Tip:
Highlight text to annotate it
X
PROMOTION: Hello, I'm Consuelo Mack. I want to tell you about a new opportunity to watch
Consuelo Mack Wealthtrack before the program appears on public television.
As a subscriber you can see programs 48 hours in advance of the general public and also
find timely interviews and commentaries exclusive to Wealthtrack Premium subscribers.
go to wealthtrack.com for more information.
[music]
[music]
[music]
[music]
[music]
[music]
[music]
[music]
CONSUELO MACK: This week on WealthTrack, a mild mannered mutual fund manager with a superman
track record- Great Investor Don Yacktman of the Yacktman Fund scans the globe for dominant
companies selling at deep discounts. Where is he finding them now? Next on Consuelo Mack
WealthTrack.
[music]
[music]
[music]
[music]
[music]
[music]
[music]
[music]
SPONSOR: The company keep is also the company we keep.
Together we'll provide lifetime guarantee income and investments solutions.
PROMOTION: Did you know you can take WealthTrack with you? You can watch full WealthTrack episodes,
highlight episodes and the WealthTrack newsletters, wherever, whenever. Let me show you how.
In your devices web browser type in… m.wealthtrack.com - that’s it!
So watch WealthTrack wherever you can whenever can.
[music]
[music]
[music]
[music]
[music]
[music]
[music]
Hello and welcome to this edition of WealthTrack. I’m Consuelo Mack. “The only predictable
thing about 2012 is its unpredictability.” So wrote Mohamed El-Erian the CEO and Co-Chief
Investment Officer of bond giant PIMCO in a recent Wall Street Journal editorial. That
is a sentiment shared by many on Wall Street and Main Street.
“Markets hate uncertainty” is a market cliché that seems to be playing out. Unpredictability
has led to a massive outflow of funds from stocks to the perceived safety of bonds for
several years and is one of the reasons that even financial advisors are reluctant to increase
their clients’ stock holdings. According to a recent survey by Investment News, a leading
publication for financial advisors, only 43.6% of planners plan to increase their clients
allocation to U.S. stocks this year versus 63.4% who said they would increase their allocation
to stocks overall last year. Just 18.7% said they would recommend increasing client exposure
to international stocks versus 60.2% who did last year. Undermining investor confidence
is the fact that active stock fund managers underperformed the market indices for the
second year in a row in 2011- only 21% of large cap fund managers for instance did better
than the Russell 1000 last year. Only 20% outperformed the year before. The average
large cap fund lagged the Russell by nearly three percentage points in 2011.
Enter this week’s Great Investor WealthTrack guest whose experience is the opposite and
could not feel more differently about the prospects he sees in the stock market. He
is Don Yacktman, co-portfolio manager with his son Steven of the nearly 20 year old flagship
Yacktman Fund and the newer Yacktman Focused Fund. Both value-oriented funds are rated
five-star by Morningstar and have beaten the markets by a wide margin since inception.
The Yacktman Fund ranks in the top one percent of its category for the past three, five,
ten and fifteen year periods, one of the reasons the team was a finalist for Morningstar’s
Domestic-Stock Manager of the Year Award in 2011. And unlike so many of their rivals the
funds have been attracting new investors. Another difference between Yacktman and many
of his peers is the opportunities he sees in the market, which he calls “amazing.”
I asked him why.
DONALD YACKTMAN: I’ve been doing this for over 40 years, and I can’t remember another
period of time where I’ve seen so many high-quality, profitable businesses selling at prices relative
to the market this cheaply. And just to give you an illustration, a 30-year Treasury today
has a lower yield than many of these companies, like Pepsi or Johnson & Johnson or Procter
& Gamble, et cetera. And that’s a very unique period of time.
CONSUELO MACK: Relative to other options. But what about, you know, in real terms? I
mean, certainly at 11 or 12 times earnings, whatever the S&P is selling at now- I mean,
that’s not, historically, like, really cheap?
DONALD YACKTMAN: I think in ’08, the bottom of ’08 and early ’09, that stocks were
absolutely cheaper. But on a relative basis, a number of these companies, like, say Procter
& Gamble, sells at almost the same price it did in the fall of ’08. And here you’ve
had three years and a half now, almost, of growth. And the dividends increased and everything
else. But the cash flows are much higher. They’re much more valuable than they were
then.
CONSUELO MACK: So, as a value investor, is the best value to be found in these, you know,
large cap kind of brand name companies? Is that really where you’re finding the best
opportunities?
DONALD YACKTMAN: It is. I mean, if you look at our process and how we go to achieve that,
we have three goals. The first goal is to preserve our clients’ capital. The second
one is to make equity-type returns, double-digit type returns. And the third one is to beat
the S&P over a full market cycle.
CONSUELO MACK: And a full market cycle is how many years?
DONALD YACKTMAN: It varies. So, we’ll use 10 years, because that will contain any cycle.
And then, from that, in order to achieve that, what we will do is we will look at forward
risk-adjusted rates of return. Now, that sounds complicated, but basically it’s like behaving
like a bond buyer. So you put a forward return, and then you put a quality rating on it. And
what we’re seeing now is, in effect, the so-called AAAs of equity, things like Coke
and Pepsi and things like that, have these very high returns, relative to other things.
And so, why would one go to lower grades when they can stay with these so-called AAA-type
bonds? Only they’re really equities.
CONSUELO MACK: Let me ask you about the whole thesis of equities for the moment, because
I think a lot of investors, unless you’re a professional investor and you have to invest
in equities, regardless of the fact that they might look relatively cheap, the volatility
that investors are seeing in the market has scared a lot of investors away. And so, how
do you view the volatility that we’re seeing in the market? In your 40-plus years of investing,
is this a much more, you know, risky time? Is it a harder time to invest? What’s your
view?
DONALD YACKTMAN: It’s more unpredictable. The overall economy and things like that.
But there are a lot of things one can control, and a lot of things one can’t control. So,
we try to focus on the things we can control. And most of the companies that we’re finding
that are a good value have relatively predictable cash flows. And so, again, why do you want
to downgrade if you can get the highest grade at these kind of returns? And, we feel very,
very comfortable on a relative basis, certainly.
CONSUELO MACK: Getting double-digit returns has not been possible for most managers on
a regular basis over the last several years. We had terrible years in, what, 2008. We had
a much better year in 2009. So, you know, again, the returns have not been predictable
either. So are the investment returns that you can really expect to deliver over a market
cycle the same as they’ve always been, or have you had to set your sights lower?
DONALD YACKTMAN: Yes and no. I mean, I think inflation, as it comes down, means the real
returns are still there. But, you don’t get the nominal returns…
CONSUELO MACK: The inflation pop.
DONALD YACKTMAN: …because of the inflation part of it. But, no, I think the process is
repeatable, what we’re doing. And think of it just very much like what somebody would
be taught in a finance course in graduate school, that you’d look for a hurdle rate,
and then you try to find things above the hurdle rate. And if they’re there, you should
invest the capital. And when the capital’s all invested, then you should start to look
at things on a relative basis, like we did in late ’08, where we were willing to sell
off a high-quality stock for a lower quality stock, because the spread had opened up so
enormously. And so, something like News Corp. and Viacom, which are still good, quality
companies, were providing, we thought, 20-plus% type returns, so we were willing to sell off
Procter & Gamble, that had low double-digit returns.
CONSUELO MACK: And so, News Corp. and Viacom, did they deliver that 20% plus returns that
you expected from them?
DONALD YACKTMAN: On the long term, yes. And then in the short term, even more dramatically.
I mean, News Corp. has more than tripled from its lows. And Viacom has also, as an example.
CONSUELO MACK: So, News Corp. is, you know, again, one of those companies that, you know,
given the scandal that they had with the phone-tapping in the UK, and the problems that the Murdoch
empire has had because of that- so, in a situation like that, that was new information for Yacktman
as well. What made you decide to stick with News Corp.?
DONALD YACKTMAN: It was, but it wasn’t new information. In other words, that had been
revealed some time ago. It was just re-emphasized in the press. That was a very tiny piece.
News of the World was, like, 25 million of operating profits, and declining, because
we’re changing. The media business is changing. When we look at not only the price, but the
business model. And what we really like about News Corp. is the fact that the business model
is moving more toward a fee-driven business and away from an ad business. The big driver
in News Corp. is Fox News, which is now bigger than MSNBC and…
CONSUELO MACK: CNN.
DONALD YACKTMAN: …CNN combined. And you’re moving toward fee-driven revenue streams because
of the cable fees on that. That company is getting stronger, in our view. And so, we
saw that as an opportunity. And we actually got a bonus out of it, because what concerned
us is that they might overpay for BSkyB, which they own part of, and were considering trying
to buy the whole thing. And they were forced into buying back their stock, which was at
a cheap price, as plan B. And, we actually liked plan B better than plan A.
CONSUELO MACK: So, were you behind the rumors in the U.K. or whatever?
DONALD YACKTMAN: No, no.
CONSUELO MACK: No. That just happened to work out for you.
DONALD YACKTMAN: Mm-hm.
CONSUELO MACK: So, you know, let’s talk a little bit about protecting capital. Because,
again, if you haven’t really analyzed the market and individual issues, it looks like
it’s more difficult to protect capital in the stock market now than it has been. Is
that the case? Or is it, you can still tell your investors that, yes, we can protect your
capital, even in a very volatile market?
DONALD YACKTMAN: Yeah. I don’t think that’s any more difficult. Actually, I would argue
that volatility is the friend of a value investor, because it creates opportunity. And, think
of it as like a storm that you have in, say, like, a fruit orchard. And when the wind comes
blowing through, some of the fruit gets knocked from the tree down to the ground, making it
very easy to look at, and you can pick up the good ones. And it’s a lot easier to
pick them off the ground than it is up on the tree.
CONSUELO MACK: Let me ask you about some of the things, that you’ve been doing as well,
over time. Because you are a long-term investor. You know, I think you told me, your turnover
rate is about 20% overall, for both of the Yacktman Funds. Which means your average holding
is about five years. So, top one percent of all funds in the last fifteen, ten, five and
three-year periods with the Yacktman Fund. How have you done that? What are you doing
differently than your competitors are that have enabled you to stay in that top one percent
of all funds?
DONALD YACKTMAN: I think, more than anything, it’s a combination of objectivity and horizon
time. We’re very patient. We’re very long-term investors. Conceptually, what we’re doing
is buying beach balls being pushed underwater, and the water level is rising. And so, if
one has the patience to stay with that, then eventually the pressure will come off, and
the longer it takes, because the water level’s rising, the more the bounce will be. But horizon
time is a huge part of that. I know there are a lot of people who would like to buy
certain investments that they look at as good value for their clients, but they’re worried
that they won’t look good for the next quarter or the next year, and that they might get
fired because of that. And so, this longer horizon time, we’re just willing to stay
there, because we know that it will stand the test of time.
CONSUELO MACK: One of the things that you and I talked about a year and a half ago,
when you were last on Wealth Track, was the fact that we were talking about how, from
a value investor point of view, that one of the things that enabled you to actually get
through the financial crisis as well as you did was the fact that you did avoid the financial
sector, which was a value trap for a lot of other value investors. But I’ve noticed
that you’re moving a little bit more into some financial service companies now. What’s
changed?
DONALD YACKTMAN: Well, the values. The values have changed, and you’ll notice, in the
bulk of the movement, it’s been more toward the fee-driven side, as opposed to the spread-driven
side. U.S. Bank is bigger than most of the other ones combined. But whether it’s that
or a tangential kind of investment, like H&R Block, and then coming back again to things
like New York Mellon… or Bank of New York Mellon, I mean. Or, Northern Trust or State
Street, or even Goldman Sachs.
CONSUELO MACK: Or Goldman Sachs.
DONALD YACKTMAN: Right. We have a little Bank of America even in there. But, in all cases,
you’ll notice they’re very small positions, and we spread the risk. Sometimes, when things
are less predictable, the way to deal with that is to have a smaller position and allow
for a greater spread over what your normal hurdle rate would be, to allow for that uncertainty.
CONSUELO MACK: So tell me, what do you mean by “a greater spread”?
DONALD YACKTMAN: A higher rate of return expectation.
CONSUELO MACK: In other words, so if you’re interested in a company, let’s say a Goldman
Sachs or, you know, Bank of America, U.S. Bank, whatever. So you’ll take a small position
in that, but you’re expecting the return to be greater, and that’s why you’re taking
a smaller position? I …
DONALD YACKTMAN: Oh, yeah. That sounds incongruous.
CONSUELO MACK: It does.
DONALD YACKTMAN: No. What I’m saying is that the outcomes can be much wider, the array
of outcomes. In other words, you could have a real disaster, or you could have a spectacular
upside.
CONSUELO MACK: I see.
DONALD YACKTMAN: And so, as the array is wider, what you end up doing is attaching probabilities
to those outcomes, come up with a centrist rate of return. And then you want that to
be quite a bit higher than what a normal rate of return would be, based on the risk. But,
the more risky things are … in other words, if you’re going to drill for wildcat oil
wells, it’s probably a good idea to spread your risk over several oil wells, as opposed
to just putting it all into one. The more knowledge you have, and the more comfort you
have, that allows you to put a bigger position in, like we have in PepsiCo or News Corp.
CONSUELO MACK: Let me ask you as well, because I know that you tend to focus in both the
Yacktman Funds- obviously, the focused fund is more focused. But in the Yacktman Fund
itself, so the top 10 holdings are, what, 50%of the portfolio? Is that correct?
DONALD YACKTMAN: That’s correct.
CONSUELO MACK: And so, you know, some of the other, I mean, companies that we’ve talked
about, News Corp., I mean, Procter & Gamble, Microsoft, Cisco, are among your top five
holdings. What’s the rationale with those companies in particular?
DONALD YACKTMAN: Well, in each case, what you have is a highly profitable company that’s
selling at a low price. That’s really what it boils down to. And we’ve talked about
some of these, but I mean, like, Microsoft- what’s interesting is, like, if somebody
had told me back in 2000 that we would own Microsoft, Cisco and Hewlett-Packard today,
I would have laughed. But yet, Microsoft’s less than half of where it was then. Cisco
has been as low as 20% of where it was in 2000, and Hewlett-Packard, half, again, as
to where it was in 2000.
Now, think about that. You’re now 12 years further along. These companies are bigger,
more profitable. It’s just that they were grossly overpriced. And they’ve reached
the point where nobody wants to even talk about them anymore. They’ve had it with
them. You know? You know, everybody said, “I’ve lost money. Why do you want to own
that?” Well, that’s what creates opportunity. And now, by being objective and looking at
the forward rate of return, we see a lot of value.
CONSUELO MACK: How important are overseas earnings in the equation? And, you know, we’ve
had a number of discussions on Wealth Track about kind of the macro picture. And in fact,
right now, the U.S. is doing better than Europe, for instance. Emerging markets are starting
to slow. So, what’s kind of changed in the way that you approach businesses, and what
you look for in businesses, as far as their global reach?
DONALD YACKTMAN: Well, I think for a company to be a truly great company over the next
20 or 50 years, I think it’s not so much the domicile as it is the footprint. And I
think what you’re going to see is, there’s going to be a U.S. footprint with 20 to 25%
of the world’s GDP in the United States. You need the volume to get the cost down,
and so, it’s going to mean you’re going to have to have some exposure in the United
States. At the same time, you’ll probably see more unit growth in the third world, or
developing world, and so, there’s a need to be in that area, and to be moving in that
direction, so that you can get continued growth out of it. And transferring some of the opportunities
you have in the United States overseas.
CONSUELO MACK: Another issue that comes up a lot is the fact that corporations have record
amounts of cash. You know, their profitability’s at record highs as well. And so, I mean, how
important is how they employ that cash, what they do with it? I mean, stock buybacks, you
know, have been increasing… at least, announced stock buybacks have. Dividend payouts. You
know, what kind of shareholder-friendly moves are you seeing on corporations’ part that
matter to you, that you think are going to enhance your value as a shareholder?
DONALD YACKTMAN: Well, we look at, there are five options, basically, that a manager has.
Let me back up a little bit, okay? When you buy a stock, what you’re really buying is
cash, a series of cash that comes in over a period of years. Now, as an investor, the
first year’s cash you can pretty well estimate. In the typical company, part of that cash
is paid out to you in the form of a dividend. You know exactly what that is when you buy
it. You can get a pretty good handle on what you can reinvest that at, over a period of
time.
So the real wild card, so to speak, is what the manager’s going to do with the bulk
of the cash that the company is generating. And they basically have five options, and
that’s what we examine. We look at their record and what they do. Not what they say
they’re going to do, but what they do. They can put it back in the business, R&D, marketing,
cost-reduction distribution, et cetera. And marginal unit growth in dominant product categories
is enormously profitable. Typically, a company that has a 40% market share doesn’t make
twice what a company that has a 20% share makes. They’ll make four times.
CONSUELO MACK: Wow.
DONALD YACKTMAN: So that marginal unit growth is very, very important. Now, the problem
is- and particularly with most companies that we have-as they start to mature, they can’t
grow their units fast enough to absorb all the cash. So now they have to examine four
other basic options. Acquisitions. And that’s a tricky one. And, too many times, we see
the ego overriding the economics. I mean, we look at Hewlett-Packard, what happened
with this autonomy acquisition which they grossly overpaid for. We’d have much rather
seen them buy back stock. So that’s the third option. The fourth one is paying a dividend.
The fifth is just sitting on it, or letting it build, or pay down debt. So it’s how
they handle that over a period of time that does have a difference for a long-term investor.
CONSUELO MACK: If you were to prioritize what you look for in a company that is generating
cash, you know, how they utilize that cash- so, what do you look for? What are the decisions
that you favor?
DONALD YACKTMAN: Pretty much in the order I gave them to you. The first, most important
one, is protecting the crown jewels and, you know, focusing on what you’re really strong
and growing that part. And then, if you can find that synergy in an acquisition, where
you don’t overpay. And the same thing with buying back stock. Those three probably are
going to be far more important than the other two, than the dividend.
CONSUELO MACK: Far more important than paying dividends.
DONALD YACKTMAN: Yeah. Oh yeah. I think one of the dangers, looking down the road- again,
it’s fun to talk about these things, but we have to deal with them as they occur. But
one of the issues is what happens to the tax rate on dividends, because if the tax rate
on dividends goes back up… I’ve questioned a few companies and said, “Well, are you
willing to eliminate your dividends?” See, they’re trapped, in a way, because you got
taxpaying shareholders and non-taxpaying shareholders. And the problem is, the taxpaying shareholders
would just as soon them can the dividend and buy back stock, you know, if you’re rational
about it, because it would be better to have your growth taxed in the form of capital gains
than at ordinary income rates on the dividends, if the rates go up.
CONSUELO MACK: Right. If the dividend rate goes up. So, you know, we always as our guests,
if there’s one thing that each of us should own some of in a long-term diversified portfolio,
what would it be? And obviously, we’ve asked you on because the Yacktman Funds have been
such terrific investments. So you can’t recommend your own fund. So, what would it
be? What do you think we should all own some of in a broadly diversified portfolio?
DONALD YACKTMAN: Well, again, if you do what we do, basically what we’re saying is, the
more money we put in an idea, the more we like it. So, we have the most money in PepsiCo,
so that would stand out. I mean, here you can get a yield higher than long-term Treasuries.
They grew the dividend at seven percent last year. I think it’s like shooting fish in
a barrel.
CONSUELO MACK: And what is it about PepsiCo, though? I mean, of all of the other companies
that you could own that have, you know, a global franchise and, you know, have dominance-
actually, they’re not the dominant player in some markets. Coca-Cola is.
DONALD YACKTMAN: Correct.
CONSUELO MACK: So, what is it about Pepsi Cola that you find so attractive?
DONALD YACKTMAN: Well, I think if you look over the- I’ve, of course, watched this
for over 30 years now, and the business has evolved to a really nice business model. And
if you look at the individual components- the biggest part, by the way, is Frito-Lay,
and they could easily change their name from Pepsi to Frito-Lay. But, each one of those
major business components- Frito-Lay, carbonated beverages, Tropicana, Gatorade, Quaker Oats-
all these are low capital requirement. They’re products that are readily disposable. They
have a price-ability to re-price the product. They generate high returns, and the price
of the stock is at a reasonable level. So I mean, to me, I just don’t understand why
more of it isn’t owned by other people, frankly.
CONSUELO MACK: Well, if it does become owned by other people, you know, better for you
at the Yacktman Funds, at any rate. So, Don Yacktman, thank you so much for joining us
on WealthTrack. We really appreciate always illuminating conversation with you.
DONALD YACKTMAN: Well, thank you. It’s flattering to be with you, and I enjoy it. Thanks.
CONSUELO MACK: At the conclusion of every WealthTrack we try to leave you with one suggestion
to help you build and protect your wealth over the long term. This week’s Action Point
picks up on Don Yacktman’s comment about why and when to buy a stock. According to
Yacktman it is almost always about price. So this week’s Action Point is: have a cash
reserve as part of your investment strategy. As we discovered through the financial crisis,
cash protects your portfolio from losses in stocks and other investments during periods
of market volatility. Cash also enables you to scoop up stocks and other investments when
they are on sale. Over the last decade the Yacktman Fund’s cash stake has averaged
fifteen percent of the portfolio. It is in the low double digits now.
Next week, we will be talking to another great investor who values the protection and flexibility
cash provides. Our guest will be Matthew McLennan, successor to the legendary Jean-Marie Eveillard
at the First Eagle Funds.
If you want to see our WealthTrack interviews ahead of their broadcast date, WealthTrack
premium subscribers can now see our program 48 hours in advance, along with timely interviews
exclusive to WealthTrack premium subscribers. To sign up, go to our website, wealthtrack.com.
And that concludes this edition of WealthTrack. Thank you for watching and make the week ahead
a profitable and a productive one.
[music]
[music]
[music]
[music]
[music]
[music]
[music]
[music]
SPONSOR: Additional funding provided by: Loomis-Sayles - investors seeking the exceptional
opportunities globally. The Wintergreen Fund - your home for global
value. Research Affiliates - Efficient index foreign
inefficient market.
[music]
[music]
[music]
[music]
[music]