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Sydnee Gatewood
Sydnee Gatewood
Articles (3500) 

Yacktman Fund's 4th-Quarter Shareholder Letter

Discussion of markets and holdings

We hope you have managed through the difficulties of 2020 as safely and healthily as possible.

In the fourth quarter, the AMG Yacktman Fund (Trades, Portfolio) (the Fund) returned 20.46%, outperforming the 16.25% return for its primary benchmark, the Russell 1000® Value Index. In 2020 we delivered strong results in the Fund compared to the Russell 1000® Value Index with the Fund appreciating 15.28%, significantly outperforming the Russell 1000® Value benchmark, which was up 2.80%.

The Fund performed exceptionally well during the fourth quarter as stocks moved higher following the U.S. presidential election results and positive vaccine announcements. With a more visible light at the end of the tunnel, investor enthusiasm returned with an especially strong performance in holdings like Macy's Inc. (NYSE:M) (Macy's) and Walt Disney Company (NYSE:DIS) (Disney) that previously had been significantly impacted by reduced sales due to COVID-19. We continued to find new investment opportunities during the quarter by adding positions in Charles Schwab (NYSE:SCHW) and Tyson Foods, Inc. (NYSE:TSN) (Tyson).

We are pleased to have again performed well in a difficult environment for value investing. Strong returns were a result of good security selection, like Samsung Electronics (XKRX:005935) Preferred (Samsung) and new positions we added during the market declines.

Recently, Mutual Fund Observer looked at risk-adjusted returns for the 2,076 equity-oriented mutual funds that have a 20-year track record and placed the Fund at the top of their risk-adjusted list, declaring, "Yacktman and Yacktman Focused are almost freakishly successful, year and year, by almost every measure. They're sort of the (pre-2020) New England Patriots of investing. Adam Sabban at Morningstar characterizes them as 'half equity fund, half absolute - return hedge fund,' which favors great core businesses but is willing to hold cash, buy during panics and shop overseas."5

While investors have enjoyed high rates of return for the last decade, they have likely set up low returns for the major indices over the long term. Many have forgotten the pain that paying crazy prices in the late 1990s technology bubble led to and should be highly concerned about the valuations of today's latest story stock. Like the last technology bubble, index funds will likely add many of these speculative companies at the wrong time and price, causing some benchmarks, which are supposed to be passive, to actively cause long-term pain for investors. As Charlie Munger (Trades, Portfolio) observed, "If you mix raisins with turds, they're still turds."

The Best of Both Worlds – Growth at Value Prices

Many of our favorite investments today continue to be in complicated, mispriced, family-controlled conglomerates, like Samsung, Bolloré (XPAR:BOL), News Corp. (NASDAQ:NWSA), and Associated British Foods (LSE:ABF). Each of these companies has business units that are powerful and growing rapidly, along with other businesses that are substantial contributors to cash flow and sell at significant discounts to what we think they are worth. Several of these companies are in the process of unlocking value through better disclosure or separation of the stronger business units. Often these mispriced securities require a great deal of time and patience, which are qualities we take great pride in possessing, especially in an industry that affords few a true long-term approach.

Contributors for the quarter included Samsung, Disney, and Macy's

Samsung was the top contributor to results for the quarter and is our largest position. The company has a strong market position in high growth markets, including foundry, sensors, and 5G equipment, and a good position in emerging industries like artificial intelligence, autonomous driving, and internet of things, yet it sells at an extremely low multiple of earnings and cash flow, and has a significant amount of net excess net cash and securities on the balance sheet. Samsung's core semiconductor business is set up for high growth over the next few years and we think the stock could be in an early phase of positive re-rating, which is a period where a stock goes from a low multiple to a substantially higher one that better reflects the company's business prospects.

Disney's stock moved sharply higher in the fourth quarter, with an extra boost of enthusiasm after their investor day. Disney's traditional businesses, including theme parks, sports programming, advertising, hotels, cruises and more, were severely impacted in 2020. Still, the company continued its hugely successful launch of Disney+, highlighting a vast growth opportunity. We believe the prospect of a recovery in the core businesses, combined with the growth of Disney+, positions the company well for the future.

Macy's share price nearly doubled in the fourth quarter as the potential for a return to a more normal environment sometime in 2021 became more realistic due to vaccine progress. In the 2020 downturn, the company was able to take many steps to productively realign its business, positioning the company significantly better for the future.

Detractors included Hengan International Group Co., Ltd. (Hengan), Tyson, and W&T Offshore debt (W&T)

Last quarter, no positions materially detracted from results, although Tyson, a new position initiated at quarter-end, was slightly lower than our cost. Hengan (HKSE:01044), a consumer products company, was down modestly. W&T (WTI) lagged in the quarter yet had a modest appreciation.

Have the rules of investing changed?

At times, a long-term change in rules can create a significant impact. Perhaps we are in an environment where securities sell at higher prices versus prior eras due to central banking, but the net result of the higher prices will be lower long-term returns. In 1968, baseball pitchers dominated hitters, causing low-scoring games that were less popular with fans. The following year, the height of the pitcher's mound was reduced from 15 inches to 10 inches, where it remains today, and hitters and average runs per game increased from 3.42 to 4.07, although some of the increase likely came from new teams being added to the league (ESPN article, March 8, 2019).

Stock returns are largely a result of free cash flow, growth, and multiple change, with most of the returns in recent years from the last variable. With the high-priced index offering a low free-cash-flow yield and likely a continuation of low growth, long-term index returns look challenging. We believe our approach of finding individual securities that we believe are mispriced and offer solid risk-adjusted returns is more important than ever when equities are expensive as they are today. Even if the rules have changed—and we would not argue they have—we have moved to prices where those who stopped thinking about risk will likely regret that decision at some point in the future.

We will continue to work hard to find mispriced opportunities to deliver results over the long term while also considering risk. The time to be most aware of potential risks is when others completely ignore them. We never forget that the price you pay matters both for potential return and to mitigate losses if things turn out worse than you expected. We wish everyone the best for the new year and, as always, will be objective, patient, and diligent when managing the AMG Yacktman Fund (Trades, Portfolio).

The views expressed represent the opinions of the Yacktman Asset Management (Trades, Portfolio) LP, as of December 31, 2020, 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 Index was the primary benchmark and the Russell 1000® Value Index was the secondary benchmark.
  5. Source: 21st Century Champions, Jan. 2021
  6. 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.


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