AMG Yacktman Focused Fund commentary for the fourth quarter ended December 31, 2015.
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The AMG Yacktman Focused Fund (Service Class) returned 6.3% for the fourth quarter of 2015 compared with 7.0% for the benchmark, the S&P 500 Index. For the 12 months ending December 31, 2015, the Fund returned -5.1%, versus the benchmark return of 1.4%. Performance for all share classes can be found on page 4 of this document and on our website at www.amgfunds.com.
AMG Yacktman Focused Fund - “It’s like deja vu all over again”
Last year marked the passing of baseball legend and American hero Yogi Berra. He is one of the most quoted figures in American history and his statement above captures the investment climate we saw in 2015. Market behavior last year was similar to the late 1990s when already high-priced momentum stocks went significantly higher while shares of companies with short-term challenges and, in our opinion, substantially more attractive valuations were unpopular.
The S&P 500 Growth Index, driven by momentum tech names, increased 5.5% in 2015, while the S&P 500 Value Index declined -3.1%. You may remember that in 1999 our approach similarly went out of favor while the tech bubble was still in full swing. Then, as now, the market favored growth and discarded what we thought was true value. That set up an amazing decade where the Yacktman Focused Fund compounded at 11.82% annually while the S&P 500 declined .95% per year. Much like a boom often precedes a bust, we believe “underperformance can often set up the best outperformance.”
As you know, we seek to achieve solid appreciation over a full market cycle while managing risk. We do this by purchasing stakes in individual securities when we think that each has a potential reward sufficient for the risk we are taking with the investment. We diversify our holdings to further manage the risk that any individual security poses to the fund objectives. We continue to adhere to this approach even during periods like last year where it may not work well in the short term. Having been through many market cycles, we believe the most important time to be disciplined investors is when others are being reckless.
Last year we were able to meaningfully increase positions in several of our favorite stocks that underperformed because we thought the largest reason for the declines was market sentiment rather than long-term business fundamentals. We believe this will pay off well over the next few years.
In early 2016, markets around the globe have begun to collapse and the U.S. stock market posted its worst start of the year in history. We are prepared for this environment and continue to have excess cash to deploy as stocks go on sale. We also have a portfolio full of what we think are some of the best quality franchises in the world selling at reasonable prices. Difficult market environments are our favorite times at Yacktman because the best values often occur during periods of uncertainty or panic. We recommend reading a report called “A Manager for Riskier Times” that discusses how the Yacktman Focused Fund performed during the more turbulent market periods.
AMG Yacktman Focused Fund - Contributors
Top contributors for the quarter included Microsoft Corp. (“Microsoft”), Procter & Gamble (“P&G”) and Samsung Electronics Preferred (“Samsung”).
Microsoft’s shares were strong as investors continued to gain enthusiasm for the company’s cloud-based business prospects, which should return the company to steady growth. Microsoft’s stock is on the more positive side of investor enthusiasm recently after being out of favor while its business momentum stalled. We were attracted to the shares because we felt the valuation was too pessimistic on the core business while the company still had many new business opportunities which could successfully drive new growth that we were, in essence, getting for free. We often buy stocks trading at significantly reduced prices when a company’s business momentum slows and others become disappointed or impatient, and frequently we reduce or sell positions when a company transforms or improves operations.
P&G’s shares bounced back during the quarter, although they were still down for the year. Strong currency headwinds caused many to overlook the significant progress the company has made in streamlining its business and cutting costs. New Chief Executive Officer David Taylor took charge during the quarter and we anticipate solid execution from him. During the year we increased our position in P&G’s shares when the stock declined.
Samsung’s shares were strong in the quarter after the company reported better-than-expected results and a transformative share repurchase plan. Samsung has long-frustrated many investors because management accumulated too much cash in the last decade. We think the increased commitment to shareholder returns could attract more attention to the stock over time.
AMG Yacktman Focused Fund - Detractors
During the quarter, our biggest detractors were C. H. Robinson Worldwide (“C.H. Robinson”), Aggreko Plc (“Aggreko”) and Hengan International Group Co. Ltd. (“Hengan”). These are small holdings that lacked strong near-term business momentum. Combined, the three positions caused a detraction of only .1%; however, with the market appreciating 7.0% during the quarter, even modest declines hurt overall results.
C.H. Robinson continued to face challenges from improved competition. We think the company is well positioned to handle challengers and remain a dominant force in the logistics industry.
Aggreko continued to be hurt by currency and challenges with its customers in energy and commodity-related businesses. We think the valuation is compelling, given the strong market position and competitive advantages the company possesses.
Hengan was weak due to concerns about the Chinese economy and currency. We think the company is well positioned to grow as China’s consumer economy expands over time, even though we expect to encounter some bumps along the way.
AMG Yacktman Focused Fund - New Portfolio Additions
During the fourth quarter we added small positions in Avon and CONSOL Energy debt. Both securities offer teen rates of return at current prices and have business values that we believe are meaningfully in excess of the debt. We are very selective when we purchase debt and believe there may be additional opportunities in the high-yield markets in coming quarters.
Conclusion
We have long believed it is impossible to predict short-term moves in the market. We focus on individual securities, their valuations, and project potential rates of return when considering a wide range of risk factors. For the last several years we have operated with a strong emphasis on high quality businesses and have held excess cash as we waited for more compelling opportunities. If we continue to see declines we will likely put more cash to work. Having the patience to wait for prices to become more attractive has proven to be valuable over the years.
To close with another quote from the great Yogi Berra, “It ain’t over till it’s over.” We remind investors that it is important to judge results over a full market cycle. After many years of stocks appreciating, especially through expanding valuations, we are now seeing declines, which could allow us to observe the full cycle. We will continue to be patient, diligent and objective when managing the AMG Yacktman Focused Fund.
The views expressed represent the opinions of Yacktman Asset Management LP as of December 31, 2015, are not intended as a forecast or guarantee of future results, and are subject to change without notice.
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