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Holly LaFon
Holly LaFon
Articles (7617) 

AMG Yacktman Focused Fund 3rd Quarter Commentary

Overview of quarter and holdings

The AMG Yacktman Focused Fund (Trades, Portfolio) (the Fund) (Class S) returned 1.75% for the third quarter of 2016, compared with 3.85% for the benchmark, the S&P 500 Index. For the 12 months ending September 30, 2016, the Fund returned 15.38%, versus the benchmark return of 15.43%.

We are pleased with the solid returns for the year, which are especially strong considering the lower level of risk in the Fund. Currently we own positions in securities we think are substantially undervalued like 21st Century Fox (Fox) and Samsung Electronics Preferred (Samsung), and have significant exposure to very high quality businesses that we think can be solid in more difficult times and offer margin expansion through long-term cost cutting efforts. Examples of these investments include Procter & Gamble (P&G), PepsiCo (Pepsi), Coca-Cola (Coke), Sysco Corporation (Sysco) and Johnson and Johnson (JNJ).

We also have residual cash, which is a function of the expensive market, which creates fewer investment opportunities than we would like. In the last 18 months we have seen an increasing number of potential new additions to the Fund, and will deploy cash when we see attractive investment opportunities in securities regardless of the level of the market.

As always, we will wait for the right price, because a low price helps maximize reward and manage risk. In the meantime, we will be patient. We think Steve Jobs said it best in his Stanford Commencement address in 2015, “If you haven’t found it yet, keep looking. Don’t settle.” We take good ideas from anywhere, even if it means quoting the co-founder of Apple when Samsung is one of our most important positions.

Contributors

Contributors in the third quarter included Samsung, P&G, Cisco Systems and Microsoft.

Samsung (XKRX:005930)’s stock was a strong performer despite the well-publicized recall and termination of the Note 7 phone line. We think Samsung is significantly undervalued at current levels, and expect additional shareholder-friendly measures will be announced in the next few months. At the end of the second quarter, Samsung was approaching $70 billion in net cash, much of which should be returned to shareholders. Unforeseen issues, sometimes significant ones, occur from time to time in investing, which is why it is important to own securities that trade for a substantial discount to what they are worth, just in case a negative surprise occurs.

In summary, we think Samsung is worth less than it was previously valued at, but far more than it currently is. While near-term earnings will be lower from recall costs and write offs from the Note issues, Samsung’s overall value is only modestly less than it was before the Note 7 launch, in large part due to improving results in the semiconductor and display businesses. Samsung remains the cheapest large stock we have seen in recent years, and we believe offers tremendous upside from current levels.

P&Gs (NYSE:PG) share price performed well during the quarter. Recently, the company reduced its share count by approximately 4% by completing a transaction combining its beauty and fragrances businesses with Coty. Over the last few years, P&G has sold-off many non-core and slow-growing brands to focus on reinvigorating its core franchises. P&G management is increasing investment in many of its remaining brands, which we believe can lead to improved growth over time.

Cisco (NASDAQ:CSCO)’s shares appreciated solidly along with the general rise in technology sector shares. We also had strong returns from Microsoft (NASDAQ:MSFT) during the quarter.

Detractors

Detractors for the quarter included Fox, Coke, Aggreko and Oracle.

Fox (NASDAQ:FOXA)’s shares declined during the quarter after the company announced stepped-up investments in cable content and a more restrained and opportunistic share repurchase. We think Fox is significantly undervalued, in part because of underappreciated businesses like Star, which provides nearly 25% of television content in India, and equity affiliates which include Fox’s 39% ownership of Sky, and non-controlling ownership stakes in Hulu and Endemol Shine. In total, we think Star, Sky and the other affiliate stakes could represent more than $10 per share of value while contributing only modestly to earnings. After adjusting for our appraisal of these underappreciated assets, we think the core of Fox trades for only 8-9 times earnings.

Coke (NYSE:KO)’s share declined modestly in the third quarter after releasing results that showed struggles, especially in Emerging Markets. Long term, we think Coke is executing a solid turnaround by significantly cutting costs, stepping up investments in marketing, taking price increases where it can and refranchising many bottler operations.

A small position in Aggreko (LSE:AGK) detracted from returns as the company struggled with greater competition and weakness in oil and gas markets and mining markets. Although current business is challenging, futures orders look encouraging.

Oracle (NYSE:ORCL)’s shares were modestly lower during the quarter after reporting mixed earnings results. We think Oracle’s shares represent solid value at current prices.

Conclusion

We are pleased with the strong results for the year and the makeup of the Fund. We continue to work hard, assessing current holdings and potential new additions to the Fund. As always, we will be patient, objective and diligent in our efforts.

The views expressed represent the opinions of Yacktman Asset Management LP as of September 30, 2016, are not intended as a forecast or guarantee of future results, and are subject to change without notice.


Rating: 5.0/5 (1 vote)

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