For the 12 months ending December 31, 2022, the AMG Yacktman Fund (Trades, Portfolio) (the “Fund”) Class I shares returned -7.37%, slightly outperforming the -7.54% return of the Russell 1000® Value Index and far better than the -18.11% return of the S&P 500® Index.
2022 may have been a turning point for investing fundamentals like valuation, leverage ratios, and cash flow to matter more once again following many years of speculative frenzy. Given the huge influence of government stimulus in the last few years, it is difficult to predict normalized earnings for many businesses. In light of this dynamic, we think there can be significant economic and business headwinds that may continue to create a more difficult environment for stocks than in many years prior—maybe even back to the turmoil leading up to the market bottom in the 2008-2009 financial crisis.
We have taken advantage of the volatility by adding significantly to our energy weighting on a mid-year pullback. The Fund has by far the highest exposure to energy stocks since its inception. We think the risk/reward in the energy sector has changed dramatically for the better in recent years as cash flows have been directed away from increasing production at all costs and have moved toward dividends, share repurchases and debt reduction. Underinvestment in new supply has continued since the initial downturn in 2015. Adding to this deficit are a number of other factors including the conclusion of emergency releases from the Strategic Petroleum Reserve, limited spare capacity at OPEC+ and productivity declines in U.S. shale basins. On the demand side, China re-opening from COVID-19 lockdowns is a major tailwind. Overall, we think fundamentals could be far stronger than many expect for energy companies in the next several years.
In 2022, Yacktman Asset Management (Trades, Portfolio) LP (Yacktman) celebrated its 30th anniversary as a boutique asset manager. We remain focused on delivering strong, risk-adjusted returns over full market cycles. In a world of passive indexing, benchmark hugging, and speculative short-term trading, we think our focus on risk management is a real differentiator. Our Fund’s portfolio has investments in companies that have strong balance sheets (including net cash at several of our top holdings) in a world where many companies leveraged up to repurchase high-priced shares. We have seen several of our portfolio companies utilize this balance sheet strength to substantially increase share repurchase plans or to begin new programs in recent quarters in contrast to companies like JP Morgan and CarMax, which had to suspend long-running programs despite lower stock prices. Stepping up when others are stepping aside could prove to be of great value in the next few years.
We continue to utilize flexibility in our mandate to own some non-U.S. domiciled companies—in many cases, their business and currency exposure are very similar to U.S.-domiciled peers but they trade at steep discounts to U.S. peers. For example, by our calculations, Bolloré SE trades at a discount to just its publicly traded position in Universal Music Group (UMG), an exceptional company which has the #1 position in music content ownership. Although UMG is traded on the Amsterdam stock exchange, its operational headquarters is in the U.S., built years ago as part of Lew Wasserman’s famed Music Corporation of America (MCA) empire. In late 2022, Bolloré completed the sale of its African logistics business, which transformed the balance sheet into a net cash position alongside the UMG stake and other businesses and investments. We think 2023 could be the year for a big re-rating if management continues to simplify.
Contributors and Detractors
We report the contributors and detractors to give more detail about what contributed to last year’s results, but we remind investors that price movements can be somewhat random during shorter periods of time.
Contributors last year included energy and defense stocks. The energy and utilities sectors were the only S&P 500® sector that were up last year, and defense shares rose due to the war between Russia and Ukraine and generally increased geopolitical tensions. The technology sector, after years of leading performance, declined dramatically, which led many of our tech holdings to underperform in 2022 alongside the sector.
Contributors
- Canadian Natural Resources Ltd. (CNQ, Financial) – benefited from strong energy prices and free cash flow
- Weatherford International PLC (WFRD, Financial) – oil services firm that is seeing solid growth and margin expansion post emergence from restructuring
- Northrop Grumman Corp (NOC, Financial) – strength in defense sector
Detractors
- Samsung Electronics Co., Ltd (XKRX:005935, Financial) – weakness in memory semiconductor market and technology shares being out of favor; optimism for a recovery in the memory market later this year, extremely low valuation, and potential for the Korean market to be reclassified from emerging market to developed could help propel the stock in 2023
- Alphabet Inc. (GOOG, Financial)(GOOGL, Financial) – concerns about potential competition from artificial intelligence, a softer advertising market, and general weakness in the technology sector contributed to declines
- Cognizant Technology Solutions Corp (CTSH, Financial) – IT consulting business that experienced weak growth; recently named new CEO who we think can reinvigorate the company
Other securities to note
U-Haul Holdings Co. (UHAL, Financial) (formerly AMERCO) took steps to simplify its structure, in part due to management’s frustration with the gap between the stock’s market price and management’s perception of value. We think its do-it-yourself moving business—an incredible brand built over multiple decades—is worth most of today’s stock price. In addition, investors get significant upside from the underappreciated self-storage holdings, which today consist of more than 75 million square feet of owned and operated space. Late in the year, the Shoen family, U-Haul’s controlling shareholders, purchased more than $75 million in shares.
Associated British Foods PLC (LSE:ABF, Financial) lagged during the year, with the stock falling to levels that we felt were dramatically disconnected from its underlying value. ABF is a conglomerate which has businesses ranging from ingredient production of baker’s yeast and sugar to food brands like Ovaltine outside of the U.S., Twinings Tea in the U.K., and fast fashion apparel with its Primark retail chain. The company has a net cash balance sheet and owns significant real estate to support its retail operations.
Firm update
We are excited to welcome Molly Pieroni to Yacktman as President, Partner and a member of the investment team. She brings a strong background in the investment field and as a strategic consultant. We believe she will be a key contributor to driving the business forward over the coming years.
Conclusion
2022 was a year of great turbulence in the financial markets but one of positive momentum for many of the Fund’s holdings. We think last year served as a good reminder of why it is important to have exposure to a manager like Yacktman, where a truly active investment approach and a keen understanding of risk management are foundational to an experienced team that has been through multiple cycles. While many have moved to indexing or benchmark hugging investment approaches, we remain independent thinkers focused on the long term and finding bargains that we believe offer strong, risk-adjusted returns over time. As always, we will be patient, objective and diligent in managing the Fund.
To hear more from the Fund’s portfolio managers, financial advisors can visit our website here to listen to Yacktman Asset Management (Trades, Portfolio)’s fourth quarter update call.
The views expressed represent the opinions of Yacktman Asset Management (Trades, Portfolio) LP, as of December 31, 2022, 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.
3Since 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.
5 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.
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.
