Yacktman Wins as Heebner Is Too Volatile: Riskless ReturnCharles Stein
Donald Yacktman and Kenneth Heebner both crushed fund rivals over the past 13 years, racking up big gains in an era when stocks went sideways. The difference is Yacktman gave investors a smooth ride, Heebner anything but.
From March 2000 through last month, a span in which the Standard & Poor’s 500 Index returned less than 2 percent a year amid two bear markets, Heebner’s $1.5 billion CGM Focus Fund had the best gain among large mutual funds that buy U.S. stocks. His clients had to stomach the highest volatility, as the fund went from an 80 percent jump in 2007 to a 48 percent drop in 2008. The $9.6 billion Yacktman Fund, fifth by total return, avoided much of the roller-coaster ride to produce the top risk-adjusted return, according to the BLOOMBERG RISKLESS RETURN RANKING.
Investors rewarded Yacktman, who employs an old-school buy-and-hold strategy, with a wave of deposits that helped swell his fund’s assets almost 30-fold in the past four years. The rapid-trading Heebner suffered redemptions that chopped his fund’s size by almost two-thirds since 2008, as customers fled in response to what he calls “lumpy” performance.
“People want consistency as well as outperformance,” Heebner said in a telephone interview from his Boston office. “I don’t produce consistency.”
The risk-adjusted return, which isn’t annualized, is calculated by dividing total return by volatility, or the degree of daily price variation, giving a measure of income per unit of risk. A higher volatility means the price of an asset can swing dramatically in a short period, increasing the potential for unexpected losses.
Ronald Sugameli, who helps oversee $1.7 billion, sold his stake in Heebner’s fund in 2011 because he didn’t think the money manager’s style meshed well with the needs of his clients.
“People are subject to fear,” Sugameli, chief investment officer at Wellesley, Massachusetts-based Weston Financial Group Inc., said in a telephone interview. “During bear markets they often reach their risk limit and sell at the worst possible time,” missing out on any subsequent rally.
Yacktman’s two mutual funds, the Yacktman Fund and the $8.3 billion Yacktman Focus Fund, attracted a net $13 billion in the four years ended Dec. 31, data from Chicago-based Morningstar Inc. show. Heebner experienced $2.9 billion in withdrawals.
The Yacktman Fund’s risk-adjusted return was 20 percent from March 24, 2000, the peak of the bull market that began in 1982, through Feb. 28, according to data compiled by Bloomberg. The S&P 500 Index closed at 1527.46 on the first date and 1514.68 on the second.
Yacktman’s absolute return ranked him fifth among 329 diversified domestic stock funds with at least $1 billion in assets. His volatility was lower than 92 percent of his peers.
Heebner had the highest volatility combined with the best total return in the group. His risk-adjusted return of 15 percent placed 12th.
CGM Focus returned an annualized 14 percent over the almost 13-year stretch, compared with 13 percent for Yacktman Fund and 1.9 percent for the benchmark U.S. index, data compiled by Bloomberg show.
Yacktman’s Focused Fund, which holds fewer stocks than his larger fund, is also the best performer since Oct. 9, 2007, the previous peak in the Dow Jones Industrial Average, with an annualized return of 11 percent. The benchmark closed yesterday at an all-time high of 14,253.77. CGM Focus did the worst among funds with at least $1 billion in assets that focus on large-cap stocks or those of all sizes, losing an annualized 7.1 percent.
Yacktman, 71, and Heebner, 72, graduated from Harvard Business School two years apart in the 1960s. They run concentrated portfolios, believing that making big investments in their best ideas will produce superior results. Yacktman Fund had 58 percent of its money in its top 10 holdings as of Dec. 31. Heebner had 76 percent in his 10 largest positions.
Beyond that, the two men travel separate paths. Heebner pays close attention to the economy, using his observations as a guide in picking stocks. Yacktman describes macroeconomic issues as “fun to talk about” and barely useful. Heebner has made hefty bets on industries sensitive to the economy, including commodity producers and banks. Yacktman typically shuns both, calling the former tough businesses in which to earn profits and the latter too difficult to understand.
Heebner turns over the stocks in his portfolio at six times the pace of peers, according to Morningstar data. Yacktman trades one-fourth as often as the average domestic stock fund manager.
In approaching risk, Yacktman focuses on projected returns for his companies, while Heebner looks at investor attitudes as well as corporate math.
Yacktman said he views stocks as if they were bonds, calculating the cash they generate relative to the price he pays. He likens one of his main holdings, Cincinnati-based home products maker Procter & Gamble Co., to an AAA-rated bond because its results are so predictable.
The future at other holdings, such as Palo Alto, California-based computer maker Hewlett-Packard Co., is more difficult to forecast. The stock is still attractive, said Yacktman, because it’s cheap.
“A good price will cover up a lot of sins,” he said in a telephone interview from Austin, Texas.
Yacktman’s ability to assess risk was on display during the global financial crisis. He beat 95 percent of peers in 2008 by building up cash and holding stable companies such as Procter & Gamble, which lost 16 percent, compared with 38 percent for the S&P 500 Index.
By the end of the year, with stocks plunging, he spent his cash on beaten-up New York-based media companies such as News Corp. and Viacom Inc. News Corp. and Viacom climbed 51 percent and 57 percent, respectively, in 2009 and Yacktman again beat 95 percent of rivals, according to data compiled by Bloomberg.
“When the storm comes through it shakes the fruit trees,” he said. “When the fruit drops to the ground you can examine it more easily and pick up the good stuff.”
Yacktman’s skill at navigating the twists of the crisis impressed Patrick Ryan, a fellow portfolio manager.
“Anyone who outperformed in those two years was doing very well,” Ryan, of Madison Asset Management LLC in Madison, Wisconsin, said in a telephone interview. “It took a tremendous amount of insight.”
Ryan’s company, which holds Yacktman’s fund for clients, oversees $16 billion.
The Yacktman Fund has 35 percent of its assets in consumer staple stocks, 7.3 percent in financials and carries a dividend yield of 2.2 percent, according to data compiled by Bloomberg. CGM Focus has 26 percent in financials, 9.2 percent in consumer staples and a dividend yield of 0.9 percent.
Yacktman’s biggest positions are in multinationals including News Corp., Procter & Gamble and Purchase, New York-based PepsiCo Inc.
“Right now you are not being paid to take a lot of risk,” he said.
Last April, Affiliated Managers Group Inc. of Beverly, Massachusetts, agreed to buy Yacktman’s firm in a deal in which Yacktman and other partners retained “substantial” equity.
For Heebner, the financial crisis ended a long streak of superior performance.
Heebner generated returns averaging 32 percent in the eight years ended Dec. 31, 2007, when the stock market returned an annualized 1.7 percent. He bet against technology stocks early in the decade before their collapse, bought homebuilders in 2003 ahead of their climb, and loaded up on energy companies in 2005 in time to benefit from soaring oil prices.
When looking at a stock, Heebner tries to assess the dangers a company faces that could lead to earnings disappointments. He also gauges investor sentiment toward the business, an admittedly subjective exercise, because he prefers to be contrarian.
“If you own something everyone likes, it takes away some of the opportunity,” Heebner said.
The manager’s instincts failed him in the second half of 2008 when commodity prices tumbled as the world economy weakened. CGM Focus lost 56 percent in the year’s second half, about double the decline suffered by the S&P 500, according to data compiled by Bloomberg.
Heebner blamed his underperformance in 2009 and 2011 on his misreading of the economy.
“I assumed a typical recovery and it didn’t happen,” he said in a February interview. In 2011, investments in companies such as New York-based Citigroup Inc. and Dearborn, Michigan-based Ford Motor Co. went awry and Heebner lost 26 percent, one of the industry’s worst showings.
CGM Focus has outpaced the broader market since August as homebuilders and financial stocks rallied. A rebound in home prices will lift the economy and consumer confidence, leading to a stronger than anticipated U.S. economy over the next few years, according to Heebner.
“We are going to see a big surprise,” he said.
Heebner wagered 21 percent of his fund at year-end on a bet that interest rates will climb and Treasuries will decline in price, according to a February regulatory filing.
He isn’t the only manager with a good long-term record to see customers bail out when his fund went cold. Bruce Berkowitz’s $7.5 billion Fairholme Fund had $6.8 billion in redemptions in 2011 as the fund lost 32 percent. Berkowitz returned an annualized 11 percent in the 10 years ended Feb. 28, versus 8.2 percent for the S&P 500 Index.
Berkowitz, in a February interview with Bloomberg Television, said he was considering ways to tie up investors’ capital for longer. “We want to make sure we have a shareholder base that understands the long-term nature of what we do,” he said.
Heebner said he has no control over how customers react to his ups and downs.
“The world isn’t going to come in huge numbers to invest in this style,” he said. “People flock to what is working and run away from what is not. They don’t have a long time horizon. I invest in what I think will produce the best results.”
Heebner’s investors have to understand what they’re buying, said Kevin McDevitt, a Morningstar analyst.
“If you own his fund, you can’t care about volatility,” McDevitt said in a telephone interview. “Otherwise it can be an incredibly difficult fund to hold. It is easier to be patient with a manager like Yacktman.”