A Time For Caution

For Stephen Yacktman, chief investment officer and portfolio manager at Yacktman Asset Management, the decision about which stocks to invest in, or whether to invest in stocks at all, rests largely on price. If he likes a company and its stock fits his valuation and quality parameters, it may be a good candidate for purchase. But if stock prices are exceeding his comfort zone, he is fine with sitting things out.

The latter conviction is the main reason that the AMG Yacktman Fund, the firm’s flagship offering, had nearly one-quarter of its assets in cash at the end of 2017. Since the end of 2011, the Standard & Poor’s 500 has more than doubled, while earnings have increased at a fraction of that pace. Using price-earnings multiples as a yardstick, the index is trading at one of its highest levels in history.

“We would not find it prudent to lower our standards to stretch for returns,” he told shareholders in a report issued late last year. “We believe there is far too little focus on risk today, and many will eventually be disappointed by the results that markets will achieve over the next decade.”

Yet despite the frothy market, there have been times the fund has seen buying opportunities. That happened in the late 1990s, when prices of tech stocks climbed to dizzying levels while value stocks remained relatively cheap and out of favor. Because the fund loaded up on those value stocks and remained fully invested, it was able to produce strong double-digit annualized returns between 2000 and 2009, while the S&P 500 sank.

But there are other times, such as 2007-2008 and today, when the rising market tide has lifted almost all stock boats. When that happens, the fund raises cash levels because quality bargains are much more difficult to find.

Yacktman’s willingness to sit things out is an anomaly in the world of mutual funds, which almost always have a mandate to stay fully invested in their respective asset classes. And while he acknowledges that having a cash hoard can be a drag on returns in expensive markets that keep going up, he believes it makes sense over the long term.

“Sure, expensive markets can get more expensive,” he says. “But our goal is to invest over a full market cycle, not for the next couple of months or years. And it’s better to keep money in cash than to lose money.” When managers are fully invested, he adds, they may be forced to sell stocks to meet redemptions amid the descending price cascade of a down market.

Maintaining high cash levels also means that when stocks become cheap again, his fund can be an aggressive and active bargain buyer.

Several charts on the firm’s website underscore its ability to beat the pack in difficult times. In the two years following the market peak in March 2000, for example, the AMG Yacktman Fund delivered an annualized return of 25.47%, while the S&P 500 fell 12.52%. Following the market peak in October 2007, the fund’s two-year annualized return was 4.05%, while the index fell 15.17%. Its resilience in down markets is one reason the fund has been a top performer in Morningstar’s large blend category over the last 10- and 15-year periods.