For the three months ending March 31, 2024, the AMG Yacktman Fund (the “Fund”) Class I shares returned 7.54%, underperformingthe Russell 1000® Value Index, which returned 8.99%, and lagging the S&P 500® Index, which returned 10.56%.
Contributors and Detractors
Quarterly contributors include Canadian Natural Resources Ltd. (CNQ, Financial) (“CNQ”) and the basket of energy companies in the portfolio. The energy sector had a strong first quarter, and the energy companies in the portfolio performed well. The thesis is based on a medium-term supply/demand imbalance and the shift to returning capital to shareholders. Diamondback Energy (FANG, Financial) announced a major merger with a private energy company during the quarter, following other deals announced recently (e.g., Chevron (CVX, Financial) announcing the purchase of Hess and Exxon (XOM, Financial) buying Pioneer). CNQ was Yacktman's first investment in the energy space in over a decade, which was followed by the basket of domestic exploration and production companies added in mid-2022. We think CNQ is one of the best-managed companies in the industry, and because the company essentially “manufactures oil” from the oil sands with 30 years of reserves, it incorporates lower maintenance capex than its traditional drilling competitors. Bolloré (XPAR:BOL, Financial) also strongly contributed to returns in the first quarter (see “Brief Update on Bolloré” section below).
Detractors from performance include U-Haul (UHAL, Financial), Embecta (EMBC, Financial), and GrafTech (EAF, Financial). U-Haul's two primary lines of business, self-storage and truck rental, both faced headwinds in the first quarter. Self-storage REIT peers traded down with prevailing interest rate trends. The truck rental business, which experiences a seasonally slow period in the first quarter, was further impacted by lingering supply chain delays in new truck availability. Embecta, though the investment thesis remains intact, has suffered from the market's enthusiasm for semiglutide products given its traditional insulin delivery products. GrafTech has struggled recently—its largest plant in Mexico missed the contracting cycle, and cyclical headwinds have impacted its customers. GrafTech's assets are valued well below their replacement costs, and the forward rate of return is attractive.
New Positions
We want to highlight two relatively new companies in the Fund. Darling Ingredients (DAR, Financial) (“Darling”) is the leading collector and renderer of animal by-products representing a crucial part of the food supply chain. Given the nature of its processing operations, the business enjoys high barriers to entry, transforming animal by-products into fats and proteins that are subsequently used in a variety of applications, from animal feed to collagen products. We believe the company has managed the business well through several smart acquisitions over recent years. It processes approximately one out of seven livestock animals on Earth. Darling has a joint venture with Valero Energy Corp to use these animal by-products to produce renewable diesel fuel, and we imagine it will benefit from being the low-cost producer in a growing business.
Another relatively new position is the consumer staples business Kellanova (K, Financial), the former Kellogg Company that spun off its cereal business, leaving a global snack company with well-known brands such as Cheez-It Crackers, Nutri-Grain Bars, and Pringles. The cereal division split has made the snack business's valuation more complex in the near term, and we have been able to find hidden value in a predictable consumer products segment that offers an attractive discount, strong margins, and growth attributes.
A Brief Update on Bolloré
Bolloré closed on the sale of its European freight and logistics business on February 29, resulting in a media company with three sources of value: its stake in Vivendi, its stake in Universal Music Group (“UMG”), and a pile of cash on the balance sheet. Vivendi is evaluating separating itself into four publicly listed companies that would simplify its structure to unlock value. UMG, with its shares trading up, has produced strong operating results that represent embedded value for Bolloré. We see all of these factors as positive for Bolloré: the upside has increased, while the risks have been reduced.
Conclusion
Risks are plentiful in the current environment, and passive indices are increasingly concentrated in a few names. Inflation has affected factor costs for many companies, and higher interest rates have impacted the cost of capital and consumer demand. We have high conviction in our strategy and focus on investing in resilient companies that we find are mispriced in today's market. We believe the AMG Yacktman Fund (Trades, Portfolio) is well-positioned to generate differentiated returns over time while protecting capital.
To hear more from the Fund's portfolio managers, financial advisors can visit our website here to listen to Yacktman Asset Management (Trades, Portfolio)'s second quarter update call.
The views expressed represent the opinions of Yacktman Asset Management (Trades, Portfolio) LP, as of March 31, 2024, are not intended as a forecast or guarantee of future results, and are subject to change without notice.
