Healthcare stocks led the way as our domestic fund surged in October.

 

October

Year to Date

Since Inception (Annualized)

Inception Date: 11/1/2010

Motley Fool Great America Fund (TMFGX)

5.04%

21.46%

13.80%

Russell 2500 Growth Index*

2.56%

20.01%

14.24%

For a standardized list of performance for the Great America Fund, please click here. For fund holdings, please click here.

The Great America fund outperformed in October, with its 5.04% gain outpacing a 2.56% gain for the Russell 2500 Growth Index. Year to date, the fund’s 21.46% return is ahead of the benchmark’s 20.01%. So far, 2017 has been a really good year for the fund, and for domestic small- and mid-cap stocks in general.

Healthcare was a big contributor to our performance for the month, with Align Technology (up 28.3%), Ionis Pharmaceuticals (up 12.7%), and ResMed (up 9.4%) heading the list. Align manufactures and sells Invisalign, the nearly invisible teeth aligners that offer an alternative to metal braces. With its 38% sales growth in Q3, consumers are voicing their preference for clear aligners with their wallet.

In other news, you may have heard that Republicans in Congress are trying to push through tax reforms before the end of the year. In late October, they introduced a bill in the House called the Tax Cuts and Jobs Act, which includes a proposed reduction in the federal corporate tax rate to 20% from its current 35%. If the bill becomes law, many of the companies owned in the fund would directly benefit from this aspect of the legislation.

Out of 42 companies in the fund, only 10 currently pay an income-tax rate, including federal and state taxes, below 20%. The low payers in the fund are either currently unprofitable or are structured as a REIT or a partnership. Twenty-two companies in the fund, meanwhile, currently report a combined state and federal tax rate over 30%. A meaningful reduction in their tax rate would increase their reported profits.

It’s my belief, from reading hundreds of earnings calls this year, that American companies would use those higher profits to repurchase shares, increase their dividends, invest in technology and automation, and engage in mergers and acquisitions. Some companies would of course allocate their capital better than others, but overall, I expect that the tax reform would work to the benefit of the shareholders of these companies. I am, however, skeptical of the claim from the White House Council of Economic Advisors that workers would see meaningfully higher wages as a result. But before I draw firm conclusions, I want to wait to see what specific form any tax changes will take, if we get any changes at all. It could be that nothing happens. Time will tell.

Note: If you're interested in learning more about the current tax reform proposal, please read the piece we published about it recently.

* The Great America Fund changed its benchmark from the Russell MidCap Index and the Russell 2000 Index to the Russell 2500 Growth Index on Feb. 28, 2017.

 

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