In the second quarter the AMG Yacktman Fund (Trades, Portfolio) (the Fund) returned 4.80%, underperforming the 5.21% return for its primary benchmark, the Russell 1000® Value Index.
Markets moved higher during the second quarter as improved earnings, a continued economic recovery, significant central banking stimulus, and a lack of attractive investment alternatives fed uninterrupted enthusiasm for stocks. It was the fifth quarter in a row of strong returns, and equities are priced at high or record valuations using many typical market valuation metrics. Owning a large-cap benchmark and paying high prices is a recipe that will likely produce low returns over time and potentially cause significant, painful declines along the way. Today, however, the investor party continues with little thought of the future.
Our approach differs from indexing or benchmark-oriented investing. We strive to produce returns by focusing on individual securities and the price paid, with an eye on the risks associated with each investment and the overall portfolio. Many of the companies held in the Fund are misunderstood or neglected, enabling us to care more about the future of these particular securities without too much regard for the general market.
New Additions
In the second quarter, we purchased AMERCO (UHAL, Financial), the parent company of U-Haul and a significant owner of public storage space. The company is well run for the long term and controlled by members of the founding family.
We are also excited to welcome Adam Sues as a third co-portfolio manager for the Fund. You may be familiar with Adam from our update calls over the years, and are aware of his outstanding skill as a securities analyst and investor. We realized Adam’s work was exceptional when we first read his investment blog, Value Uncovered, nearly a decade ago. We were astonished to learn that at thetime, Adam was a first-year business school student. Adam joined Yacktman Asset Management (Trades, Portfolio) in 2013 and immediately became a meaningful contributor to investment ideas and research. He became a partner of the firm in 2016. He brings significant experience as Portfolio Manager of the AMG Yacktman Special Opportunities Fund, a mutual fund with an excellent track record which he will continue to manage.
Contributors
Bolloré’s (XPAR:BOL, Financial) shares were a strong performer during the quarter due to its highly anticipated September public offering and share distribution of Universal Music Group (UMG). This will result in Bolloré directly owning approximately 18% of UMG and indirectly owning another 3% through its position in Vivendi. The UMG position alone could be worth the current stock price. Besides this continued ownership of Vivendi, the company has a valuable port/logistics/transportation infrastructure business, plus an electric vehicle battery business that we think is underappreciated. We believe this is just one of several simplification steps that might occur over the next 12-24 months leading to a significant re-rating in Bolloré’s share price.
Technology stocks generally performed well during the second quarter, with Alphabet (GOOG, Financial)(GOOGL, Financial) and Microsoft (MSFT, Financial) shares being sound contributors to results. Both companies delivered excellent earnings and have solid prospects for the next several years.
Detractors
Associated British Foods (LSE:ABF, Financial) stock underperformed due to short-term margin pressure, but in our view the business remains an attractive long-term investment. ABF is a fourth-generation family-controlled business with leading food brands like Ovaltine (outside of the United States) and Twinings (a major tea company since the early 1700s), a strong retail presence through Primark, a fashion retailer with nearly 400 stores in 13 countries, and a food ingredient business selling sugar and yeast, among other products. The balance sheet is strong with excess net cash and an attractive valuation.
Booking Holdings (BKNG, Financial) shares detracted due to reduced travel expectations in Europe as COVID-19 variants delayed travel plans. Over the long term, Booking Holdings is a well-positioned business with significant scale, sound management, and innovative DNA that should help drive earnings growth over time.
Cognizant Technology Solutions (CTSH, Financial), an information technology services provider, was a lag on Fund performance. The company has struggled in the last few years versus its peers, but we think management is taking concrete steps to improve the business, and the shares sell at a significant discount to competitors.
Conclusion
While results for the Fund were modest, we believe we achieved them with a healthy respect for risk. Many of our favorite holdings, like Bolloré, trade at prices we think are meaningfully discounted in an environment where valuations for benchmarks trade at prices we see as overly optimistic.
To paraphrase the great Baseball Hall of Fame pitcher Greg Maddux, “The hardest thrower doesn’t always win, the best pitcher does, and I think it will continue to be that way as long as we play baseball.” We think the best way to achieve outperformance in difficult markets is the following: Be disciplined and opportunistic, grind through the lineup in periods of momentum, manage risk, and own misunderstood bargains. While they might not be appreciated in the near term, eventually they’ll represent significant opportunity once they are more widely discovered. As always, we will continue to be patient, objective, and diligent in managing the AMG Yacktman Fund (Trades, Portfolio).
The views expressed represent the opinions of Yacktman Asset Management (Trades, Portfolio) LP, as of June 30, 2021, are not intended as a forecast or guarantee of future results, and are subject to change without notice.
- Returns for periods less than one year are not annualized.
- The performance information shown for periods prior to June 29, 2012, is that of the predecessor to the Fund, The Yacktman Fund (Trades, Portfolio), which was reorganized into the AMG Yacktman Fund (Trades, Portfolio) on June 29, 2012, and was managed by Yacktman Asset Management (Trades, Portfolio) LP with the same investment policies as the predecessor Fund.
- Since the inception of the Fund on July 6, 1992.
- Effective June 30, 2020, the Fund’s primary and secondary benchmarks were changed. The Russell 1000® Value Index became the primary benchmark and S&P 500® Index the secondary benchmark; previously the S&P 500 Index was the primary benchmark and the Russell 1000® Value Index was the secondary benchmark.
- Mention of a specific security should not be considered a recommendation to buy or a solicitation to sell that security. Holdings are subject to change.
Disclosure
Investors should carefully consider the fund’s investment objectives, risks, charges, and expenses before investing. For this and other information, please call 800.835.3879 or download a free prospectus. Read it carefully before investing or sending money.
Past performance is no guarantee of future results.
