Tuesday, August 2, 2011

Yacktman Funds 2Q 2011 Portfolio Update

Donald Yacktman and his team have a very solid long-term track record.

Over the past ten years the cumulative return of the S&P 500 is a bit over 30%.

By comparison, both the Yacktman Funds, YAFFX and YACKX, are up more than 242% and 212% over the same time frame respectively.*

At the end of the most recent quarter, Yacktman continued to hold and build positions in large capitalization stocks that are household names. These are relatively concentrated portfolios with roughly 40% in the top 5 stocks.

Top 5 Holdings
1 News Corp (NWSA)
2 Pepsi (PEP)
3 Procter & Gamble (PG)
4 Microsoft (MSFT)
5 Cisco (CSCO)

Interestingly, Coca-Cola (KO) was displaced from the top 5. This came from Yacktman adding more Cisco not reducing Coca-Cola which is now the 6th largest holding (more shares on the soft drink maker were actually added during the quarter).

Yacktman Funds continue to have minimal exposure to financials with only 1 bank in the top 25 (U.S. Bancorp: USB). 

A summary of the additions to the portfolio:

Additions that had greater than 1 percent impact on the portfolio
Cisco (CSCO)
News Corp (NWSA)
Procter & Gamble (PG)
Microsoft (MSFT)

Additions that had between .2 percent and 1 percent impact on the porfolio
Research in Motion (RIMM, new position)
Hewlett-Packard (HPQ)
U.S. Bancorp (USB)
Exxon Mobil (XOM)
Wal-Mart (WMT)
Johnson & Johnson (JNJ)
Sysco (SYY),
C.R. Bard (BCR)
Apollo (APOL)
Pepsi (PEP)
Coca-Cola (KO)
Bank of New York Mellon (BK)

Additions that had less than .2 percent impact on the portfolio
Viacom (VIA-B)
ConocoPhillips (COP)
Pfizer (PFE)
Becton Dickinson (BDX)
Comcast (CMCSK)
Berkshire Hathaway (BRKb)

The biggest addition in terms of percentage impact on the portfolio was Cisco at just over 3%.

Yacktman also reduced exposure to Leucadia (LUK) and sold all shares in Dell (DELL) and SLM Corporation Preferred (SLM-PA).

As a major holding and with News Corp experiencing some rather high profile difficulties they had this to say in their 2nd Quarter 2011 Letter:

After the end of the second quarter, News Corp became a major news story as new information about an old phone hacking scandal at its newspaper, News of The World, was released. Management has taken swift action to deal with the issues, including closing the News of The World, withdrawing a bid for BSkyB, authorizing an increase to the share repurchase, and changing management. We continue to monitor the situation closely and think News Corp is taking the right steps to address the issues and move forward.

Some other comments from the letter:

Consumer Staples
PepsiCo, Procter & Gamble, Coca-Cola, and Sysco are four of our top ten positions in each fund, and all appreciated during the second quarter, with PepsiCo and Sysco rising more than 10% each. We like the steady nature of these consumer staples businesses and think that the valuations are compelling.

"Old Tech"
Cisco Systems declined nearly 10% during the quarter and we increased our exposure, making it the 5 th largest holding in each fund. The company has a stellar balance sheet with significant excess cash, and we think management is objectively facing the challenges in the business.

Microsoft appreciated during the quarter but disappointed us by offering $8.5 billion to acquire Skype. We think Microsoft is paying a high price for this business, and the company has had a poor record of integrating and managing acquisitions. Fortunately, the amount of money on the proposed deal is not especially significant to Microsoft and represents only about 5 months of free cash flow. While companies disappoint us from time to time, we think it is important to objectively evaluate information in context of the entire investment thesis. In Microsoft’s case, we think the valuation is so compelling that we are able to look beyond a deal of this modest size that we do not especially like.

Hewlett-Packard declined a bit more than 10% during the quarter as business results continued to be challenging. The weak share price is due in part to business issues and in larger part to the general disfavor of "old tech" shares. We think Hewlett-Packard's stock could perform well from current levels even if its businesses continue to struggle.

I've said before that it's worth noting value-oriented managers like Yacktman, who wouldn't touch a tech stock a decade ago due to extreme overvaluation, are moving into stocks like Microsoft, Cisco, and Hewlett-Packard in a meaningful way.

Large media companies like News Corp and Viacom, even though they seem reasonably valued, are businesses that I've never become comfortable with as investments.

Adam

Long positions in PEP, KO, PG, MSFT, CSCO, HPQ, JNJ and COP. Technology stocks are generally smaller positions.

* From the letter: The performance data quoted for The Yacktman Fund and The Yacktman Focused Fund represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that the investor's shares, when redeemed, may be worth more or less than their original cost. The current performance may be higher or lower than the performance data quoted.
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