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By Kevin McDevitt, CFA | 06-21-2012 01:30 PM

Yacktman: Taking Advantage of a Casino Mentality

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.

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