MUTUAL FUND COMMENTARY
FOR FOURTH QUARTER ENDING
DECEMBER 31, 2011
Overall 2011 market action was dominated by the European debt crisis, political gridlock in the US Congress, and the earthquake and subsequent tsunami in Japan. All these issues increased volatility in the markets and led to some wild swings throughout the year. When all was said and done the S&P 500 Index ended the year up 2.11%. The S&P 500 started 2011 at 1257.64 and closed 2011 at 1257.60. The 2.11% increase is attributable to the dividends paid out by the companies that comprise the index. Interest rates continued to drop throughout the year, which helped fixed income performance. The broad measure of the bond market, the Barclays US Aggregate Bond Index, increased 7.84% in 2011. Even though the fed has pledged to keep rates low through 2014, rates will increase sooner rather than later, which will cause bond prices to drop.
According to The Wall Street Journal, the average diversified US domestic equity fund lost 2.9% last year. Most of the mutual funds held in accounts at Old Point Trust produced positive gains. The emerging markets and international funds were down for the year due to slower growth in China and the ever present problems in Europe. International funds will still be plagued by European debt issues going forward, but the emerging markets could be an area for positive growth in the coming year. The focus of many investors in 2012 will be on large, dividend paying companies. Many of our funds are well positioned to take advantage of an increase in these larger, multinational corporations.
Recently the Investment Committee met and we decided to remove one of the mutual funds from portfolios. We removed the Sound Shore Fund (SSHFX) and replaced it with another fund that has been a better performer within the same category. Sound Shore is a well run fund where the management team has been in place for over 20 years, but the fund’s performance started to lag the S&P 500 over longer time periods. Sound Shore’s five year average return is -2.52% underperforming the S&P 500 by 2.27% on an annualized basis. It is our job as stewards of your capital to remove underperforming assets and replace them with better investments.
The replacement for Sound Shore is the Yacktman Fund (YACKX). Yacktman is an independent asset management firm based in Austin, Texas. The fund has three lead managers Don Yacktman, Stephen Yacktman, and Jason Subotky. Don Yacktman has managed money for over 40 years and Stephen and Jason play integral roles in managing the portfolio. The Yacktman Fund has been an excellent long-term performer. The five year average return for the fund is 8.04% outperforming the S&P 500 by 8.29% on an annualized basis. More important is the way these managers produce these solid returns. Yacktman as a large value fund tries to invest in large, multinational companies that are trading below their intrinsic value. This means the portfolio managers try to buy quality companies trading at substantial discounts to what they believe the companies are actually worth. To describe value investing you often hear Warren Buffet say he wants to buy a dollar for fifty cents.
One of the common phrases the portfolio managers use in conference calls and commentaries is, "It’s almost all about the price.” In a recent commentary the Yacktman team said, "Often, the most important variable in having a successful investment and managing risk is the price paid for a security.” Another of the keys factors to their long-term investment success is protecting capital during major market declines. As I said earlier the focus this year and going forward will be on large, dividend paying companies. Some of the top positions in the fund include Pepsi, News Corp, Microsoft, and Coca-Cola. One of the compelling reasons this fund should continue to do well is that many of the top holdings are at lower prices than they sold for five or ten years ago even though the earnings of the businesses are significantly higher today. Morningstar® gives the Yacktman Fund its top 5 stars and gold analyst rating. We believe the Yacktman Fund is an upgrade and an excellent addition to the portfolios.
2011 proved to be a year that tested the patience of many investors. The year ahead could include similar volatility with the issues in Europe worked out over time. Corporate balance sheets show record amounts of cash and these companies are in strong positions to do well going forward. Hopefully some of that cash will be paid out to investors in the form of a dividend. If the headline risks out of Europe cool off and the market gets back to trading on fundamentals, stocks should perform well. One of the strongest attributes of the Yacktman Fund is patience to wait for their investment thesis to work and has served them well over the years. Stay patient and thank you for your confidence in Old Point Trust. May the New Year bring above average returns.
Lars E. Lassen, CFP®
Investment Officer
January 30, 2012
The opinions contained herein are those of Lars E. Lassen as of the date of publication and are subject to change without notice. The contents have been derived from sources believed reliable. Old Point Trust makes no representation or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions which may be contained herein and accepts no liability whatsoever for any loss arising from any use of, or reliance on this report or its contents. Old Point Trust, its affiliates and/or their respective officers, directors or employees may from time to time acquire, hold or sell securities mentioned herein.