Don Yacktman of the Yacktman Funds was recently voted a finalist for Fund Manager of the Decade by mutual fund rating firm Morningstar. He didn't end up winning the coveted top award, but being in the top five out of a universe of thousands of domestic fund managers isn't too shabby. Below is an overview of Yacktman's process and how it can help individual investors outperform the market over the long haul.

IN PICTURES: 7 Forehead-Slapping Stock Blunders

Yacktman's Investment Selection Process

About the time Morningstar announced Yacktman as a finalist for its award, investment publication Value Investor Insight interviewed Yacktman and his son, Stephen Yacktman, who joined his team in 1993. Their philosophy is similar to that of many value investors and focuses on identifying market leaders that are growing in their respective industry and have low needs for capital. As such, they report high returns on invested capital and generate cash flow well in excess of what is needed to maintain the existing business.

Excess cash flow can then be used for a combination of purposes, including growing the business organically or through acquisitions, repurchasing company stock or paying dividends to shareholders. Yacktman determines this by calculating a firm's free cash flow yield, which is simply free cash flow divided by market capitalization. To estimate a required rate of return going forward, Yacktman adds an inflation expectation and expected growth rate in free cash flow. For the market overall, as measured by the S&P 500, he estimates a 2.5% free cash flow yield, 3% inflation and 1.5% growth in free cash flow for a 7% annual return by just passively investing in the market.

Double-Digit Returns By Holding Blue Chip Firms

Yacktman has been able to obtain double-digit total returns by holding well-known blue chip firms, including Coca-Cola (NYSE: KO), Pepsico (NYSE: PEP), Johnson & Johnson (NYSE: JNJ) and media companies such as Viacom (NYSE: VIA), Comcast (Nasdaq: CMCSA) and News Corp. (Nasdaq: NWS). These positions are subject to change, and updated current holdings can be seen by viewing Yacktman's most recent 13-F filing with the Securities and Exchange Commission.

Bottom Line

Through the end of February, Yacktman's funds, which consist of the Yacktman Fund (YACKX) and the Yacktman Focused Fund (YAFFX), have outperformed the market through every important investment time line - year-to-date as well as annualized over one, three, five and 10-year time frames. Over the past decade, each fund has returned just under 14% annually, while the market is down 31 basis points, offering the best illustration that his investing techniques are well worth noting. (Read about the success of those who helped individual investors achieve high returns in Top Five All-Time Mutual Fund Managers.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Investing

    Build a Retirement Portfolio for a Different World

    When it comes to retirement rules of thumb, the financial industry is experiencing new guidelines and the new rules for navigating retirement.
  2. Investing

    Automating Your 401(k) is Easier Than You Think

    If you like automation, you should check out these features that many 401(k) plans offer.
  3. Investing Basics

    Explaining Delivery Versus Payment

    Delivery versus payment is a common procedure for settling the exchange of securities.
  4. Mutual Funds & ETFs

    Top 5 Japan Mutual Funds

    Discover five of the most popular and best-performing mutual funds offering investors direct exposure to equities of Japanese companies.
  5. Mutual Funds & ETFs

    5 Mutual Funds that Hold Berkshire Hathaway Stock

    Discover the top five mutual funds most heavily weighted with Berkshire Hathaway stock, and the percentage of their assets dedicated to BRK.
  6. Mutual Funds & ETFs

    3 Mutual Funds that Hold Google Stock

    Discover the top three mutual funds that dedicate the largest percentage of their total assets to Google, Inc. stock.
  7. Mutual Funds & ETFs

    Comparing ETFs Vs. Mutual Funds For Tax Efficiency

    Explore a comparison of mutual funds and exchange-traded funds, or ETFs, and learn what makes ETFs a significantly more tax-efficient investment.
  8. Mutual Funds & ETFs

    4 Mutual Funds that Hold Tesla Stock

    Obtain information on the four mutual funds that have significant allocations to Tesla Motors, Inc. in their major portfolio holdings.
  9. Mutual Funds & ETFs

    4 Mutual Funds that Hold Apple Stock

    Discover mutual funds offering the most substantial percentage of holdings in Apple, Inc. stock that investors can use to get significant exposure to Apple.
  10. Mutual Funds & ETFs

    ETF Analysis: Vanguard Small-Cap Value

    Find out about the Vanguard Small-Cap Value ETF, and explore detailed analysis of its characteristics, suitability, recommendations and historical statistics.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. Series 6

    A securities license entitling the holder to register as a limited ...
  4. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth ...
  5. Return On Investment - ROI

    A performance measure used to evaluate the efficiency of an investment ...
  6. Systematic Manager

    A manager who adjusts a portfolio’s long and short-term positions ...
RELATED FAQS
  1. How do dividends affect net asset value (NAV) in mutual funds?

    Distribution of dividends reduces the net asset value (NAV) of mutual fund shares. However, this doesn't mean that fund investors ... Read Full Answer >>
  2. Are mutual funds considered retirement accounts?

    Unlike a 401(k) or Individual Retirement Account (IRA), mutual funds are not classified as retirement accounts. Employers ... Read Full Answer >>
  3. Do mutual funds invest only in stocks?

    Mutual funds invest in stocks, but certain types also invest in government and corporate bonds. Stocks are subject to the ... Read Full Answer >>
  4. Why are mutual funds not FDIC-insured?

    Mutual funds are not Federal Deposit Insurance Corporation (FDIC)-insured because money invested in funds are not considered ... Read Full Answer >>
  5. Can mutual funds invest in commodities?

    Mutual funds can invest in commodities. In fact, mutual funds may provide a better way for investors to gain exposure to ... Read Full Answer >>
  6. Can mutual funds invest in IPOs?

    Mutual funds can invest in initial public offerings (IPOS). However, most mutual funds have bylaws that prevent them from ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!