Top Picks 2020: YCG Enhanced (YCGEX)

01/20/2020 5:00 am EST

Focus: FUNDS

Brian Kelly

Publisher, MoneyLetter

YCG Enhanced (YCGEX), a relative newcomer to the actively managed equity mutual funds universe (having been launched at the end of 2012), has drawn attention for its options-enhanced value strategy, observes Brian Kelly, mutual fund expert and editor of MoneyLetter.

In addition, its performance in 2017, 2018, and 2019 has been admirable. And despite a couple of underperforming calendar years, its long-term trailing returns stack up well compared to its Morningstar large blend category peers.

Background

YCG Enhanced portfolio manager (and founder of YCG, LLC) is Brian Yacktman. He is the son of legendary value stock investor Don Yacktman, who founded Yacktman Asset Management.

Initially, Brian was an associate with Yacktman Asset Management. Brian founded Yacktman Capital Group in 2007, later renamed YCG, and opened this fund about five years later. Brian differentiated his investment style from Yacktman Asset Management using what he calls “option enhancement.”

He further explained that as “using options as a way to get exposure to businesses. It’s a strategic way to indirectly access a security when we believe that doing so through the option provides a better risk-adjusted return than owning a stock outright.”

Investment basics

The investment process at YCG is grounded in value fundamentals. Brian and co-portfolio manager Elliott Savage look at equities of any market capitalization that they believe will produce high, risk-adjusted, forward rates of return.

They use a bottom-up approach focused on individual companies and construct a portfolio they expect to excel across economic cycles, with an investment horizon that looks out a decade or more.

Brian told Wellingon Wall St. that they like stocks with “attributes like high cash returns on tangible assets, low or no cyclicality, high returns on incremental invested capital, wide and stable profit margins, high market share, pricing power, conservative use of leverage, and a growing competitive advantage.”

He added, “Our goal is to outperform the market over an entire market cycle, so we tend to lose ground during the go-go periods, then we tend to make up ground during the rough periods, or just in an average market.”

Portfolio highlights

Brian Yacktman acknowledges that the fund’s portfolio is going to be concentrated. Holding a relatively small number of stocks that are the “best ideas” allow those to have a meaningful impact on fund performance.

Typically, the fund will hold 15 to 50 securities. Recently, there were about 30 holdings in the fund, with more than half of assets concentrated in the top ten stocks.

Key contributors to recent results include a number of financial holdings: Mastercard (MA), Moody’s (MCO), and Msci, Inc. (MSCI), plus industry-leading commercial real estate services firm CBRE Group (CBRE).

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