IT’S ME OR THEM, FUND STAR THREATENS: YACKTMAN BATTLING TO DUMP DIRECTORS

This mutual fund ain’t big enough for the both of us.

Prominent value manager Donald A. Yacktman has declared war on the outside directors of his two namesake mutual funds with a preliminary proxy filing asking shareholders to fire them and to hire replacements picked by Mr. Yacktman.

The outside directors – including Yacktman Asset Management Co.’s former chief marketer, Jon D. Carlson, whom Mr. Yacktman dismissed in June and had removed from the fund’s offices by Chicago cops – are returning the fire.

The four directors (a majority on each six-member board) voted last Tuesday to boot Mr. Yacktman as president of Yacktman Funds and to replace him with Mr. Carlson. On Friday they pulled out the big guns, asking the Securities and Exchange Commission to halt Mr. Yacktman’s filing.

In their letter to the SEC, the directors accused Mr. Yacktman of intimidating them with “thinly veiled threats” after they had questioned his investment techniques and alleged improper use of derivatives and ethics violations by some employees.

Also at issue: allegations that the Yackt-man portfolios have been managed by people other than those named in the prospectuses to run the funds.

“Absolutely ridiculous,” Mr. Yacktman responds to the letter’s charges. “I am the portfolio manager; I know exactly what’s going on.” For now, he remains manager of both the $540 million flagship Yacktman Fund and the $53 million Yacktman Focused Fund. And in his Sept. 18 SEC proxy filing, he accuses the outside directors of trying to force him to change his investment style. He calls for a special meeting of shareholders Nov. 24.

Mr. Yacktman’s shop has not produced stellar results over the last year. (The largest holding in the 22-stock Yacktman Fund: Philip Morris Cos., battered by regulatory and legal clouds.) Yet his filing suggests that the board’s unhappiness may have been motivated more by Mr. Yacktman’s unwillingness to hire one of the outside directors for a marketing job than by improving the funds’ performance.

Reached Wednesday about his proxy filing, Mr. Yacktman declined to elaborate on his assertions, citing SEC restrictions on attempts to influence shareholders.

But in a Sept. 15 letter to the outside directors, Mr. Yacktman vows to ask shareholders to fire them if they didn’t resign and to sue them if they used money in the funds to battle him in a proxy contest.

Mr. Carlson responds: “Our side will be represented completely and forcefully. We have been acting in the interest of shareholders in a period of deteriorating and relatively poor performance.”

An ugly falling out

Mr. Carlson wouldn’t comment further, but the picture that emerges is of an ugly falling-out between Mr. Yacktman and Mr. Carlson, who worked with Mr. Yacktman for 12 years as a marketer and started Yacktman Asset Management with him six years ago after they left the former Kemper Corp. in a pay dispute. In fact, it was Mr. Carlson who picked all the outside directors for the Yacktman Fund.

Events came to a head three months ago, when Mr. Yacktman fired Mr. Carlson after an analyst quit and alleged interference from both the board and Mr. Carlson in how he was doing his job, a source familiar with the dispute says.

The directors’ letter to the SEC says Mr. Yacktman had Mr. Carlson “escorted from (the) premises by the Chicago police.”

Mr. Yacktman’s filing also alleges board meddling: “The (outside) directors have been critical of our younger employees. Their criticism and interference in portfolio management is creating an environment where it will be unnecessarily difficult for us to attract and retain. . . qualified personnel.”

The other board member leading the charge against Mr. Yacktman is Stanislaw Maliszewski, a managing director of Gateway Asset Management Inc. in Chicago who specializes in marketing to institutional investors. The filing contends that Mr. Carlson tried last year to hire Mr. Maliszewski to sell Mr. Yacktman’s investment services to institutional investors, but Mr. Yacktman refused.

“We believe both Mr. Carlson and Mr. Maliszewski resented the actions we took,” the proxy states.

Neither director would comment on those assertions.

Mr. Yacktman’s bombshell is a rare occurrence in the chummy world of mutual fund boards and the investment adviser firms they oversee on behalf of investors.

The only recent conflict that compares is last year’s board-inspired attempt to remove momentum investing maven Louis Navellier as manager of the Navellier Aggressive Small Cap Portfolio and to replace him with Boston-based Massachusetts Financial Services.

Perhaps boding ill for the Yacktman Fund’s outside directors, shareholders in the Navellier case rejected MFS, spurning the board and clearing the way for Mr. Navellier’s return.

But Mr. Yacktman’s recent performance doesn’t put him in a strong position: In the year ending Sept. 18, four-star Yacktman Fund is down 12.79%, while the Focused Fund has lost 8.72%, reports Morningstar Inc.

ASSETS HALVED

Individual investors and their financial planners clearly are nervous: Assets in the Yacktman Fund have been halved from $1.1 billion a year ago to $540 million today, giving some indication of the heavy redemptions the fund has suffered.

The outside directors wanted Mr. Yacktman to be more consistent in his style of investing to make his services more attractive to well-heeled institutions, which tend to insist on style discipline, according to Mr. Yacktman’s proxy.

While Mr. Yacktman is a strict value investor – he buys companies at prices below their intrinsic value and holds them for extended periods – he is less consistent about the size of companies he buys.

One of the central complaints in the Yacktman filing is that the independent directors had voted over his objections to hire an outside consultant, presumably to reinforce their position on his lack of style consistency. The statement also claims the outside directors have cut their personal investment in the funds.

Mr. Yacktman warns investors in his filing: “Our disagreements with them have become intolerable.”