In the second quarter the AMG Yacktman Fund (Trades, Portfolio) (the Fund) returned -11.50%, underperforming the -12.21% return for its primary benchmark, the Russell 1000® Value Index.
In the first half of 2022, markets declined sharply due to increased geopolitical tensions, runaway inflation and eroding corporate earnings—to name just a few of a long list of additional challenges. Stocks were especially vulnerable to such negative events as we ended 2021 at extremely high valuations compared to historical ranges. The AMG Yacktman Fund (Trades, Portfolio) declined -11.50% in the second quarter compared to Russell 1000® Value Index at -12.21% and the S&P 500® Index at -16.10%. The S&P 500 Index was particularly impacted by steep declines in high-priced growth stocks, an area we avoid.
Yacktman Asset Management (Trades, Portfolio) and the AMG Yacktman Fund (Trades, Portfolio) are celebrating our 30th anniversary this year. Three decades is a significant milestone for an independent boutique asset manager and mutual fund. We want to thank shareholders for the confidence they have placed in us and the patience and intelligence they have displayed through a wide range of investment environments.
Over the years, we have earned a reputation for thinking independently and producing substantial risk-adjusted returns. Some of our best results have been achieved in declining markets, during extended periods of low returns, or rebounding from market low points. The last decade-plus of a low-interest rate environment full of reckless behavior and puzzling valuations for many unproven companies is not always conducive to our patient approach built on fundamental analysis and risk management. We believe our investment philosophy and experience set us up well for an investment climate that is likely to be far more challenging versus the last thirteen years.
The Yacktman Approach
Below is a summary of some key attributes we think are critical to investment success.
Price, Quality and Risk
We focus on price and risk with most of our time spent evaluating these characteristics at the individual security level. We believe good investment results are ultimately about what you own and what price you pay. Unlike many growth investors, we believe an attractive purchase price is essential to managing risk and creating solid returns. However, we may differ from other value investors because we believe quality is also important. The real magic happens when we can purchase higher quality businesses that are misunderstood—sometimes due to complexity or short-term orientation by others—allowing us to buy them at what we believe to be a great price.
Patience and Objectivity
Patience and objectivity are paramount to investment success. Microsoft is a good example of an investment that took significant time to work. We initially purchased Microsoft as a small position in 2003 and increased the portfolio weighting over time. Even though the price was attractive, the stock then spent the next decade or so going nowhere despite growing business results. That patience was rewarded as the stock price caught up to the fundamentals, rising 10-fold in recent years. During the initial ten lean years, it was necessary to continually reassess the investment thesis to make sure we were being objective and not just stubborn. It can be a fine line, but the wait was well worth it in this case.
Concentration
Many managers spend a great deal of time thinking about sector allocations and over/under allocations versus the index. We take a different tack, focusing first and foremost on bottom-up idea generation. We then take significant positions when we think the risk/reward is highly tilted in our favor. Top positions often make up a significant weighting in the Fund, and our success in many of our largest investments over time have helped create the strong risk-adjusted performance track record. We believe great investment opportunities are rare and our goal is to make them count.
Flexibility
While the Fund is largely focused on large U.S. companies, we have the flexibility to invest across market caps, geographies and even into debt securities (typically only when they offer equity-like rate of return at lower risk). We construct the portfolio based on the best opportunities we see at a given time and will hold cash if we find the risk-adjusted returns at the individual security level do not warrant being fully invested. We do not attempt to mimic a benchmark. In the late 1990s we owned no technology stocks. A few years later, we bought many of them—but at dramatically different valuations. Today we are seeing an opportunity in energy stocks that we think is more positive than at any previous time in our firm’s history and are positioning the Fund accordingly.
Overall, we think our differentiated approach is more important than ever, especially since many have gone all-in on a passive indexed approach, especially in the U.S. large-cap space. While the benefits of a low-cost approach are sound, being indexed today may be the world’s most overcrowded trade. In an environment where returns may be meaningfully harder to generate than they have in the past decade, we believe that individual security choices and their corresponding performance will once again be a big differentiator in returns.
While we do not put too much emphasis on shorter-term performance, below are contributors and detractors for the first half of the year.
Contributors and Detractors
Energy and defensive stocks were among the top contributors for the first half of the year. Our largest holding within energy the sector is Canadian Natural Resources (CNQ, Financial) which we think is one of the best-managed and well-positioned companies among global oil and gas majors. Most of CNQ’s production and oil and gas reserves are long-life, low decline assets capable of producing for 30 years. Due to recent high free cash flow generation, CNQ has reduced debt and plans to return meaningful capital to shareholders via dividends and share repurchases.
We have recently become more constructive on energy stocks due to high expected free cash flow yields, sound balance sheets and a more challenging supply environment that could last for years. While the development of cleaner energy sources is important, pressures on energy companies and their management teams have led to significant underinvestment in new sources of supply. The industry has remained more disciplined than ever before and that will have ramifications on the supply/demand situation going forward. We believe this will be a positive for energy stocks.
Northrop Grumman (NOC, Financial) and Lockheed Martin (LMT, Financial) were also contributors to results as the war in Ukraine has been a reminder of the importance of the defense sector. The valuations of these stocks remain attractive, especially given the stronger business prospects going forward as governments place greater emphasis on security.
Detractors included Samsung Electronics (XKRX:005930, Financial) (Samsung), Microsoft (MSFT, Financial) and Bolloré (XPAR:BOL, Financial). While these securities lagged during the first half of 2022, they remain among our favorite holdings. Technology stocks sold off sharply in the first half, and Samsung and Microsoft were unable to avoid the sector’s declines. While Samsung’s memory semiconductor business has weakened slightly in 2022, it remains highly profitable, and the shares are remarkably inexpensive. The stock trades at little more than book value, and given inflationary pressures, at a significant discount to replacement book value. The balance sheet should mitigate the downside from here, with more than one-third of the market cap accounted for by excess cash and investments totaling more than US$100 billion.
Bolloré was a detractor in the first half; however, we were very encouraged by the company’s execution and activity. In March Bolloré announced it signed an agreement to sell its African Logistics business to MSC Group for EUR 5.7 billion, which would put Bolloré in a net cash position and help simplify a complicated investment story. A friend once said to us, “Where there’s mystery, there’s margin.” We’ve found that complexity can lead to significant undervaluation in the stock market. Bolloré management appears to agree as they executed significant share repurchases in the year’s first half.
Conclusion
We want to acknowledge the broader members of the Yacktman team, who are a key element to our firm’s success, allowing us to focus on the investment process while the business runs smoothly. We feel fortunate to work with an incredibly high-quality group at our firm and with our partners at Affiliated Managers Group and AMG Funds. We are keenly focused on the future and driving strong risk-adjusted returns from here. As always, we will remain objective, diligent, and patient while managing investor capital.
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 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 June 30, 2022, 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.
