The AMG Yacktman Fund (Trades, Portfolio) (“Fund”) returned 4.1% for the first quarter of 2016 compared with 1.4% appreciation for the benchmark, the S&P 500 Index. For the 12 months ending March 31, 2016, the Fund returned 1.6% versus the benchmark return of 1.8%.
The U.S. markets dropped sharply in January and early February before staging a strong rebound which took the S&P 500 Index modestly higher for the first three months of 2016. We produced solid outperformance in the quarter, with the Fund appreciating 4.1% compared to the S&P 500, which was up 1.4%. We achieved this outperformance, in large part, by holding up much better than the market during the decline and then capturing a solid percentage of the recovery. Protecting our Fund holders during difficult periods by our constant focus on quality, price and risk has been a key component of our strong long-term results.
We feel good about the way the Fund is positioned today. The Fund has large holdings in many of the finest companies in the world. Most of the companies we own are strong leaders in their industries, and have businesses that can hold up in both good economic times and bad, solid balance sheets and opportunities to improve profit margins over time. We think the last attribute may be the most valuable in the next few years, as many companies in the S&P 500 could be facing meaningful margin
contraction, and those that have the ability to expand margins could stand out favorably.
The U.S. Dollar was generally weaker during the first quarter, after having been strong during the 18 months prior to the end of 2015. That significant Dollar strength caused an earnings headwind for many of our top holdings, due to their global business exposures. We think this caused many investors to underestimate the long-term earnings power of these businesses, and the recent Dollar weakness should help many of our investments report better earnings and demonstrate the value of their non-U.S. businesses.
Contributors
Top contributors for the quarter include Sysco Corporation (“Sysco”), Oracle Corporation (“Oracle”) and Coca-Cola.
Sysco (SYY, Financial), the leading food distribution company in the United States, was a strong performer in the first quarter. After struggling for several years with significant margin pressure, Sysco has shown signs of improvement in recent quarters. The company also announced a $3.1 billion acquisition of Brakes Group, a leading European foodservices distributor, which could provide a platform for additional non-U.S. expansion over time.
Oracle (ORCL, Financial)’s shares rallied after the company reported better-than-expected results. We continue to think the shares are attractive at the current valuation. Although Oracle’s best days of growth are likely behind the company, we think the business can produce strong free cash flow and continue to expand its business over time.
Coca-Cola (KO, Financial) was a solid performer in the quarter, along with the general strength in the consumer staples sector. Given the market turmoil and global uncertainty, staples were favored due to the quality and consistency of their businesses. We think Coca-Cola could benefit from the recent Dollar weakness and achieve solid margin expansion as the company focuses on cutting costs.
Detractors
Top detractors for the quarter include BNY Mellon Corp. (“BNY”), and ConocoPhillips (COP, Financial).
Both BNY Mellon and Wells Fargo (WFC, Financial) dropped with general weakness in the financial sector. We think both companies are well-positioned leaders in the industry whose shares are attractively priced.
ConocoPhillips was weak along with other commodity stocks in the first quarter. Recently the shares have rallied significantly off their lows. Our total exposure to energy stocks is modest in the Fund.
Other
21st Century Fox (FOXA, Financial) (“Fox”), which is our largest position, appreciated solidly during the quarter, though we think the shares remain significantly undervalued. In recent years, the company has increased expenses to build its sports networks in the U.S. and India, battled significant currency headwinds and underperformed in its film and network television businesses. As the share price declined, the company reduced the share count through a large share repurchase program.
We think Fox is now poised for significant growth as its investments bear fruit, underperforming businesses turn around and currency headwinds abate. Fox has investments we feel are underappreciated, such as its ownership stakes in Sky and Hulu, which we believe make its valuation even more attractive than meets the eye when looking at reported earnings. Fox shares sell at a modest valuation considering the high quality of its diverse businesses, its significant growth potential, hidden assets and strong management team.
Conclusion
During the quarter, the Fund handled the market volatility well, holding up much better than the market during the declines, capturing a significant portion of the rebound and solidly outperforming over the full quarter. We think the first quarter is a healthy reminder that sound risk management is a critical component of generating strong returns over a full cycle. We continue to find many securities that could become new additions to Fund holdings in future quarters, and, as always, will continue to be patient, diligent and objective when managing the Fund.
The views expressed represent the opinions of the Yacktman Asset Management L.P., as of March 31, 2016, are not intended as a forecast or guarantee of future results, and are subject to change without notice.
