4th Quarter 2013 Commentary - ASTON/LMCG Small Cap Growth Fund
4th Quarter 2013
The trajectory remained decidedly upward for U.S. stocks during the fourth quarter, raising full-year advances to more than 30% for most broad market indices—at or near record territory in most cases. Investors have continued to embrace an improving economic backdrop, backed by steady growth in corporate earnings and improvements in jobs data, and the clear caution on the part of the Federal Reserve as it considers a slow unwind of its bond purchase program. Fed monetary support has been a boon to riskier assets, as higher beta (volatility), smaller size, and more leveraged names have handily outperformed.
For 2013 as a whole, growth stocks outpaced value across all market-cap segments, but most notably among small-cap stocks. The Fund’s Russell 2000 Growth Index benchmark gained 43% during the year in outperforming its value counterpart by roughly nine percentage points. Not surprisingly, higher growth industries, including biotechnology within the Healthcare sector and Internet stocks within Technology, drove sector level performance. More-defensive sectors, notably Utilities, tended to lag. The top performing sectors during the fourth quarter were Healthcare (though biotech less so), Materials, and Industrials, while Energy and Consumer Staples lagged through the final months of the year.
The Fund outperformed the benchmark during the fourth quarter aided by stock selection across a broad base of stocks and industries. Holdings in Consumer Discretionary, Consumer Staples, Financials, and Technology all contributed positively to relative results. The specialty retail and restaurant operator categories within Consumer Discretionary were especially strong. Del Frisco Restaurant Group, Internet retailer HSN (known as the Home Shopping Network), and Vitamin Shoppe were among the top contributors from these groups. A meaningful position in Del Frisco benefitted from its well-received Grille concept as the company opened six new Grilles across the country during the year. Vitamin Shoppe reported strong sales growth during the quarter. Other consumer-oriented holdings, such as Staples stocks Susser Holdings and Fairway Group, traded higher after being added to the portfolio in December.
In Financials, real estate investment trust (REIT) holdings Ryman Hospitality Properties (resort hotels & attractions) and CyrusOne (data centers) remained positive, adding to performance late in the year. REITs as a group have underperformed essentially since May when the Federal Reserve first hinted at tapering its quantitative easing bond purchases, so the portfolio’s overweight position in the group has offset somewhat the solid individual performances. Wisdomtree Investments, a sponsor and manager of exchange traded funds, was another strong stock within the sector. Finally, the market began to recognize growth in a handful of the portfolio’s names in Technology, notably top-holding Vantiv.
The only notable underperformance on a sector level during the quarter was in Healthcare. Community Health Systems retraced a bit more after the flurry of merger and acquisition (M&A) activity that had propelled the whole hospital company group (and several portfolio holdings) during the first half of the year. In aggregate, holdings in biotech also underperformed, though our tendency to limit position sizes in biotech helped to contain the impact, positive or negative, from any one name. Puma Biotechnology, with positive study data from its breast cancer drug, was a key contributor in the group, while ARIAD Pharmaceuticals, whose late-stage cancer drug was removed from the market, was a key detractor.
Our strategy seeks to achieve competitive returns by identifying unrecognized growth potential across all industry sectors, not just the high-flying handful of growth sectors than many small-growth managers favor. 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 in our holdings. We want these firms to have duration and sustainability in these characteristics based on their competitive positions in the industry.
Lee Munder Capital Group, LLC
As of December 31, 2013, Del Frisco Restaurant Group comprised 3.31% of the portfolio's assets, HSN – 2.60%, Vitamin Shoppe – 0.65%, Susser Holdings – 1.41%, Fairway Group – 2.03%, Ryman Hospitality Properties – 1.24%, CyrusOne – 1.93%, WisdomTree Investments – 1.24%, Vantiv – 4.95%, Community Health Systems – 3.78%, Puma Biotechnology – 1.14%, and ARIAD Pharmaceuticals – 0.00%.
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.