Protecting in Market Declines
At Yacktman Asset Management we think one of the keys to long-term investment success is protecting capital during major market declines. Our focus on price and quality, understanding investment risks at the individual security level, and patience helped us significantly outperform during the steep declines this year as well as those of 2008-2009 and 2000-2002.
One of the common phrases we use at our firm is, “It’s almost all about the price”. Often, the most important variable in having a successful investment and managing risk is the price paid for a security. Many of our top holdings are now at lower prices than they sold for five or ten years ago even though the earnings of the businesses are significantly higher today.
Although price is typically the most important investment consideration, we also like to invest in businesses we think have the ability to perform in both good and bad economic times. These companies often have dominant market share in products that are inexpensive and consumed frequently or as part of a monthly subscription. Examples include PepsiCo selling snack chips and beverages, News Corp selling television content, and Microsoft selling software. PepsiCo, News Corp, and Microsoft are among our largest holdings because each company has a good business and is selling at a very attractive price.
Focus on Individual Securities
Yacktman Asset Management employs what is often referred to as a “bottom-up” investment approach, meaning we focus on the businesses we appraise rather than attempt to forecast the short-term market direction or economic cycles. We think about macro issues in order to help us understand how different economic environments may impact our fund holdings and potential new investments, but generally make our final decisions based on the long-term merits of each business we analyze.
Patiently Wait for Investment Opportunities/Results
At quarter end we held slightly more than 10% in cash. That level is modestly lower than the prior quarter because we found a few new small investment opportunities. It is not unusual for us to hold excess cash in our funds as we wait for the right balance of price/quality. After investing in a company, patience again can be critical to success. We are willing to wait as long as it takes for an investment thesis to work.
Portfolio Update – Top 5 Holdings
News Corp’s (NASDAQ:NWS) cable content division is one of the most valuable media assets in the world. This unit, which consists of channels like Fox News, Fox Sports, FX, and National Geographic, has been growing earnings at 20+% a year for more than a decade, and today represents the majority of News Corp’s pre-tax earnings. Despite strong prospects for continued growth in the cable content business and significant value in other assets, the shares trade at only 12 times our estimate of next years’ earnings. Last quarter the company restarted its share repurchase plan, and in the last six weeks of the quarter reduced the total share count by more than 3%.
Consumer Staples – PepsiCo and Procter & Gamble
PepsiCo (NYSE:PEP) declined more than 11% during the quarter amid short-term business struggles and general market declines. At the end of the quarter, PepsiCo’s shares traded at lower prices than they did three years prior, even though earnings have increased by more than 35% since that time. PepsiCo now sells for less than 13 times our estimate of next year’s earnings which we think is very inexpensive given the quality and predictability of its businesses.
Procter & Gamble’s (NYSE:PG) stock was a bright spot last quarter appreciating modestly in the down market. Next year, the company celebrates its 175th anniversary, a huge testament to its ability to successfully handle a wide variety of economic and business environments.
“Old Tech” – Microsoft and Cisco
Microsoft (NASDAQ:MSFT) and Cisco (NASDAQ:CSCO) are our fourth and fifth largest positions in each fund. During the quarter, Cisco declined less than 1% and Microsoft was off approximately 4%, performing far better than the market’s decline. We think the share price resilience was a reflection of the already low valuation placed on each stock.
We are highly confident about our holdings. We think the quality level of the companies in the funds is extremely high and valuations are attractive. We will work hard to objectively examine current positions and new opportunities and, as always, will continue to be diligent, objective, and patient when managing The Yacktman Funds.
The Yacktman Team