about 70% of investors (or maybe 95%) are rear-looking and momentum-driven investors. He thinks that you have to figure a forward risk adjusted return based on future cash flows versus Treasuries — it’s all about potential.

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How do you protect capital? Do homework, be objective. And you can’t stick it under the mattress because inflation is inevitable in our system (in 100 years since the Federal Reserve was founded, the dollar has gone from a dollar to a nickel. In the last 50 years, it’s gone from a dollar to 13 cents).

What’s the investment process?

Look for good businesses that dominate their industry. They want low capital intensity and low cyclicality, good businesses with secular growth. Some media, some utilities, but lots of consumer staples kind of stuff.

In stable businesses, market share is critical for return on capital — and marginal return on incremental units is astronomical.

High market share in principal product and/or service lines, high cash return on tangible assets, relatively low capital requirements allowing a business to generate cash while growing. They want a short customer repurchase cycle and a long product cycle, with unique franchise characteristics.

High cyclicality and high capital requirements are a terrible combination. Capital goods businesses are much more difficult.

You also want shareholder-oriented management. You want companies who reinvest in the business and still have excess cash, make synergistic acquisitions, or buy back stock or pay a dividend. But too many times the ego overcomes the economics when acquisitions are on the table — some companies are much better at acquisitions than others.

Ultimately it comes down to predictability of returns — heavily predictable companies like Coke are like AAA bonds, but they also look for dirt cheap companies that they won’t hold for as long. You can’t always get the AAA bonds because the price that you pay is so critical.

The Yacktman Funds are pretty concentrated, with 50-70% in the top ten holdings, he did not go into great deal on any specific stocks that he likes, but he did say that his most recent substantial moves were to sell Pfizer ...

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