Given recent events, Tyco is not the kind of stock that most financial advisors would recommend for a client's portfolio right now. In June, former chief executive Dennis Kozlowski was indicted on charges of evading more than $1 million in New York State income taxes on $13 million worth of art purchases. Since then, new revelations about the company's costly junkets and questionable loan programs for top executives have surfaced in media reports. In the last year, the stock has fluctuated between $60 and $7 a share, and was trading at around $14 in mid-August. The only good news came on August 19 when the new CEO asked the entire board of directors to resign and shares surged 9%.
But where some investors smell trouble, Donald Yacktman, manager of the $170 million Yacktman Fund, smells opportunity. Yacktman began loading up on Tyco in June soon after the flood of bad news began to break and its price plunged. His average purchase price was just under $9 a share, and he likes the stock so much that it now accounts for about 10% of fund assets.
Yacktman believes investors are overreacting to the company's tribulations. "This is not an Enron," he says. "This is a conglomerate with real, legitimate businesses whose manager did some dumb things." By selling off some of its holdings and appointing a new chief executive officer, he adds, Tyco is taking steps that will eventually help bring the stock back into favor.
Controversial bets like Tyco are nothing new to the 61-year-old manager. For decades, Yacktman has been known for pushing the envelope of value investing by putting money into companies that almost everyone else is ignoring or selling at the time he buys them. And he isn't afraid to keep 10% or more of fund assets in stocks that he feels have the greatest potential to come roaring back, adding octane to his deep-value investing style. Those looking for an even more concentrated portfolio can invest in the Yacktman Focus Fund, which has just $14 million in assets.
The strategy won respect when Yacktman managed Selected American Shares from 1982 to 1992. In 1991, the year before Yacktman left to launch his own fund, Morningstar named him its portfolio manager of the year.
Over the last two years, as the broad market averages have gone into a tailspin, the Yacktman Fund has been a standout performer. In 2001, the fund gained 19.5%, beating the S&P 500 Index by more than 31%. It is up 5.2 % this year as of mid-August, beating the index by roughly 24%.
Those numbers stand in sharp contrast to 1998, when the fund gained less than 1%. Its 17% loss the following year put it behind the performance of the S&P 500 Index by a gaping 38% and among the bottom 2% of mid-cap value funds, according to Morningstar. If advisors need a manager who can zig when the market zags, Yacktman's the man.
Performance troughs aren't terribly unusual among funds that subscribe to a deep-value philosophy. In fact, investors in such funds should be willing to wait five to seven years for the strategy to play out, says Ronald W. Roge, CFP, president of R.W. Roge & Co. in Bohemia, N.Y. "In that time frame these funds may not have spectacular relative performance," he says. "However, when the underlying values are recognized, performance is dramatic and may occur in a relatively short period of time."
What is unusual about the recent fall and subsequent rise of the Yacktman Fund is both the magnitude of the decent, particularly in 1999, and the very public drama that played out the year before in an industry known for keeping a tight lid on its internal controversies.
In 1998, several members the fund's independent board of directors waged an aggressive and well-publicized battle to oust Yacktman. Their primary concern was that he had strayed from fund policy by drifting from larger to smaller companies, which were performing poorly at the time. Yacktman countered that he was investing in smaller stocks because larger companies had become overpriced, and that the strategy was consistent with fund policy. In response, he called for a proxy vote to oust four of the fund's six directors, and to add three new directors he recommended. Shareholders voted in favor of the proposal.
The Controversial World Of Donald Yacktman
October 1, 2002