Bronze-rated AMG River Road Dividend All Cap is a worthy option for conservative investors.
By Alec Lucas, Ph.D. | 01-06-18 | 09:18 PM | Email Article

The following is our latest Fund Analyst Report for AMG River Road Dividend All Cap Value . Morningstar Premium Members have access to full analyst reports such as this for more than 1,000 of the largest and best mutual funds. Not a Premium Member? Gain full access to our analyst reports and advanced tools immediately when you try Morningstar Premium free for 14 days.

Alec Lucas is a senior manager research analyst for Morningstar.

AMG River Road Dividend All Cap Value has a Morningstar Analyst Rating of Bronze for its disciplined and effective approach.

The fund sticks to its risk-averse process even when it hurts. In 2017, for example, confidence in  General Electric then newly appointed CEO John Flannery led comanagers Henry Sanders and Thomas Forsha to build a roughly 1.5% position in the company right before Flannery cut GE’s dividend in half and sent its shares into a further nosedive. The dividend cut confirmed their belief that Flannery is serious about turning around GE, but Sanders and Forsha did not add to the stock and even trimmed it. Their weariness of stocks whose share prices never recover means they’re willing to forsake the additional gain that can be had by increasing exposure to stocks that later prove to be huge bargains.

Management’s refusal to average down positions within the fund’s roughly 60-80 stock portfolio has helped it avoid blowups and fare well amid sustained turbulence. The fund held up significantly better than its Russell 3000 Value Index and most large-value Morningstar Category peers during the 2007-09 credit crisis as well as the 2011 and 2015-16 market corrections.

The fund is prone to lag in market rallies, however. It posted a bottom-decile calendar-year showing in 2009 and again in 2017. Buying GE when it did hurt in 2017. Longtime holding Owens & Minor OMI also kept the fund back. Management sold Owens late in the year when it became clear the firm was still grappling with the loss of a key customer.

The fund’s poor showing in 2017 hasn’t impaired its long-term record, though. The fund maintains a meaningful edge over its benchmark and most rivals since Forsha joined Sanders as a manager here in mid-2007.

While fees could be more competitive, there’s reason to believe the comanagers can build on the fund’s record. They work as part of a stable investment culture, invest alongside shareholders, and keep close watch on the fund’s capacity in good times. The fund is a worthy option for conservative investors.

Process Pillar: Positive | Alec Lucas, Ph.D. 01/03/2018
This fund’s defense-minded, all-cap strategy merits a Positive Process Pillar rating. Focused on dividend-paying stocks with market caps of more than $300 million, managers Henry Sanders and Thomas Forsha aim to beat the Russell 3000 Value Index while also delivering a yield gross of fees that is 150 basis points higher than the index's. They invest in a mix of large caps with 2%-4% yields, smaller caps with 3%-6% yields, and even higher-yielding stocks that have muted growth potential, like REITs.

While the fund typically has a hefty allocation to small- and mid-cap stocks, the managers go where they find the best opportunities. They favor firms with strong business models and solid balance sheets with shares trading at a minimum 15% discount to their estimate of share price appreciation potential (or 10% for higher-yielding stocks). They value most firms based on enterprise value relative to projected earnings before interest, taxes, depreciation, and amortization during the next 12 to 18 months but will look at other metrics like tangible book value for banks and insurers.

The managers protect against value traps by not adding to a position if its share price has trended downward. They sell if they become concerned about a firm’s ability or willingness to grow its dividend. They review stocks that hit their price targets, trim those trading at a 10% premium, and sell before they reach a 20% premium.

Management builds an all-cap portfolio of roughly 60-80 stocks. The portfolio tends toward the lower end of that range when overall market valuations are rich and the higher end when bargains abound. Top positions generally take up about 3% of the fund's assets, with a 5% cap to control security-specific risk, while smaller positions occupy around 0.5%. A combination of yield, share price discount, and conviction determines each position size. Liquidity figures in, too. The managers take smaller position sizes in more thinly traded stocks at the lower end of the market-cap spectrum. In late 2017, 19% of the fund's assets were in small- and micro-cap stocks combined versus 9.9% for the Russell 3000 Value Index.

Company-level, bottom-up analysis has the greatest impact on sector positioning. The fund tends to tread lightly in financials and healthcare and heavily in consumer discretionary and staples. Sector bets can be sizable. Throughout 2010, for example, the fund combined a double-digit overweighting in consumer staples stocks with a double-digit underweighting in financials stocks.

Although the portfolio includes a mix of dividend growers and higher-yield stocks, management tends to favor the latter. In September 2017, the fund’s 10.8% real estate stake was one of the category’s highest. Management thinks there is undue pessimism about top-holding Iron Mountain’s IRM document storage business.

Performance Pillar: Positive | Alec Lucas, Ph.D. 01/03/2018
The fund can lag in rallies but tends to hold up well in challenging market conditions. That's thanks to its dividend-focused strategy and downside protection measures, which include not adding to positions in firms whose share prices have plummeted and forced trimming of positions whenever net unrealized losses in the overall portfolio begin to multiply. Both measures kept the fund from falling as far as its benchmark during the 2007-09 credit crisis. The managers started trimming financials in early 2008, and the fund's 47.7% peak-to-trough cumulative loss was 12.1 percentage points less than the Russell 3000 Value Index.

The fund’s tendency to lose less than peers and the benchmark in bear markets has helped it earn a Positive Performance Pillar rating. Since Thomas Forsha joined with lead manager Henry Sanders in June 2007, the fund's 7% annualized gain through December 2017 beat the Russell 3000 Value Index by 86 basis points and landed in the large-value category's top quartile. Plus, the fund was less volatile than about four fifths of its peers during that time.

A few missed picks can drag down its otherwise resilient portfolio, however. In 2015, top-five holding Natural Fuel Gas lost more than a third of its value as the price of natural gas plummeted. A top-10 position in  Qualcomm also hurt. As a result, the fund’s 4.6% calendar-year loss lagged the index by 43 basis points. 

People Pillar: Positive | Alec Lucas, Ph.D. 01/03/2018
Experience, stability, and fund ownership characterize this fund’s management team, earning it a Positive People Pillar rating. Lead portfolio manager Henry Sanders began running this strategy as a separate account in October 2003 while at Commonwealth SMC. He co-founded River Road in 2005 and launched the retail share class of this fund in June of that year. Thomas Forsha has comanaged the fund since June 2007. He joined River Road in July 2005 after working as an equity analyst and managing a similar dividend-focused strategy for ABN AMRO Asset Management. James Shircliff, River Road's chief investment officer, has also been a comanager on the fund since its June 2005 inception, but he is not involved on a daily basis. Shircliff, instead, focuses on running sibling ASTON/River Road Small Cap Value ARSIX while overseeing other River Road funds.

River Road has historically had success with its analyst team, retaining 10 of 13 analysts hired since 2005. Two of the three who left, however, were dedicated to this strategy. Erik Keener departed in April 2016 to take a job outside the investment industry, and two weeks later John Watkins left for a portfolio management job at another firm. The fund is currently supported by seven generalist analysts, whose industry experience ranges from four to nearly 20 years.

Sanders, Forsha, and Shircliff each invest more than $1 million here.

Parent Pillar: Neutral | 09/05/2017 
AMG Funds' parent, Affiliated Managers Group, has historically focused on acquiring equity interests in boutique asset managers while leaving investment and operational autonomy to each investment firm. That strategy continues. However, the AMG-branded fund lineup has grown as the firm has become more engaged with some, but not all, of its affiliates, particularly with distribution. Today, its lineup numbers more than 60 funds as AMG has included some of its affiliates' offerings under its own brand, including the funds subadvised by Yacktman Asset Management when it made an investment in that firm in 2012. More recently, the 2016 integration of Aston added 20 funds to the AMG brand. (AMG initially made an investment in Aston in 2010.)

Other emphases for the firm have emerged. First, AMG signaled its expansion into new geographies with the 2017 hires of Hugh Cutler as head of global distribution and Thomas Henauer as head of distribution, Switzerland. Second, the firm has made recent investments in a number of alternatives shops. Although the Yacktman-run funds still constitute the largest portion of AMG Funds' assets under management, this, combined with a slight shift in assets toward quantitative and alternatives strategies, is new for the firm. As the firm establishes itself as a more assertive distribution partner, AMG Funds continues to earn a Neutral Parent rating.

Price Pillar: Negative | Alec Lucas, Ph.D. 01/03/2018
The fund receives a Negative Price Pillar rating because its price tag could be more competitive. The institutional shares hold most of the fund’s assets and the retail shares house the rest. Both charge higher fees than most of their rivals. The institutional shares’ current 0.85% expense ratio is 10 basis points more than the large-cap institutional peer median and the retail shares’ 1.10% is 20 basis points more than the large-cap, no-load peer median. Annual trading costs are typically modest or at least in line with those of most peers, thanks to the fund’s below-average portfolio turnover. On the whole, though, this fund is a bit pricey.

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Alec Lucas, Ph.D. does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
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