1st Quarter 2013 Commentary - ASTON/LMCG Small Cap Growth Fund
1st Quarter 2013
Strong corporate earnings reports, positive economic news, and the strongest January rally since 1997 helped to push U.S. equities sharply higher during the first quarter of 2013. Aided by increasing evidence of a healthy recovery in housing, better than expected employment and consumer reports, and reassuring comments on interest rates from the Federal Reserve, the market carried on past poor Gross Domestic Product numbers and the March 1 sequestration deadline to close the quarter at record levels. Essentially all of the broad industry sectors participated in the rally, with particularly strong gains from Healthcare and consumer-related groups. Energy was strong as well, while Telecom and Technology stocks lagged.
Across the market-cap spectrum, small- and mid-cap U.S. stocks (as represented by the Russell indices) posted double-digit gains, and were modestly stronger than the large-cap benchmarks. Growth generally lagged value, though not among small-cap stocks, as the Fund’s Russell 2000 Growth Index gained 13.2%.
The Fund slightly outperformed the benchmark during the quarter, aided by stock selection within the Consumer Discretionary, Healthcare, and Industrials sectors—three sectors that together comprise more than half the index. Office Depot and Arctic Cat were two of the key holdings in Consumer Discretionary that boosted returns, the former after the announcement of its merger with OfficeMax. The office supply category had already been trending higher on expected consolidation, and we had been trimming Office Depot (the position was entirely sold by the end of the quarter) and adding to OfficeMax in the weeks leading into the deal agreement in late February. The Fund continued to hold OfficeMax as of quarter end. Recreational vehicle maker Arctic Cat essentially reversed losses from the prior quarter, helped by increased sales of snowmobiles.
Hospital holdings were especially strong for the portfolio within Healthcare. Both Health Management Associates and Universal Health Services advanced more than 30%, and continued to be meaningful positions within the Fund. In Industrials, Triumph Group was among the portfolio’s stronger stocks. Triumph is an aerospace systems manufacturer, and commercial sales growth outstripped declines on the defense side during the period. Staffing outsourcer Kelly Services, part of the professional services category within Industrials, rebounded strongly as flexible staffing firms provided a valuable service amid the ongoing choppy economy.
Technology was the Fund’s weakest sector during the quarter after being one of the portfolio’s strongest sectors in 2012. A number of stocks, primarily among Internet- and software-related names, that had been up meaningfully toward the end of last year were off the pace at the beginning of 2013. Liquidity Services, which operates online auction facilities for commercial and government surpluses, reported slightly slower revenue growth due to the lumpy nature of its business. Shares of AVG Technologies retreated more than 10% due to a management transition. We cut the portfolio’s position back substantially as a result.
Other stock underperformers included account receivables management company Encore Capital and Volcano Corp. Medical equipment maker Volcano gave guidance on 2013 that contained further investment spending and a slight earnings drag from foreign exchange movements. We maintained positions in both of these names.
As we’ve outlined in the past, our strategy seeks to achieve superior returns by identifying unrecognized growth potential across all industry sectors. We seek to identify firms with high quality business models, distinct competitive advantages, proven management teams, and significant growth potential. Revenue growth, margin expansion, and the ability to positively surprise and revise estimates are key characteristics we seek in holdings for the Fund. We think our focus on the key investment drivers of each stock and the avoidance of “noise” and non-critical news items remains a hallmark to adding value in small-caps.
Lee Munder Capital Group, LLC
As of March 31, 2013, Office Depot comprised 0.00% of the portfolio's assets, Arctic Cat – 1.25%, OfficeMax – 2.35%, Health Management Associates – 4.89%, Universal Health Services – 3.57%, Triumph Group – 4.86%, Kelly Services – 1.90%, Liquidity Services – 2.37%, AVG Technologies – 0.48%, Encore Capital – 3.32%, and Volcano Corp. – 3.18%.
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.