Yacktman calls the whole dogfight "a pitiful attempt" to gain control of the fund's management, and believes he had no choice other than to bring it public with a shareholder proxy vote. "There is a narrow difference between determined and stubborn," he says, referring to his refusal to buy pricier large-company growth stocks in the late 1990s that could just as easily apply to the board spat. "If you are proven right, then you are determined."
Eventually, Yacktman would fit his own definition of determined as fund performance firmed up and the board controversy became a memory. Before that happened, the Yacktman Fund's assets would plummet from $1.1 billion at the beginning of 1998 to $307 million by the end of the year. By 2000, it had roughly $70 million in its coffers.
The beleaguered manager had something working in his favor, though-a portfolio of incredibly inexpensive stocks of companies with solid businesses that began looking increasingly attractive compared with the pricey, overheated technology and growth stocks that had dominated the market in the late 1990s. Investors took notice, and the fund has received more than $100 million in new assets from them.
Yacktman has put that money to work buying what he considers growth companies at low prices. Corporate characteristics he looks for include high market share for a principal product or service line, long product cycles and unique franchise characteristics. Managers must show a shareholder orientation by using excess cash to invest in their businesses, make synergistic acquisitions or buy back stock.
While the portfolio holds a number of well-recognized names such as Coca-Cola and Tyco, smaller companies such as Lancaster Colony also are liberally represented. The maker of specialty foods and glassware, which has a market capitalization of $1.3 billion, has no debt and managers who have a history of buying back stock.
To fit his pricing parameters, a company's stock should sell for less than what an investor would pay to buy the whole company. The valuations of the stocks in the Yacktman Fund reflect that view, with the weighted average price-earnings ratio of the portfolio coming in at 13.7, compared with 20 for the S&P 500 Index. Because the stock prices of many companies vary by 50% or more from low to high each year, Yacktman often lurks around until a buying opportunity presents itself.
Such an opportunity arose in June when Yacktman began buying bonds issued by financially troubled Qwest Communications. (The fund's charter allows him to invest as much as 10% of assets in bonds rated below Aa, he says.) Yacktman believes that while the company's stock is risky-its price has plummeted from $26 a share to $1.12 over the last year-its bonds are well-secured by corporate assets. They currently trade at $410, and mature in 2010.
Yacktman keeps tabs on Qwest and other holdings with the help of son Stephen, 32, a research analyst. Although the elder Yacktman says there are no immediate plans for a change in management, he does sound like someone who has given the matter ample consideration. "If anything ever happened to me, Stephen could take over at the drop of a hat and no one would notice a change," he says. He adds that his son "could be given a larger role at some point," and does not rule out the possibility that he could become portfolio manager.
Whether Stephen Yacktman will successfully fill his father's shoes remains to be seen. But it is almost certain that as long as deep value continues to outperform most other styles of equity investing, the investment philosophy will gain new fans. In the eyes of some financial advisors, Yacktman remains one of the best fund managers to carry it out.
"There will always be a place in diversified portfolios for good value managers like Yacktman," says Norman Fosback, editor of Fosback's Fund Forecaster newsletter and founder of Mutual Funds Magazine. "I suspect the value approach will rule the roost for some time to come, beyond its recent superiority. But the more extreme the investment philosophy deployed within a general investment category, the more extreme will be the performance. So eventually, Yacktman will be a poorer-than-average performer again. In the meantime, now is a good time to be buying Yacktman shares."