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. Mutual Funds & ETFs

    The 3 Best Downside Protection Equity Mutual Funds

    Learn how it is possible to profit in a bear market by owning the correct selection of mutual funds that provide downside protection and opportunity.
  2. Mutual Funds & ETFs

    The 4 Best Lord Abbett Mutual Funds

    Discover the four best mutual funds administered and managed by Lord, Abbett & Co., LLC that offer investors a wide variety of investment strategies.
  3. Mutual Funds & ETFs

    The ABCs of Mutual Fund Classes

    There are three main mutual fund classes, and each charges fees in a different way.
  4. Investing Basics

    5 Common Mistakes Young Investors Make

    Missteps are common whenever you’re learning something new. But in investing, missteps can have serious financial consequences.
  5. Mutual Funds & ETFs

    The 3 Best Vanguard Funds for Value Investors in 2016

    Find out which of Vanguard's value funds are the best for building a solid core-satellite value investing strategy for your portfolio.
  6. Mutual Funds & ETFs

    The 4 Best American Funds for Growth Investors in 2016

    Discover four excellent growth funds from American Funds, one of the country's premier mutual fund families with a history of consistent returns.
  7. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  8. Investing Basics

    5 Questions First Time Investors Should Ask in 2016

    Learn five of the most important questions you need to ask if you are a new investor planning on starting an investment program in 2016.
  9. Products and Investments

    A Guide to DIY Portfolio Management

    These are some of the pillars needed to build a DIY portfolio.
  10. Mutual Funds & ETFs

    The 5 Best US Small Cap Value Index Mutual Funds

    Find out which index mutual funds do the best at investing in small-cap value stocks for higher potential returns at the lowest cost.
RELATED FAQS
  1. Are target-date retirement funds good investments?

    The main benefit of target-date retirement funds is convenience. If you really don't want to bother with your retirement ... Read Full Answer >>
  2. Do mutual funds require a demat account?

    A dematerialized account enables electronic transfer of funds. The account is used so an investor does not need to hold the ... Read Full Answer >>
  3. How liquid are Vanguard mutual funds?

    The Vanguard mutual fund family is one of the largest and most well-recognized fund family in the financial industry. Its ... Read Full Answer >>
  4. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  5. Does OptionsHouse have mutual funds?

    OptionsHouse has access to some mutual funds, but it depends on the fund in which the investor is looking to buy shares. ... Read Full Answer >>
  6. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center