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Friday, August 31, 2012 - 09:00
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Friday, August 31, 2012 - 09:43
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Friday, August 31, 2012 - 09:00

The Highest Quality U.S. Blue Chip Stocks... All in One Investment

Friday, August 31, 2012 9:00 AM

If the thought of having a portion of your portfolio in foreign stocks makes your stomach turn, then you're not alone. Conversations I've had with people in the industry confirm what I had expected because of the drawn-out euro crisis: Foreign stocks are extremely unpopular and many investors want nothing to do with them.

Despite this, most financial advisors would probably argue against avoiding foreign stocks, insisting global diversification is necessary to reduce overall risk and maximize returns in the long term. I've got a lot of foreign exposure myself in my portfolio. But when it comes down to it, you're in charge of your investments and you don't have to buy any foreign stocks if you don't want to.

If you don't want anything to do with a foreign stocks but still want diversification and downside protection in your investments, then consider making a mutual fund the centerpiece of your portfolio. In my experience, investors are often better off having a large chunk of their money in a well-diversified fund and then supplementing it with individual stocks, coordinating all their picks to match their investment objective (growth, income or a combination).

In this sense, I've come across a fund that has beaten the market by more than 8% during the past five years. In fact, you may have even heard of it, because it's been around for 20 years -- Yacktman Svc (Nasdaq: YACKX).

Currently, not one penny of its $7.9 billion portfolio is invested overseas, although the fund might occasionally buy a foreign stock or two if the price and quality are consistent with management's investment philosophy. But for the most part, the lion's share of the fund resides in shares of reliable U.S. blue-chip stocks. In fact, management has specifically said it favors domestic stocks, asserting it's much easier for U.S. investors to understand this country's executives and the accounting rules that govern the companies they run.

Often, the first thing prospective shareholders notice is Yacktman's outstanding track record. As the table below illustrates, the fund has greatly outperformed the S&P 500 in the long term.

A top-notch investment approach
To achieve these results, the three-person management team headed by 40-year veteran Donald Yacktman has always taken an extremely long-term, value-oriented approach to stock picking. Specifically, the managers look for companies with histories of high returns on assets, predictable earnings and stable operating results in all economic environments. Like other value seekers, they buy aggressively when valuations are depressed. I also like that they look for generalist businesses, not specialist companies. Focusing on only one sector or segment often creates walls in an organization, management explains.

Right now, the fund is composed of about 86% domestic stocks and 14% cash. It has often been known to hold a lot of cash to facilitate quick action when good values arise -- which, if you know anything about Warren Buffett and his investment approach -- is not a bad way to invest. The stock portion of the portfolio includes 43 holdings -- more than enough for effective diversification, but still relatively small for management to be able to track the high-quality companies they know well. Portfolio turnover has been low historically, ranging from about 3% to 40% during the past decade, reflecting management's patient buy-and-hold perspective.

Here's the stock portfolio breakdown as of July 31: 84% large-cap, 15% mid-cap and 1% small-cap. The top-five holdings by percentage of total assets are News Corp. (Nasdaq: NWSA), PepsiCo Inc. (NYSE: PEP), Procter & Gamble Co. (NYSE: PG;), Sysco Corp. (NYSE: SYY) and Microsoft Corp. (Nasdaq: MSFT):

While Yacktman currently contains no foreign stocks, in the past it has held shares of high-quality European companies like consumer products maker Henkel AG & Co. (OTC: HENKY) and packaged foods giant Unilever Plc (NYSE: UL). At most, foreign equities might make up a mere 0.5% to 1% of the entire portfolio.

Risks to Consider: In a deal announced on April 18, Yacktman will be purchased by asset management firm Affiliated Managers Group Inc. (NYSE: AMG) sometime in the third quarter. Also, Lead Manager Donald Yacktman is 70-years-old and obviously getting toward the end of his career. Thus, there's concern about how much longer the fund will be able to operate as before. Continuity shouldn't be an issue for quite some time, since management signed a 10-year employment agreement with Affiliated and will retain full investment discretion after the acquisition deal closes.. Thus, shareholders should be able to count on the Yacktman investment strategy staying in place for at least another decade.

Action to Take --> A word of caution about investment returns, though: Because the economy is shaky and may take a while to get back to where it was before the financial crisis, I wouldn't expect Yacktman -- or any investment for that matter -- to perform like it has in the past. Going forward, it might be more realistic to hope for the fund to return something in the 4-6% range each year. Nevertheless, it would make an excellent foundation to any investor's portfolio.

Tim Begany owns shares of PG, SYY .
StreetAuthority LLC owns shares of MSFT, PG in one or more of its “real money” portfolios.