Yacktman Fund Q1 2013 Letter
Consumer staples performed well with Procter & Gamble (PG) and PepsiCo, Inc. (PEP) being the top contributors to results for the Funds. Both companies struggled last year as they worked through business challenges that produced what we think were below normal profit margins. Last quarter both companies reported results showing margin improvement and the shares rebounded. We like holding positions in companies where we believe profit margins can improve in coming years, a period when we think the general market will see profit margins decline.
Our positions in News Corp. CI A (“News Corp”) (NWS) and Viacom Inc Cl B (“Viacom”) (VIA.B) continued to appreciate in the first quarter. News Corp announced it will be starting a national sports network, which could be a big opportunity over time. While some think that ESPN is already too dominant a national sports presence to compete against, we would remind shareholders that management at News Corp already achieved the nearly impossible many times, including successfully creating Fox as a fourth network to ABC, CBS and NBC and building Fox News into a powerhouse that today dominates the cable news industry.
Viacom is starting to show ratings improvements at key networks. Significant programming investments have started to produce stronger viewership, especially at Nickelodeon. The shares rebounded strongly during the quarter, but we think the stock remains attractively priced.
The health care sector was the strongest industry group in the first quarter. Stryker Corporation, Pfizer and Johnson & Johnson, all appreciated during the quarter. Bard, Inc., C.R. (“Bard”) (BCR) was only up modestly as the company experienced increased short-term margin pressures. We expect Bard to receive proceeds from a long-running patent battle in the next few quarters as well as an ongoing royalty stream, which will help financial results improve. We believe the company is well run and invests for the long term, which is the appropriate way to manage the business. We think the company is positioned to perform well over the next several years.
Microsoft Corp. (MSFT) and Cisco Systems Inc. (CSCO) both appreciated during the quarter. The companies are a bit like aging superstar athletes, and neither one can produce results like it used to. However, in investing we believe it is “almost all about the price,” and the compelling valuations are what attract us to the investments. Both companies also have significant excess cash in the bank, which should act as a cushion should their businesses prove to have greater challenges than we currently estimate.
At times, we make investments in companies that are in turn around mode or have unique issues they are confronting. We often label these “special situations” due to the uncertainty of the outcome to distinguish the investments from the high quality franchises we also like to own. We typically take smaller weightings in these investments as a risk management technique.
During the quarter, Hewlett-Packard (“HP”), Avon Products (“Avon”), Dell, H&R Block and Blackberry all produced meaningful returns. HP and Avon both appreciated, as investors grew more confident that the new management teams at each company would have success stabilizing the businesses.
Dell jumped after receiving a buyout proposal from management. Apollo Group was our largest decliner during the quarter as the business continued to struggle. We think the valuation continues to be compelling. It is important to remember that not all special situations will work out, but that we expect these investments will work out well when judged as a group over time.
We sold H&R Block because we thought the price appreciation made the shares unattractive. Our Blackberry (BBRY) position was reduced significantly as its price moved higher before its product launch.
Our positions in ConocoPhillips (COP) and Exxon Mobil (XOM) both lagged during the quarter with the general underperformance in energy shares while our positions in Microsoft Corp. (MSFT) and Cisco Systems Inc. (CSCO) delivered positive performance but also lagged the market return. A smaller position in CH Robinson Worldwide, a logistics company declined modestly.
We are happy with results for the first quarter. We will continue to objectively examine the Funds holdings and potential new opportunities as we seek to produce favorable results and manage risk over a market cycle. Our team will continue to be patient, diligent and objective when managing the Funds.
Investors should carefully consider the Fund’s investment objectives, risks, charges, and expenses before investing. For this and other information, please call 800.457.6033 or visit www.managersinvest.com to download a free prospectus. Read it carefully before investing or sending money.
The S&P 500 Index is capitalization-weighted index of 500 stocks. The S&P 500 Index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Unlike the Fund, the S&P 500 Index is unmanaged, is not available for investment, and does not incur expenses. The S&P 500 Index is proprietary data of Standard & Poor’s, a division of McGraw-Hill Companies, Inc. All rights reserved.
The Funds are 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. High yield bonds (also known as “junk bonds”) are subject to additional risks such as the risk of default. 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. 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 Funds can invest in securities of different market capitalizations (small, mid and large capitalizations) and styles (growth vs. value), each of which will react differently to various market movements. A greater percentage of the Yacktman Focused Fund’s holdings may be focused in a smaller number of securities which may place the Fund at greater risk than a more diversified fund.
The performance information shown and Fund inception dates reflect that of the predecessor Funds, The Yacktman Fund and The Yacktman Focused Fund, which were reorganized into the Yacktman Fund, and the Yacktman Focused Fund, respectively, on June 29, 2012, and were managed by Yacktman Asset Management with the same investment objectives and substantially similar investment policies as those of the predecessor Funds.
Funds are distributed by Managers Distributors, Inc., a member of FINRA.