This Superstar Fund Is Still a Smart Bet

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Everyone knows you shouldn't mess with success. But when I heard that one of the top-performing mutual fund companies over the past two decades was selling itself to another asset management company, my first reaction was to worry for the fund's shareholders.

But after looking more closely at Affiliated Managers Group's (NYSE: AMG  ) deal to buy out Yacktman Asset Management, it appears everything should remain "business as usual" for Yacktman's mutual fund shareholders. In fact, many investors may never even realize anything has changed.

Later in this article I'll explain why Affiliated's move shouldn't have a huge impact on the funds. But first, let's take a look at exactly how Yacktman has managed money so successfully over the years, through good markets and bad.

Top performance
The manager's flagship Yacktman Fund has had strong performance for a very long time. With showings in the top 1% of all large-cap value funds over the past 10-year and 15-year periods, Yacktman Fund boasts peer-crushing performance that has led to huge extra returns for shareholders. Since 2002, the fund has beaten both the S&P 500 and the typical value mutual fund by more than 6 percentage points annually, helping the fund's investors avoid anything close to resembling a lost decade.

Yacktman gets the job done in part by doing two things many funds are reluctant to do: having highly concentrated positions and holding large amounts of cash at certain times. Yacktman Fund owns about 40 stocks right now, but its top three holdings make up almost a quarter of its assets.

Some of Yacktman's best performance has come during down markets. The fund managed an 11% gain in 2002, when the market was down more than 20%. Even during the crisis year of 2008, Yacktman managed to limit its losses to 26%, beating its peers by more than 10 percentage points.

But the fund also did well in 2009, jumping nearly 60% as it cashed in on the big market rebound. With timely investments in Bank of America (NYSE: BAC  ) when it was, in Yacktman's words, "priced for doomsday," as well as beaten-down media stocks Viacom (Nasdaq: VIAB  ) and News Corp. (Nasdaq: NWSA  ) , the fund didn't hesitate to boost its bets even when Wall Street investors seemed convinced the end was near. B of A came back from the brink, and media companies proved to be among the biggest winners in the recovery, as the backlash on ad spending proved not to be as devastating as investors had expected.

Right now Yacktman Fund continues to hold News Corp., but it's also focusing more on long-held defensive names. PepsiCo (NYSE: PEP  ) remains the largest position in the fund, with Yacktman pointing out that it and its consumer-staple peers "tend to be fairly stable and predictable, with a strong ability to handle uncertain economic periods." That ballast has served the fund well during past rough patches.

Will a buyout ruin the fund?
New management can devastate a fund. When there's a change in leadership, it often means a change in strategy as well -- and when the current strategy has been doing as well as Yacktman has, it's hard to imagine a better one.

But AMG has a reputation for investing in asset managers while basically leaving them alone. In the past, it has allowed existing fund managers to keep operating without major challenges to their independence.

Moreover, by leaving Yacktman's current team with substantial equity in the management company, AMG ensures that the same incentives that have produced such stellar past performance will continue into the future. In fact, the move may actually help Yacktman if it ends up giving the fund manager back-office support and other services it previously had to do on its own.

The biggest potential downside for current investors may be the attention that Yacktman could get from the takeover. If Yacktman gets flooded with new assets, it could be increasingly difficult for the managers to invest cash effectively, endangering its future performance.

Stick with it, but keep your eyes open
Overall, though, Yacktman's move seems like the best of all worlds for everyone involved. You'll want to watch for any possible changes or problems that may suggest otherwise, but for now, Yacktman's sterling reputation should remain intact for the foreseeable future.

Finding top funds can help you in your quest to save for retirement, but Yactkman's focused approach is a good reminder that individual stocks can make or break your portfolio. Let me invite you to look at three promising stock picks, which you'll find in The Motley Fool's special report on long-term investing. But don't wait; get your free report today while it's still available.

Fool contributor Dan Caplinger has admired Yacktman's funds from afar for a long time. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Bank of America and PepsiCo. Motley Fool newsletter services have recommended buying shares of and creating a diagonal call position in PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy is always a smart bet.

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