Donald Yacktman is doing something rival mutual fund managers Bruce Berkowitz and Bill Miller haven’t done lately: making money for his clients—and carrying the flag for active stockpicking over index investing.
The two funds he manages, Yacktman and Yacktman Focused, have beaten 96 percent of peers in 2011 and at least 95 percent for the past 5 and 10 years through 0ct. 21, according to Morningstar (MORN). Excluding small-cap portfolios and those with less than $200 million in assets, the only diversified U.S. stock funds to equal that mark as of Oct. 21 are Artisan Mid Cap Value (ARTQX), Wells Fargo Advantage Growth Fund (SGRAX), First Eagle U.S. Value Fund, and SunAmerica Focused Dividend Strategy Portfolio (FDSAX). “They may not be easy to find, but there are some top managers who can still outperform,” says Ronald Sugameli, chief investment officer of Weston Financial Group in Wellesley, Mass. His firm oversees $1.6 billion and invests in actively managed funds.
Over the past 10 years, Yacktman Focused’s 13 percent average annual return was the best showing among 500 comparable funds. At 12 percent, the Yacktman fund was No. 2. Yacktman, 70, uses the same method to evaluate stocks for both the Yacktman fund, launched in 1992, and the Focused fund, which opened in 1997 and concentrates its money in fewer stocks. The Austin-based manager looks for companies with strong, predictable cash flows. He buys when those companies are trading for less than he estimates those cash flows are worth. Yacktman’s approach hurt him in the late 1990s, when he refused to buy technology stocks he considered overpriced. The Focused fund lost 22 percent in 1999, compared with a gain of 21 percent for the Standard & Poor’s 500-stock index.
Two tech stocks, Microsoft (MSFT) and Cisco Systems (CSCO), are among the fund’s biggest holdings today. “If someone had told me 10 years ago that these stocks would be in my portfolio, I would have laughed,” Yacktman says. The former highfliers have fallen so far that they’re now attractive, he says. Microsoft has lost about half its value since 1999. Cisco is down more than 70 percent.
Yacktman also holds large, relatively stable stocks such as Coca-Cola (KO), PepsiCo (PEP), and Johnson & Johnson (JNJ). “I can’t remember a time when so many quality companies were selling at low prices compared to alternatives,” he says. While Yacktman Focused owned shares of U.S. Bancorp (USB) and Bank of New York Mellon (BK) as of Sept. 30, the manager has shunned most large banks because they’re difficult to analyze. “They create assets with a stroke of a pen, and it takes five years to find out how good the assets are,” he says.
Yacktman Focused rose 5.2 percent in 2011, Morningstar data show. Over 10 years it is the No. 1 performer among more than 500 large-cap value funds, with an average annual return of 13 percent. Yacktman Fund ranks second with an average gain of 12 percent. Those strong performances helped the two funds attract a combined $3.6 billion in fresh deposits this year through Sept. 30, while many competitors grapple with redemptions. Investors have pulled $349 billion from actively managed U.S. equity funds since the end of 2006, Morningstar data show, as two bear markets in the past decade shook their faith in stockpickers.
The struggles of well-known managers such as Berkowitz and Miller reinforce the view that stockpicking doesn’t work as well as index investing over the long run, says Geoff Bobroff, an industry consultant. Berkowitz’s $8.9 billion Fairholme Fund (FAIRX) fell 26 percent this year through Oct. 21 with wrong-way bets on financial stocks such as Bank of America (BAC), down 50 percent in 2011. Miller’s $964 million Legg Mason Capital Management Opportunity Trust slumped 33 percent this year, hurt by declines in financial companies, including Citigroup (C), which is down 33 percent. “People have thrown up their hands,” says Bobroff. “They don’t think they can find enough managers who add value.”