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Yacktman Focused Fund 2Q15 Commentary

Yacktman Focused Fund 2Q15 Commentary for the second quarter ended June 30, 2015.

The AMG Yacktman Focused Fund (Service Class) returned -2.6% for the second quarter of 2015, compared with 0.3% for the benchmark, the S&P 500 Index. For the 12 months ending June 30, 2015, the Fund returned -0.1%, while the benchmark returned 7.4%.

This year, the Russell 1000® Value, which is an index representative of Large Cap Value, has lagged the Russell 1000® Growth Index by nearly 5% in the first half of the year. More than 30% of the Russell 1000 Value stocks are now greater than 20% below their 52-week high. We think the underperformance is mostly attributable to the short-term race for growth over value that often happens towards the end of an aging and expensive bull market.

Yacktman Focused Fund - Current Market Favors Promise over Profits

In recent quarters, the investment environment has favored expensive concept stocks which offer a promise of potential significant future growth over much more attractively-priced companies where there may be less momentum in the short term because of currency headwinds or short-term business challenges. “Promise” stocks include “new tech” stocks like Netflix, Inc. (NASDAQ:NFLX) and, Inc. (NASDAQ:AMZN).com, as well as companies where there may be no earnings, or even revenues, as with biotech companies.

As investors we often state that “it’s almost all about the price.” We remain focused on companies with sustainable business models that generate significant free cash flow, and sell at attractive valuations. Like it did in the late 1990s, this approach can go out of favor in the short term when high multiple stocks are popular.

Yacktman Focused Fund - Underperformance Often Sets Up Outperformance

We think our recent results have set us up for much better returns going forward. Some of our largest positions, like Procter & Gamble (“P&G”) and 21st Century Fox (“Fox”), which have underperformed, are much more attractively priced today than they were at the beginning of the year. The Fund is more concentrated than it was at the end of the first quarter, with the Yacktman Focused Fund holding 26 positions.

Our favorite investments may lag late in expensive bull markets. The underperformance of the Fund in the late 1990s set us up to provide strong positive returns over the next three years, even as the market dropped nearly 50%. Similarly, underperformance from 2005-2007 prepared us to deliver solid results in 2008-2009 even as the market declined.

In early July, investors were...