Donald Yacktman: High Quality Equities are Relatively as Cheap as Ever
Consuelo Mack interviewed mutual fund superstar Donald Yacktman regarding his investment philosophy and strategies. Mack pointed out that the Yacktman Fund has ranked in the top 1% of its fund category in the three, five, 10 and 15-year periods.
Yacktman refers to the current environment as an amazing and unique period of time in which he hasn’t seen so many high quality, profitable businesses selling at prices this cheap relative to the stock market.
As an illustration, Yacktman said the 30-Year Treasury has a lower yield than many high quality companies (Johnson and Johnson, Pepsico, Procter and Gamble, etc.).
Mack questioned Yacktman whether these stocks were not just relative bargains, but good buys overall. Yacktman replied that stocks were absolutely cheaper at the bottom in 2008-2009, but on a relative basis a number of these companies (ex. Procter and Gamble) sell at almost the same price they did in the fall of 2008. This, while there’s been 3 1/2 years of growth in the dividends and everything else. The cash flows are much higher and they’re more valuable now than then. Yacktman said he’s finding the best bargains in the brand name companies.
Yacktman said he operates under three goals. Number one is to preserve the client’s capital. The second goal is to make equity-like returns; double digit returns. The third goal is to beat the S&P 500 over a full market cycle (10 years).
Yacktman says they look at forward risk-adjusted rates of return, behaving like a bond buyer. He says you estimate a forward return and place a quality rating on it and what he sees is the AAA’s of equity such as Coca Cola and Pepsico have very high returns relative to other things. Yacktman questioned why one would go to lower grades when they can stay with these AAA bond-like equities.
The interview (available below) continued with a discussion of market volatility, what investors can control, Yacktman’s view of his investment in News Corporation and his opinion on the financial sector, protecting capital via a margin of safety, the importance of overseas earnings, the options companies have to deploy their cash, and the one stock Yacktman believes everyone should own and why (his stock pick was Pepsico – “like shooting fish in a barrel”).