UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT
OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-04750
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Fenimore Asset Management Trust
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(Exact name of registrant as specified in charter)
384 North Grand Street
P.O. Box 399
Cobleskill, New York 12043
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(Address of principal executive offices) (Zip code)
Thomas O. Putnam
Fenimore Asset Management Trust
384 North Grand Street
Cobleskill, New York 12043
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(Name and address of agent for service)
Registrant's telephone number, including area code: 1-800-453-4392
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Date of fiscal year end: December 31
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Date of reporting period: December 31, 2006
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Form N-CSR is to be used by management investment companies to file reports
with the Commission not later than 10 days after the transmission to
stockholders of any report that is required to be transmitted to stockholders
under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1).
The Commission may use the information provided on Form N-CSR in its
regulatory, disclosure review, inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 450 Fifth Street,
NW, Washington, DC 20549-0609. The OMB has reviewed this collection of
information under the clearance requirements of 44 U.S.C. ss. 3507.
Item 1. Reports to Stockholders.
The annual report to stockholders is filed herewith.
FAM
VALUE FUND [LOGO] EQUITY-INCOME FUND
Investor Share Class and Advisor Share Class
ANNUAL REPORT
December 31, 2006
Table of Contents
Chairman's Commentary.......................................................1
FAM Value Fund..............................................................4
Letter to Shareholders...................................................4
Performance Summary......................................................8
Portfolio Data..........................................................10
Expense Data............................................................11
Statement of Investments................................................13
Statement of Assets and Liabilities.....................................18
Statement of Operations.................................................19
Statement of Changes in Net Assets......................................20
Notes to Financial Statements...........................................21
Report of Independent Registered Public Accounting Firm.................27
Investment Advisor Contract Renewal Disclosure..........................28
FAM Equity-Income Fund.....................................................32
Letter to Shareholders..................................................32
Performance Summary.....................................................36
Portfolio Data..........................................................38
Expense Data............................................................39
Statement of Investments................................................41
Statement of Assets and Liabilities.....................................45
Statement of Operations.................................................46
Statement of Changes in Net Assets......................................47
Notes to Financial Statements...........................................48
Report of Independent Registered Public Accounting Firm.................54
Investment Advisor Contract Renewal Disclosure..........................55
Information About Trustees and Officers....................................59
Definition of Terms........................................................61
Supplemental Information...................................................63
FAM Funds has adopted a Code of Ethics that applies to its principal
executive and principal financial officers. You may obtain a copy of this
Code without charge, upon request by calling FAM Funds at (800) 932-3271.
Chairman's Commentary [LOGO]
December 2006
Dear Shareholder:
The year 2006 began with concern over high energy prices, a housing market
bubble, rising inflation, recessionary fears, and a world full of unrest and
conflict. Given the volatility of this market -- especially the downward
pressure of the second quarter -- it was a decent year. I would rate our
performance as a B- despite having no direct exposure to international stocks
or energy stocks.
Investing for many individuals and institutions, as well, starts with a
focus on returns. When the stock market or various sectors of the market
start to run, there is often an urge to chase return. Unfortunately, as the
bursting of the growth/tech bubble in 2000-2002 illustrated, what worked well
over the last three years will probably not work as favorably in the future.
It is doubtful that energy stocks or international stocks can demonstrate the
same market leadership that they have over the last three years. Such
focusing on past performance for future return is much like trying to drive a
car while looking in the rear view mirror. Too much concentration on the
mirror will ultimately lead to disaster. And while thinking about future
return, one should never forget about risk.
A Primer on Risk
Investors who chase return often forget that risk is very much a part of the
investment decision. For us, this is especially true since we feel our
responsibility to you is as much about capital preservation as it is about
return. Risk in investing takes on many forms. Often, risk is equated with
volatility. Beta is a technical measure of volatility. If a stock or a
portfolio has a Beta of 1, its price movement coincides with that of the
market as measured by a major index, i.e., the S&P 500. A Beta of .5
illustrates a stock or portfolio with 50% less volatility than the market and
conversely, a Beta of 1.5 indicates a stock or portfolio that is 50% more
volatile than the S&P 500. For us, Beta is good as a curiosity factor, but
has little to do with risk. Markets by their very nature are volatile; they
will go up or down when least expected. Often, in the short run, they are
driven by emotional factors that have little to do with the economics of
investing.
A second definition of risk is the probability of a permanent loss of
capital. This definition gets more to the heart of investment risk since most
investors are willing to seek out growth and return only if they can avoid a
loss of capital. What investor is willing to take a gamble on an investment
that has a 50% probability of doubling your capital and an equal 50%
probability of losing one half of your original investment? Most investors
seek a high return with a low probability of loss of capital. It is
interesting to note that upward volatility of a stock price can
1
Chairman's Commentary [LOGO]
often fool investors into thinking they may own a high-return
investment with a low probability of a permanent loss of capital. This was
obviously the unfortunate case for many who invested in Enron before its
demise. Protecting and preserving capital can be as important, perhaps even
more important, as the growth of capital. This is our main investment focus.
There is a third type of investment risk which I will call opportunity
risk. It is the probability of minimizing the future return of an investment.
This risk has little to do with loss of capital but has a lot of influence on
the future growth of capital. In simple terms, opportunity risk occurs when
we do not buy a stock we should have or when we sell a stock with little gain
that goes on to be very profitable. Sometimes loss of opportunity or errors
of omission can be our most painful mistakes. They have no capital loss to
you, but they may have cost you considerably in future gain. We are working
diligently to minimize opportunity risk.
Opportunity risk can be overcome only by adherence to a disciplined
approach to investing and a healthy dose of patience. As an example, I will
cite our history with one of our largest holdings: White Mountains Insurance
(WTM). Although it may not be indicative of many of our positions, we first
purchased WTM when it was known as Fireman's Fund, in September of 1986, at a
price of $28.43. We had completed our initial due diligence and discovered
that it was a company we could understand. It had an insurance business, a
mortgage servicing company, a solid balance sheet, and a superb manager in
Jack Byrne. Jack had previously been CEO at Geico and was Warren Buffett's
hand-picked manager to rescue Geico from poor underwriting decisions made in
the mid 1970s. The stock had a price selling close to book value -- a price
that was not only reasonable, but very attractive. With all these
characteristics, we felt certain our risk of loss was low and our opportunity
for gain was high. For the next three and one-half years, from September 1986
until May 1990, the price of the stock rose to 32, a mere 13%. Now the moment
of truth! Do you sell the stock because its price performance has been
disappointing (which at this juncture would result in a high opportunity
risk) or do you continue holding, confident that your initial and ongoing due
diligence will pay off? Fortunately for our shareholders, we had the
confidence to hold on and add to the position over many years. Over the last
twenty-year time period, White Mountains has risen from $28.43 to $579 -- a
twenty-fold gain or a 16% annualized compounded return.
To paraphrase a famous investing quote: "investing is not a sprint, it
is a marathon." Our focus is to create wealth for you over long periods of
time. We firmly believe that this can be accomplished only with adherence to
our disciplined investment process and a clear understanding of the risk of a
permanent loss of capital and the risk of lost opportunity. It may require
patience and hard work, but rest assured we are dedicated to this process.
2
Chairman's Commentary [LOGO]
Addendum
Recently in the Journal of Financial Planning, financial planner Harold
Evensky was quoted saying, "We're giving our clients' money to people -- not
an institution ... It's managers' brains we're depending on. And we want to
get inside that as much as we possibly can." It is this very same advice we
practice when we visit companies we own, or those we would like to own. We
are no better than the human capital we have. I can honestly say that you
have some of the most talented and brightest people I have ever met in the
investment management industry working on your behalf. Our research team, led
by John Fox, Director of Research, Paul Hogan, Eric Elbell and Andrew Boord
are not only bright, but steadfast in their determination to serve in your
interests.
Lastly, we thank you for the patience and the confidence you have
placed in our stewardship of your capital. We wish you all a Happy and
Prosperous New Year.
Sincerely,
/s/ Thomas O. Putnam
Thomas O. Putnam
Chairman
Fenimore Asset Management, Inc.
P.S. -- The Cobleskill-Richmondville High School is once again the location
for our Annual Shareholder Informational Meeting. The meeting will be held on
Tuesday, October 9, 2007 at 4 PM. As always, we look forward to seeing you
there for what we hope will be an informative and educational experience.
Invitations and more details will be provided to you later in the year.
3
FAM Value Fund [LOGO]
Dear Fellow Value Fund Shareholder:
For the year 2006, the Investor Class of the FAM Value Fund posted a positive
return of 8.7%. By comparison, the S&P 500 Index closed the year up 15.8% and
the Russell 2000 index was up 18.4%.
2006 in Review
There is an old saying on Wall Street that the stock market climbs a wall of
worry. There was certainly a lot to worry about in 2006. The housing market
weakened with home prices declining for the first time since 1991. There was
continued strife around the world with the war in Iraq and conflict in the
Middle East. Energy prices remain elevated from the stable levels of two
years ago. Finally, there was a major change in our government as the
Democrats won control of both houses of Congress in the mid-term elections.
Despite all of these uncertainties stock markets around the world
finished the year up in the mid-teens. The top headline in the United States
was a record close for the Dow Jones Industrial Average. The venerable Dow
closed above 12,000 in October and went on to set numerous records. It is
important to note that all of the year's gains came in the second half of the
year. In fact, in mid-July, most stock indices were down for the year as
fears of oil prices, inflation and recession were prevalent. These fears
eventually passed and the market staged a major rally during the last five
months of the year.
Performance Detail
The performance of our stocks was mixed and we are disappointed that we
trailed the market and performed below our internal goal.
Best Performers
In terms of dollar appreciation, our best performing stock was Forest City
Enterprises. Forest City appreciated over $10 million (a 55% gain). Forest
City is a real estate developer specializing in urban markets like New York
City and Washington D.C. Real estate continues to be a hot area in those
markets. Forest City participated in this trend and we have been rewarded by
earning 100% on our investment in two years.
Our investment in the construction materials business continues to
generate excellent profits for our shareholders. Our number two performer was
Martin Marietta Materials, up over $10 million in appreciation (37%). In the
same industry is our fourth best performer -- Vulcan Materials, which
generated $8.5 million in gains (up 32%). The phrase "construction materials"
is a fancy term for crushed rock. These companies mine rock, crush it, and
then sell it to construction companies. The rock is then used to pave roads
and build commercial buildings and homes. Pricing in the industry continues
to be very strong, which is producing record profits for these companies.
Last year we wrote at length about the severe hurricane season and the
losses it created in the Value Fund. This year was a very quiet season as
there were no major hurricanes and our insurance investments responded
positively to this good news. Markel was our third top performer with our
position up 51% for the year for a gain of $10 million. Also in the insurance
industry is Warren Buffett's Berkshire Hathaway. The stock made headlines
this year when it closed over $100,000 a share for the first time in history.
The stock had a great year increasing 24% for $8.4 million in gains. While
the stock certainly has an impressive price tag, we
4
FAM Value Fund [LOGO]
still do not believe it is expensive compared to the value of the
company.
Our best stock, on a percentage gain basis, was CarMax which
appreciated 94% or $7.8 million in 2006. CarMax is a unique investment for
us. It is one of only two companies that we have paid 20x earnings for in the
last ten years. We decided to "pay up" for CarMax because of its unique
business model and early stage of growth. CarMax is the nation's largest
retailer of used cars. The company sells a wide variety of used cars at a
pre-determined fixed price. We think the company's unique business model,
product selection, and pricing strategy will provide many years of growth.
The company currently has seventy-six stores, and we believe the number of
stores can realistically double in the future.
Worst Performers
Our worst performer was Gentex, down 27% with a $6.6 million loss. A supplier
of mirrors to the automobile industry, we initially purchased Gentex due to
its financial strength, high profit margins, and ability to generate cash
flow. While we were aware of the problems plaguing the US automotive
industry, we believed that growth from foreign manufacturers would offset
that weakness. Unfortunately, the problems in the USA were worse than we
anticipated and impacted Gentex's earnings. As a result, we have sold our
entire position in this company.
The second worst performer was the Fund's second largest holding --
Brown & Brown. The unrealized loss was $4.4 million (-8%) for the calendar
year. Brown & Brown is an insurance agency with headquarters in Daytona
Beach, Florida. We believe Brown & Brown to be one of the best-managed
companies in corporate America. Based on expected earnings, 2006 will be the
fourteenth year in a row of 15% earnings growth. The company has a unique
culture of high performance which has delivered fantastic earnings gains.
Despite the stock's decline in 2006 over concerns about the future growth of
the company, we believe the company will continue to grow.
Our third worst performer was Mohawk Industries. The stock declined 14%
generating a loss of $3.4 million. Mohawk is one of the two largest carpet
companies in the country. In addition to carpet, the company sells other
flooring surfaces such as tile and laminate. We believe Mohawk has an
excellent competitive position given its broad product line and unmatched
distribution capability. The stock has declined due to concerns about the
sale of carpeting to their home builder customers. We believe that sales
related to new housing will decline significantly and have factored this into
our valuation of the company. However, when the downturn in housing ends and
sales begin to grow again, Mohawk will be in a great position to sell more
carpet. We believe the long-term potential in the stock is favorable.
Our 20th Year
The close of 2006 brings an important milestone for the FAM Value Fund -- 20
years of history! We began the Fund on January 2, 1987, the year of the worst
one-day decline in the stock market since the Great Depression! Our start was
modest with $1 million in assets, an amount that seems very small in today's
world. We did not get off to the best start -- losing 17% of our
shareholder's investment in the first year. However, even with our slow start
and the ups & downs over the years, we have achieved our long-term investment
goal.
5
FAM Value Fund [LOGO]
Since inception the Fund has compound at 12.35% per year which has turned an
original $10,000 investment into $102,553.
The More Things Change ...
As one can imagine, it is always difficult to write a letter when you have
trailed the market, and shareholders may be thinking they could have done
better in another investment. In preparing to write this letter we went back
to read our 1996 (tenth anniversary) letter. We were struck by the
similarities between 2006 and 1996. In 1996, we trailed the market by a
margin similar to 2006. Our 1996 performance is shown below.
1996 Annual Results
FAM Value 11.2%
S&P 500 22.9%
Russell 2000 16.6%
There are two other similarities between 1996 and 2006. In 1996 we made
an investment in a large company -- American Express. We wrote --
"occasionally, we will invest in a large company if we feel it is severely
undervalued." And this year we purchased shares in another large company --
General Electric. The final parallel from our old letter was our discussion
of mergers and acquisitions. In 1996 we had three companies taken away from
us in mergers. This trend was back in 2006. Mergers and corporate buyouts
were active resulting in five companies being purchased from us in 2006.
Those companies were Bank North, Golden West, North Fork Bank, Scientific
Atlanta, and OSI Restaurants (formerly Outback Steakhouse). The Bank North
and Scientific Atlanta deals were announced in 2005, but we sold our shares
in 2006.
The reason we mention 1996 is to point out that we have had other years
where we lagged the market as in 2006. This is a natural part of the
investing cycle. In every calendar year there are industries or investing
styles that are beating the market. Conversely, there are always industries
or styles that are trailing the averages. Over long periods of time (10 to 15
years) these cycles will even out. Investor behavior contributes to these
swings by pouring money into the area that has recently performed the best.
For example, at the beginning of this decade technology stocks were all the
rage. Investors clamored for Internet IPO's and "category killers" like Cisco
Systems and Intel. Everyone was talking about the Internet and how the number
of Internet users doubles every 100 days. (As an aside, this statistic which
was cited as proof of the Internet's potential, was later proven to be
incorrect). At December 31, 1999 the best performing market sectors were
technology and telecommunications. All of the attention, press coverage, and
flow of investor's money went into technology. Then what happened? Looking
over the last five years (ending December 31, 2006) technology funds have
returned 1% per year.
You might wonder which sectors are hot today. According to Morningstar
the three best performing domestic fund categories in 2006 were real estate,
utilities, and communications. In 2006 our relative performance was hurt by
the fact we had less than 4% of our assets in these industries.
The More They Stay the Same
In the twenty years since we started the Fund many things have changed in the
world. There has been one stock market crash and a three year bear market.
There have been two wars in Iraq and two Federal Reserve chairmen.
6
FAM Value Fund [LOGO]
Republicans and Democrats have both had control of Congress. The world became
digitized with the widespread use of the personal computer and the adoption
of the Internet. We experienced a foreign terrorist attack on USA soil.
Amidst these changes we have remained steadfast in our approach to
investing. While we use many tools that did not exist twenty years ago, our
investment principles remain the same. We invest in quality businesses that
possess a competitive advantage. Every business we purchase must be
financially strong. Strength means a good balance sheet, wide profit margins,
generous free cash flow and high returns on invested capital. Company
management must be top notch. Since we are just investors in the business,
not managers, we need highly capable people running the businesses that we
own. We continue to travel the country interviewing dozens of managers every
year. Management should be honest, forthright, and skilled at allocating the
owner's capital. Finally, any investment that has these attributes will be
purchased only if it sells at a discount to its intrinsic value. Our return
on an investment will ultimately come from the economics of the business, not
a hot trend or fad in the stock market.
Long Term Returns
Below is a comparison of the FAM Value Fund's returns to two market indexes
over various time periods.
Average Annual Total Returns as of December 31, 2006
Life of Fund
1-Year 3-Year 5-Year 10-Year (1/2/87)
FAM Value Fund
(Investor Shares) 8.73% 10.27% 9.67% 11.82% 12.35%
(Advisor Shares)* 7.96% 9.39% N/A N/A *
S&P 500 Index 15.79% 10.45% 6.19% 8.42% 11.67%
Russell 2000 Index 18.37% 13.56% 11.39% 9.44% 10.91%
*FAM Value Fund Advisor Shares were launched on July 1, 2003. The return
since inception is 11.82%.
Thank you for investing with us in FAM Value Fund.
Sincerely,
/s/ John D. Fox /s/ Thomas O. Putnam
John D. Fox, CFA Thomas O. Putnam
Co-Manager Co-Manager
7
FAM Value Fund -- Performance Summary [LOGO]
Annual Total Investment Returns:
JANUARY 2, 1987 TO DECEMBER 31, 2006
FAM VALUE FUND
INVESTOR SHARES ADVISOR SHARES* RUSSELL 2000 INDEX S&P 500 INDEX
FISCAL YEAR TOTAL RETURN TOTAL RETURN TOTAL RETURN
1987 -17.40% -- -8.77% 5.25%
1988 35.50% -- 24.89% 16.61%
1989 20.32% -- 16.24% 31.69%
1990 -5.36% -- -19.50% -3.11%
1991 47.63% -- 46.05% 30.47%
1992 25.08% -- 18.42% 7.60%
1993 0.21% -- 18.90% 10.06%
1994 6.82% -- -1.82% 1.31%
1995 19.71% -- 28.44% 37.53%
1996 11.23% -- 16.54% 22.95%
1997 39.06% -- 22.37% 33.35%
1998 6.19% -- -2.55% 28.58%
1999 -4.84% -- 21.26% 21.04%
2000 19.21% -- -3.03% -9.10%
2001 15.07% -- 2.49% -11.88%
2002 -5.33% -- -20.48% -22.09%
2003 24.98% 12.99% 47.25% 28.67%
2004 16.86% 15.91% 18.33% 10.88%
2005 5.56% 4.62% 4.55% 4.91%
2006 8.73% 7.96% 18.37% 15.79%
*FAM Value Fund Advisor Shares were launched on July 1, 2003.
8
FAM Value Fund -- Performance Summary [LOGO]
The chart below depicts the change in the value of a $10,000 investment in
Investor Shares of the FAM Value Fund, since inception of January 2, 1987, as
compared with the growth of the Standard & Poor's 500 Index and the Russell
2000 Index during the same period. The information assumes reinvestment of
dividends and capital gain distributions. The Standard & Poor's 500 Index is
an unmanaged index generally representative of the market for the stocks of
large size U.S. companies. The Russell 2000 Index is an unmanaged index
generally representative of the market for the stocks of smaller size U.S.
companies..
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
FAM VALUE FUND, THE RUSSELL 2000 INDEX, AND THE S&P 500
S&P 500 Russell 2000 FAM Value Fund
1987 10000 10000 10000
1988 12278 11391 11193
1989 16170 13236 13466
1990 15669 10655 12740
1991 20448 15567 18808
1992 22002 18432 23517
1993 24224 21915 23565
1994 24539 21521 25175
1995 33741 27632 30143
1996 41468 32192 33523
1997 55318 39403 46618
1998 71139 38378 49502
1999 86078 46553 47105
2000 78245 45156 56152
2001 68934 46285 64623
2002 53699 36797 61179
2003 69111 54202 76464
2004 76591 64157 89356
2005 80352 67076 94323
2006 93039 79398 102553
This information represents past performance of Investor Shares of the FAM
Value Fund and is not indicative of future results. 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 the original cost.
An investment of $10,000 in the Advisor Shares of the FAM Value Fund since
the inception date of this share class, July 1, 2003 would have changed in
value to $14,791 by December 31, 2006.
Average Annual Total Returns as of December 31, 2006
Life of Fund
1-Year 3-Year 5-Year 10-Year (1/2/87)
FAM Value Fund
(Investor Shares) 8.73% 10.27% 9.67% 11.82% 12.35%
(Advisor Shares)* 7.96% 9.39% N/A N/A *
S&P 500 Index 15.79% 10.45% 6.19% 8.42% 11.67%
Russell 2000 Index 18.37% 13.56% 11.39% 9.44% 10.91%
*FAM Value Fund Advisor Shares were launched on July 1, 2003. The return
since inception is 11.82%.
The graph and performance table do not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or the redemption of Fund shares.
9
FAM Value Fund -- Portfolio Data [LOGO]
As of December 31, 2006
TOP TEN HOLDINGS
(% of Net Assets)
White Mountains Insurance Group 6.0%
Brown & Brown, Inc. 5.0%
Berkshire Hathaway, Inc. 4.1%
Federated Investors 3.4%
Kaydon Corporation 3.0%
Markel Corporation 2.8%
General Electric Company 2.7%
CDW Corporation 2.7%
Liz Claiborne, Inc. 2.6%
Vulcan Materials Company 2.6%
COMPOSITION OF NET ASSETS
Property & Casualty 12.9%
Temporary Investments 9.0%
Machinery & Equipment 7.3%
Construction Materials 5.9%
Banking 5.6%
Retail Stores 5.2%
Insurance Agency 5.0%
Restaurants 4.2%
Health Care Services 3.8%
Wholesale Distribution 3.7%
Investment Management 3.4%
Transportation 2.7%
Diversified Manufacturing 2.7%
Retail Apparel 2.6%
Home Furnishings 2.6%
Recreation & Entertainment 2.5%
Publishing 2.4%
Media 2.4%
Registered Investment Company 2.3%
Real Estate Development 2.2%
Electronic Equipment 2.2%
Life Insurance 2.1%
Other 7.3%
Statement Regarding Availability of Quarterly Portfolio Schedule. Please note
that (i) the Fund files its complete schedule of portfolio holdings with the
Securities and Exchange Commission for the first and third quarters of each
fiscal year on Form N-Q; (ii) the Fund's Forms N-Q are available on the
Commission's website at http://www.sec.gov; (iii) the Fund's Form N-Q may be
reviewed and copied at the Commission's Public Reference Room in Washington,
DC, and that information on the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330; and (iv) the Fund makes the information
on Form N-Q available to shareholders upon request, by calling FAM Funds at
1-800-932-3271.
10
FAM Value Fund -- Expense Data [LOGO]
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees on the Advisor Class Shares; and (2) ongoing
costs, including management fees; distribution (and/or service) (12b-1 fees
on the Advisor Class Shares only) fees; and other Fund expenses. This Example
is intended to help you understand your ongoing costs (in dollars) of
investing in the Fund and to compare these costs with the ongoing costs of
investing in other mutual funds.
The Example is based on an investment of $1,000 invested at the
beginning of the period and held for the entire period (6/30/2006 to
12/31/2006).
Actual Expenses
Lines (A) and (B) of the following table provides information about actual
account values and actual expenses for Investor Class Shares and Advisor
Class Shares, respectively. You may use the information in this line,
together with the amount you invested, to estimate the expenses that you paid
over the period. Simply divide your account value by $1,000 (for example, an
$8,600 account value divided by $1,000 = 8.6), then multiply the result by
the number in the line for your share class under the heading entitled
"Expenses Paid During Period" to estimate the expenses you paid on your
account during this period.
Hypothetical Example for Comparison Purposes
Lines (C) and (D) of the following table provides information about
hypothetical account values and hypothetical expenses based on the Fund's
actual expense ratio and an assumed rate of return of 5% per year before
expenses, which is not the Fund's actual return for the Investor Class Shares
and Advisor Class Shares, respectively. The hypothetical account values and
expenses may not be used to estimate the actual ending account balance or
expenses you paid for the period. You may use this information to compare the
ongoing costs of investing in the Fund and other funds. To do so, compare
this 5% hypothetical example with the 5% hypothetical examples that appear in
the shareholder report of other funds.
Please note that the expenses shown in the table are meant to highlight
your ongoing costs only and do not reflect any transactional costs, such as
redemptions fees. Therefore, lines (C) and (D) of the table are useful in
comparing ongoing costs only, and will not help you determine the relative
costs of owning different funds. In addition, if these transactional costs
were included, your costs would have been higher.
11
FAM Value Fund -- Expense Data [LOGO]
SIX MONTHS ENDED DECEMBER 31, 2006
Beginning Ending Expenses
Account Value Account Value Paid
6/30/2006 12/31/2006 During Period
Ongoing Costs Based on Actual Fund Return
A. Investor Share Class $1,000.00 $1,086.60 $ 6.26*
B. Advisor Share Class $1,000.00 $1,084.10 $11.56**
Ongoing Costs Based on Hypothetical
5% Yearly Return
C. Investor Share Class $1,000.00 $1,019.00 $ 6.06*
D. Advisor Share Class $1,000.00 $1,013.91 $11.17**
*Expenses are equal to the Fund's Investor Class Shares annualized expense
ratio of (1.19%), multiplied by the average account value over the period,
multiplied by 184/365 (to reflect the one-half-year period).
**Expenses are equal to the Fund's Advisor Class Shares annualized expense
ratio of (2.20%), multiplied by the average account value over the period,
multiplied by 184/365 (to reflect the one-half-year period).
12
FAM Value Fund -- Statement of Investments [LOGO]
December 31, 2006
SHARES VALUE
COMMON STOCKS (91.1%)
Automotive (1.5%)
CarMax, Inc.*
o specialty retailer of used cars and light-trucks
in the United States 300,000 $ 16,089,000
Banking (5.6%)
M&T Bank Corporation
o bank holding company that provides
commercial and retail banking services
to individuals, businesses, corporations
and institutions in the Northeast 143,000 17,468,880
TCF Financial Corp.
o holding company that offers various banking
services throughout the United States 796,000 21,826,320
Westamerica Bancorp
o provides banking services to individual
and corporate customers in northern
and central California 386,100 19,548,243
58,843,443
Computer Software & Service (1.2%)
Kronos, Inc.*
o provides a suite of solutions that automate
employee-centric processes, as well as
tools to optimize the workforce 344,000 12,638,560
Construction Materials (5.9%)
Florida Rock Industries
o produces aggregates for the construction industry 177,075 7,623,079
Martin Marietta Materials
o produces aggregates for the construction industry 253,443 26,335,262
Vulcan Materials Company
o produces, distributes and sells construction
aggregates and industrial and specialty chemicals 306,165 27,515,049
61,473,390
Consumer Products (0.6%)
CSS Industries, Inc.
o giftware, bows, Halloween and Easter
novelty products 182,375 6,450,604
Diversified Manufacturing (2.7%)
General Electric Company
o diversified industrial manufacturer 763,875 28,423,789
See Notes to Financial Statements.
13
FAM Value Fund -- Statement of Investments continued [LOGO]
December 31, 2006
SHARES VALUE
Electronic Equipment (2.2%)
Cognex Corp.
o develops, manufactures and markets
machine vision systems used to
automate manufacturing processes 39,200 $ 933,744
Zebra Technologies Corp.*
o designs, manufactures and supports bar code
label printers 638,502 22,213,485
23,147,229
Health Care Services (3.8%)
Amsurg Corp.*
o develops, acquires and operates practice-based
ambulatory surgery centers in partnership with
physician practice groups in the U.S. 696,150 16,011,450
Lincare Holdings*
o provides respiratory therapy services
to patients in the home 350,000 13,944,000
Pediatrix Medical Group, Inc.*
o healthcare services company focused on physician
services for newborn, maternal-fetal and other
pediatric subspecialty care 200,000 9,780,000
39,735,450
Home Furnishings (2.6%)
Ethan Allen Interiors, Inc.
o manufactures and retails home furnishings 269,175 9,719,909
Mohawk Industries, Inc.*
o produces floor covering products for
residential and commercial applications 228,100 17,075,566
26,795,475
Insurance Agency (5.0%)
Brown & Brown, Inc.
o one of the largest independent general
insurance agencies in the U.S. 1,879,696 53,026,224
Investment Management (3.4%)
Federated Investors, Inc.
o provides investment management products
and services primarily to mutual funds 1,050,000 35,469,000
Life Insurance (2.1%)
Protective Life Corporation
o individual and group life/health insurance
and guaranteed investment contracts 471,400 22,391,500
See Notes to Financial Statements.
14
FAM Value Fund -- Statement of Investments continued [LOGO]
December 31, 2006
SHARES VALUE
Machinery & Equipment (7.3%)
Donaldson Company, Inc.
o designs, manufactures and sells
filtration systems and replacement parts 311,200 $ 10,801,752
Graco Inc.
o supplies systems and equipment for the
management of fluids in industrial, commercial
and vehicle lubrication applications 261,550 10,362,611
IDEX Corporation
o manufactures proprietary, highly engineered
industrial products and pumps 514,500 24,392,445
Kaydon Corporation
o custom-engineers products including bearings,
filters, and piston rings 780,750 31,027,005
76,583,813
Media (2.4%)
Meredith Corporation
o magazine publishing and tv broadcasting 447,450 25,213,808
Pharmaceuticals (1.2%)
Barr Pharmaceuticals*
o specialty pharmaceutical company that
develops, manufactures and markets both
generic and pharmaceutical products 250,000 12,530,000
Property and Casualty Insurance (12.9%)
Berkshire Hathaway Inc.*
o holding company for various insurance
and industrial companies 395 43,446,050
Markel Corporation*
o sells specialty insurance products 61,850 29,694,185
White Mountains Ins. Grp., Ltd.
o personal property and casualty, and reinsurance 108,275 62,737,783
135,878,018
Publishing (2.4%)
John Wiley & Sons, Inc.
o publisher of print and electronic products,
specializing in scientific, technical
professional and medical books and journals 661,700 25,455,599
Real Estate Development (2.2%)
Forest City Enterprises
o ownership, development, management and
acquisition of commercial and residential
real estate properties 400,000 23,360,000
See Notes to Financial Statements.
15
FAM Value Fund -- Statement of Investments continued [LOGO]
December 31, 2006
SHARES VALUE
Real Estate Investment Trust (1.1%)
Plum Creek Timber Co. Inc.
o operates as a real estate investment trust
(REIT) that owns and manages timber lands
in the United States 300,000 $ 11,955,000
Recreation and Entertainment (2.5%)
International Speedway Corporation
o owns and operates auto racing tracks
including Daytona 515,688 26,320,716
Recreation Vehicles (1.8%)
Winnebago Industries
o manufacturer of self-contained recreational
vehicles used primarily in leisure travel 559,000 18,396,690
Registered Investment Company (2.3%)
Allied Capital Corp
o venture capital corporation for entrepreneurs
and management 736,391 24,065,258
Restaurants (4.2%)
Outback Steakhouse
o operates a diversified restaurant system
including Outback Steakhouse, Carrabba's
Italian Grill, Roy's and Bonefish Grill 509,700 19,980,240
YUM! Brands, Inc.
o quick service restaurants including KFC,
Pizza Hut and Taco Bell 416,800 24,507,840
44,488,080
Retail Apparel (2.6%)
Liz Claiborne, Inc.
o designs and markets an extensive range
of branded men's and women's apparel,
accessories and fragrance 635,150 27,603,619
Retail Stores (5.2%)
Bed Bath & Beyond, Inc.*
o national chain of retail stores selling domestic
merchandise such as bed linens, bath items,
kitchen textiles and home furnishings 613,000 23,355,300
Ross Stores, Inc.
o chain of off-price retail apparel and
home accessories stores 921,422 26,997,664
See Notes to Financial Statements.
16
FAM Value Fund -- Statement of Investments continued [LOGO]
December 31, 2006
SHARES VALUE
Retail Stores (5.2%) continued
Whole Foods Market, Inc.
o national grocery store selling organic
and natural products 100,000 $ 4,693,000
55,045,964
Transportation (2.7%)
Forward Air Corporation
o provides surface transportation and
related logistics services to the deferred
air freight market in North America 299,233 8,656,811
Heartland Express, Inc.
o short-to-medium-haul truckload carrier
of general commodities 1,333,333 20,026,661
28,683,472
Wholesale Distribution (3.7%)
CDW Corp.
o direct marketing of multibrand computers
and related technology products and services 402,900 28,331,928
SCP Pool Corp.
o wholesale distributor of swimming pool supplies 275,950 10,808,961
39,140,889
Total Common Stocks (Cost $586,542,485) $ 959,204,590
TEMPORARY INVESTMENTS (8.9%)
Money Market Fund (2.3%)
First American Treasury Fund 24,511,813 24,511,813
U.S. Government Obligations (6.6%) PRINCIPAL
U.S. Treasury Bill, 4.9%,
with maturity to 2/8/07 $70,000,000 69,646,811
Total Temporary Investments (Cost $94,158,624) $ 94,158,624
Total Investments (Cost $680,701,109) (100%) $1,053,363,214
*Non-income producing securities.
See Notes to Financial Statements.
17
FAM Value Fund [LOGO]
December 31, 2006
STATEMENT OF ASSETS AND LIABILITIES
Assets
Investment in securities at value (Cost $680,701,109) $1,053,363,214
Cash 709,686
Receivable for fund shares 101,946
Dividends and interest receivable 688,966
Total Assets 1,054,863,812
Liabilities
Payable for fund shares 1,314,635
Payable for investment securities purchased 1,726,522
Accrued investment advisory fees 891,232
Accrued shareholder servicing and administrative fee 103,703
Accrued expenses 160,973
Total Liabilities 4,197,065
Net Assets
Source of Net Assets:
Net capital paid in on shares of beneficial interest $ 677,989,776
Accumulated net realized gains 14,866
Net unrealized appreciation 372,662,105
Net Assets $1,050,666,747
Net Asset Value Per Share
Investor Class Shares -- based on net assets of
$1,042,173,176 and 20,990,712 shares outstanding $49.65
Advisor Class Shares -- based on net assets of
$8,493,571 and 173,642 shares outstanding $48.91
See Notes to Financial Statements.
18
FAM Value Fund [LOGO]
Year Ended December 31, 2006
STATEMENT OF OPERATIONS
INVESTMENT INCOME
Income
Dividends $10,825,947
Interest 6,845,427
Total Investment Income 17,671,374
Expenses
Investment advisory fee (Note 2) 10,582,254
Administrative fee (Note 2) 762,844
Shareholder servicing and related expenses (Note 2) 470,622
Printing and mailing 184,739
Professional fees 134,648
Registration fees 83,143
Custodial fees 111,086
Trustees and Officers 88,058
Distribution and Service Fees -- Advisor Class Shares (Note 2) 82,329
Other 81,747
Total Expenses 12,581,470
Less: Investment advisory fee waived (Note 2) 29,546)
Expenses Paid Indirectly (Note 3) (7,799)
Net Expenses 12,544,125
Net Investment Income 5,127,249
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments 45,384,718
Realized gain distributions 909,443
Unrealized appreciation of investments 35,687,415
Net Gain on Investments 81,981,576
NET INCREASE IN NET ASSETS FROM OPERATIONS $87,108,825
See Notes to Financial Statements.
19
FAM Value Fund [LOGO]
Years Ended December 31, 2006 and 2005
STATEMENT OF CHANGES IN NET ASSETS
2006 2005
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income $ 5,127,249 $ 8,306,764
Net realized gain on investments 45,384,718 19,557,451
Realized gain distributions 909,443 --
Unrealized appreciation of investments 35,687,415 30,224,842
Net Increase in Net Assets
From Operations 87,108,825 58,089,057
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Investor Class (6,249,474) (8,305,767)
Advisor Class -- --
Net realized gain on investments
Investor Class (44,788,894) (19,411,954)
Advisor Class (373,060) (143,905)
TRANSACTIONS IN SHARES OF
BENEFICIAL INTEREST (NOTE 4): (82,391,608) 145,912,510
Total (Decrease) Increase in Net Assets (46,694,211) 176,139,941
NET ASSETS:
Beginning of year 1,097,360,958 921,221,017
End of year (including undistributed
net investment income of $4,884
at December 31, 2005) $1,050,666,747 $1,097,360,958
See Notes to Financial Statements.
20
FAM Value Fund -- Notes to Financial Statements [LOGO]
Note 1. Nature of Business and Summary of Significant Accounting Policies
FAM Value Fund (the "Fund") is a series of Fenimore Asset Management Trust, a
diversified, open-end management investment company registered under the
Investment Company Act of 1940. The Fund offers two classes of shares
(Investor Class and Advisor Class since January 2, 1987 and July 1, 2003,
respectively). Each class of shares has equal rights as to earnings and
assets except the Advisor Class bears its own distribution expenses. Each
class of shares has exclusive voting rights with respect to matters that
affect just that class. Income, expenses (other than expenses attributable to
a specific class), and realized and unrealized gains or losses on investments
are allocated to each class of shares based on its relative net assets. The
investment objective of the Fund is to maximize long-term total return on
capital. The following is a summary of significant accounting policies
followed in the preparation of its financial statements.
a) Valuation of Securities
Securities traded on a national securities exchange or admitted to
trading on NASDAQ are valued at the last reported sale price or the
NASDAQ official closing price. Common stocks for which no sale was
reported, and over-the-counter securities, are valued at the last
reported bid price. Short-term securities are carried at amortized cost,
which approximates value. Securities for which market quotations are not
readily available or have not traded are valued at fair value as
determined by procedures established by the Board of Trustees.
Investments in First American Treasury Fund are valued at that fund's net
asset value.
b) Federal Income Taxes
It is the Fund's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to its shareholders. Therefore, no
provision for federal income tax is required.
c) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of increases and decreases
in net assets from operations during the reporting period. Actual results
could differ from those estimates.
d) Other
Securities transactions are recorded on trade date. Realized gains and
losses on securities sold are determined on the basis of identified cost.
Interest income is accrued as earned and dividend income is recorded on
the ex-dividend date. The Fund records distributions received in excess
of income from underlying investments as a reduction of cost of
investments and/or realized gain. Such amounts are based on estimates if
actual amounts are not available, and actual amounts of income, realized
gain and return of capital may differ from the estimated amounts. The
Fund adjusts the estimated amounts of the components of distributions
(and consequently its net investment income) as an increase to
21
FAM Value Fund -- Notes to Financial Statements [LOGO]
unrealized appreciation/(depreciation) and realized gain/(loss) on
investments as necessary once the issuers provide information about the
actual composition of the distributions. Distributions to shareholders
are recorded on the ex-dividend date. Distributions to shareholders are
determined in accordance with income tax regulations and may differ from
those determined for financial statement purposes. To the extent these
differences are permanent such amounts are reclassified within the
capital accounts.
e) New Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes -- an
Interpretation of FASB Statement No. 109" (the "Interpretation"). The
Interpretation establishes for all entities, including pass-through
entities such as the Fund, a minimum threshold for financial statement
recognition of the benefit of positions taken in filing tax returns
(including whether an entity is taxable in a particular jurisdiction),
and requires certain expanded tax disclosures. The Interpretation is
effective for fiscal years beginning after December 15, 2006, and is to
be applied to all open tax years as of the date of effectiveness.
Management has recently begun to evaluate the application of the
Interpretation to the Fund, and is not in a position at this time to
estimate the significance of its impact, if any, on the Fund's financial
statements.
In addition, in September 2006, Statement of Financial Accounting
Standards No. 157, "Fair Value Measurements" (SFAS 157), was issued and
is effective for fiscal years beginning after November 15, 2007. SFAS 157
defines fair value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements. Management is
currently evaluating the impact the adoption of SFAS 157 will have on the
Fund's financial statement disclosures.
Note 2. Investment Advisory Fees and Other Transactions with Affiliates
Under the Investment Advisory Contract, the Fund pays an investment advisory
fee to Fenimore Asset Management, Inc. (the "Advisor") equal, on an annual
basis, to 1% of the Fund's average daily net assets. The Advisor has entered
into a voluntary agreement with the Fund to reduce the investment advisory
fee for the Fund through December 31, 2007 to 0.95% of the Fund's average
daily net assets in excess of $1 billion. For the year ended December 31,
2006, the Advisor waived $29,546 as a result of this investment advisory fee
limitation agreement. Thomas Putnam is an officer and trustee of the Fund and
also an officer and director of the Advisor.
The Investment Advisory Contract requires the Advisor to reimburse the
Investor Class for its expenses to the extent that such expenses, including
the advisory fee, for the fiscal year exceed 2.00% of the average daily net
assets. For the year ended December 31, 2006 the Advisor contractually agreed
to reimburse the Fund for its expenses to the extent such expenses exceed
1.28% and 2.28% of the average daily net assets of the Investor Class and
Advisor Class, respectively. No such reimbursement was required for the year
ended December 31, 2006.
FAM Shareholder Services, Inc. (FSS), a company under common control
with the Advisor, serves as shareholder servicing agent and receives a
monthly fee of $2.00 per shareholder account. For the year ended December 31,
2006, shareholder servicing agent fees paid to FSS amounted to $470,622.
22
FAM Value Fund -- Notes to Financial Statements [LOGO]
Additionally, FSS serves as the Fund administrative agent and receives
an annual fee of 0.075% on the first $750,000,000 of the Fund's average daily
net assets, 0.065% thereafter.
Fenimore Securities, Inc. (FSI), a company also under common control
with the Advisor, acts as distributor of the Fund's shares. On July 1, 2003,
the Fund adopted a distribution plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940 for the Advisor Class of shares. Under the
plan the Fund pays FSI a total of 1.00% per annum of the Advisor Class
shares' average daily net assets.
Note 3. Indirect Expenses
The Fund's custodian bank has also agreed to reduce its fees when the Fund
maintains cash on deposit in the non-interest-bearing custody account. For
the year ended December 31, 2006, these arrangements reduced the Fund's
custodian fees by $7,799.
Note 4. Shares of Beneficial Interest
At December 31, 2006 an unlimited number of $.001 par value shares of
beneficial interest were authorized. The Advisor Class of shares that are
redeemed within the first eighteen months of purchase are subject to a 1.00%
redemption fee. For the year ended December 31, 2006, redemption fees
amounted to $3,212 and were credited to paid in capital. Transactions were as
follows:
YEAR ENDED 12/31/06 YEAR ENDED 12/31/05
Shares Amount Shares Amount
Shares sold
Investor Class 2,279,435 $ 112,324,360 5,895,231 $ 276,728,327
Advisor Class 26,575 1,290,049 59,170 2,743,877
Shares issued on
reinvestment of dividends
Investor Class 983,049 49,044,308 555,383 26,769,471
Advisor Class 6,976 350,132 2,839 1 39,222
Shares redeemed
Investor Class (4,969,229) (244,031,112) (3,381,827) (159,900,125)
Advisor Class (28,628) (1,369,345) (12,121) (568,262)
Net (Decrease) Increase from
Investor Class Share
Transactions (1,706,745) $ (82,662,444) 3,068,787 $ 143,597,673
Net Increase from
Advisor Class
Share Transactions 4,923 $ 270,836 49,888 $ 2,314,837
23
FAM Value Fund -- Notes to Financial Statements [LOGO]
Note 5. Investment Transactions
During the year ended December 31, 2006, purchases and sales of investment
securities, other than short term obligations were $159,870,333 and
$219,771,036. The cost of securities for federal income tax purposes is
substantially the same as shown in the investment portfolio.
Note 6. Income Taxes and Distribution to Shareholders
The components of tax basis undistributed earnings at December 31, 2006 were
as follows:
Undistributed Long-term Capital Gain $14,866
The aggregate gross unrealized appreciation and depreciation of portfolio
securities, based on cost for federal income tax purposes of $680,701,109,
was as follows:
Unrealized appreciation $374,662,150
Unrealized depreciation (2,000,045)
Net unrealized appreciation $372,662,105
The tax composition of dividends and distributions to shareholders for
the years ended December 31, 2006 and 2005 were as follows:
2006 2005
Ordinary income $15,089,676 $ 8,307,149
Long-term capital gain 36,321,752 19,554,477
$51,411,428 $27,861,626
To reflect reclassifications arising from permanent differences at December
31, 2006, undistributed net investment income was increased and accumulated
net realized gain was decreased by $1,117,341.
Note 7. Line of Credit
FAM Value Fund has a line of credit up to 33 1/3% of total net assets or a
maximum of $200,000,000. Borrowings under the agreement bear interest at the
prime rate as announced by the lending bank. The line of credit is available
until December 1, 2007 when any advances are to be repaid. During the year
ended December 31, 2006 no amounts were drawn from the available line.
Note 8. Commitments and Contingencies
In the normal course of business, the Fund enters into contracts that contain
a variety of representations and warranties which provide general
indemnifications. The Fund's maximum exposure under these arrangements is
unknown as this would involve future claims that might be made against the
Fund that have not yet occurred. However, based on experience of the Advisor,
the Fund expects the risk of loss to be remote.
24
FAM Value Fund -- Notes to Financial Statements [LOGO]
Note 9. Financial Highlights
FAM VALUE FUND -- INVESTOR CLASS SHARES
Years Ended December 31,
Per share information
(For a share outstanding throughout the year) 2006 2005 2004 2003 2002
Net asset value, beginning of year $ 48.00 $ 46.65 $ 41.15 $ 33.69 $ 36.17
Income from investment operations:
Net investment income 0.24+ 0.39+ 0.09+ 0.10 0.11
Net realized and unrealized
gain (loss) on investments 3.96 2.20 6.84 8.32 (2.04)
Total from investment operations 4.20 2.59 6.93 8.42 (1.93)
Less distributions:
Dividends from net investment income (0.31) (0.37) (0.07) (0.09) (0.11)
Distributions from net realized gains (2.24) (0.87) (1.36) (0.87) (0.44)
Total distributions (2.55) (1.24) (1.43) (0.96) (0.55)
Change in net asset value for the year 1.65 1.35 5.50 7.46 (2.48)
Net asset value, end of year $ 49.65 $ 48.00 $ 46.65 $ 41.15 $ 33.69
Total Return 8.73% 5.56% 16.86% 24.98% (5.33)%
Ratios/supplemental data
Net assets, end of year (000) $1,042,174 $1,089,369 $915,742 $578,579 $469,277
Ratios to average net assets of:
Expenses 1.18% 1.18% 1.20% 1.24% 1.21%
Net investment income 0.49% 0.82% 0.20% 0.26% 0.30%
Portfolio turnover rate 17.53% 14.25% 10.29% 9.43% 17.51%
+Based on average shares outstanding.
25
FAM Value Fund -- Notes to Financial Statements [LOGO]
Note 9. Financial Highlights (continued)
FAM VALUE FUND -- ADVISOR CLASS SHARES
Period Ended
Years Ended December 31, December 31,
Per share information
(For a share outstanding throughout the year) 2006 2005 2004 2003+
Net asset value, beginning of year $47.37 $46.11 $40.96 $37.10
Income from investment operations:
Net investment income (loss) (0.25)++ (0.09)++ (0.35)++ 0.00
Net realized and unrealized gain on investments 4.03 2.22 6.86 4.82
Total from investment operations 3.78 2.13 6.51 4.82
Less distributions:
Dividends from net investment income -- -- -- (0.09)
Distributions from net realized gains (2.24) (0.87) (1.36) (0.87)
Total distributions (2.24) (0.87) (1.36) (0.96)
Change in net asset value for the year 1.54 1.26 5.15 3.86
Net asset value, end of year $48.91 $47.37 $46.11 $40.96
Total Return 7.96% 4.62% 15.91% 12.99%**
Ratios/supplemental data
Net assets, end of year (000) $8,494 $7,992 $5,479 $1,562
Ratios to average net assets of:
Expenses 2.18% 2.18% 2.20% 2.25%*
Net investment income (loss) (0.51)% (0.19)% (0.80)% (0.02)%*
Portfolio turnover rate 17.53% 14.25% 10.29% 9.43%
+Beginning of period reflects Advisor Class Shares inception date of 7/1/03.
++Based on average shares outstanding.
*Annualized.
**Not Annualized.
26
FAM Value Fund --
Report of Independent Registered Public Accounting Firm [LOGO]
To the Board of Trustees and Shareholders of FAM Value Fund:
In our opinion, the accompanying statement of assets and liabilities,
including the statement of investments, and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of FAM Value Fund, a
series of Fenimore Asset Management Trust, at December 31, 2006, the results
of its operations for the year then ended, the changes in its net assets for
each of the two years in the period then ended and the financial highlights
for each of the periods presented, in conformity with accounting principles
generally accepted in the United States of America. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits, which included confirmation of
securities at December 31, 2006 by correspondence with the custodian and
brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
February 1, 2007
27
FAM Value Fund [LOGO]
Board Consideration of the Continuation of the Investment Advisory
Agreements for the Funds
In accordance with the Investment Company Act of 1940, the Board of Trustees
of the Funds is required, on an annual basis, to consider the continuation of
the Investment Advisory Agreements (the "Agreements") with the Advisor, and
this must take place at an in-person meeting of the Board. The relevant
provisions of the Investment Company Act of 1940 specifically provide that it
is the duty of the Board to request and evaluate such information as the
Board determines is necessary to allow them to properly consider the
continuation of the Agreements, and it is the duty of the Advisor to furnish
the Trustees with such information that is responsive to their request.
Accordingly, in determining whether to renew the Agreements between the
Funds and the Advisor, the Board of Trustees requested, and the Advisor
provided, information and data relevant to the Board's consideration. This
included materials prepared by the Advisor and materials prepared by an
independent mutual fund industry consulting firm that produced materials
specifically for the Board that provided them with information regarding the
investment performance of the Funds and information regarding the fees and
expenses of the Funds, compared to other similar mutual funds. As part of its
deliberations, the Board also considered and relied upon the information
about the Funds and the Advisor that had been provided to them throughout the
year in connection with their regular Board meetings at which they engage in
the ongoing oversight of the Funds and their operations.
The Board engaged in a thorough review process to determine whether or
not to continue the Agreements with the Advisor. After receiving the
materials they had requested to assist them with their review, the Board had
a preliminary meeting by conference call on November 17, 2006, with
representatives of the Advisor in order to discuss the proposed continuation
of the Agreements and to review the materials that had been presented. The
Board then requested certain additional information which the Advisor
provided and the Board also met separately on November 27, 2006 and then with
representatives of the Advisor on two occasions on November 27 and 28, 2006
prior to their required in-person meeting in order to further consider and
discuss the proposed continuation of the Agreements.
The Board then met to consider the continuation of the Agreements at an
in-person meeting of the Board held on November 28, 2006. Among the factors
the Board considered was the overall performance of the Funds relative to the
performance of other similar mutual funds on a long-term basis (five years
and longer) and over shorter time periods (less than five years). In
connection with its review of the performance results achieved for the Funds,
the Board discussed with management the fact that the Advisor maintains a
particular focus on long-term investment performance results and they
reviewed the reasons why this may, from time to time, cause the longer-term
performance results and the shorter-term performance results to under-perform
when compared to other funds for similar time periods. In connection with
this, the Board took note of management's stated
28
FAM Value Fund [LOGO]
position that achieving favorable long-term investment results is a
primary objective of the firm. The Board also considered and discussed with
the Advisor their focus on "value investing" which may result in short-term
performance that lags the performance results achieved by other managers,
especially those managers that emphasize other types of investment
strategies, such as "growth investing." The Board also took into
consideration the Advisor's stated objective of attaining investment results
with less risk and less volatility than other funds. The Board determined
that it was beneficial to shareholders that the Advisor has continued to
invest on behalf of the Funds in a manner that is consistent with its
long-term investment objectives due to the fact that Advisor has been able to
achieve favorable long-term performance results for the Funds and when
performance is adjusted for risk, it shows even more favorable results.
The Board also took note of the long-term relationship between the
Advisor and the Funds and the efforts that have been undertaken by the
Advisor to foster the growth and development of the Funds since the inception
of each of the Funds. In connection with this, the Board took note of the
fact that Thomas Putnam, the Chairman and founder of the Advisor and the
co-manager of each of the Funds, has been advising each of the Funds since
their inception, during which time the Funds have experienced favorable
long-term investment results on a comparative basis and a steady growth in
assets. The Board also noted that the Advisor has continued to retain and
develop additional portfolio managers and investment analysts to work with
Mr. Putnam in an effort to provide for the continued long-term management and
oversight of the Funds' and their portfolios.
In addition, the Board compared expenses of each Fund to the expenses
of other similar mutual funds, noting that the expenses have generally
decreased over time as assets in each Fund have grown, and noting further
that the expenses for each of the Funds compare favorably with industry
averages for other funds of similar size and investment objective. They noted
the range of investment advisory and administrative services provided by the
Advisor and its affiliates to the Funds and the level and quality of these
services, and in particular, they considered the quality of the personnel
providing these services noting that they were of a high caliber. The Board
considered that the Funds receive administrative and accounting services from
an affiliate of the Advisor, FAM Shareholder Services, Inc. ("FSS"), and the
Board reviewed the fees paid to FSS and the services provided to the Funds
and their shareholders by FSS during the past year and determined that the
fees were fair and reasonable and that the services provided are useful and
beneficial to the ongoing operations of the Funds given that the services
provided by FSS are separate and distinct services apart from the investment
advisory services provided to the Funds by the Advisor. The Board also
considered that the Funds are distributed by an affiliate of the Advisor,
Fenimore Securities, Inc., ("FSI"), and the Board reviewed the distribution
related services provided by FSI, the distribution fees received by FSI in
connection with its distribution of the Advisor Class of shares of the Funds,
and they determined that the fees were fair and
29
FAM Value Fund [LOGO]
reasonable and that the distribution services provided by FSI are
useful and beneficial to the ongoing operations of the Funds. In the course
of reviewing the nature and quality of the services provided to the Funds and
their shareholders by the Advisor and its affiliates, the Board took into
consideration the very favorable scores that had been awarded to the Funds by
their shareholders as indicated in the results of the "Mutual Fund
Shareholder Satisfaction Survey" conducted by the National Investment Company
Service Association, the not-for-profit trade association serving the
operations sector of the mutual fund industry.
The Board also reviewed financial information concerning the Advisor
and its affiliates relating to the operation of the Funds, noting the overall
profitability of the relationship with the Funds to the Advisor and the
financial soundness of the Advisor and its affiliates as demonstrated by the
financial information provided. The Board also took note of the fact that the
Advisor bears the entire cost associated with the Funds' participation in
various "mutual fund supermarket" programs, noting that this is beneficial to
the Funds because it allows them to be held by a wide array of shareholders
in a convenient manner.
The Board reviewed the Advisor's brokerage practices and best-execution
procedures, and noted that these were reasonable and consistent with standard
industry practice. In connection with this review, the Board considered the
fact that the Advisor does not have any express arrangements in place with
respect to "soft dollar" arrangements with brokers or other similar parties
relating to the direct use of Fund brokerage commissions to obtain research
or execution services. With respect to the Advisor's brokerage practices, the
Board also took into consideration the fact that the Advisor has maintained
low portfolio turnover rates for the Funds that are substantially lower than
industry averages for equity-type funds, which the Board determined is
beneficial to shareholders due to the reduced brokerage expenses that are
attributable to low portfolio turnover rates.
The Board also considered information regarding the fees that the
Advisor charges other clients for investment advisory services that are
similar to the advisory services provided to the Funds and noted that the
Funds' fees were reasonable when compared to the relevant circumstances of
the types of accounts involved.
In connection with the Board's consideration of the ways in which
economies of scale are reflected with respect to the Agreements, the Board
took note of the fact that the Advisor had previously entered into a
voluntary expense limitation arrangement with the Funds pursuant to which the
investment advisory fees payable to the Advisor by each of the Funds is
reduced on assets in excess of $1 billion from the stated contractual rate of
1.00% of the average daily net assets of each respective Fund to 0.95% of the
average daily net assets of those assets in each Fund in excess of $1 billion
for the two year period from January 1, 2005 through December 31, 2006. This
limitation on the amount of the investment advisory fees payable under the
Agreements was extended to December 31, 2007. The limitation on the amount of
the investment advisory fees payable under the Agreements is in addition to
the contractual arrangement in place with respect to each of the Funds
pursuant to which the Advisor has previously agreed to limit the total
operating
30
FAM Value Fund [LOGO]
expenses of each class of shares of the Funds and is reviewed by the
Board each year in connection with the further continuation of the
Agreements.
In reaching their conclusion with respect to the continuation of the
Agreements, the Trustees did not identify any one single factor as being
controlling, rather, the Board took note of a combination of factors that
influenced their decision making process. The Board did, however, identify
the overall favorable investment performance of the Funds on a long-term
basis, the commitment of the Advisor to the successful operation of the
Funds, and the level of expenses of the Funds, as well as the Advisor's
willingness to enter into agreements to reduce the overall operating expenses
of the Funds and the investment advisory fees payable by the Funds, as being
important elements of their consideration. Based upon their review and
consideration of these factors and other matters deemed relevant by the Board
in reaching an informed business judgment, the Board of Trustees, including
all of the Independent Trustees, unanimously concluded that the terms of the
Investment Advisory Agreements are fair and reasonable and the Board voted to
renew the Agreements for an additional one-year period, subject to the
applicable limitations on the total operating expenses of the Funds and the
investment advisory fees payable by the Funds as considered and approved at
the meeting.
31
FAM Equity-Income Fund [LOGO]
Dear Fellow Equity-Income Fund Shareholder:
2006 was a good year for the market. The S&P 500 index was up 15.8%, and the
Russell 2000 appreciated by 18.4%. The Equity-Income Fund on the other hand
didn't perform as well. The Investor Class of the FAM Equity-Income Fund was
up 6.6% for the year. While we are certainly disappointed with this
short-term performance, we are very happy to own this collection of
businesses which have a demonstrated, long-term track record of generating
economic value for their shareholders.
Overview of 2006
2006 continued to reflect divergence of market volatility. The year started
on the positive side, but then gave back all of the earlier gains by July.
This market volatility was caused by fears of higher gas prices and higher
interest rates that might send the economy into a recession. The slowdown in
housing was also apparent. Additionally, dire predictions about the upcoming
hurricane season also had investors on edge. In comparison, the Equity-Income
Fund appreciated by 7.3% in the first quarter then gave up all the gains
during the correction and ended the first half of the year with a slight
loss. While these events are out of our control, there was a silver lining to
this correction. We took the opportunity to add to a number of our positions
in strong companies including CDW Corp., John Wiley & Son, Winnebago, and
initiated a position in Franklin Resources as well.
By late July the market shook off its fears and began to advance once
more. This rally was sustained through the rest of the year. The big story
was the rally in commercial real estate, telecom and energy. The returns in
these industries far outstripped the returns for all other industries. The
Fund's lack of investments in these industries put us at a clear disadvantage
to the rest of the market. While we would like to own commercial real estate
and energy, we feel that prices are too high and the down side risk too great
to justify committing capital to these areas. However, over longer periods of
time, we have been able to meet our return objectives despite not having
exposure to all sectors of the market.
At a recent meeting with a shareholder we were asked why the Fund
wasn't participating more in this up market. We think the answer is that
we're in a period where some of our investments are out of phase with the
market. This is not unusual and happens from time to time. Over the last 10
years we had several back-to-back years where the Fund was beating the
market. Over the same period we also had some years where the Fund's
performance bared little resemblance to what was happening in the market --
such as 1998 and 1999. We believe the Fund's long-term results are due to the
consistent application of our investment philosophy. We know from experience
that patient, long-term shareholders have been rewarded for looking past
those relatively short periods of underperformance. To understand why, it's
important to look at just how we invest your money.
What We Look For in an Investment
We look at the Fund as a collection of great businesses. While most of these
businesses are very different, they all have some common attributes. They are
all leaders in their industries and are able to keep competition at bay. They
are well managed by honest and ethical people, and most importantly they
generate a lot of cash. Obviously, the more cash they generate the better.
Cash is important because it can be used to
32
FAM Equity-Income Fund [LOGO]
reinvest into the company, make acquisitions, pay down debt, or can be
returned to shareholders through dividends or stock buybacks. Companies that
do not generate a lot of cash may not be able to do those things. Once we
find these great companies we must figure out how much they are actually
worth.
In order to value these companies we look at the opportunities that
each company has to grow and how profitable that growth will be. We are then
able to estimate how much cash they can generate over the next several years.
If we know how much cash they can earn over the ensuing five years, we can
then value the company and then determine a fair price to pay for that
company without taking on excessive risk. We have found that it is not enough
to invest in a great company; we must also pay the right price in order to
make an acceptable return and preserve your capital.
Once we purchase these great businesses at good prices, we want to own
them for a very long time. We spend a lot of time researching companies and
getting to know them and their competitors. The more decisions investors make
the more likely it is that they will make errors. We try to simplify the
process by making fewer decisions and holding for longer periods of time.
Having a long-term investment horizon has its advantages including tax
efficiency and the ability to gain confidence in the management of the
businesses we purchase for the portfolio.
A down side to holding investments for long periods is that that
businesses never grow the same amount every year. In some years the company
will grow faster, and in other years the company will grow at a slower rate.
If we are confident that the faster rates of growth are ahead of us then we
will hold onto the company during those temporary periods of slower growth.
This makes more sense than believing that we have perfect information and
have the ability to get in and out of investments at precisely the right
time. It would be nice if investing was that easy.
From our vantage point, we are going through a period where some of
these wonderful cash flow generating businesses are not growing as quickly as
we think they ultimately will. We believe this is a short-term phenomenon as
we have seen in other periods of time.
Companies Having the Greatest Impact
on Performance
The worst performing company in the fund was Gentex, which detracted $2.72
million (-27%) from the Fund's value. We sold the position because we believe
the company will have a difficult time growing revenues and earnings as SUV
and pickup truck sales slow due to higher gas prices. Additionally, over 20%
of Gentex's revenues come from General Motors. We believe things are getting
worse at General Motors, not better, which also influenced our decision.
Although the company has many positive attributes which we have touted in the
past, the price concessions that they are required to give the auto
manufactures is weighing on the growth rate of the company. Without growth in
earnings or cash flow, the company cannot create economic value. With little
growth in economic value the stock will have a difficult time meeting our
return expectations.
OSI Restaurant Partners (-13%) and Federated Investors (-6%) together
had a negative impact on performance. The combined impact was -$1.34 million
from the Fund which equates to 0.74% of beginning Fund assets. OSI was hurt
by negative same store sales trends in the Outback
33
FAM Equity-Income Fund [LOGO]
Steakhouse brand which in turn hurt earnings. This was largely a
function of consumers not eating out as much partly due to higher gasoline
prices. The company is in the process of reinvigorating the Outback brand. In
November, the company announced that it was being bought out by management
for $40 per share. Federated Investors money market business suffered as
short-term interest rates were rising. We held onto the investment because
once short-term interest rates stabilize, money markets would again be
competitive and would attract assets. That started to happen late in the year
and we expect to benefit for the full year in 2007. We may even see a cut in
short-term interest rates which could potentially provide the company with a
boost.
The best performing company in terms of dollar appreciation was CDW
Corp. (+23.0%) which added $1.65 million to the value of the Fund. During the
year the company undertook a major restructuring of their corporate sales
force. For most of the year the sales force was operating at a low level of
efficiency as they worked on transitioning customer relationships to
geographic based sales reps. This gave us the opportunity to add to our
position at attractive valuations. The company is now emerging from the sales
force restructuring which should drive future earnings growth. The company
also completed the acquisition of Burbee Networks, which gives the company
another avenue for growth. CDW has exceptional fundamentals. They have over
$7 per share of cash in the bank, only a miniscule amount of long-term debt,
and returns on invested capital that exceed 35%. Furthermore, management
routinely buys back stock. So far this year they have repurchased nearly 5%
of the outstanding shares of the company. That is on top of the 5.3% of the
company bought back the previous year. We like it when a company generates so
much cash that it can reinvest in the business, make acquisitions, increase
their dividend, and/or buy back stock.
The next best performing holdings in terms of dollar appreciation were
Vulcan Materials Corp. (+34.8%) and Martin Marietta Materials (+36.8%), which
added $1.6 million and $1.4 million respectively to the value of the Fund.
Both companies benefited from strong aggregate shipments as well as higher
prices. We trimmed both positions early in the year as the stocks appreciated
smartly. After we trimmed the positions both stocks declined by roughly 30%
from their highs over the following 3 months amidst fears of the residential
and commercial construction slowdown. The stocks steadily recovered to end
the year near record highs. We expect that shipments will be down in the
coming year but that price increases will still lead to revenue growth. These
businesses are unique because they are effectively local monopolies. Since
aggregates (crushed rock) are very heavy, the cost of transportation is high.
It isn't cost effective to transport a load of aggregates more than 40 to 50
miles because the transportation costs would be more than the cost of the
aggregates. This means that whoever owns the quarries closest to the
construction project most likely wins the business. We like the fact that
Vulcan and Martin Marietta own quarries in all the high population growth
states.
Another positive contributor to performance was IDEX Corp. (+16.7%),
which added $1.43 million to the value of the Fund. The company enjoyed
strong order growth for the third year in a row. This was driven by new
products as well as serving faster growing markets. The
34
FAM Equity-Income Fund [LOGO]
company was also able to make three acquisitions during the year which
will enhance the growth profile of the company. This is another company that
we trimmed early in the year as its price approached our estimation of full
valuation.
Dividends
Every company in the Fund pays a dividend, and the vast majority of the
companies also raise their dividends every year. In 2006, the average company
in the fund paid out 14% more in dividends than the previous year. If we look
at the indicated dividend rate, the growth rate jumps up to 21%. We believe
that when a company increases its dividend it is a reflection of how well
they are doing and expect to do in the future. If a company is doing well and
is generating more cash than it needs to reinvest into the business, the
board tends to pay out that cash flow in the form of higher dividends.
Conversely, if a company is just treading water or doing poorly, the board
most likely would conserve cash and not raise the dividend. Despite the
lackluster stock performance of some of the companies in the Fund, we believe
the dividend increases are a good indicator of future performance for those
companies.
Outlook
We are optimistic about the upcoming year for several reasons. First, the
companies in the Fund are executing well and putting distance between
themselves and their competitors. They are generating good cash flow and are
earning a high return on their invested capital. Second, we visit with every
company in the Fund at least once a year. The one thing that stands out
during our most recent visits is the enthusiasm of the management teams. In
general, we feel management teams are more positive and enthusiastic about
the future now than they were one year ago. Third, our companies are
generating more free cash flow than they need to reinvest in their
businesses. Managements are returning this excess cash flow to shareholders
through dividends and share buyback programs and this practice makes these
companies more valuable to shareholders. Finally, we are starting to see a
greater number of investment opportunities where we think we can achieve our
investment objectives.
As always we are working hard to invest your money in high quality
companies that we believe can earn significant returns over the next five
years. We will continue to apply our time-tested value investment principles
on your behalf.
Best wishes for a prosperous year.
Sincerely,
/s/ Paul Hogan
Paul Hogan, CFA
Co-Manager
/s/ Thomas O. Putman
Thomas O. Putnam
Co-Manager
35
FAM Equity-Income Fund -- Performance Summary [LOGO]
Annual Total Investment Returns:
APRIL 1, 1996 TO DECEMBER 31, 2006
FAM EQUITY-INCOME FUND
INVESTOR SHARES ADVISOR SHARES* RUSSELL 2000 INDEX S&P 500 INDEX
FISCAL YEAR TOTAL RETURN TOTAL RETURN TOTAL RETURN
4/1/96-12/31/96 11.84% -- 10.30% 15.20%
1997 26.90% -- 22.37% 33.35%
1998 4.67% -- -2.55% 28.58%
1999 -6.98% -- 21.26% 21.04%
2000 17.18% -- -3.03% -9.10%
2001 20.79% -- 2.49% -11.88%
2002 -2.25% -- -20.48% -22.09%
2003 20.30% 9.83% 47.25% 28.67%
2004 14.04% 13.05% 18.33% 10.88%
2005 5.75% 4.76% 4.55% 4.91%
2006 6.57% 5.73% 18.37% 15.79%
*FAM Equity-Income Fund Advisor Shares were launched on July 1, 2003.
36
FAM Equity-Income Fund -- Performance Summary [LOGO]
The chart below depicts the change in the value of a $10,000 investment in
Investor Shares of the FAM Equity-Income Fund, since inception April 1, 1996,
as compared with the growth of the Standard & Poor's 500 Index and the
Russell 2000 Index during the same period. The information assumes
reinvestment of dividends and capital gain distributions. The Standard &
Poor's 500 Index is an unmanaged index generally representative of the market
for the stocks of large size U.S. companies. The Russell 2000 Index is an
unmanaged index generally representative of the market for the stocks of
smaller size U.S. companies.
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
FAM EQUITY-INCOME FUND, THE RUSSELL 2000 INDEX, AND THE S&P 500
S&P 500 Russell 2000 FAM Equity-Income Fund
1996 10000 10000 10000
1997 15368 13501 14202
1998 19763 13150 14865
1999 23913 15951 13824
2000 21737 15472 16199
2001 19150 15859 19567
2002 14918 12608 19127
2003 19200 18571 23010
2004 21287 21963 26241
2005 22332 22963 27750
2006 25858 27181 29573
This information represents past performance of Investor Shares of the FAM
Equity-Income Fund and is not indicative of future results. 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 the original
cost.
An investment of $10,000 in the Advisor Shares of the FAM Equity-Income Fund
since the inception date of this share class, July 1, 2003 would have changed
in value to $13,753 by December 31, 2006.
Average Annual Total Returns as of December 31, 2006
Life of Fund
1-Year 3-Year 5-Year 10-Year (4/1/96)
FAM EQUITY-INCOME FUND
(Investor Shares) 6.57% 8.72% 8.61% 10.20% 10.60%
(Advisor Shares)* 5.73% 7.78% N/A N/A *
S&P 500 Index 15.79% 10.45% 6.19% 8.42% 9.36%
Russell 2000 Index 18.37% 13.56% 11.39% 9.44% 9.87%
*FAM Equity-Income Fund Advisor Shares were launched on July 1, 2003. The
return since inception is 9.52%.
The graph and performance table do not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or the redemption of Fund shares.
37
FAM Equity-Income Fund -- Portfolio Data [LOGO]
As of December 31, 2006
TOP TEN HOLDINGS
(% of Net Assets)
White Mountains Insurance 5.8%
John Wiley & Sons, Inc. 5.6%
Courier Corporation 5.2%
CDW Corporation 5.2%
Federated Investors 5.1%
Ross Stores, Inc. 5.1%
International Speedway 4.6%
Winnebago Industries 4.6%
McGrath Rentcorp 4.5%
Allied Capital Corporation 4.3%
COMPOSITION OF NET ASSETS
Publishing 10.9%
Banking 8.3%
Machinery & Equipment 8.1%
Temporary Investments 7.2%
Investment Management 7.0%
Construction Materials 6.6%
Property & Casualty Insurance 5.8%
Wholesale Distribution 5.2%
Retail Stores 5.1%
Recreation & Entertainment 4.6%
Recreation Vehicles 4.6%
Commercial Services 4.5%
Transportation 4.3%
Registered Investment Company 4.3%
Life Insurance 2.9%
Media 2.8%
Insurance Agency 2.3%
Other 5.5%
Statement Regarding Availability of Quarterly Portfolio Schedule. Please note
that (i) the Fund files its complete schedule of portfolio holdings with the
Securities and Exchange Commission for the first and third quarters of each
fiscal year on Form N-Q; (ii) the Fund's Forms N-Q are available on the
Commission's website at http://www.sec.gov; (iii) the Fund's Form N-Q may be
reviewed and copied at the Commission's Public Reference Room in Washington,
DC, and that information on the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330; and (iv) the Fund makes the information
on Form N-Q available to shareholders upon request, by calling FAM Funds at
1-800-932-3271.
38
FAM Equity-Income Fund -- Expense Data [LOGO]
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees on the Advisor Class Shares; and (2) ongoing
costs, including management fees; distribution (and/or service) (12b-1 fees
on the Advisor Class Shares only) fees; and other Fund expenses. This Example
is intended to help you understand your ongoing costs (in dollars) of
investing in the Fund and to compare these costs with the ongoing costs of
investing in other mutual funds.
The Example is based on an investment of $1,000 invested at the
beginning of the period and held for the entire period (6/30/2006 to
12/31/2006).
Actual Expenses
Lines (A) and (B) of the following table provides information about actual
account values and actual expenses for Investor Class Shares and Advisor
Class Shares, respectively. You may use the information in this line,
together with the amount you invested, to estimate the expenses that you paid
over the period. Simply divide your account value by $1,000 (for example, an
$8,600 account value divided by $1,000 = 8.6), then multiply the result by
the number in the line for your share class under the heading entitled
"Expenses Paid During Period" to estimate the expenses you paid on your
account during this period.
Hypothetical Example for Comparison Purposes
Lines (C) and (D) of the following table provides information about
hypothetical account values and hypothetical expenses based on the Fund's
actual expense ratio and an assumed rate of return of 5% per year before
expenses, which is not the Fund's actual return for the Investor Class Shares
and Advisor Class Shares, respectively. The hypothetical account values and
expenses may not be used to estimate the actual ending account balance or
expenses you paid for the period. You may use this information to compare the
ongoing costs of investing in the Fund and other funds. To do so, compare
this 5% hypothetical example with the 5% hypothetical examples that appear in
the shareholder report of other funds.
Please note that the expenses shown in the table are meant to highlight
your ongoing costs only and do not reflect any transactional costs, such as
redemptions fees. Therefore, the second line of the table is useful in
comparing ongoing costs only, and will not help you determine the relative
costs of owning different funds. In addition, if these transactional costs
were included, your costs would have been higher.
39
FAM Equity-Income Fund -- Expense Data [LOGO]
SIX MONTHS ENDED DECEMBER 31, 2006
Beginning Ending Expenses
Account Value Account Value Paid
6/30/2006 12/31/2006 During Period
Ongoing Costs Based on Actual Fund Return
A. Investor Share Class $1,000.00 $1,074.80 $ 6.85*
B. Advisor Share Class $1,000.00 $1,071.80 $12.06**
Ongoing Costs Based on Hypothetical
5% Yearly Return
C. Investor Share Class $1,000.00 $1,018.40 $ 6.66*
D. Advisor Share Class $1,000.00 $1,013.36 $11.72**
*Expenses are equal to the Fund's Investor Class Shares annualized expense
ratio of (1.31%), multiplied by the average account value over the period,
multiplied by 184/365 (to reflect the one-half-year period).
**Expenses are equal to the Fund's Advisor Class Shares annualized expense
ratio of (2.31%), multiplied by the average account value over the period,
multiplied by 184/365 (to reflect the one-half-year period).
40
FAM Equity-Income Fund -- Statement of Investments [LOGO]
December 31, 2006
SHARES VALUE
COMMON STOCKS (92.9%)
Banking (8.3%)
TCF Financial Corp.
o holding company that offers various banking
services throughout the United States 223,000 $ 6,114,660
Westamerica Bancorp
o provides banking services to individual
and corporate customers in northern
and central California 118,000 5,974,340
12,089,000
Commercial Services (4.5%)
McGrath RentCorp
o modular building and electronic test equipment
rentals, subsidiary classroom manufacturing 213,600 6,542,568
Construction Materials (6.6%)
Florida Rock Industries
o produces aggregates for the construction industry 42,000 1,808,100
Martin Marietta Materials
o produces aggregates for the construction industry 45,000 4,675,950
Vulcan Materials Company
o produces, distributes and sells construction
materials and industrial and specialty chemicals 36,200 3,253,294
9,737,344
Diversified Manufacturing (1.6%)
General Electric Company
o diversified industrial manufacturer 61,400 2,284,694
Electronic Equipment (0.7%)
Cognex Corp.
o develops, manufactures and markets
machine vision systems used to
automate manufacturing processes 45,700 1,088,574
Insurance Agency (2.3%)
Brown & Brown, Inc.
o one of the largest independent general
insurance agencies in the U.S. 121,200 3,419,052
See Notes to Financial Statements.
41
FAM Equity-Income Fund -- Statement of Investments continued [LOGO]
December 31, 2006
SHARES VALUE
Investment Management (7.0%)
Federated Investors
o provides investment management products
and services primarily to mutual funds 221,900 $ 7,495,782
Franklin Resources, Inc.
o provides investment management and
fund administration services as well as
retail-banking and consumer lending services 25,000 2,754,250
10,250,032
Life Insurance (2.9%)
Protective Life Corporation
o individual and group life/health insurance and
guaranteed investment contracts 88,219 4,190,403
Machinery & Equipment (8.1%)
Donaldson Company, Inc.
o designs, manufactures and sells
filtration systems and replacement parts 88,800 3,082,248
IDEX Corporation
o manufactures proprietary, highly engineered
industrial products and pumps 100,137 4,747,495
Kaydon Corporation
o custom-engineers products including bearings,
filters, and piston rings 100,000 3,974,000
11,803,743
Media (2.8%)
Meredith Corporation
o magazine publishing and tv broadcasting 72,173 4,066,949
Property and Casualty Insurance (5.8%)
White Mountains Ins. Grp., Ltd.
o personal property and casualty, and reinsurance 14,775 8,561,078
Publishing (10.9%)
Courier Corporation
o manufactures and publishes specialty books,
including Dover Publications 197,250 7,686,833
John Wiley & Sons, Inc.
o publisher of print and electronic products,
specializing in scientific, technical professional
and medical books and journals 214,650 8,257,585
15,944,418
See Notes to Financial Statements.
42
FAM Equity-Income Fund -- Statement of Investments continued [LOGO]
December 31, 2006
SHARES VALUE
Recreation and Entertainment (4.6%)
International Speedway Corporation
o owns and operates auto racing tracks
including Daytona 132,500 $ 6,762,800
Recreation Vehicles (4.6%)
Winnebago Industries
o manufacturer of self-contained recreational
vehicles used primarily in leisure travel 202,500 6,664,275
Registered Investment Company (4.3%)
Allied Capital Corp.
o venture capital corporation for entrepreneurs
and management 193,714 6,330,574
Restaurants (1.7%)
Outback Steakhouse
o operates a diversified restaurant system including
Outback Steakhouse, Carrabba's Italian Grill,
Roy's and Bonefish Grill 62,150 2,436,280
Retail Apparel (1.8%)
Liz Claiborne, Inc.
o designs and markets an extensive range
of branded men's and women's apparel,
accessories and fragrance 60,174 2,615,162
Retail Stores (5.1%)
Ross Stores, Inc.
o chain of off-price retail apparel and
home accessories stores 254,041 7,443,401
Transportation (4.3%)
Forward Air Corporation
o provides surface transportation and
related logistics services to the deferred
air freight market in North America 90,000 2,603,700
Heartland Express, Inc.
o short-to-medium-haul truckload carrier
of general commodities 250,533 3,763,005
6,366,705
See Notes to Financial Statements.
43
FAM Equity-Income Fund -- Statement of Investments continued [LOGO]
December 31, 2006
SHARES VALUE
Wholesale Distribution (5.2%)
CDW Corp.
o direct marketing of multibrand computers
and related technology products and services 109,100 $ 7,671,912
Total Common Stocks (Cost $97,621,138) $ 136,268,964
TEMPORARY INVESTMENTS (7.2%)
Money Market Fund (4.4%)
First American Treasury Fund 6,507,473 $ 6,507,473
U.S. Government Obligations (2.7%) PRINCIPAL
U.S. Treasury Bill, 4.9%,
with maturity to 2/1/07 $4,000,000 3,983,484
Total Temporary Investments (Cost $10,490,957) $ 10,490,957
Total Investments (Cost $108,112,095) (100%) $ 146,759,921
See Notes to Financial Statements.
44
FAM Equity-Income Fund [LOGO]
December 31, 2006
STATEMENT OF ASSETS AND LIABILITIES
Assets
Investment in securities at value (Cost $108,112,095) $146,759,921
Cash 32,354
Dividends and interest receivable 130,858
Receivable for fund shares 5,398
Total Assets 146,928,531
Liabilities
Payable for fund shares 248,073
Accrued investment advisory fee 123,876
Accrued shareholder servicing and administrative fees 15,161
Accrued expenses 74,922
Total Liabilities 462,032
Net Assets
Source of Net Assets:
Net capital paid in on shares of beneficial interest $107,813,115
Accumulated net realized gains 5,558
Net unrealized appreciation 38,647,826
Net Assets $146,466,499
Net Asset Value Per Share
Investor Class Shares -- based on net assets of
$142,545,832 and 6,596,460 shares outstanding $21.61
Advisor Class Shares -- based on net assets of
$3,920,667 and 183,311 shares outstanding $21.39
See Notes to Financial Statements.
45
FAM Equity-Income Fund [LOGO]
Year Ended December 31, 2006
STATEMENT OF OPERATIONS
INVESTMENT INCOME
Income
Dividends $2,368,738
Interest 571,284
Total Investment Income 2,940,022
Expenses
Investment advisory fee (Note 2) 1,599,336
Administrative fee (Note 2) 119,950
Shareholder servicing and related expenses (Note 2) 74,712
Printing and mailing 37,233
Professional fees 53,778
Registration fees 39,237
Custodial fees 23,754
Trustees and Officers 88,058
Distribution and Service Fees -- Advisor Class Shares (Note 2) 43,952
Other 21,353
Total Expenses 2,101,363
Expenses Paid Indirectly (Note 3) (2,727)
Net Expenses 2,098,636
Net Investment Income 841,386
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments 7,917,576
Realized gain distributions 239,237
Unrealized depreciation of investments (236,594)
Net Gain on Investments 7,920,219
NET INCREASE IN NET ASSETS FROM OPERATIONS $8,761,605
See Notes to Financial Statements.
46
FAM Equity-Income Fund [LOGO]
Years Ended December 31, 2006 and 2005
STATEMENT OF CHANGES IN NET ASSETS
2006 2005
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income $ 841,386 $ 1,093,947
Net realized gain (loss) on investments 7,917,576 (460,257)
Realized gain distributions 239,237 --
Unrealized appreciation (depreciation)
of investments (236,594) 8,641,649
Net Increase in Net Assets
From Operations 8,761,605 9,275,339
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Investor Class (1,078,611) (1,092,959)
Advisor Class -- --
Net realized gain on investments
Investor Class (7,253,566) --
Advisor Class (203,602) --
TRANSACTIONS IN SHARES OF
BENEFICIAL INTEREST (NOTE 4): (35,899,942) 22,165,381
Total (Decrease) Increase in Net Assets (35,674,116) 30,347,761
NET ASSETS:
Beginning of year 182,140,615 151,792,854
End of year (including undistributed
net investment income of $3,395
at December 31, 2005) $146,466,499 $182,140,615
See Notes to Financial Statements.
47
FAM Equity-Income Fund -- Notes to Financial Statements [LOGO]
Note 1. Nature of Business and Summary of Significant Accounting Policies
FAM Equity-Income Fund (the "Fund") is a series of Fenimore Asset Management
Trust, a diversified, open-end management investment company registered under
the Investment Company Act of 1940. The Fund offers two classes of shares
(Investor Class and Advisor Class since April 1, 1996 and July 1, 2003,
respectively). Each class of shares has equal rights as to earnings and
assets except the Advisor Class bears its own distribution expenses. Each
class of shares has exclusive voting rights with respect to matters that
affect just that class. Income, expenses (other than expenses attributable to
a specific class), and realized and unrealized gains or losses on investments
are allocated to each class of shares based on its relative net assets. The
investment objective of the Fund is to provide current income and long term
capital appreciation from investing primarily in income-producing equity
securities. The following is a summary of significant accounting policies
followed in the preparation of its financial statements.
a) Valuation of Securities
Securities traded on a national securities exchange or admitted to
trading on NASDAQ are valued at the last reported sale price or the
NASDAQ official closing price. Common stocks for which no sale was
reported, and over-the-counter securities, are valued at the last
reported bid price. Short-term securities are carried at amortized cost,
which approximates value. Securities for which market quotations are not
readily available or have not traded are valued at fair value as
determined by procedures established by the Board of Trustees.
Investments in First American Treasury Fund are valued at that fund's net
asset value.
b) Federal Income Taxes
It is the Fund's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to its shareholders. Therefore, no
provision for federal income tax is required.
c) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of increases and decreases
in net assets from operations during the reporting period. Actual results
could differ from those estimates.
d) Other
Securities transactions are recorded on trade date. Realized gains and
losses on securities sold are determined on the basis of identified cost.
Interest income is accrued as earned and dividend income is recorded on
the ex-dividend date. The Fund records distributions received in excess
of income from underlying investments as a reduction of cost of
investments and/or realized gain. Such amounts are based on estimates if
actual amounts are not available, and actual amounts of income, realized
gain and return of capital may differ from the estimated amounts. The
Fund adjusts the estimated amounts
48
FAM Equity-Income Fund -- Notes to Financial Statements [LOGO]
of the components of distributions (and consequently its net investment
income) as an increase to unrealized appreciation/(depreciation) and
realized gain/(loss) on investments as necessary once the issuers provide
information about the actual composition of the distributions.
Distributions to shareholders are recorded on the ex-dividend date.
Distributions to shareholders are determined in accordance with income
tax regulations and may differ from those determined for financial
statement purposes. To the extent these differences are permanent such
amounts are reclassified within the capital accounts.
e) New Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes -- an
Interpretation of FASB Statement No. 109" (the "Interpretation"). The
Interpretation establishes for all entities, including pass-through
entities such as the Fund, a minimum threshold for financial statement
recognition of the benefit of positions taken in filing tax returns
(including whether an entity is taxable in a particular jurisdiction),
and requires certain expanded tax disclosures. The Interpretation is
effective for fiscal years beginning after December 15, 2006, and is to
be applied to all open tax years as of the date of effectiveness.
Management has recently begun to evaluate the application of the
Interpretation to the Fund, and is not in a position at this time to
estimate the significance of its impact, if any, on the Fund's financial
statements.
In addition, in September 2006, Statement of Financial Accounting
Standards No. 157, "Fair Value Measurements" (SFAS 157), was issued and
is effective for fiscal years beginning after November 15, 2007. SFAS 157
defines fair value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements. Management is
currently evaluating the impact the adoption of SFAS 157 will have on the
Fund's financial statement disclosures.
Note 2. Investment Advisory Fees and Other Transactions with Affiliates
Under the Investment Advisory Contract, the Fund pays an investment advisory
fee to Fenimore Asset Management, Inc. (the "Advisor") equal, on an annual
basis, to 1% of the Fund's average daily net assets. The Advisor has entered
into a voluntary agreement with the Fund to reduce the investment advisory
fee for the Fund through December 31, 2007 to 0.95% of the Fund's average
daily net assets in excess of $1 billion. No such waiver was required for the
year ended December 31, 2006. Thomas Putnam is an officer and trustee of the
Fund and also an officer and director of the Advisor.
The Investment Advisory Contract requires the Advisor to reimburse the
Investor Class for its expenses to the extent that such expenses, including
the advisory fee, for the fiscal year exceed 2% of the average daily net
assets. For the year ended December 31, 2006 the Advisor contractually agreed
to reimburse the Fund for its expenses to the extent such expenses exceed
1.40% and 2.40% of the average daily net assets of the Investor Class and
Advisor Class, respectively. No such reimbursement was required for the year
ended December 31, 2006.
FAM Shareholder Services, Inc. (FSS), a company under common control
with the Advisor, serves as shareholder servicing agent and receives a
monthly fee of $2.00 per shareholder account. For the year ended December 31,
2006, shareholder servicing agent fees paid to FSS amounted to $74,712.
49
FAM Equity-Income Fund -- Notes to Financial Statements [LOGO]
Additionally, FSS serves as the Fund administrative agent and receives
an annual fee of 0.075% on the first $750,000,000 of the Fund's average daily
net assets, 0.065% thereafter. Fenimore Securities, Inc. ("FSI"), a company
also under common control with the Advisor, acts as distributor of the Fund's
shares. On July 1, 2003, the Fund adopted a distribution plan pursuant to
Rule 12b-1 under the Investment Company Act of 1940 for the Advisor Class of
shares. Under the plan the Fund pays FSI a total of 1.00% per annum of the
Advisor Class shares' average daily net assets.
Note 3. Indirect Expenses
The Fund's custodian bank has also agreed to reduce its fees when the Fund
maintains cash on deposit in the non-interest-bearing custody account. For
the year ended December 31, 2006, these arrangements reduced the Fund's
custodian fees by $2,727.
Note 4. Shares of Beneficial Interest
At December 31, 2006 an unlimited number of $.001 par value shares of
beneficial interest were authorized. The Advisor Class of shares that are
redeemed within the first eighteen months of purchase are subject to a 1.00%
redemption fee. For the year ended December 31, 2006, redemption fees
amounted to $5,037 and were credited to paid in capital. Transactions were as
follows:
YEAR ENDED 12/31/06 YEAR ENDED 12/31/05
Shares Amount Shares Amount
Shares sold
Investor Class 993,318 $ 21,825,426 3,164,629 $ 65,903,167
Advisor Class 27,694 607,640 67,528 1,402,122
Shares issued on
reinvestment of distributions
Investor Class 359,368 7,845,239 49,603 1,040,432
Advisor Class 9,114 197,271 -- --
Shares redeemed
Investor Class (3,013,950) (65,143,264) (2,220,586) (45,981,892)
Advisor Class (59,776) (1,232,254) (9,444) (198,448)
Net Increase (Decrease) from
Investor Class
Share Transactions (1,661,264) $(35,472,599) 993,646 $ 20,961,707
Net Increase (Decrease) from
Advisor Class Share Transactions (22,968) $ (427,343) 58,084 $ 1,203,674
50
FAM Equity-Income Fund -- Notes to Financial Statements [LOGO]
Note 5. Investment Transactions
During the period ended December 31, 2006, purchases and sales of investment
securities, other than short term obligations were $28,118,806 and
$65,910,137. The cost of securities for federal income tax purposes is
substantially the same as shown in the investment portfolio.
Note 6. Income Taxes and Distribution to Shareholders
The components of tax basis undistributed earnings at December 31, 2006 were
as follows:
Undistributed Long-term Capital Gain $5,556
The aggregate gross unrealized appreciation and depreciation of portfolio
securities, based on cost for federal income tax purposes of $108,112,095,
was as follows:
Unrealized appreciation $38,895,985
Unrealized depreciation (248,159)
Net unrealized appreciation $38,647,826
The tax composition of dividends and distributions to shareholders for
the years ended December 31, 2006 and 2005 were as follows:
2006 2005
Ordinary income $3,047,152 $1,092,257
Long-term capital gain 5,488,627 702
$8,535,779 $1,092,959
To reflect reclassifications arising from permanent differences at December
31, 2006, undistributed net investment income was increased and accumulated
net realized gain was decreased by $233,830.
Note 7. Line of Credit
FAM Equity-Income Fund has a line of credit up to 33 1/3% of total net assets
or a maximum of $50,000,000. Borrowings under the agreement bear interest at
the prime rate as announced by the lending bank. The line of credit is
available until December 1, 2007 when any advances are to be repaid. During
the year ended December 31, 2006 no amounts were drawn from the available
line.
Note 8. Commitments and Contingencies
In the normal course of business, the Fund enters into contracts that contain
a variety of representations and warranties which provide general
indemnifications. The Fund's maximum exposure under these arrangements is
unknown as this would involve future claims that might be made against the
Fund that have not yet occurred. However, based on experience, the Fund
expects the risk of loss to be remote.
51
FAM Equity-Income Fund -- Notes to Financial Statements [LOGO]
Note 9. Financial Highlights
FAM EQUITY-INCOME FUND -- INVESTOR CLASS SHARES
Years Ended December 31,
Per share information
(For a share outstanding throughout the year) 2006 2005 2004 2003 2002
Net asset value, beginning of year $ 21.52 $ 20.48 $ 18.27 $ 15.45 $ 16.05
Income from investment operations:
Net investment income 0.12+ 0.14+ 0.15+ 0.12 0.12
Net realized and unrealized
gain (loss) on investments 1.30 1.03 2.40 3.00 (0.48)
Total from investment operations 1.42 1.17 2.55 3.12 (0.36)
Less distributions:
Dividends from net investment income (0.16) (0.13) (0.15) (0.12) (0.12)
Distributions from net realized gains (1.17) -- (0.19) (0.18) (0.12)
Total distributions (1.33) (0.13) (0.34) (0.30) (0.24)
Change in net asset value for the year 0.09 1.04 2.21 2.82 (0.60)
Net asset value, end of year $ 21.61 $ 21.52 $ 20.48 $ 18.27 $ 15.45
Total Return 6.57% 5.75% 14.04% 20.30% (2.25)%
Ratios/supplemental data
Net assets, end of year (000) $142,546 $177,740 $148,776 $114,194 $73,969
Ratios to average net assets of:
Expenses, total 1.28% 1.26% 1.27% 1.28% 1.37%
Net investment income 0.55% 0.66% 0.79% 0.73% 0.84%
Portfolio turnover rate 19.01% 14.11% 17.64% 6.46% 7.11%
+Based on average shares outstanding.
52
FAM Equity-Income Fund -- Notes to Financial Statements [LOGO]
Note 9. Financial Highlights (continued)
FAM EQUITY-INCOME FUND -- ADVISOR CLASS SHARES
Period Ended
Years Ended December 31, December 31,
Per share information
(For a share outstanding throughout the year) 2006 2005 2004 2003+
Net asset value, beginning of year $21.33 $20.36 $18.18 $16.77
Income from investment operations:
Net investment income (loss) (0.10)++ (0.07)++ (0.04)++ 0.10
Net realized and unrealized gain on investments 1.33 1.04 2.41 1.54
Total from investment operations 1.23 0.97 2.37 1.64
Less distributions:
Dividends from net investment income -- -- -- (0.05)
Distributions from net realized gains (1.17) -- (0.19) (0.18)
Total distributions (1.17) -- (0.19) (0.23)
Change in net asset value for the year 0.06 0.97 2.18 1.41
Net asset value, end of year $21.39 $21.33 $20.36 $18.18
Total Return 5.73% 4.76% 13.05% 9.83%**
Ratios/supplemental data
Net assets, end of year (000) $3,921 $4,400 $3,017 $1,291
Ratios to average net assets of:
Expenses 2.28% 2.26% 2.27% 2.28%*
Net investment income (loss) (0.45)% (0.34)% (0.21)% 1.10%*
Portfolio turnover rate 19.01% 14.11% 17.64% 6.46%
+Beginning of period reflects Advisor Class Shares inception date of 7/1/03.
++Based on average shares outstanding.
*Annualized.
**Not Annualized.
53
FAM Equity-Income Fund --
Report of Independent Registered Public Accounting Firm [LOGO]
To the Board of Trustees and Shareholders of FAM Equity-Income Fund:
In our opinion, the accompanying statement of assets and liabilities,
including the statement of investments, and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of FAM Equity-Income
Fund, a series of Fenimore Asset Management Trust, at December 31, 2006, the
results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended and the financial
highlights for each of the periods presented, in conformity with accounting
principles generally accepted in the United States of America. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits, which included confirmation of
securities at December 31, 2006 by correspondence with the custodian, provide
a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
February 1, 2007
54
FAM Equity-Income Fund [LOGO]
Board Consideration of the Continuation of the Investment Advisory
Agreements for the Funds
In accordance with the Investment Company Act of 1940, the Board of Trustees
of the Funds is required, on an annual basis, to consider the continuation of
the Investment Advisory Agreements (the "Agreements") with the Advisor, and
this must take place at an in-person meeting of the Board. The relevant
provisions of the Investment Company Act of 1940 specifically provide that it
is the duty of the Board to request and evaluate such information as the
Board determines is necessary to allow them to properly consider the
continuation of the Agreements, and it is the duty of the Advisor to furnish
the Trustees with such information that is responsive to their request.
Accordingly, in determining whether to renew the Agreements between the
Funds and the Advisor, the Board of Trustees requested, and the Advisor
provided, information and data relevant to the Board's consideration. This
included materials prepared by the Advisor and materials prepared by an
independent mutual fund industry consulting firm that produced materials
specifically for the Board that provided them with information regarding the
investment performance of the Funds and information regarding the fees and
expenses of the Funds, compared to other similar mutual funds. As part of its
deliberations, the Board also considered and relied upon the information
about the Funds and the Advisor that had been provided to them throughout the
year in connection with their regular Board meetings at which they engage in
the ongoing oversight of the Funds and their operations.
The Board engaged in a thorough review process to determine whether or
not to continue the Agreements with the Advisor. After receiving the
materials they had requested to assist them with their review, the Board had
a preliminary meeting by conference call on November 17, 2006, with
representatives of the Advisor in order to discuss the proposed continuation
of the Agreements and to review the materials that had been presented. The
Board then requested certain additional information which the Advisor
provided and the Board also met separately on November 27, 2006 and then with
representatives of the Advisor on two occasions on November 27 and 28, 2006
prior to their required in-person meeting in order to further consider and
discuss the proposed continuation of the Agreements.
The Board then met to consider the continuation of the Agreements at an
in-person meeting of the Board held on November 28, 2006. Among the factors
the Board considered was the overall performance of the Funds relative to the
performance of other similar mutual funds on a long-term basis (five years
and longer) and over shorter time periods (less than five years). In
connection with its review of the performance results achieved for the Funds,
the Board discussed with management the fact that the Advisor maintains a
particular focus on long-term investment performance results and they
reviewed the reasons why this may, from time to time, cause the longer-term
performance results and the shorter-term performance results to under-perform
when compared to other funds for similar time periods. In connection with
this, the Board took note of management's stated
55
FAM Equity-Income Fund [LOGO]
position that achieving favorable long-term investment results is a
primary objective of the firm. The Board also considered and discussed with
the Advisor their focus on "value investing" which may result in short-term
performance that lags the performance results achieved by other managers,
especially those managers that emphasize other types of investment
strategies, such as "growth investing." The Board also took into
consideration the Advisor's stated objective of attaining investment results
with less risk and less volatility than other funds. The Board determined
that it was beneficial to shareholders that the Advisor has continued to
invest on behalf of the Funds in a manner that is consistent with its
long-term investment objectives due to the fact that Advisor has been able to
achieve favorable long-term performance results for the Funds and when
performance is adjusted for risk, it shows even more favorable results.
The Board also took note of the long-term relationship between the
Advisor and the Funds and the efforts that have been undertaken by the
Advisor to foster the growth and development of the Funds since the inception
of each of the Funds. In connection with this, the Board took note of the
fact that Thomas Putnam, the Chairman and founder of the Advisor and the
co-manager of each of the Funds, has been advising each of the Funds since
their inception, during which time the Funds have experienced favorable
long-term investment results on a comparative basis and a steady growth in
assets. The Board also noted that the Advisor has continued to retain and
develop additional portfolio managers and investment analysts to work with
Mr. Putnam in an effort to provide for the continued long-term management and
oversight of the Funds' and their portfolios.
In addition, the Board compared expenses of each Fund to the expenses
of other similar mutual funds, noting that the expenses have generally
decreased over time as assets in each Fund have grown, and noting further
that the expenses for each of the Funds compare favorably with industry
averages for other funds of similar size and investment objective. They noted
the range of investment advisory and administrative services provided by the
Advisor and its affiliates to the Funds and the level and quality of these
services, and in particular, they considered the quality of the personnel
providing these services noting that they were of a high caliber. The Board
considered that the Funds receive administrative and accounting services from
an affiliate of the Advisor, FAM Shareholder Services, Inc. ("FSS"), and the
Board reviewed the fees paid to FSS and the services provided to the Funds
and their shareholders by FSS during the past year and determined that the
fees were fair and reasonable and that the services provided are useful and
beneficial to the ongoing operations of the Funds given that the services
provided by FSS are separate and distinct services apart from the investment
advisory services provided to the Funds by the Advisor. The Board also
considered that the Funds are distributed by an affiliate of the Advisor,
Fenimore Securities, Inc., ("FSI"), and the Board reviewed the distribution
related services provided by FSI, the distribution fees received by FSI in
connection with its distribution of the Advisor Class of shares of the Funds,
and they determined that the fees were fair and
56
FAM Equity-Income Fund [LOGO]
reasonable and that the distribution services provided by FSI are
useful and beneficial to the ongoing operations of the Funds. In the course
of reviewing the nature and quality of the services provided to the Funds and
their shareholders by the Advisor and its affiliates, the Board took into
consideration the very favorable scores that had been awarded to the Funds by
their shareholders as indicated in the results of the "Mutual Fund
Shareholder Satisfaction Survey" conducted by the National Investment Company
Service Association, the not-for-profit trade association serving the
operations sector of the mutual fund industry.
The Board also reviewed financial information concerning the Advisor
and its affiliates relating to the operation of the Funds, noting the overall
profitability of the relationship with the Funds to the Advisor and the
financial soundness of the Advisor and its affiliates as demonstrated by the
financial information provided. The Board also took note of the fact that the
Advisor bears the entire cost associated with the Funds' participation in
various "mutual fund supermarket" programs, noting that this is beneficial to
the Funds because it allows them to be held by a wide array of shareholders
in a convenient manner.
The Board reviewed the Advisor's brokerage practices and best-execution
procedures, and noted that these were reasonable and consistent with standard
industry practice. In connection with this review, the Board considered the
fact that the Advisor does not have any express arrangements in place with
respect to "soft dollar" arrangements with brokers or other similar parties
relating to the direct use of Fund brokerage commissions to obtain research
or execution services. With respect to the Advisor's brokerage practices, the
Board also took into consideration the fact that the Advisor has maintained
low portfolio turnover rates for the Funds that are substantially lower than
industry averages for equity-type funds, which the Board determined is
beneficial to shareholders due to the reduced brokerage expenses that are
attributable to low portfolio turnover rates.
The Board also considered information regarding the fees that the
Advisor charges other clients for investment advisory services that are
similar to the advisory services provided to the Funds and noted that the
Funds' fees were reasonable when compared to the relevant circumstances of
the types of accounts involved.
In connection with the Board's consideration of the ways in which
economies of scale are reflected with respect to the Agreements, the Board
took note of the fact that the Advisor had previously entered into a
voluntary expense limitation arrangement with the Funds pursuant to which the
investment advisory fees payable to the Advisor by each of the Funds is
reduced on assets in excess of $1 billion from the stated contractual rate of
1.00% of the average daily net assets of each respective Fund to 0.95% of the
average daily net assets of those assets in each Fund in excess of $1 billion
for the two year period from January 1, 2005 through December 31, 2006. This
limitation on the amount of the investment advisory fees payable under the
Agreements was extended to December 31, 2007. The limitation on the amount of
the investment advisory fees payable under the Agreements is in addition to
the contractual arrangement in place with respect to each of the Funds
pursuant to which the Advisor has previously agreed to limit the total
operating
57
FAM Equity-Income Fund [LOGO]
expenses of each class of shares of the Funds and is reviewed by the
Board each year in connection with the further continuation of the
Agreements.
In reaching their conclusion with respect to the continuation of the
Agreements, the Trustees did not identify any one single factor as being
controlling, rather, the Board took note of a combination of factors that
influenced their decision making process. The Board did, however, identify
the overall favorable investment performance of the Funds on a long-term
basis, the commitment of the Advisor to the successful operation of the
Funds, and the level of expenses of the Funds, as well as the Advisor's
willingness to enter into agreements to reduce the overall operating expenses
of the Funds and the investment advisory fees payable by the Funds, as being
important elements of their consideration. Based upon their review and
consideration of these factors and other matters deemed relevant by the Board
in reaching an informed business judgment, the Board of Trustees, including
all of the Independent Trustees, unanimously concluded that the terms of the
Investment Advisory Agreements are fair and reasonable and the Board voted to
renew the Agreements for an additional one-year period, subject to the
applicable limitations on the total operating expenses of the Funds and the
investment advisory fees payable by the Funds as considered and approved at
the meeting.
58
FAM Funds -- Information About Trustees and Officers [LOGO]
The business and affairs of the Funds are managed under the direction of the
Funds' Board of Trustees. Information pertaining to the Trustees and Officers
of the Funds is set forth below.
Independent Trustees**
Number of
Position(s) Principal Portfolios in Other
Held With Fund Occupation(s) Fund Complex* Directorships
Name, Address, and Length of During Past Overseen Held by
and Age Time Served 5 Years by Trustee Trustee
Fred "Chico" Lager Trustee since 1996 Business Consultant; 2 N/A
384 North Grand Street Retired President and
Cobleskill, NY 12043 Chief Executive Officer
Age: 52 of Ben & Jerry's
Homemade, Inc.
C. Richard Pogue Trustee since 2000 Retired Executive Vice 2 N/A
384 North Grand Street President, Investment
Cobleskill, NY 12043 Company Institute
Age: 70
David A. Hughey Trustee since 2000 Retired Executive 2 N/A
384 North Grand Street Chairman since Vice President and
Cobleskill, NY 12043 November 2004 Chief Administrative
Age: 75 Officer, Morgan Stanley
Investment Advisors
John J. McCormack, Jr. Trustee since 2004 Retired Group President, 2 N/A
384 North Grand Street TIAA-Cref Enterprises
Cobleskill, NY 12043
Age: 62
Barbara V. Weidlich Trustee since 2004 President, National 2 N/A
384 North Grand Street Investment Company
Cobleskill, NY 12043 Service Association;
Age: 62 Managing Director --
DEXIA BIL Fund Services,
Dublin, Ireland
59
FAM Funds -- Information About Trustees and Officers continued [LOGO]
Interested Trustees and Officers**
Number of
Position(s) Principal Portfolios in Other
Held With Fund Occupation(s) Fund Complex* Directorships
Name, Address, and Length of During Past Overseen Held by
and Age Time Served 5 Years by Trustee Trustee
Thomas O. Putnam*** President Chairman, Fenimore 2 N/A
384 North Grand Street since 1986 Asset Management, Inc.
Cobleskill, NY 12043
Age: 62
Joseph A. Bucci Secretary and Controller, Fenimore 2 N/A
384 North Grand Street Treasurer since Asset Management, Inc.
Cobleskill, NY 12043 2000
Age: 53
Charles Richter, Esq. Chief Compliance Chief Compliance 2 N/A
384 North Grand Street Officer since Officer, Fenimore Asset
Cobleskill, NY 12043 March 2005 Management, Inc.
Age: 50 Chief Operating Officer
and Chief Compliance
Officer, Manarin
Securities Corporation
and Chief Compliance
Officer, Manarin
Investment Counsel,
Omaha, NE
*"Fund Complex" includes the two series of the Trust, FAM Value Fund and
FAM Equity-Income Fund.
**The "Independent Trustees" are those Trustees that are not considered
"interested persons" of the Trust, as that term is defined in the 1940 Act.
***Mr. Putnam, by virtue of his employment with Fenimore Asset Management,
Inc., the Trust's investment adviser, is considered an "interested person"
of the Trust.
60
FAM Funds -- Definition of Terms [LOGO]
Earnings Growth Rate. The earnings growth rate is the annual average rate of
growth in earnings over the past five years for the stocks currently in a
portfolio.
Expense Ratio. The expense ratio is the percentage of a portfolio's average
net assets used to pay its annual administrative and advisory expenses. These
expenses directly reduce returns to investors.
Median Market Cap. The median market cap is the midpoint of market
capitalization (market price times shares outstanding) of stocks in a
portfolio.
Number of Stocks. This is an indication of diversification. The more stocks a
portfolio holds, the more diversified, and the more likely it is to perform
in line with the overall stock market.
Price/Book Ratio. The share price of a stock, divided by its net worth, or
book value, per share. For a portfolio the weighted average price/book ratio
of the stocks it holds.
Price/Earnings Ratio (P/E). We would like to take this opportunity to review
one fundamental concept, P/E, which, if not properly understood, can lead to
some confusion. This measure is included to give investors an idea of how
much is being paid for a company's earning power, and thereby, to assist in
evaluating a portfolio's risk. Typically, the higher the P/E, the more
investors are paying and the more growth they are expecting. Lower P/E stocks
tend to be in lower-growth industries, in stock groups that have fallen out
of favor, or in mature companies that have long records of earnings
stability.
If you look at Morningstar, Lipper or Value Line mutual fund data, you
will most likely encounter P/E ratios that differ perhaps from each other, as
well as from the one that we have included in this report. The major reasons
for discrepancies are two-fold. One reason is that reporting services use
unadjusted data that is obtained from filed annual reports, 10Ks, 10Qs and
quarterly reports; as such, this data is historically based, and does include
current year estimates. Some of this information may also come from Standard
and Poor's and Comstock. While these databases are good sources for raw
statistics, we have observed that they do not carry all the data that is
necessary to record every relevant element that factors into operating
earnings.
Additionally, we make adjustments to operating earnings to eliminate
one time events (if they are truly one time!). For example, we would
eliminate the gain or loss on an investment that was sold if it is obvious
that the likelihood of this recurring is remote. We also eliminate negative
P/Es and P/Es of companies where valuation has little to do with the
company's reported earnings and most to do with asset growth, i.e. Berkshire
Hathaway. We believe that this methodology is more representative of the
relevant fundamentals of the P/E for the FAM Value Fund and the FAM
Equity-Income Fund and provides you with a better understanding of what you
own.
61
FAM Funds -- Definition of Terms continued [LOGO]
Return on Equity. The rate of return generated by a company during the past
year for each dollar or shareholder's equity (net income for the year divided
by shareholder's equity). For a portfolio, the weighted average return on
equity for the companies represented in the portfolio.
Turnover Rate. Indicates the trading activity during the past year.
Portfolios with high turn over rates incur higher transaction costs and are
more likely to realize and distribute capital gains (which may be taxable to
investors).
Yield. This is the portfolio's income from interest and dividends. The yield,
expressed as a percentage of a portfolio's net asset value, is based on
income earned by the portfolio over the past 30 days and is annualized, or
projected forward for the coming year.
62
FAM Funds -- Supplemental Information [LOGO]
Statement Regarding Availability of Proxy Voting Policies and Procedures.
Please note that a description of the policies and procedures the Funds use
to determine how to vote proxies relating to portfolio securities is
available (i) without charge, upon request, by calling FAM Funds at
1-800-932-3271; (ii) and on the Commission's website at http://www.sec.gov.
Statement Regarding Availability of Proxy Voting Record. Please note that
information regarding how the Funds voted proxies relating to portfolio
securities during the most recent 12-month period ended June 30 is available
(i) without charge, upon request, by calling FAM Funds at 1-800-932-3271; or
on the FAM Fund's Website at http://FAMFunds.com (ii) and on the Commission's
website at http://www.sec.gov.
SPECIAL 2006 TAX INFORMATION (UNAUDITED) FOR FAM FUNDS
This information for the fiscal year ended December 31, 2006, is included
pursuant to provisions of the Internal Revenue Code.
The Value Fund distributed $36,321,752, or the maximum amount
available, as capital gain dividends (from net long-term capital gains) to
shareholders during the fiscal year.
The Equity-Income Fund distributed $5,488,627, or the maximum amount
available, as capital gain dividends (from net long-term capital gains) to
shareholders during the fiscal year.
For Value Fund taxable non-corporate shareholders, 66.2% of the Fund's
income represents qualified dividend income subject to the 15% rate category.
For Equity-Income Fund taxable non-corporate shareholders, 71.3% of the
Fund's income represents qualified dividend income subject to the 15% rate
category.
For Value Fund corporate shareholders, 66.2% of investment income
(dividend income plus short-term gains, if any) qualifies for the
dividends-received deduction.
For Equity-Income Fund corporate shareholders, 71.3% of investment
income (dividend income plus short-term gains, if any) qualifies for the
dividends-received deduction.
63
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Investment Advisor
Fenimore Asset
Management, Inc.
Cobleskill, NY
Custodian
U.S. Bank, N.A.
Cincinnati, OH
Independent Registered
Public Accounting Firm
PricewaterhouseCoopers LLP
New York, NY
Trustees
David A. Hughey,
Independent Chairman
Fred "Chico" Lager
John J. McCormack, Jr.
C. Richard Pogue
Thomas O. Putnam
Barbara V. Weidlich
Legal Counsel
Dechert, LLP
Washington, DC
Shareholder Servicing Agent
FAM Shareholder Services, Inc.
Cobleskill, NY
Distributor
Fenimore Securities, Inc.
Cobleskill, NY
[LOGO] FAM Funds
384 North Grand Street
PO Box 399
Cobleskill, New York 12043-0399
(800) 932-3271
www.famfunds.com
[LOGO] FAM Funds
384 North Grand Street
PO Box 399
Cobleskill, New York 12043-0399
(800) 932-3271
www.famfunds.com
FINANCIAL PEACE OF MIND THROUGH A VALUE APPROACH TO INVESTING
Item 2 Code of Ethics.
The Registrant has adopted a code of ethics that applies to the Registrant's
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the Registrant or a
third party. The Registrant has undertaken in this report filed on Form N-CSR
to provide to any person without charge, upon request by calling
1-(800)932-3271, a copy of such code of ethics.
Item 3. Audit Committee Financial Expert.
The Registrant's Board of Trustees has determined that David A. Hughey and
Fred Lager are each an "audit committee financial expert" and are
"independent," as these terms are defined in this Item 3.
Item 4. Principal Accountant Fees and Services.
(a) Audit Fees 2006 - $90,000; Audit Fees 2005 - $78,297
(b) Audit-Related Fees - None.
(c) Tax Fees 2006 - $13,150; Tax Fees 2005 - $11,100; - Tax Preparation
Expenses
(d) All Other Fees - 2006 - None; 2005 - $1195 - Form N-1A filing review
(e)(1) Audit Committee Pre-Approval Policy. All services to be performed for
the Registrant by PricewaterhouseCoopers LLP must be pre-approved by the
audit committee. All services performed during 2006 and 2005 were
pre-approved by the committee.
(e)(2) 100 percent.
(f) Not applicable.
(g) The aggregate fees paid by the Registrant's investment advisor for
Non-audit professional services rendered by PricewaterhouseCoopers LLP
for 2006 and 2005 were $22,500 and $22,129, respectively. The aggregate
fees paid to PricewaterhouseCoopers LLP for professional services to
Registrant's affiliated broker-dealer for 2006 and 2005 were $16,000 and
$10,000 respectively.
(h) Not applicable.
Item 5. Audit Committee of Listed Registrants
Not Applicable.
Item 6. Schedule of Investments
This Schedule of Investments in securities of unaffiliated issuers is
included as part of the Report to Shareholders.
Item 7. Disclosure of Proxy Voting Policies and Procedures for
Closed-End Management Investment Companies
Not applicable.
Item 8. Portfolio Managers of Closed-End Management Companies
Not applicable.
Item 9. Purchases of Equity Securities by Closed-End Management
Investment Company and Affiliated Purchasers
Not applicable.
Item 10. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 11. Controls and Procedures.
(a) The registrant's principal executive officer and principal financial
officer have concluded that the registrant's disclosure controls and
procedures (as defined in Rule 30a-3(c)) under the Investment Company
Act of 1940, as amended (the "Act") are effective based on their
evaluation of these controls and procedures as of a date within 90 days
of the filing date of this document.
(b) There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Act that
occurred during the registrant's second fiscal half-year of the period
covered by this report that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting.
Item 12. Exhibits.
File the exhibits listed below as part of this Form. Letter or number the
exhibits in the sequence indicated.
(a) A separate certification for each principal executive officer and
principal financial officer of the registrant as required by Rule 30a-2
under the Act (17 CFR 270.30a-2) in the exact form set forth below:
(Attached hereto).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) Fenimore Asset Management Trust
By (Signature and Title)* /s/ Thomas O. Putnam
---------------------------
Thomas O. Putnam, President
Date February 15, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the dates indicated.
By (Signature and Title)* /s/ Thomas O. Putnam
---------------------------
Thomas O. Putnam, President
Date February 15, 2007
By (Signature and Title)* /s/ Joseph A. Bucci
--------------------------
Joseph A. Bucci, Treasurer
Date February 15, 2007
* Print the name and title of each signing officer under his or her signature.