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.
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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.
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.)
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