The AMG Yacktman Focused Fund (Trades, Portfolio) (S Class) returned 2.5% in the fourth quarter of 2016, compared with a 3.8% return for its benchmark, the S&P 500 Index. For the 12-month period ending December 31, 2016, the Fund returned 11.3%, compared with the 12.0% return for its benchmark. We consider our results to be far superior to the S&P’s last year, as we produced nearly the same return as the benchmark with significantly less market exposure.
Our goal remains to provide outperformance over a full market cycle while managing the level of risk. In the last five years, the S&P 500 Index has nearly doubled in price, largely through multiple-expansion”•people paying higher prices for the level of earnings”•and valuations for the market are at very high levels compared to history. Expensive markets can make it more difficult to find bargains and sometimes, like in recent years, cause us to wait with excess cash. To be clear, we will invest in individual securities regardless of the market’s valuation”•it is the risk/reward of the individual security that matters.
In November, the market rallied sharply after the unexpected outcome in the U.S. election. Coupled with the surprising outcome of the Brexit vote, last year proved how difficult it is to predict macro events, as well as market reactions to them. (After Brexit, markets plunged then rallied and, in the U.S., futures plunged after the election results we projected, then rallied.) Our approach focuses on long-term security selection with an emphasis on valuation and a preference for quality businesses that can perform in good times and bad. We study and pay significant attention to macro, because it influences the investments we make; however, we maintain a strong focus on the long-term and the individual securities when allocating capital in the Fund.
Contributors
Contributors to the quarter included 21st Century Fox (FOX), Sysco Corp (Sysco) and Microsoft.
In the fourth quarter, FOX (FOXA, Financial)’s shares were the strongest contributor to results for the Fund. Recently, FOX has delivered strong ratings in news and sports, and announced an agreement to purchase full ownership of Sky, a leading European media and communications company. In the last few years, FOX has struggled with currency headwinds and challenges in the movie studio business, which has masked continued solid growth in cable content. Recently, AT&T announced a proposed acquisition of Time Warner that we think demonstrates that top content is increasingly valuable today.
Sysco (SYY, Financial)’s shares contributed to fourth-quarter results as the company delivered solid earnings results, benefitting from improved case volume growth and strong cost-cutting. In 2016, Sysco expanded overseas, completing the acquisition of Brakes Group, a leading European foodservice provider. We think this will help provide the company with significant opportunities for growth for many years to come.
Microsoft (MSFT, Financial)’s shares were solid contributors to fourth-quarter results as the company continues its remarkable transformation under CEO Satya Nadella. Microsoft could be a significant beneficiary of the new administration’s proposed tax repatriation plan.
Detractors
Detractors included Procter & Gamble (P&G), PepsiCo (Pepsi) and Cisco Systems (Cisco).
P&G (PG, Financial)’s and Pepsi (PEP, Financial)’s shares sold off in the fourth quarter with the post-election market rotation away from defensive companies stocks. We continue to believe that P&G and Pepsi are attractive long-term holdings with both companies highly focused on achieving solid volume growth while managing costs.
Cisco (CSCO, Financial) declined modestly during the quarter, though the shares produced strong returns in 2016. Like Microsoft, Cisco, with more than $60 billion of overseas cash, could benefit greatly from tax repatriation.
Other
Samsung Electronics Preferred (Samsung)
During the quarter, Samsung (XKRX:005930, Financial)’s shares contributed solidly to Fund results even though the company’s Note7 was terminated, resulting in one of the worst product failures in history. The stock was resilient because Samsung’s semiconductor and display businesses delivered strong profit growth.
During the fourth quarter, Samsung announced improved cash returns to shareholders via an increased dividend and significant new share repurchase plan. Management also announced it is studying the corporate structure of the business and will consider an ADR listing. We think either or both of these events would propel the stock significantly higher. Even without corporate restructuring, Samsung looks like it could achieve strong growth in 2017. The shares are incredibly inexpensive and trade at a substantial discount to any of the company’s global peers.
Conclusion
We are pleased with the solid results for the fourth quarter and 2016. We continue to work hard assessing current holdings and potential new additions to the Fund. As always, we will be patient, objective and diligent in our efforts when managing the Fund.
The views expressed represent the opinions of Yacktman Asset Management LP as of December 31, 2016, are not intended as a forecast or guarantee of future results, and are subject to change without notice.
1 Returns for periods greater than one year are annualized.
2. The performance information shown for periods prior to June 29, 2012 is that of the predecessor to the Fund, The Yacktman Focused Fund (Trades, Portfolio), which was reorganized into the AMG Yacktman Focused Fund (Trades, Portfolio) on June 29, 2012, and was managed by Yacktman Asset Management LP with the same investment policies as those of the predecessor Fund.
3. Prior to October 1, 2016, the Fund’s S and I shares were known as Service and Institutional shares, respectively.
4. Since the inception of the Fund’s Class S shares on May 1, 1997.
5. Since the inception of the Fund’s Class I shares on July 24, 2012.
6. Annual expense ratio as of May 1, 2016.
