2nd Quarter 2014 Commentary - ASTON/TAMRO Small Cap Fund
2nd Quarter 2014
Small-cap stocks continued to be volatile in the second quarter, with a sharp drop in April followed by a small rise in May and strong gains in June. The Fund underperformed the 2.05% gain of its Russell 2000 Index benchmark for the period. Underperformance relative to the benchmark was primarily due to weak stock selection in the Consumer Discretionary and Health Care sectors, compounded by the fact that these two sectors were also overweighted in the portfolio. On the positive side, stock selection was strong in the Technology and Industrials sectors. A lack of exposure to the Utilities sector, the second best-performing sector in the Russell 2000 Index for the quarter, led to a negative sector allocation effect.
Winners and Losers
Within the Consumer Discretionary sector, surf clothing and snowboard outwear retailer Quiksilver was the top detractor from performance for the quarter. The company’s quarterly sales and earnings were below expectations, and management has been lowering prices to help increase competitiveness. Two portfolio holdings in the Health Care sector were a drag on results for the period, Auxilium Pharmaceuticals and Clovis Oncology. Auxilium lowered its outlook for the year to reflect greater-than-expected pressure on its testosterone gel product, and shares of Clovis fell following an analyst downgrade due to possible side effects of a developmental lung cancer drug, despite continued strength in its efficacy and the FDA’s granting of a Breakthrough Therapy designation.
Stock selection in the Technology sector helped boost Fund performance during the quarter, in particular, Synaptics and OpenTable. Synaptics, a developer of human interface solutions for consumer electronics, reported solid March quarter results and announced a transformative deal that expands the company’s total market opportunity. Online reservation company OpenTable is being acquired by Priceline for a hefty $103 a share. Lastly, within the Industrials sector, Polypore International was among the top five contributors to performance during the quarter. Polypore, a high technology filtration company specializing in microporous membranes, announced a large stock repurchase authorization and a new long-term supply agreement with Panasonic.
Three stocks, BofI Holding, Strayer Education and TrueBlue, reached full-position status during the quarter either through purchase, appreciation or a combination of the two. BofI Holding is a diversified financial services company that provides business and consumer banking products via its branchless network over the internet. The company is characterized by its low cost distribution channels, high credit quality and affinity partnerships with a variety of retailers. We see the continued enhancements in remote banking capabilities and the resulting increase in customer convenience as a big driver for the company.
Strayer Education provides undergraduate and graduate programs to working adults through 80 physical campuses and online courses. A weak economic environment, affordability and a new regulatory regime have weighed on the growth and profitability of for-profit education companies over the past few years. Strayer’s management team has initiated a restructuring program that is expected to lower annual operating costs and the cost of a typical undergraduate and graduate degree. We believe, over time, these efforts should both help stabilize margins and drive a turn in overall enrollment.
TrueBlue is a staffing company serving a number of industries including construction, energy, aviation and general services. Since the recession, the company has maintained profitability and a solid balance sheet allowing it to grow its platform through focused acquisitions and organic initiatives. With recent indications of improving manufacturing employment, TrueBlue appears poised to take advantage of its expanded market position in our view.
Company-specific issues led to the sale of Chart Industries, Portfolio Recovery Associates and Quiksilver during the quarter. We redeployed proceeds into what we believe are more attractive investment opportunities for the Fund. For Chart Industries, we were concerned that overseas markets would remain weak and domestic demand would fall short of expectations. Organic growth appeared to be slowing for Portfolio Recovery Associates, while the regulatory environment was becoming more burdensome. Lastly, Quiksilver’s restructuring was facing headwinds in North America and management was guiding for a continuation of weak retail sales trends in developed markets.
We believe that the domestic economy should rebound from its first quarter -2.9% gross domestic product (GDP) report and are encouraged by the level of optimism we have seen and heard in recent reports and conference calls from many of the companies held in the portfolio. In our view, the Fund’s portfolio is well positioned to take advantage of an ongoing domestic recovery. We have increased exposure to economically sensitive companies and have been trimming our positions in more classically defensive names, primarily due to valuation.
TAMRO Capital Partners
As of June 30, 2014, Quiksilver comprised 0.00% of the portfolio’s assets, Auxilium Pharmaceuticals – 1.91%, Clovis Oncology – 0.48%, Synaptics – 2.17%, OpenTable – 2.28%, Polypore International – 1.52%, BofI Holding – 1.73%, Strayer Education – 1.23%, and TrueBlue – 1.84%.
Note: Small-cap stocks are considered riskier than large-cap stocks due to greater potential volatility and less liquidity.
Before investing, consider the Fund’s investment objectives, risks, charges, and expenses. Contact 800 992-8151 for a prospectus or summary prospectus containing this and other information. Please, read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC.