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Fund sticks with tobacco
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July 16, 1999: 6:53 p.m. ET
Yacktman Fund thinks Philip Morris is a good buy despite litigation
By Staff Writer Martine Costello
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NEW YORK (CNNfn) - Veteran fund manager Donald Yacktman is fuming, if you'll excuse the pun.
If it weren't for the cloud of lawsuits hanging over Big Tobacco, Philip Morris (MO) might be valued at three or four times the current price of roughly $40 a share. And who knows how high the Yacktman Fund would be soaring?
"It's frustrating in the sense that we look dumber than we really are," Yacktman said. "We own a lot of unpopular but profitable stocks."
Cigarette companies have been on the defensive in court. Most recently, a Louisiana jury ruled in favor of RJ Reynolds and Brown & Williamson in a negligence suit filed by the family of a deceased smoker. But a day earlier, tobacco stocks suffered when a Florida jury decided the industry was liable for smoking-related illnesses.
"The whole court system in this country seems a little bizarre," Yacktman said. "When I was a kid, cigarettes were called 'cancer sticks' and 'coffin nails.' To say the companies have been trying to hide things doesn't make sense…The courts tied the tobacco companies' arms behind their backs."
At one time, the Yacktman Fund owned many of the big names in tobacco -- Philip Morris, U.S.T. (UST), RJ Reynolds (RJR) and Loews (LTR). He decided only Philip Morris was worth keeping because the company has been aggressive in gobbling up market share.
The fund, with $191.8 million in assets, is down 4.04 percent year to date, according to Chicago fund-tracker Morningstar. The fund was ranked 276 out of 281 mid-cap blend funds followed by Morningstar year to date as of June 30. It was one of 22 in the category that lost money in the second quarter.
Yacktman blamed the fund's lackluster returns partly on the poor performance of Philip Morris and one other top holding, Dept. 56. Philip Morris represented 10.81 percent of the portfolio as of May 31, while Dept. 56 (DFS), a maker of ceramic figurines, was the top holding at 11.52 percent.
The fund lost 1.87 percent on the day in March when an Oregon jury awarded $80 million in damages in a suit over the death of a former smoker, according to Morningstar.
"There's only so long you can hold the beach ball under water," Yacktman said of the two stocks, meaning he thinks they will eventually soar.
It also means he hasn't given up on tobacco, despite the wave of lawsuits. He wouldn't sell the shares unless a class-action lawsuit gets "certified" at the federal level. If a judge certifies a class-action suit, it means he's found grounds for the case to continue.
"Philip Morris still generates enormous amounts of cash," Yacktman said. "We're not giving up yet."
Has gold outlived its usefulness as a currency of safety around the world as its price has dropped to 20-year lows? Stephen Land, portfolio manager of the Franklin Gold Fund, said it is hard to say.
"You turn to gold as a function of last resort," Land said. "People don't feel that way now. It's been a long time since people felt that way."
The Franklin fund was a top performer year to date as of the second quarter, with different share classes capturing the number 1, 3 and 4 spots out of 45 funds tracked by Morningstar. (More recently, the volatile fund has given up some gains and was up 4.79 percent as of Wednesday, Morningstar said).
Gold funds racked up losses of 60 or 70 percent in the last few years for a number of reasons. The Bre-X scandal was partly to blame, Land said. A number of central banks, including the Bank of England, have also been divesting in gold.
Another negative for the metal is that there are a record number of investors who are "shorting" gold, Land said. (In a short sale, an investor borrows stock and hopes to sell them back later at a lower price, to pocket the difference).
"If they were shorting gold at $350 (an ounce) then they made a lot of money," Land said.
His fund gained this year from top-performing platinum and palladium stocks such as Anglo American Platinum, and diamond stocks such as De Beers Consolidated Mines, which both trade in the United States as American depositary receipts.
Land said he's adjusted the portfolio by getting out of smaller gold producers. His outlook is neutral for the year.
"From a diversification standpoint, it (a gold fund) does warrant a look," Land said.
Ryan Jacob hit the ground running after he left on July 2 as manager of the $716 million Internet Fund to form his own company. The Jacob Internet Fund will invest in 30 to 35 "Internet-centric" businesses that derive a large part of their revenue from or on the Internet. The fund will invest in small to large-capitalization companies.
The fund is waiting for comments from the Securities and Exchange Commission and hopes to be open for business in the next month or two.
Meanwhile, Investec Guinness Flight Global Asset Management reached an agreement with internet.com Corp. (INTM) to introduce the Guinness Flight internet.com Index Fund. The fund will track the internet.com Internet Stock Index and will open July 30.
The index includes Internet heavyweights such as Amazon.com (AMZN), Cisco (CSCO), eBay (EBAY), and Yahoo! (YHOO).
Finally, here are a few winners in mid-cap blend funds -- of which the Yacktman Fund is a part -- tracked by Lipper Analytical Services.
At the top of the list is Vertex Contr. Fund, class A shares, up 7.18 percent for the week July 8 to 15 and up 74.84 percent year to date; followed by TCW Gallileo Earnings Momentum Fund, up 5.10 percent for the week and up 7.64 percent year to date; and PBHG Focused Value Fund, up 3.66 percent for the week. (Its year-to-date figure wasn't immediately available from Lipper).
At the bottom of the list was First Omaha Equity Fund, off 0.91 percent for the week but up 7.07 percent year to date; followed by Orchard Value Fund, down 0.77 percent this week but up 11.15 percent year to date; and Prudential Jennison Growth & Income Fund, class C shares, down 0.71 percent this week but up 18.70 percent year to date.
-- Staff Writer Martine Costello covers mutual funds for CNNfn.com. If you have any comments about mutual funds, you can contact her at cnnfn.interact@turner.com
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