AMG Funds Research and Analysis January 2015
Debunking Debunking Investment Investment Myths: Myths: Paying Paying Taxes Taxes on on Capital Capital Gains Gains is is Inevitable Inevitable Taxes Are Eating Into Investors’ Gains Despite being well into an equity bull market, investors may still be surprised by their increased tax liability this year. Capital gain distributions represented 820 basis points of investors’ total return in 2014, on average, for a Large-Cap Fund, up significantly from just 70 basis points for the average Large-Cap Fund3 just three years prior.
Table 1 - Average Yearly Capital Gain Returns1,2 (Portion of Return Attributed to Capital Gain Distributions) Morningstar Large-Cap Funds3
9.0 8.0
Capital Gain Return %
7.0
8.2
7.9 7.4 6.1
6.2
6.0
5.3
5.0
3.9
4.0 2.5
3.0 1.8
2.0
1.6 1.0
1.0
0.3
0.3
1.1
0.7 0.1
0.2
0.0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2002 2013 2014 1
Source: Morningstar Direct, AMG Funds
2
Capital gain return is the portion of the holding period return that is attributed to (realized) capital gain distributions. (Unrealized gains are still embedded in the NAV and haven’t been distributed to shareholders yet.) This calculation assumes that the investor incurs no transaction fees, pays no taxes at the time of distribution, and reinvests all distributions paid during the period.
3
Funds with at least a 15-year track record
Data as of December 31, 2014.
For a hypothetical investor with a $100,000 investment and a 20% tax rate, an 820 basis point capital gain distribution would cost the investor $1,640 in taxes, reducing total return by over 100 basis points. Even if markets pull back, as some anticipate, investors not actively seeking to minimize capital gains distributions are likely to continue to pay taxes on gains, as was the case in 2008 when the average Large-Cap Fund3 had a capital gain of 110 basis points, despite an average total return of -38.3%1.
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AMG Funds Research and Analysis
January 2015
The Trend is Likely to Continue According to Morningstar, all of the top 20 largest Large-Cap Funds1, by assets under management2, currently have potential capital gain exposure representing more than 28% of their assets under management.
Table 2 - Unrealized Capital Gain Exposure3
Fund
Unrealized Capital Gain
Net Assets2 (Share Class)
Unrealized Cap Gain (Potential cap gain exposure as a % of current Share Class Net Assets)
Fund 1
$34,693,418,025
$117,966,098,546
37.79%
Fund 2
$29,798,550,430
$102,113,744,858
38.50%
Fund 3
$25,413,038,570
$85,610,984,861
39.08%
Fund 4
$21,719,136,772
$96,674,385,260
29.99%
Fund 5
$32,988,012,830
$76,029,616,601
45.77%
Fund 6
$30,227,007,942
$71,467,572,992
39.98%
Fund 7
$20,518,558,864
$57,833,874,947
35.65%
Fund 8
$16,834,239,150
$60,260,121,025
33.75%
Fund 9
$18,298,714,687
$51,839,134,982
38.60%
Fund 10
$14,952,605,591
$43,136,689,760
34.97%
Fund 11
$17,200,698,880
$38,582,643,172
42.38%
Fund 12
$12,385,315,310
$28,039,908,057
52.46%
Fund 13
$7,903,492,158
$28,254,126,254
28.32%
Fund 14
$9,838,074,370
$24,025,672,904
52.46%
Fund 15
$7,674,492,974
$24,272,425,130
32.21%
Fund 16
$7,884,700,000
$24,367,337,927
38.61%
Fund 17
$9,283,605,388
$23,275,679,737
42.95%
Fund 18
$6,988,172,185
$22,549,560,399
32.31%
Fund 19
$4,538,713,000
$23,436,445,671
30.42%
Fund 20
$8,562,454,497
$21,799,250,519
38.02%
1
Funds with at least a 15-year track record. Data reported is share class level data. Includes Blend, Value and Growth Funds.
2
Assets under management as of December 31, 2014.
3
Source: Morningstar Direct, AMG Funds
Data as of December 31, 2014.
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AMG Funds Research and Analysis
January 2015
AMG FQ Tax-Managed U.S. Equity Fund Many investors view paying taxes on capital gains as inevitable. For some that may be true, but a wise investor will seek good investments that also minimize the loss of earnings to taxes. One way to do this is to use an investment strategy that seeks to minimize capital gains distributions. The AMG FQ Tax-Managed U.S. Equity Fund (MFQTX) has not had a realized capital gain distribution since its inception in 2000. This has occurred as a result of First Quadrant’s tax-management techniques used as part of their investment process. First Quadrant (FQ) utilizes an integrated investment process that consists of four key components: 1. Tax Management: seeks to maximize retention of investment gains after taxes 2. Alpha Generation: seeks to provide better return than the market 3. Risk Management: seeks to achieve desired returns by taking diversified positions 4. Transaction Cost Management: seeks to minimize market impact
Tax Management 1
Transaction Cost Management
4
2
Alpha Generation
3 Risk Management There is no guarantee that these investment strategies will work under all market conditions, and each investor should evaluate his or her ability to invest for the long term, especially during periods of downturns in the market.
Over the past five and ten years the average Large-Cap Fund2 manager has lost 100 basis points and 88 basis points, to taxes (Tax Cost Ratio) respectively, on an annualized basis. The AMG FQ Tax-Managed U.S. Equity Fund’s return, on the other hand, was only reduced by 14 basis points and 16 basis points, respectively, to taxes (on ordinary income dividends, not capital gains) on an annualized basis over the past five and ten years. Moreover, the AMG FQ Tax-Managed U.S. Equity Fund has just a 12% potential capital gain exposure, unlike the 28% - 52% exposure of the 20 largest Large-Cap Funds. (See Table 2)
Table 3 - Tax Cost Ratio: Portion of Return Reduced by Income & Capital Gain Taxes
5 Years1
10 Years1
(Annualized)
(Annualized)
Average Large-Cap Fund2
100 bps
88 bps
AMG FQ Tax-Managed U.S. Equity Fund
14 bps
16 bps
AMG FQ Tax-Managed U.S. Equity Fund Tax Advantage
86 bps
72 bps
Morningstar Tax Cost Ratio
Through December 31, 2014 using Morningstar’s Tax Cost Ratio definition. Funds with at least a 15-year track record. The Morningstar Tax Cost Ratio measures how much a fund’s annualized return is reduced by the taxes investors pay on income and capital gain distributions. Mutual funds regularly distribute stock dividends, bond dividends and capital gains to their shareholders. Investors then must pay taxes on those distributions during the year they were received. 1 2
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AMG Funds Research and Analysis
January 2015
AMG FQ Tax-Managed U.S. Equity Fund (MFQTX) Morningstar Risk-Adjusted Return Ratings as of December 31, 2014 | Category: Large Blend Overall Rating
3 Years
5 Years
10 Years
(of 1,336 Funds)
(of 1,336 Funds)
(of 1,193 Funds)
(of 812 Funds)
Source: Morningstar
Average Annual Returns (%)1 (as of 12/31/14) QTD
YTD
1 Yr
3 Yr
5 Yr
10 Yr
MFQTX (Institutional Class) — Return before taxes on distributions
6.78
13.54
13.54
22.02
18.08
8.96
MFQTX (Institutional Class) — Return after taxes on distributions
6.69
13.44
13.44
21.90
17.98
8.87
MFQTX (Institutional Class) — Return after taxes on distributions & sale of shares
3.92
7.75
7.75
17.51
14.72
7.35
Russell 3000® Index
5.24
12.56
12.56
20.51
15.63
7.94
Morningstar Large Cap Blend Category Average Return
4.20
10.96
10.96
19.00
13.90
7.08
10-Year Calendar Returns and Distributions1 ‘05
‘06
‘07
‘08
‘09
‘10
‘11
‘12
‘13
‘14
MFQTX Return (%)
15.46
14.51
9.75
-41.06
20.18
23.98
1.90
13.95
40.42
13.54
Russell 3000® Index (%)
6.12
15.72
5.14
-37.31
28.34
16.93
1.03
16.42
33.55
12.56
Morningstar Large Cap Blend Category Average Return (%)
5.88
14.30
5.62
-37.61
28.10
13.96
-0.68
14.92
31.67
10.96
MFQTX Capital Gain Distributions (%)
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
Fund Facts2 Ticker
Inception
Expense Ratio (Gross/Net)3
Minimum Investment
Maximum Sales Load
12b–1 Fees
Investor Class
MFQAX
03/01/06
1.28%/1.24%
$2,000 ($1,000 IRA)
—
0.25%
Institutional Class
MFQTX
12/18/00
1.03%/0.99%
$1,000,000 ($50,000 IRA)
—
—
Share Class
1 3
Returns for periods greater than one year are annualized. 2 The Fund’s net assets are $71.8 million as of December 31, 2014. The Fund’s Investment Manager has contractually agreed, through at least March 1, 2015, to limit Fund operating expenses. The net expense ratio reflects this limitation, while the gross expense ratio does not. Please refer to the Fund’s Prospectus for additional information on the Fund’s expenses.
The performance data shown represents past performance. Past performance is not a guarantee of future results. Current performance may be lower or higher than the performance data quoted. The investment return and the principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. For performance information through the most recent month end, please call 800.835.3879 or visit our web site at www.amgfunds.com.
For more information on the AMG FQ Tax-Managed U.S. Equity Fund, please visit www.amgfunds.com. PAGE 4
AMG Funds Research and Analysis
January 2015
DISCLOSURES Investors should carefully consider the Fund’s investment objectives, risks, charges and expenses before investing. For this and other information, please call 800.835.3879 or visit www.amgfunds.com for a free prospectus. Read it carefully before investing or sending money. The Fund invests in large-capitalization companies that may underperform other stock funds (such as funds that focus on small- and medium-capitalization companies) when stocks of large-capitalization companies are out of favor. Although the Fund is managed to minimize taxable distributions, it may not be able to avoid taxable distributions. The tax information contained herein is provided for informational purposes only. AMG Funds does not provide legal or tax advice. Always consult an attorney or tax professional regarding your specific financial or tax situation. The Russell 3000® Index is composed of the 3,000 largest U.S. companies as measured by market capitalization, and represents about 98% of the U.S. stock market. Unlike the Fund, the Russell 3000® Index is unmanaged, is not available for investment and does not incur expenses. The Russell 3000® Index is a trademark of Russell Investments. Russell is a trademark of Russell Investments. For each fund with at least a three-year history, Morningstar calculates a Morningstar Rating™ based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a fund’s monthly performance (including the effects of sales charges, loads and redemption fees), placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars and the bottom 10% receive 1 star. (Each share class is counted as a fraction of one fund within this scale and rated separately, which may cause slight variations in the distribution percentages.) The Overall Morningstar Rating for a fund is derived from a weighted average of the performance figures associated with its three-, five- and ten-year (if applicable) Morningstar Rating metrics. Morningstar Rating is for the share class indicated only (see ticker); other share classes may have different performance characteristics. The Ranking may reflect the waiver of all or a portion of the fund’s fees. Without such waiver, the Rankings may have been lower. Past performance is no guarantee of future results. © 2015 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. Funds are distributed by AMG Distributors, Inc., a member of FINRA/SIPC.
Each of us at AMG Funds appreciates the continued opportunity to assist you with your investing needs. If you have any questions, please call 800.368.4410.
© 2015 AMG Funds LLC. All Rights Reserved.
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