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Jul 15 2014

2nd Quarter 2014 Commentary - ASTON/LMCG Small Cap Growth Fund

2nd Quarter 2014

Global equity markets continued to advance in the second quarter, with many broad market indices close to reaching all-time highs as the midyear approached. In the U.S., investors looked past the winter weakness in the consumer and economic data. Corporate earnings releases, while moderate overall, continued to come in better than most analysts’ expectations. Overseas markets also responded to an improving economic picture. European equities and emerging markets, in particular, gained as geopolitics and questions surrounding Russia’s next move in Ukraine abated late in the second quarter.

With gains in the range of 5% for the recent quarter, large- and mid-cap equities have continued to lead the U.S. market higher, while small caps, which recorded especially solid gains in June, have lagged somewhat so far this year. In terms of the style segments, growth- and value-oriented equities in the U.S. diverged during the second quarter, although not in one direction throughout the period. The sharp shift favoring value equities that began in March did hold through the first several weeks of the second quarter before giving way to higher momentum, more growth-oriented stocks and sectors, which returned to prominence beginning in May through the final weeks of the quarter. Within small caps, growth stocks outperformed value by nearly 400 basis points over the final seven weeks of the quarter. 

The Fund underperformed its Russell 2000 Growth Index benchmark. Weakness in select names in the Information Technology sector and, to a lesser extent, Health Care, offset positive stock selection in the Consumer Discretionary, Consumer Staples and Energy sectors. 

Within the Information Technology sector, software companies Imperva and Varonis Systems fell during the quarter and detracted from performance. Shares of data center security solutions company Imperva dropped when the company announced preliminary first quarter revenues and earnings that fell well short of expectations and short of the company’s prior guidance. Shares of Varonis, which designs enterprise software for managing unstructured data, have traded lower since the company’s successful initial public offering in late February. In Health Care, Aegerion Pharmaceuticals and Isis Pharmaceuticals declined in step with a broader downturn in biotech, with Aegerion also lower on disappointing sales for its Juxtapid therapy. Outside of IT and Health Care, Continental Building Products in the Industrials sector and JGWPT Holding in Financials also detracted from second quarter results. Continental manufactures wallboard and other building materials and had been a top performing name earlier in the year.

Lithia Motors and Office Depot were up significantly during the quarter, adding meaningfully to portfolio performance in the Consumer Discretionary sector. Lithia, an auto dealership operator headquartered in Oregon, reported strong revenues and earnings growth and announced a key acquisition in May that expanded the company’s geographical footprint to the East Coast and to key metro areas on both coasts. Shares of Office Depot have been strong on post-merger execution that ultimately translated to a meaningfully positive surprise on its first quarter earnings report. The company has been aggressively closing underperforming stores and eliminating costs since the merger with OfficeMax. Other important contributors in the Consumer Discretionary sector included Burlington Stores and Lifetime Fitness. Within the Consumer Staples sector, Susser Holdings, an operator of convenience stores and gas stations primarily in Texas and bordering states, helped boost Fund performance when the company was acquired at a significant premium in late April. 

In the Energy sector, Goodrich Petroleum and Halcon Resources advanced sharply in the second quarter against the backdrop of possible supply interruptions in Iraq and Ukraine driving oil prices higher. Both companies are in the Tuscaloosa Marine Shale (TMS), and Goodrich shares reacted to very positive early returns out the company’s just completed Blades well on the eastern side of the TMS.

Andrew Morey

Lee Munder Capital Group, LLC


As of June 30, 2014, Imperva comprised 0.00% of the portfolio’s assets, Varonis Systems – 0.00%, Aegerion Pharmaceuticals – 0.52%, Isis Pharmaceuticals – 0.62%, Continental Building Products – 1.28%, JGWPT Holding – 0.00%, Lithia Motors – 2.77%, Office Depot – 2.30%, Burlington Stores – 0.85%, Lifetime Fitness – 0.00%, Susser Holdings – 0.61%, Goodrich Petroleum – 1.06%, and Halcon Resources – 1.02%.

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.

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