Yacktman Fund 2013 letter to shareholders
In the quarter ending December 31, 2013, Yacktman Focused Fund (Trades, Portfolio) and Yacktman Fund (Trades, Portfolio) produced returns of 6.95% and 6.98%, respectively, while the S&P 500 Index returned 10.51%. For the year, Yacktman Focused and Yacktman Fund (Trades, Portfolio) appreciated 27.01% and 27.74% compared to the S&P 500’s rise of 32.39%. Our long-term goal is to achieve solid absolute rates of return over multi-year time periods while managing the overall level of risk in the Funds. In the current environment, where the stock market has risen significantly since 2009, and rapidly in the last two years, we are very focused on managing risk through quality security selection and portfolio positioning.
We are happy with results in the last 12 months and over the long term. We are optimistic about the current holdings, which we think offer attractive rates of return in companies that are generally of extremely high quality. Our cash levels increased slightly during the quarter and have been a short term drag to results, however current cash levels are only modestly higher than the long-term average in the Funds since 2000.
We think it is important to prudently manage risk for investors. As long-only fund managers, patience – combined with the willingness to hold cash – are some of our best tools to protect our Funds’ investors when we are not finding sufficient bargains. To be clear, our approach is focused on investments in individual securities, and we do not try to predict the direction of the market. We do not require market declines to put cash to work, however, it is generally more difficult to find significant new investment opportunities in a rapidly rising market.
Portfolio Review
Portfolio Review Funds Closed to New Investors
On December 31, 2013, Yacktman Focused Fund (Trades, Portfolio) and Yacktman Fund (Trades, Portfolio) closed to new investors. The effect of the soft close will vary by intermediary firm, based on the sponsor’s platforms for advisors and shareholders. If you have a specific question on Fund availability we would ask you contact our Managers’ sales center at 800-368-4410 and they will assist you with questions on the Funds’ availability.
In recent years, total fund assets, along with assets in other accounts we manage with similar investment mandates, have grown due to strong investment results and additional inflows. We believe it is prudent to restrict flows to preserve the integrity of our investment approach and maintain flexibility. The closure is not related to the level of the market or our ability to find attractive investments currently.
Fourth Quarter Contributors/Detractors
The Yacktman Focused Fund (Trades, Portfolio)’s top contributors to performance for the quarter included C.R. Bard, Coca-Cola and Procter & Gamble and for the Yacktman Fund (Trades, Portfolio), C.R. Bard Inc., Microsoft Corp and Coca-Cola. C.R. Bard Inc. (BCR)’s shares rose sharply during the quarter as the company received more than $800 million in pre-tax proceeds from a long-running patent lawsuit victory. The company has already used some of the proceeds to make acquisitions and increase its investments in attractive new technologies. We think C.R. Bard Inc. is positioned to be one of the fastest growing health care companies over the next few years.
Coca-Cola (KO)’s shares appreciated solidly during the quarter after being left out of much of the rally earlier in the year. Microsoft Corp’s shares were up solidly during the quarter on stronger than expected earnings and anticipation of positive changes at the company after a new Chief Executive Officer is hired.
Detractors in the quarter for both Funds included Avon Products Inc., Cisco Systems Inc. and C.H. Robinson Worldwide Inc. Avon Products Inc. (AVP) shares declined due to poor quarterly results and increased market concerns about fines related to the Foreign Corrupt Practices Act (FCPA) investigation. Turnarounds generally take time, and we continue to have confidence that the new management team is taking the correct steps to improve the business. We believe the concerns about the potential magnitude of FCPA fines are overstated given the practices that Avon Products Inc. is being investigated for as well as previous FCPA fines levied on other firms. The shares remain inexpensive based on our assessment of normalized earnings and the potential value to a strategic buyer.
Cisco Systems Inc. (CSCO) shares fell after the company reported disappointing results and issued poor forward guidance, largely due to weakness in emerging markets. We think the shares continue to represent extremely good value given the strong balance sheet and earnings power of the business. C.H. Robinson Worldwide Inc.’s shares declined modestly due to continued margin pressure in its North American truckload brokerage business.
Other
We modestly reduced our position in Twenty-First Century Fox (FOXA) due to strong price appreciation. Our News Corporation position was eliminated in Yacktman Focused Fund (Trades, Portfolio) and pared down considerably within Yacktman Fund (Trades, Portfolio).
Oracle Corp. (ORCL) appreciated more than 10% after reporting solid earnings results. We first purchased shares in Oracle Corp. in late June of this year and quickly built a position that today is more than 3% of assets in each Fund. The Oracle Corp. investment demonstrates that new value opportunities can still be found even during a period of significant market appreciation.
Sysco Corp (SYY)’s stock jumped after announcing an agreement to acquire U.S. Foods, Inc., its largest competitor. We think the deal is extremely attractive as the business combination offers significant cost savings opportunities and economies of scale. During the quarter, Dell Inc. (DELL) shares were removed from the Portfolio due to the management buyout, Janus Capital Group, Inc. (JNS) was sold out of Yacktman Fund (Trades, Portfolio) due to price appreciation, and eBay Inc. (EBAY) was added to the Focused Fund and increased in the Yacktman Fund (Trades, Portfolio). We also purchased two small new positions in both Funds. We think C.H. Robinson (CHRW) continues to represent good value at current prices.
Conclusion
We are pleased with the returns for 2013. We believe the quality level of the Funds’ holdings is extremely high and valuations are attractive. We will work hard to evaluate current positions and look for new opportunities. As always, we will continue to be diligent, objective and patient when managing Yacktman Focused Fund (Trades, Portfolio) and Yacktman Fund (Trades, Portfolio).
Investors should carefully consider the Fund’s investment objectives, risks, charges, and expenses before investing. For this and other information, please call 800.457.6033 or visit www.managersinvest.com to download a free prospectus. Read it carefully before investing or sending money. The S&P 500 Index is capitalization-weighted index of 500 stocks. The S&P 500 Index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Unlike the Fund, the S&P 500 Index is unmanaged, is not available for investment, and does not incur expenses. The S&P 500 Index is proprietary data of Standard & Poor’s, a division of McGraw-Hill Companies, Inc. All rights reserved. The Funds are subject to the risks associated with investments in debt securities, such as default risk and fluctuations in the perception of the debtor’s ability to pay its creditors. High yield bonds (also known as “junk bonds”) are subject to additional risks such as the risk of default. Changing interest rates may adversely affect the value of an investment. An increase in interest rates typically causes the value of bonds and other fixed income securities to fall. Investments in international securities are subject to certain risks of overseas investing including currency fluctuations and changes in political and economic conditions, which could result in significant market fluctuations. These risks are magnified in emerging markets. The Funds can invest in securities of different market capitalizations (small, mid and large capitalizations) and styles (growth vs. value), each of which will react differently to various market movements. A greater percentage of the Yacktman Focused Fund (Trades, Portfolio)’s holdings may be focused in a smaller number of securities which may place the Fund at greater risk than a more diversified fund. The performance information shown and Fund inception dates reflect that of the predecessor Funds, The Yacktman Fund (Trades, Portfolio) and The Yacktman Focused Fund (Trades, Portfolio), which were reorganized into the Yacktman Fund (Trades, Portfolio), and the Yacktman Focused Fund (Trades, Portfolio), respectively, on June 29, 2012, and were managed by Yacktman Asset Management with the same investment objectives and substantially similar investment policies as those of the predecessor Funds. Funds are distributed by Managers Distributors, Inc., a member of FINRA.
