Yacktman Fund First Quarter Letter

Author's Avatar
Holly LaFon
Apr 26, 2012
Article's Main Image
Though the Yacktman Focused Fund (YAFFX, Financial) and Yacktman Fund (YACKX, Financial) did not beat their benchmark S&P 500 in the first quarter, they appreciated a solid 6.76% and 7.48%, respectively. Donald Yacktman and his associates explain what stocks contributed to performance in their first-quarter letter below:

In the first quarter of 2012, The Yacktman Focused Fund and The Yacktman Fund appreciated 6.76% and 7.48% compared to the S&P 500 which was up 12.59%. We were pleased with the strong absolute returns even though our funds failed to keep pace with the S&P 500 during the quarter. We judge our results over longer time periods, not quarterbyquarter, and are proud of the longterm results demonstrated in the total return table below. As a reminder, our funds are constructed to achieve superior investment results over time while managing risk, not track shortterm market moves.

The performance data quoted for The Yacktman Fund and The Yacktman Focused Fund represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that the investor's shares, when redeemed, may be worth more or less than their original cost. The current performance may be higher or lower than the performance data quoted. The most recent monthend performance data may be obtained by calling this toll free number 18005258258.

The market rally, which began in the fourth quarter of 2011, generally favored lowerquality, more economically sensitive securities. We think our funds currently have key positions in higher quality, more predictable businesses.

Portfolio Review

Consumer Staples

So far this year, consumer staples like PepsiCo (PEP, Financial) and Procter & Gamble (PG, Financial) have produced only low singledigit returns, far below those of the broader market. High quality stocks generally stalled to begin the year as momentum returned to the market, particularly in the financial service and technology sectors. This was largely the opposite of much of 2011 when the consumer staples sector was one of the best performing sectors. We think the combination of predictability, quality, and valuation of companies like Procter & Gamble, PepsiCo, Clorox (CLX, Financial), and Coca Cola (KO, Financial) is especially important in a time when we perceive many significant risks in the world.

Avon (AVP, Financial), a position we purchased in the second half of 2011, appreciated slightly during the quarter but jumped after the end of the quarter when it received an acquisition proposal which the company rejected. We think the offer demonstrates the strategic value of Avon's products and global market presence. Recently, Avon announced a new CEO, Sherilyn McCoy, who comes to the company with a strong reputation after many successful years at Johnson & Johnson.

"Old Tech"

Technology shares were generally strong with Microsoft (MSFT, Financial), Cisco (CSCO, Financial), and Corning (CRW, Financial) all appreciating solidly. HP (HPQ, Financial) continued to disappoint, declining by about 7%. Microsoft the top contributor to fund results in the first quarter, appreciating more than 20%, though we believe the stock remains inexpensive at less than 10 times our expectation of 2012 earnings when adjusting for net of the cash on the balance sheet. While HP struggled, we think the shares are remarkably inexpensive and the management team has improved significantly since Meg Whitman became CEO.


Shares in healthcare stocks generally appreciated during the quarter with medical device stocks stronger than pharmaceutical shares. This was the reverse of 2011 when pharmaceutical stocks were much stronger. C. R. Bard (BCR), our largest holding in healthcare had its victory in a patent case upheld, putting the company much closer to receiving a significant payment in the next 12 months. Shares in Pfizer (PFE) and Johnson & Johnson (JNJ) were up only modestly in the first quarter, lagging the rise in the S&P.

Media News Corp (NWS) was up solidly during the first quarter. Operating results were strong and the company continued to repurchase a significant number of shares. Viacom's (VIA) stock appreciated only modestly last quarter as the company faced ratings weakness at Nickelodeon and MTV. Management is capably addressing the issues and we think the shares remain inexpensive at current prices.

Special Situations Apollo Group (APOL), which was a star performer in 2011, was our weakest performer during the first quarter as its "for profit" universities experienced more challenging enrollment trends. We think the stock is very attractive after the recent declines.

Total System Services (TSS), a credit card processing firm was eliminated from both funds after strong price appreciation no longer made the security a bargain.


During the quarter we achieved solid returns while keeping appropriately positioned to effectively manage risk. Currently, the quality level of the companies in our funds is extremely high and valuations are attractive. We will work hard to objectively examine both current positions and new opportunities and, as always, we will continue to be diligent, objective, and patient when managing The Yacktman Funds.


The Yacktman Team

See additional disclosures on next page An investor should consider the investment objectives, risks and charges and expenses of the Funds carefully before investing. The Funds' prospectus contains this and other important information about the Funds. An investor may obtain a prospectus at www.yacktman.com or by calling this toll free number 18005258258. The prospectus should be read carefully before investing.

The S&P 500 is an unmanaged but commonly used measure of common stock total return performance. Cumulative return data calculation includes reinvestment of gross dividends.

Distributed by Rafferty Capital Markets, LLC. Principal Risks of Investing in the Fund

Investors in the Fund may lose money. There are risks associated with investments in the types of securities in which the Fund invests. These risks include:

Market Risk: The prices of the securities in which the Fund invests may decline for a number of reasons. The price declines of common stocks, in particular, may be steep, sudden and/or prolonged.

Value Investing Risk: From time to time "value" investing falls out of favor with investors. When it does, there is the risk that the market will not recognize a company's improving fundamentals as quickly as it normally would. During these periods, the Fund's relative performance may suffer.

NonDiversification Risk: The Fund is a nondiversified investment company. As such it will likely invest in fewer securities than diversified investment companies and its performance may be more volatile. If the securities in which the Fund invests perform poorly, the Fund could incur greater losses than it would have had it invested in a greater number of securities.

SmallerCapitalization Companies Risk: Smaller capitalization companies typically have relatively lower revenues, limited product lines and lack of management depth, and may have a smaller share of the market for their products or services, than largercapitalization companies. The stocks of smallercapitalization companies tend to have less trading volume than stocks of largercapitalization companies. Less trading volume may make it more difficult for our investment adviser to sell securities of smallercapitalization companies at quoted market prices. Finally, there are periods when investing in smallercapitalization stocks falls out of favor with investors and the stocks of smallercapitalization companies underperform.

Interest Rate Risk: In general, the value of bonds and other debt securities falls when interest rates rise. Longer term obligations are usually more sensitive to interest rate changes than shorter term obligations. While bonds and other debt securities normally fluctuate less in price than common stocks, there have been extended periods of increases in interest rates that have caused significant declines in bond prices.

Credit Risk: The issuers of the bonds and other debt securities held by the Fund may not be able to make interest or principal payments. Even if these issuers are able to make interest or principal payments, they may suffer adverse changes in financial condition that would lower the credit quality of the security, leading to greater volatility in the price of the security.

Junk Bond Risk: Although junk bonds generally pay higher rates of interest than investment grade bonds, junk bonds are high risk investments that may cause income and principal losses for the Fund. The major risks of junk bond investments include: 1) Junk bonds may be issued by less creditworthy issuers. Issuers of junk bonds may have a larger amount of outstanding debt relative to their assets than issuers of investment grade bonds. In the event of an issuer's bankruptcy, claims of other creditors may have priority over the claims of junk bond holders, leaving few or no assets available to repay junk bond holders. 2) Prices of junk bonds are subject to extreme price fluctuations. Adverse changes in an issuer's industry and general economic conditions may have a greater impact on the price of junk bonds than on other higher rated fixedincome securities. 3) Issuers of junk bonds may be unable to meet their interest or principal payment obligations because of an economic downturn, specific issuer developments, or the unavailability of additional financing. 4) Junk bonds frequently have redemption features that permit an issuer to repurchase the security from the Fund before it matures. If the issuer redeems junk bonds, the Fund may have to invest the proceeds in bonds with lower yields, with a corresponding reduction in future income. 5) Junk bonds may be less liquid than higher rated fixedincome securities, even under normal economic conditions. There are fewer dealers in the junk bond market, and there may be significant differences in the prices quoted for junk bonds by the dealers. Because they are less liquid, judgment may play a greater role in valuing certain of the Fund's securities than is the case with securities trading in a more liquid market. 6) The Fund may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting issuer. The credit rating of a high yield security does not necessarily address its market value risk. Ratings and market value may change from time to time, positively or negatively, to reflect new developments regarding the issuer.

Foreign Securities Risk: The securities of foreign issuers may be less liquid and more volatile than securities of comparable U.S. issuers. The costs associated with securities transactions are often higher in foreign countries than the U.S. The U.S. dollar value of foreign securities traded in foreign currencies (and any dividends and interest earned) held by the Fund may be affected favorably or unfavorably by changes in foreign currency exchange rates. An increase in the U.S. dollar relative to these other currencies will adversely affect the Fund. Additionally, investments in foreign securities, even those publicly traded in the United States, may involve risks which are in addition to those inherent in domestic investments. Foreign companies may not be subject to the same regulatory requirements of U.S. companies, and as a consequence, there may be less publicly available information about such companies. Also, foreign companies may not be subject to uniform accounting, auditing, and financial reporting standards and requirements comparable to those applicable to U.S. companies. Foreign governments and foreign economies often are less stable than the U.S. Government and the U.S. economy. Because of these risks the Fund is a suitable investment only for those investors who have longterm investment goals. Prospective investors who are uncomfortable with an investment that will increase and decrease in value should not invest in the Fund.

Also check out:
4 / 5 (10 votes)
Load More
Author's Avatar
I'm a financial journalist with a Master of Science in journalism from Medill at Northwestern University.