In the fourth quarter the AMG Yacktman Fund (Trades, Portfolio) (the Fund) returned 5.4%, underperforming the 7.8% return for its primary benchmark, the Russell 1000® Value Index.
2021 was the third year in a row of exceptional U.S. stock market returns, and reminded us of the speculative period of the late 1990s when multiple expansion, momentum, and dreams seemed to matter more than cash flow, competitive advantages, and fundamentals.
Everything abruptly changed in early 2022. High multiple stocks with uncertain futures have been crushed and multiples on many expensive equities have been reduced somewhat.
Our investment approach, which focuses on valuation, quality, and risk management, has held up well during the sharp correction of early 2022. Some of our strongest performance has come from protecting well in market declines, bargain hunting and reloading the portfolio with new opportunities if available.
Today we are optimistic about the significant potential of some of our top positions, such as Samsung Electronics (Samsung) and Bolloré, which sell at low valuations and have been overlooked by many in the speculative frenzy of the last few years.
Contributors and Detractors
Technology, consumer staples, and energy were all solid contributors during the fourth quarter. Our holdings in Microsoft Corporation (MSFT, Financial), PepsiCo (PEP, Financial), and Canadian Natural Resources (CNQ, Financial) all produced exceptional returns for the Fund. Media stocks were unpopular in the fourth quarter, and Bolloré (XPAR:BOL, Financial), Fox Corporation (FOX, Financial), News Corp (NWSA, Financial), and The Walt Disney Company (DIS, Financial) were among the portfolio laggards. Brenntag (XTER:BNR, Financial) was also a detractor after a strong run in the last few years.
Looking at individual stock returns in shorter periods often provides little real insight. While Bolloré was the leading decliner in the fourth quarter, it was the biggest contributor to results for 2021 and remains one of the most exciting opportunities in the Fund.
Bolloré’s strong performance last year was partially a result of the successful public offering and spinoff of Universal Music Group’s (UMG) shares, which gave Bolloré direct ownership of approximately 18% of UMG’s stock and helped simplify a complex ownership structure that many investors have probably avoided because tracking it required too much effort. 2022 could be an even more transformative year for Bolloré, especially if it closes on an announced agreement with MSC to sell the African Logistics business for $6.4 billion.
New Q4 Positions in Samsung C&T Corporation and Reliance Steel
We added a new position in Samsung C&T Corporation (C&T) (XKRX:028260, Financial) during the quarter. C&T is another example of a conglomerate that sells at a significant discount to the value of its holdings. In this case, the main asset includes a 5% ownership position in Samsung Electronics, our largest holding, so the investment gives us a discount on a security we already love. The Samsung Electronics holding alone is worth more than C&T’s entire market cap, as is the 43% ownership position in Samsung Biologics that C&T holds. We do not like the Biologics position remotely as much as the Samsung Electronics holdings, but since it is free we are happy to have it. Additionally, C&T operates a construction and trading operation and owns a variety of other public and private investments.
Another new position is Reliance Steel & Aluminum Company (RS, Financial) (Reliance). Don’t be confused by the name, as the company does not produce or manufacture any metal products; it serves as the middleman between steel mills and end customers. Reliance has compounded shareholder returns well above peers and the market for decades despite operating alongside a difficult industry. It is the leader in a highly fragmented market and benefits from the supply chain disruptions and inflationary environment, leading to record earnings. We’ve had success before with leading distribution companies like Sysco in food and Brenntag in chemicals.
Conclusion
Since the market low in March of 2009, U.S. markets have steadily risen, in large part due to higher valuations. We think the start of 2022 could mark a change where, instead of coasting with ever-increasing index valuations, investments will be judged and rewarded based on fundamentals. In this type of environment, price will matter, and investments with the hidden value we often find could flourish. We have successfully navigated turbulent environments in the past, and will work hard to do so again. We wish investors in the AMG Yacktman Fund (Trades, Portfolio) a happy and healthy 2022, and, as always, we will be diligent, patient, and objective in our approach.
1Returns 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.
The views expressed represent the opinions of Yacktman Asset Management (Trades, Portfolio) LP, as of December 31, 2021, are not intended as a forecast or guarantee of future results, and are subject to change without notice.
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.
