A Battle Investors Can't Win

Donald Yacktman and his board are trying to oust each other

Donald A. Yacktman, a well-regarded mutual-fund manager in Chicago, is in an awkward position. As he sees it, the directors of the funds he founded are trying to throw him out, so he has launched a pre-emptive strike to oust those directors and replace them with a friendlier bunch. A special shareholder meeting is set for Nov. 24.

The very unusual battle centers mainly around investment performance--which has not been good of late--and what to do about it. So far this year, the Yacktman Fund is down 15.8%, vs. a 2.6% gain for the Standard & Poor's 500-stock index (including dividends). Yacktman says the directors have been pressuring him to convert to a large-cap value portfolio--funds typically heavy on manufacturing, energy, and utility stocks.

Yacktman's investment strategy defies such conventions. His modus operandi is to buy growth stocks when they are out of favor. The prospectus says the investments must be "primarily" in stocks with $1 billion or more market cap. Morningstar Inc. says the Yacktman Fund has a $1.4 billion median market cap. "This is how I've always invested," says Yacktman. "My shareholders get the same Don Yacktman yesterday, today, and forever."

He concedes his results always have been cyclical--and they're in a down cycle. With such strategies, the payoff comes only if the periods of strong performance more than compensate for the weak. Yacktman usually does well in risk-adjusted fund ratings, since he often takes lower than average risk. Now, the Yacktman Fund has four stars from Morningstar, the second-highest rating, and B+ from BUSINESS WEEK, our second-highest as well.

But with lousy recent returns, shareholders have been leaving in droves. The Yacktman Fund is only about half the size it was a year ago. Still, anyone remaining by the time of the Nov. 24 shareholder meeting is probably a Yacktman loyalist, which suggests the prospects for him prevailing in a proxy fight are good. He's spending Yacktman Asset Management Co.'s money to wage it.

The independent directors are in an unusual spot as well. As of Oct. 6, they had not yet filed their response to Yacktman's proxy but are expected to do so shortly. But as representatives of the shareholders, they'll be spending fund assets to advocate a position that most remaining shareholders likely will reject.

This battle can be costly for shareholders. Last year, the independent directors of the Navellier Aggressive Small Cap Equity Fund dropped manager Louis G. Navellier and moved the fund to Massachusetts Financial Services. Three months later, the shareholders voted to rehire Navellier. In the scuffle, the portfolio turned over several times, resulting in higher trading costs and capital-gains distributions for investors.

FORMER FRIENDS. Ironically, the directors Yacktman is seeking to oust were once his friends, as "independent" directors usually are. All have been on the board since the fund's founding in 1992. Director Jon D. Carlson says he and Stanislaw Maliszewski worked with Yacktman at his previous job. Carlson says Stephen E. Upton, his uncle by marriage, and Thomas R. Hanson, were longtime shareholders of Yacktman's prior fund, Selected American Shares.

Until June, Carlson was Yacktman's marketing chief and thus an inside director. But he became an outside director when Yacktman dismissed him. Yacktman says directors turned against him when he fired Carlson. Carlson says the board had differences with Yacktman long before that, which he tried to get resolved.

Besides performance, the dissidents also complain about "derivatives" and "ethics." Yacktman says his only derivatives are put options on the largest holding--Philip Morris Cos., and those are in the $52 million Yacktman Focused Fund, whose prospectus permits it. Ethics? The Yacktman Fund code says personnel shouldn't sit on boards of public companies without directors' permission. Yacktman remained on the board of a private company, 1-800-Contacts Inc., after it became public, but he says the fund directors knew it. Yacktman says he has since asked 1-800-Contacts to replace him. Moreover, he says his funds are not and never have been investors in that company.

No doubt, the charges and countercharges will continue. But what would benefit investors more than a costly proxy fight would be for the warring parties to work out differences and improve performance of the funds.

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