In the second quarter of 2011, The Yacktman Focused Fund and The Yacktman Fund appreciated 2.41% and 2.57% compared to the S&P 500 which was barely positive, advancing .1%. For the first six months of the year, the funds are up a solid 8.14% and 8.52% respectively, compared to the S&P 500 which is up 6.02%.



Over longer time periods we have significantly outperformed the S&P 500. $10,000 invested in The Yacktman Focused Fund and The Yacktman Fund 10 years ago would be $34,244 and $31,285 compared to $13,076 in the S&P 500.



Media



After the end of the second quarter, News Corp (NASDAQ:NWS) became a major news story as new information about an old phone hacking scandal at its newspaper, News of The World, was released. Management has taken swift action to deal with the issues, including closing the News of The World, withdrawing a bid for BSkyB, authorizing an increase to the share repurchase, and changing management. We continue to monitor the situation closely and think News Corp is taking the right steps to address the issues and move forward.



Viacom (VIA) and Comcast (NASDAQ:CMCSA) appreciated solidly in the second quarter. Both companies reported strong earnings, especially in the cable content segments. At Viacom, MTV was especially strong, with primetime ratings up nearly 65%.



Consumer Staples



PepsiCo (NASDAQ:PEP), Procter & Gamble (NYSE:PG), Coca-Cola (NYSE:KO), and Sysco (NYSE:SYY) are four of our top ten positions in each fund, and all appreciated during the second quarter, with PepsiCo and Sysco rising more than 10% each. We like the steady nature of these consumer staples businesses and think that the valuations are compelling. After the end of the quarter, Clorox (NYSE:CLX) received an acquisition proposal by Carl Icahn.



Healthcare



During the second quarter, healthcare stocks were generally positive. Johnson & Johnson (NYSE:JNJ), C.R. Bard (BCR), and UnitedHealth Group (UNH) were our strongest contributors to results, appreciating more than 10% each. Pfizer (PFE), Becton Dickinson (BDX), and Covidien (COV) posted solid returns, while Stryker (SYK) and Medtronic (MDT) (The Yacktman Fund only) declined modestly. We think valuations continue to be attractive in the healthcare sector.



“Old Tech”



Cisco Systems (NASDAQ:CSCO) declined nearly 10% during the quarter and we increased our exposure, making it the 5th largest holding in each fund. The company has a stellar balance sheet with significant excess cash, and we think management is objectively facing the challenges in the business. Microsoft (NASDAQ:MSFT) appreciated during the quarter but disappointed us by offering $8.5 billion to acquire Skype.



We think Microsoft is paying a high price for this business, and the company has had a poor record of integrating and managing acquisitions. Fortunately, the amount of money on the proposed deal is not especially significant to Microsoft and represents only about 5 months of free cash flow. While companies disappoint us from time to time, we think it is important to objectively evaluate information in context of the entire investment thesis. In Microsoft’s case, we think the valuation is so compelling that we are able to look beyond a deal of this modest size that we do not especially like. Hewlett-Packard (HPQ) declined a bit more than 10% during the quarter as business results continued to be challenging. The weak share price is due in part to business issues and in larger part to the general disfavor of “old tech” shares. We think Hewlett-Packard’s stock could perform well from current levels even if its businesses continue to struggle.



Apollo Group



During the quarter, the Department of Education released standards for “for profit” education companies that were softer than anticipated. Apollo Group’s (APOL) shares went up on the news, and continued to rally after the company posted stronger than expected earnings on the last day of the quarter. With the Department of Education rules finalized, we expect Apollo will soon begin to show enrollment and earnings growth.



Conclusion



We are highly confident about our holdings. The quality level of the companies in the funds is extremely high and valuations are attractive. We will work hard to objectively examine current positions and new opportunities and, as always, we will continue to be diligent, objective, and patient when managing The Yacktman Funds.



Sincerely,



The Yacktman Team





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