Find value in funds: Invest for the long run

@Money May 31, 2012: 5:55 AM ET
When looking for value funds that can go the distance, try ones like the Yacktman fund which uses a value investment approach.

When looking for value funds that can go the distance, try ones like the Yacktman fund which uses a value investment approach.

(MONEY Magazine) -- Over the past 10 years, the Yacktman fund has delivered 11% annualized gains, putting it in the top 1% of its peers (and attracting a flood of money).

But the strategy of buying quality businesses with big cash cushions and beaten-down stock prices has led to lean stretches too.


Yacktman (YACKX) languished from 2004 to 2006 and ranks in the bottom 5% of similar funds over the past six months.

Co-manager and fund president Donald Yacktman is unfazed. "Our approach won't work every quarter or every year," he says, "but over 10 years it will."

Stocks for the long run

Patient with his picks, Yacktman doesn't sell holdings often.

Once Yacktman and his co-managers -- his son Stephen and Jason Subotky -- add a stock to the portfolio, it settles in for a long stay, even during rough patches.

The second-largest holding, News Corp. (NWSA, Fortune 500) (8% of assets) has been in the fund since 2008. When Britain's phone hacking scandal sent shares down last summer, Yacktman picked up more.

Morningstar analyst Kevin McDevitt cautions investors who have recently piled in -- assets top $7.6 billion today, up from less than $300 million in 2008 -- to channel Yacktmanesque patience during dry spells. But, he adds, "long term, there is no question this is a great fund." And because the fund favors shares of big companies, the managers are well positioned to handle the growth.

Courage of convictions

Yacktman managers mostly traffic in fortress-like multinationals with rock-solid balance sheets, plenty of free cash flow (what's left after covering operating costs), and compelling valuations based on risk/reward projections for the next 10 years. Typically that leads them to established firms with impressive market share, such as PepsiCo (PEP, Fortune 500) and Procter & Gamble (PG, Fortune 500).

Yacktman tends to take bigger stakes than average. More than one-third of the portfolio is in consumer staples, nearly triple the weight of that defensive sector in the S&P 500. That big bet paid off in the third quarter last year. Yacktman Fund fell 9%, compared with a 16% drop for the average large-cap value fund.

Yacktman also owns fewer stocks than average -- meaning a big bet on the favorites. More than half of the fund's total assets are in its top 10 holdings. The average large-cap value fund has 31.5% of its total assets in its top 10 holdings, according to Morningstar.

Value surprises

When the team can't find quality at an alluring price, it doesn't buy. In early 2008 more than a third of the fund was in cash, allowing Yacktman to load up on blue chips that had been washed out with the tide.

Today the fund's cash stake is 13%, pretty bullish for Yacktman, who says he's not hurting for places to put his money: "It's unique to have such high-quality firms selling at such compelling relative values."

Yacktman took heat in the 1990s for not buying tech, but now he has a combined 9% riding on Cisco Systems (CSCO, Fortune 500) and Microsoft (MSFT, Fortune 500). Tech shares make up 16% of the portfolio -- because the price is right.

Just as Warren Buffett warmed up to IBM (IBM, Fortune 500) last year, Yacktman found these "old techs" had morphed into his sort of investment: big market share, gobs of free cash, and low prices.

Sources: Morningstar, Standard & Poor's

Do you know a Money Hero? MONEY magazine is celebrating people, both famous and unsung, who have done extraordinary work to improve others' financial well-being. Nominate your Money Hero.  To top of page

Index Last Change % Change
Dow 24,715.09 1.11 0.00%
Nasdaq 7,354.34 -28.13 -0.38%
S&P 500 2,712.97 -7.16 -0.26%
Treasuries 3.07 -0.04 -1.35%
Data as of 10:23pm ET
Company Price Change % Change
Bank of America Corp... 30.26 -0.55 -1.79%
Advanced Micro Devic... 13.00 0.18 1.40%
Applied Materials In... 49.51 -4.45 -8.25%
Micron Technology In... 53.39 -1.31 -2.39%
General Electric Co 14.97 -0.06 -0.40%
Data as of May 18
Overnight Avg Rate Latest Change Last Week
30 yr fixed4.53%4.42%
15 yr fixed3.96%3.88%
5/1 ARM4.37%4.30%
30 yr refi4.53%4.42%
15 yr refi3.94%3.86%
Rate data provided
View rates in your area
Find personalized rates: