In the third quarter the AMG Yacktman Fund (Trades, Portfolio) (the Fund) returned -5.52%, underperforming the -5.62% return for its primary benchmark, the Russell 1000® Value Index.
In the third quarter, the market declined due to multiple factors: inflationary pressures, rate hikes, corporate earnings reductions, and geopolitical tensions, to list just a few. Although equity prices are somewhat lower, valuations in the U.S. remain at elevated levels, especially considering normalized earnings are likely meaningfully lower than today’s numbers. The AMG Yacktman Fund (Trades, Portfolio) declined -5.52% in the third quarter compared to Russell 1000® Value Index at -5.62% and the S&P 500® Index at -4.88%.
One of the most frequent questions we are asked is what we think will happen to the market. We typically answer that we don’t know what will happen in the short term, and we don’t invest in the market—we own individual securities, which should be the long-term driver of our results. As valuations remain elevated and risks have increased in recent years, we believe the long-term outcomes for the market could be modest, and an active approach like ours will be far more important to investors than passive and indexed alternatives.
During the quarter, we added to energy exposure on the sharp selloff in oil stocks. Although we’ve largely avoided the energy sector for most of our 30-year history, we think the significant underinvestment for new supply coupled with the better capital discipline in the industry has made for an extremely attractive risk/reward equation for investors.
Several of our top ideas are undergoing meaningful business transformations even though the general market has scarcely noticed the positive benefits. Bolloré (XPAR:BOL, Financial), one of our top holdings, is currently simplifying its business by selling its African port and logistics business. The transaction is expected to close in the next six months, and the cash proceeds will take the company from levered to cash-rich. Given Bolloré’s history of executing attractive, opportunistic deals, the cash could be coming in at an excellent time.
Bolloré’s shares trade at a steep discount to what we believe they are worth, partly due to a complex ownership structure where the company is controlled by an entity called Compagnie de l’Odet (Odet), which, in turn, is partly owned by Bolloré. In the last couple of quarters, Odet has executed one of the most aggressive share purchases we have seen, buying more than 100 million shares of Bolloré. We believe all of today’s market cap of Bolloré is accounted for by its publicly traded holding of Universal Music Group, a leading owner of music rights and publishing.
Contributors and Detractors
Charles Schwab Corp’s (SCHW, Financial) shares rose during the quarter, helped by solid current earnings and the benefits to forward earnings the company expects to accrue in a higher rate environment.
AMERCO’s (UHAL, Financial) stock performed well in the third quarter but remains steeply discounted. The company is the U.S. leader in do-it-yourself moving and has built a valuable public storage business that largely gets ignored. Recently, the company announced a name change to U-Haul, a stock split, and is studying additional ways to have the share price more reflective of the value of the businesses.
Weatherford International (WFRD, Financial) shares rallied due to solid revenue growth and margin expansion. After many years of restructuring, the company’s results are improving significantly, which we think offers continued upside to the shares.
Samsung Electronics (XKRX:005935, Financial) (Samsung) shares struggled during the quarter with general weakness in semiconductor shares and downward earnings revisions. Despite near-term business challenges, we believe Samsung’s stock is incredibly attractive, with around 40% of the market cap in net cash and investments, plus strong earnings from a wide variety of businesses, from semiconductors to displays to mobile phones.
Canadian Natural Resources (CNQ, Financial) stock was weaker during the quarter amidst the volatility in the energy sector.
Associated British Foods (LSE:ABF, Financial) shares weakened due to concerns about the company’s retail business in a challenging economy. We think the value of the food businesses, the net cash and excess real estate accounts for most of today’s share price, even if the retail business faces increased headwinds.
Conclusion
We are optimistic about the positioning of the Fund today with some highly underappreciated and undervalued securities versus a market that continues to have a high valuation, given the existing risks. For additional information, please listen to our recent quarterly update, which goes into greater detail about our thoughts and holdings. As always, we will be patient, diligent and objective when managing the Fund.
To hear more from the Fund’s portfolio managers, financial advisors can visit our website here to listen to Yacktman Asset Management (Trades, Portfolio)’s third quarter update call.
The views expressed represent the opinions of Yacktman Asset Management (Trades, Portfolio) LP, as of September 30, 2022, are not intended as a forecast or guarantee of future results, and are subject to change without notice.
1 Returns for periods less than one year are not annualized.
2 The performance information shown for periods prior to June 29, 2012, is that of the predecessor to the Fund, The Yacktman Fund (Trades, Portfolio), which was reorganized into the AMG Yacktman Fund (Trades, Portfolio) on June 29, 2012, and was managed by Yacktman Asset Management (Trades, Portfolio) LP with the same investment policies as those of the predecessor Fund.
3 Since the inception of the Fund on July 6, 1992.
4 Effective June 30, 2020, the Fund’s primary and secondary benchmarks were changed. The Russell 1000® Value Index became the primary benchmark and S&P 500® Index the secondary benchmark; previously the S&P 500 was the primary benchmark and the Russell 1000® Value Index was the secondary benchmark.
5 Mention of a specific security should not be considered a recommendation to buy or a solicitation to sell that security. Holdings are subject to change.
Disclosure
Investors should carefully consider the fund’s investment objectives, risks, charges, and expenses before investing. For this and other information, please call 800.835.3879 or download a free prospectus. Read it carefully before investing or sending money.
Past performance is no guarantee of future results.
The Fund is subject to the risks associated with investments in debt securities, such as default risk and fluctuations in the perception of the debtor’s ability to pay its creditors. Changing interest rates may adversely affect the value of an investment. An increase in interest rates typically causes the value of bonds and other fixed income securities to fall.
High-yield bonds (also known as “junk bonds”) are subject to additional risks such as the risk of default.
Investments in international securities are subject to certain risks of overseas investing, including currency fluctuations and changes in political and economic conditions, which could result in significant market fluctuations. These risks are magnified in emerging markets.
The Fund is subject to risks associated with investments in mid-capitalization companies such as greater price volatility, lower trading volume, and less liquidity than the stocks of larger, more established companies.
