For fund manager Brian Yacktman, the secret to winning performance is a concentrated portfolio of what he calls “global champions.”
Yacktman, who oversees the YCG Enhanced Fund, said such companies enjoy “enduring pricing power and long-term volume growth” as the global economy expands over time.
The YCG Enhanced Fund
was established in December 2012, has $225 million in assets and has a five-star rating from Morningstar (the highest). Its performance against benchmark indexes and its morningstar category is shown at the bottom of this article.
The “enhanced” portion of the fund is its sale of put and call options to generate additional income when placing limit orders to buy or sell stocks.
In an interview April 8, Yacktman said “nearly all businesses are deflationary over time, after you adjust for inflation, because competition and innovation drive down prices in real terms.”
That can easily be illustrated by the capabilities of smartphones. If we had purchased devices providing services such as GPS, videoconferencing and high-res digital photography, among others, when they were invented, the total cost over the years would have been sky-high. Today they’re cheap enough that around 2 billion people own them.
Yacktman went on to say something similar about commodities: Despite the assumption that commodities hold their value over time and can act as a hedge against sliding currency values, “over the past 100 years, they have been in a slow decline.”
So, few industries can maintain their sales as a percentage of gross domestic product (GDP) over time. One industry that has not suffered a decline in sales relative to global GDP, according to Yacktman, is advertising. The need to sell cannot be eliminated by technology. This is one reason Google holding company Alphabet
is one of the largest holdings of the YCG Enhanced Fund.
“It is a scarce good that will have pricing power,” Yacktman said of advertising. “The obvious good is our time, relative to the increased opportunities that are afforded to us by this increase in global wealth.”
The fund manager added that “the true value is to be had in time-saving filters.” He went on to say that in addition to long-term pricing power, he wants to see that a company has the potential for significant volume growth with a relatively low capital outlay and “an ownership-minded” management team — one with a lot of skin in the game.
He breaks down the time-saving filters into two buckets: information filters and “people” filters. Some companies, such as Colgate-Palmolive
which has a dominant market share for toothpaste in many countries, actually serve as both types of filters — people trust its product and it might be a waste of time to try to find a slightly less expensive competing brand they may like. That gives the company pricing power.
Yacktman named many more examples of both types of time-saving filters.
”A people filter is essentially a good that increases attractiveness. Humans are tribal by nature. So good filters are an appeal to loyalty in a tribe or status within a tribe,” Yacktman said.
An excellent example is Nike
Many people “are willing to pay a premium to identify with their heroes,” he said. It is obvious from the company’s tremendous stable of famous athletes wearing its products and advertising for the company that nobody is better at the celebrity-endorsement game than Nike.
Some of Nike’s athletic shoes are very expensive. “A status filter has pricing power because if it is easily obtainable, it loses its status.”
Another people filter Yacktman discussed is L’Oreal SA
“Personal care is one of the few industries that has grown its share of global GDP, going to 2.4% from 2.3% over the past 20 years,” he said.
That may not be much of a surprise, as more people around the world join the middle class, but it points to another need that people will continue to have, despite radical changes in technology.
“As discretionary wealth increases, there is an arms race to spend on beauty, Yacktman said. L’Oreal “can raise prices without push back, because for consumers it is a high-value add,” he said. In other words, consumers would rather go with a well-known, trusted brand that spend time and money to find a substitute.
Yacktman sees L’Oreal as similar to a bond with a triple-A rating. The company has “a short repurchase cycle and products considered mission-critical by users, so they grew revenue during the Great Recession,” he said.
But some fashion brands can become less relevant over long periods. That cannot be easily predicted, so Yacktman and his co-managers have created what he calls “our own suite of luxury brands” held by the fund:
• LVMH Moet Hennessy Louis Vuitton
• Hermes International SCA
which owns Gucci.
• Compagnie Financiere Richemont SA
which owns Cartier.
An information filter might be a company whose service is well-known, trusted and difficult or costly to replace. Moody’s
is an example, with its decades of experience as a bond-rating agency. Bond issuers need to pay the company to analyze and rate their paper. If they choose to forgo a Moody’s rating, they are likely to pay a higher interest rate to investors. Institutional investors rely on the ratings because changing their own risk-management methodology would be costly. The easiest thing for issuers, investors and risk managers to do is maintain status quo.
“What has helped make Moody’s a filter is they are a globally known language for bond ratings. As capital markets become more global, they are using S&P
and Moody’s. You only pay 6 basis points to rate your debt. It is a good value,” he said. (For comparison, 1 percentage point is 100 basis points.)
Yacktman said “no startup can replicate” a decades-old ratings agency’s proprietary data — an ever-growing resource that “allows ratings to be compared across time.” Moody’s can sell its analytics of that data.
Yacktman said he prefers Moody’s to S&P Global as a pure-play in the ratings space, and that he believes MSCI
— the eighth-largest holding of the fund as of Dec. 31 — “has more pricing power” in the international stock index business than S&P at this point.
is another information filter. The payment processor was the largest holding of the YCG Enhanced Fund as of the end of 2018. The fund does not have a position in Mastercard’s larger rival Visa
because Mastercard was priced more attractively when Yacktman began building the position and he is now holding the stock with a large paper gain.
“I would prefer to have half Visa and half Mastercard,” he said.
This is another instance of a company (or two) being well-positioned because of the trust they have gained over multiple decades.
“Many have tried to disrupt them and been unsuccessful, to the point that they said, if you cannot beat them, join them,” he said. “PayPal
tried to circumvent the Mastercard/Visa networks [by making the default payment choice a user’s checking account], but they realized it was too difficult to go against consumer behavior.”
Yacktman acknowledges that Mastercard and Visa have been shut out of the Chinese market — where Tencent
dominate the market for electronic-transaction processing with the government’s blessing. But he still sees a very long runway for potential volume growth for Mastercard and Visa because “you have 80% to 85% of transactions still in cash, globally.”
has a market advantage as a one-stop shop where individual investors can trade securities with very low commissions and also manage their investments easily, with access to thousands of mutual funds and exchange traded funds (ETFs). Schwab’s profit model is based on leveraging the low-cost cash deposits in customer accounts with margin lending, as well as the fees, or other fees, it collects from mutual fund managers or fund investment advisers, depending on which additional services Schwab provides them.
Yacktman calls Schwab “the Amazon of the investment world,” because it is “the lowest-cost producer” in the discount-brokerage space. Schwab also has an incredible advantage over its competitors because of money managers’ need to pay it to “get on the supermarket shelf.”
Another “global champion” Yacktman favors is CBRE Group
which he called “the largest internationally recognized brand” for commercial real estate brokerage and investment services. This is another case in which investors entering various markets would probably pay more if they tried to circumvent a dominant company’s ubiquitous services.
“The brand name is well-recognized,” Yacktman said. “That is where the talent goes, because they have the most resources. So it is a perpetual cycle.”
One last information filter with a built-in advantage over competitors that Yacktman mentioned is Copart
an online exchange for vehicle parts.
“As vehicles become more expensive, cars are being totaled [fully written off by insurance companies after accidents] at a higher rate than they used to be,” he said. “So they are a toll-taker on auctioned vehicles.”
Here are the top 10 equity positions (of 31) of the YCG Enhanced Fund, which account for 52% of assets, as of Dec. 31:
|Company||Ticker||Share of portfolio||2019 through April 9||2018||3 years||5 years|
|Mastercard Inc. Class A||
|CBRE Group Inc. Class A||
|Alphabet Inc. Class C||
|Nike Inc. Class B||
|MSCI Inc. Class A||
|Charles Schwab Corp.||
|Wells Fargo & Co.||
|Sources: YCG Funds, FactSet|
In its prospectus, the YCG Enhanced Fund’s performance is measured against the S&P 500
and the S&P Global BMI Total Return Index. Yacktman said the MSCI All Countries World Index also provides a fair comparison for performance. So here’s how the fund has performed against all three indexes and its Morningstar category:
|Total return – 2019 through April 9||Total return – 2018||Average return – 3 years||Average return- 5 years|
|YCG Enhanced Fund
|S&P 500 Index
|S&P Global BMI Total Return Index – U.S. dollars||14.4%||-7.9%||12.2%||7.2%|
|MSCI All Countries World Index – U.S. dollars
|Morningstar Large Blend category||12.9%||3.1%||12.7%||9.3%|
|Sources: FactSet, Morningstar|
Yacktman said that if the fund’s performance matches that of the benchmarks, he is providing “great value” to investors, not only because the fund diversifies a portfolio away from the index, but because “our downside capture ratio [to the S&P 500] is super low at 70%, while our upside capture is in the 90s [percent].”