Donald Yacktman Interview

Donald Yacktman has a stellar track record and a very sound investment process.

According to Morningstar, “Kiplinger’s has ranked his two mutual funds (Yacktman Fund and Yacktman Focus Fund) top in the large-cap value fund category for the past 1, 3, 5, and 10-year.” Also, according to Morningstar, the Yacktman Fund (YACKK) has bested the S&P by 9.66% annually over the past 10 years, through 8/31/09.

Yackman’s approach reminds me of that of Bruce Berkowitz in that they both look at stocks as a kind of equity bond where the key determinant of value is the free cash yield.

Here’s an interview with Yacktman from The Wall Street Transcript. I hope you find it as informative as I did.

“The Wall Street Transcript (TWST): Let’s start with an overview of Yacktman Asset Management and your investment philosophy there.

Donald Yacktman: Yacktman Asset Management was founded in 1992 and we manage two mutual funds and separate accounts. The two mutual funds are The Yacktman Fund and The Yacktman Focused Fund. The investment process or philosophy has evolved over a period of years. Basically, we are investors in businesses and we view the selection process as though we were buying a long-term bond. Our logo is a triangle. The base of the triangle is a low purchase price. We look at businesses as if we were going to buy them and own them for a long period of time. We look at the rate of the return we would earn and the quality of those businesses. The higher the quality is, the lesser the required rate of return. It’s very much like a person buying a bond. But we don’t like to calculate returns to the fourth decimal; we try to make sure we have a lot of room for error. Then we try to get as much as we can of the other two sides of the triangle, namely good businesses run by shareholder-oriented managers.

On the good business side, our sweet spot is businesses that have low capital intensity and low cyclicality. One of our largest holdings, for instance, is Coca-Cola (KO). It fits our criteria very well. We will also move away from those components if the rates of return are adequate for the additional unpredictability that comes with the business, whether it has more fixed assets or more economic sensitivity. We have moved in both directions, but we don’t typically invest in businesses that have both enormous amounts of fixed assets and cyclicality. The airline industry would be the classic example. Coca-Cola is the opposite side of the grid. If you think of it like a bond, we’re buying high coupon bonds.

The third part of the triangle is the management. The difference between a stock and a bond is with a bond, the investor reinvests the cash flow most of the time. In the case of an equity owner, a lot of the reinvestment is done by the manager, so we like to evaluate the manager on the basis of how well he has invested cash in the past. We look at five basic options the manager has. The first option is putting the money back into the business through R&D, marketing, cost reduction, distribution, etc. The second option is making acquisitions, but the acquisitions should be synergistic and the manager should not pay too high a price for them. The problem is, in a lot of cases, the egos of managers get in the way of doing a proper job. Another option is buying back stock, which is buying more of the same. The fourth is paying a dividend and the fifth option is paying down debt or letting it accumulate, which is pretty much the same thing. We also tend to be very concentrated. The top 10 holdings plus cash will typically be 50% in The Yacktman Fund, and 75% in the Yacktman Focused Fund.

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