05 Nov 2012 Yacktman Funds - Q3 2012 Commentary ( Portfolio )
“This is like déjà vu all over again.” Yogi Berra

The market rally of the last 12 months has been driven by global central banking policies that have encouraged investors to move to riskier investments. We have seen this kind of short-term impact many times over the 20-year history of our firm. Rather than pursue riskier securities, we tend to focus even more on quality, predictability, and valuation in times like these when others ignore the additional risks they are taking.

We are pleased that we are able to own such high quality, market-leading businesses at attractive valuations at the current time. We think the quality aspect will protect us when risk again becomes more of a market focus down the road. Over the long term, we think our portfolios are priced to outperform the market by a solid margin.

The top 10 positions in Yacktman Focused and Yacktman Fund represented 58.7% and 51.6% of fund assets respectively as of September 30, 2012. Each of the companies in the top 10 is a leader in its industry. We believe the holdings listed above offer an exceptional combination of strong business predictability and attractive valuation.

Consumer Staples
Consumer staples stocks generally lagged during the quarter and year-to-date after providing solid returns in 2011. Even though the sector lagged, Procter & Gamble, our top holding in Yacktman Focused and second largest position in Yacktman Fund, performed well. Sysco Corp and Walmart also produced solid results. Positions in Pepsi, Clorox, and Avon were fairly flat and Coca-Cola declined modestly.

Media
News Corp, Viacom, and Comcast all produced strong results for the quarter. For the year, these three positions have contributed solidly to performance.
News Corp reported another strong quarter, with its cable network business growing pre-tax profits at more than 25% over the prior year. Since we made our initial investment in 2008, the cable network business has grown from approximately $1.3 billion in annual pre-tax earnings to nearly $3.3 billion in the fiscal year just ended. Because of the strong growth, News Corp remains inexpensive even though its stock has performed exceptionally well for the funds. This year, News Corp announced plans to spin off its print and Australian assets, a move we think will further highlight the exceptional quality of the cable and television network businesses.

During the quarter, Viacom announced an attractive new long-term agreement with DirecTV. We expect this will help them produce solid growth over the next few years. The shares are inexpensive at slightly more than 10 times free cash flow. Comcast’s shares continued to rise on solid results and are now up significantly year-to-date.

Technology
Cisco rebounded last quarter after reporting solid results. Microsoft declined modestly as PC-related stocks struggled. We think the demise of PC companies has been greatly exaggerated and Microsoft’s shares are inexpensive at current prices. This quarter, Microsoft will be launching its newest operating system, Windows 8
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Health care
We had mixed results in health care stocks during the quarter. Our largest position in the sector, C.R. Bard declined modestly during the quarter after a strong first half of the year. Johnson & Johnson appreciated slightly, and Pfizer was up solidly. We increased our position in Stryker, a leading medical device company with strong position in knee, hip, and spine products. It is conservatively managed with a strong balance sheet and low valuation.

Conclusion
The third quarter produced solid returns for investors. We feel the portfolios are well-positioned, with an emphasis on companies with dominant market positions at attractive valuations. We will work hard to examine current positions and new opportunities and, as always, we will continue to be diligent, objective, and patient when managing Yacktman Focused Fund and Yacktman Fund.