Yacktman’s Triangle of Success
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Donald Yacktman is no ordinary investor. As a matter of fact, he was a runner-up in Morningstar’s Fund Manager of the Decade award (see winner here). Besides stellar performance, how did Yacktman accomplish this honor? The answer is simple…a triangle. Yacktman wasn’t a geometry professor, but his investment philosophy is based on the three corners of this popular shape. Specifically, Yacktman looks to invest in companies trading at good prices, that are good businesses, with good management teams. Stated differently, one side of the investment philosophy represents a low purchase price, while the other sides represent good businesses and shareholder-oriented management.
Where the Magic Began
Like any legendary investor, experience plays a huge role in becoming a market master. Yacktman is no exception. Yacktman is the President and Co-Chief Investment Officer of Yacktman Asset Management Co., overseeing about $7 billion in assets. Prior to founding the firm in April 1992, he worked for 10 years as a portfolio manager at Selected Financial Services, Inc. and before then he served 14 years as a portfolio manager at Stein Roe & Farnham. Geographically, he has been all over the map. He earned his economics degree from the University of Utah and an MBA with distinction from Harvard University. After working for a longtime in Chicago, he decided to start the Yacktman Funds in Austin, Texas. Who knows, maybe the next stop will be Alaska or Hawaii?
Despite all the successes, life has not always been a bed of roses for Yacktman. As a matter of fact, during the late-1990s, the fund board attempted to oust him and investors left in a mass exodus. Even after posting stellar results in 2000-2003 relative to the S&P 500, Yacktman underperformed significantly in three out of four years from 2004 – 2007.
Managing to sidestep the technology bubble in 2000 and then the financial sector bubble in 2008 contributed tremendously to Yacktman’s outperformance (see graph).
As you can see, the long-term track record of the Yacktman fund has been exceptional (#1 fund on a 3 yr., 5 yr., and 10 yr basis), but anyone can eventually lose the Midas touch – Bill Miller’s 15 consecutive market-beating returns subsequently reversed into a financial disaster in the following years (see Revenge of the Dunce). Even with all the boos and cheers Yacktman has received over the years, some of that attention should be directed towards his son Stephen Yacktman (Co-Manager of Yacktman funds) and other Co-Manager Jason Subotky.
More Yacktman Investment Nuts & Bolts
There are other key elements to the Yacktman strategy beyond the triangle philosophy. For example, Yacktman preaches the importance of patience, long-term thinking, and the ability to develop a repeatable process.
And how does Yacktman find these great opportunities for his funds? Driving the process of picking stocks is the ability to price equity securities like bonds. Using cash flows, inflation expectations, and forecasted growth, the Yacktman team derives a forward rate of return that they can compare against a broad set of investment alternatives, including bonds. This framework is very consistent with my free cash flow yield ranking system I use. If opportunities do not present themselves, Yacktman is not afraid to raise cash levels to unorthodox levels (e.g., around 30% cash near the 2007 peak).
Since the differential in return opportunities has narrowed between what Yacktman defines as high quality and low quality, he has shifted more of the portfolios toward Blue Chip companies, like News Corporation (NWS), PepsiCo, Inc. (PEP), Coca-Cola Company (KO), Procter & Gamble Company (PG), and Microsoft Corporation (MSFT). Since the return opportunity spreads have narrowed, Yacktman feels he can get more bang for his risk buck by investing in quality large capitalization stocks.
With a long-run magical track record like Donald Yacktman’s, it is difficult to critically critique his systematic investment process. By implementing a few cornerstones of Yacktman’s investment philosophy, we should all be able to triangulate a better investment strategy four ourselves.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct position in YACKX, YAFFX, NWS, PEP, PG, KO, MSFT, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.