Donald Yacktman has been one of the top mutual fund managers of the past decade, and in a new interview with Barron’s he discusses parts of his value-centric strategy.
According to Barron’s, Yacktman looks for well-run firms, particularly those whose stocks are getting beaten up. “When we buy something, we try to look at it as if we were buying a bond,” he says. “If a bond [price] declines, its yield goes up. So if a stock declines, its forward rate of return goes up.” Barron’s says Yacktman “equates this forward rate of return with a company’s free-cash yield”. He “estimates how much cash the company has left after spending what it needs to maintain its business, then adds in the cash he believes it can generate through growth and adjusts for the effect of inflation. That figure is then divided by the stock price.” Finally, he compares the result to yields on long-term Treasuries.
Yacktman went through some underperformance during parts of the 2002-2007 bull market, as he positioned himself for a downturn a bit early. But when the downturn came, he was there to scoop up bargains. “When you have a disruptive period, think of it as a fruit tree that is shaking,” he said. “Some of the fruit will drop to the ground. You can examine the fruit and see which ones you want.”
Currently, Yacktman is very cautious, and has built big defensive positions in stalwart-type firms like PepsiCo and Coca-Cola. According to Barron’s, he “can’t recall another time when such dominant players with reliable earnings growth were selling for less than their average prices.”
While Yacktman isn’t expecting another big plunge in the coming months, it also wouldn’t shock him. “If it goes down, we are going to shoot the lights out again,” he says.