Thu, 21 Jun 2012
Manager Don Yacktman says the decline in trading costs along with the natural volatility of stocks is creating opportunities for value managers focused on the long term.
Kevin McDevitt: Hi, I'm Kevin McDevitt with Morningstar. We're here at the Morningstar Conference with Don Yacktman from the Yacktman Funds. Don, thanks for joining us today.
Donald Yacktman: Happy to be here.
McDevitt: I want to ask you a bit about just what kinds of companies you're interested in these days? In recent times you've had a lot of consumer staples names, and lot of names that kind of fall into that less cyclical, less capital-intensive part of the market. That seems to be the firm's sweet spot to some extent. Would you be willing to buy, though, kind of the more cyclical, more capital-intensive companies, and if so, what kind of margin of safety would you require?
Yacktman: Well, we may, depending on, again, the margin of safety. If the rate of return that we perceive going forward were high enough, then we'd do it, but it doesn't happen very often. The closest thing would be something like a Cisco Systems where you have an early-stage capital good in a technology business that's just very, very cheap.
McDevitt: You mentioned technology, and that's a fairly new area for the fund in recent years. You've added some tech names, Microsoft among others. Was it an adjustment at all? You haven't really owned those companies as much in the past. Was it an adjustment at all getting comfortable with those business models, and how as a firm did you get comfortable with how they do business and what they're doing?
Yacktman: Well, again as Jason [Subotky, co-chief investment officer at Yacktman Funds] says, it's almost always about the price, so it's a function of getting them very, very cheaply and to override any concerns. In the case of Microsoft, it's actually concern about management there. So, sometimes we will buy them in spite of the managers, but when they get cheap enough, if the business model is good enough it will take care of itself.
McDevitt: How important as part of evaluating management is capital allocation? I imagine that's perhaps an issue with Microsoft?
Yacktman: Yes, that's one of their biggest jobs and responsibilities because it will affect returns over a long period of time. And clearly the more objective the management is in the capital-allocation process, the better. So, I mean, like the latest announcement [of a new tablet device], one wonders if that isn't a defensive move because some of the partners Microsoft has had that make computers have not been able to successfully dent or have chosen not to dent the tablet market. But yet there's a lot of demand for people to have a tablet where they could tie it in with their PC as opposed to having to use the Apple technology. So, I think, it's a natural fit in some ways, but we don't have any great confidence in Microsoft's ability to be in the manufacturing side of the business.
McDevitt: I want to switch gears a bit and ask you about just kind of a general character of the portfolio these days on the Yacktman Fund. It's funny, these days the fund is very much geared toward large-cap stocks, and has been very successful with that in recent years. Going way back to the 1990s, the fund was much more geared toward and oriented toward small-cap stocks when valuations were much more attractive for small caps than they are today. Do you worry at all with the growth of the fund, if small caps ever did become more attractive in terms of valuation, would you still have the flexibility with your asset base today to make meaningful investments in small-cap stocks?
Yacktman: That's one of those scary questions. Fortunately, I don't see that situation existing for very, very long time frame. But if it were to occur it would mean we'd either have to back off or we'd have to hire some more people to cover that area, but fortunately we're way removed from that.
McDevitt: One of the hallmarks of your funds is just taking on a long-term approach. You have very low turnover in both funds and tend to hang on to your investments for a long period of time. It seems like the general trend, though, in the investment world is away from that; it's toward more short-term thinking especially with all that's happening in a macroeconomic sense with all of the macro headwinds out there. Do you feel like it's more difficult in this environment to be a long-term investor, or have the advantages changed at all if you are a long-term investor?
Yacktman: I don't think it's made long-term investing any less attractive. I just think that it's part of what the reality is. I can control the sails on the ship, I can't control the wind, so to speak. But I think the decline in trading costs, combined with the natural volatility of equities, has lent itself to more of a casino mentality. The more volatile, interestingly enough, a situation is, I think, the more attractive it is for value managers, who are long-term investors, because it creates more opportunities.
McDevitt: In a sense, too, if you're looking out beyond the next quarter, beyond the next year, what are you focusing on? If you're not focused 18 months out, if you are focused more five years and more out, what are the factors you're considering?
Yacktman: Well, it boils down to what you buy and what you pay for it. So we focus first on the price and what we look at is projecting out. Nobody can project with total 100% accuracy; that's just impossible. But [we project] to the degree you possibly can project out a compounded rate of return and then adjust for the amount of risk that's perceived in achieving that rate of return, or how wide the alternative outcomes are and putting probabilities to those various outcomes.
McDevitt: Also in terms of your holding period and when a stock gets too rich for your taste, how do you make that determination, and what sorts of metrics are you looking at?
Yacktman: Well, what happens generally is the stock goes up faster than the normal cash flows have been going up, and so we just start to slowly back off of it as the perceived forward rate of return gets lower and lower. So it just gradually fades out of the portfolio.
McDevitt: Don, thank you for your time.
Yacktman: You bet. Happy to be here.