The more things change, the more they stay the same.
Views on the Market from Aston’s Subadvisers
That just about sums up the market views of our investment managers. Those that were bullish last year have not changed their perspective; those that were bearish are in the same place. The Federal Reserve’s unorthodox monetary policies continue to loom large in the perspectives of all of our money managers, but they differ in how the effect of the Fed cutting back bond purchases a.k.a. “tapering” will affect securities markets. What follows below are the opinions of our subadvisers on the outlook for securities markets in general and specific sectors within that market.
Stuart D. Bilton, CFA
Chairman and Chief Executive Officer
Aston Asset Management
Montag & Caldwell
We believe that 2.5 to 3% real gross domestic product (GDP) growth can be achieved in the U.S. in 2014. The Federal Reserve’s accommodative monetary policy is likely to remain very supportive of growth. We expect inflation, as measured by the Consumer Price Index (CPI), to increase between 1.5% and 2% in 2014. The outlook for the stock market is generally favorable. A moderate, but synchronized global economic recovery and accommodative central-bank policies throughout the developed world should be supportive of higher stock prices. However, given fair to full market valuations, we do expect a pickup in stock market volatility during the year. We believe that high-quality growth stocks are well-positioned for the period ahead; since most of these companies derive 40% or more of their earnings from international markets, they should benefit from the synchronized global recovery. In addition, with their reasonable valuations and sound earning prospects, these companies should do relatively well if the stock market experiences the pickup in volatility that we anticipate. It is difficult to tell whether we are in a secular bull market or simply an extended cyclical recovery, much will depend on whether persistent high levels of debt in the U.S. and abroad can be worked down to reasonable levels.
Ronald E. Canakaris, CFA
Chairman and Chief Investment Officer
ASTON/Montag & Caldwell Growth Fund · ASTON/Montag & Caldwell Mid Cap Growth Fund
ASTON/Montag & Caldwell Balanced Fund
Cornerstone Investment Partners
While markets are not as attractive as they were in early 2013, we still find considerable opportunity in many segments of the equity market. Valuations by sector are below the average for the period 1990 – 2013 and our fair value model still suggests that the overall equity market is somewhat below fair value. We see opportunities as particularly compelling in Information Technology.
Rick van Nostrand, CFA
Senior Portfolio Manager
ASTON/Cornerstone Large Cap Value Fund
Herndon Capital Management
We have positioned our portfolio towards an economy that will strengthen, with inflation increasing and interest rates rising. We believe that the Federal Reserve’s tapering program will continue on a measured pace as the economy allows, but, we believe the pace will likely quicken. While some investors fear negative stock results as a consequence of tapering, we believe that being positioned in undervalued stocks can provide a reasonable measure of protection and makes us confident in our sector allocations and individual stock positions. Will 2014 mimic 2013? We don’t know. The question we constantly seek to answer in the affirmative is, “Are our portfolios populated with value creating opportunities?” The answer is unequivocally yes. There is always value in the market. Our quest is to find it.
Randell A. Cain, Jr., CFA
Principal and Portfolio Manager
ASTON/Herndon Large Cap Value Fund
TAMRO Capital Partners
We believe the outlook for equities remains attractive in 2014. We also believe that as the Federal Reserve continues its tapering and the liquidity environment normalizes, opportunities in the market will rebalance away from the extremes we saw in 2013 and toward company specific catalysts. In 2013 the stock market was fueled by a torrent of liquidity that levitated low quality stocks (defined as those with a leveraged balance sheet and weak market position) and speculative growth stocks. As we look across our small-cap portfolio, we see many reasons to be encouraged about the economy generally and potential future returns from high-quality small-cap stocks in 2014.
Philip D. Tasho, CFA
CEO, Chief Investment Officer and Co-Founder
ASTON/TAMRO Small Cap Fund · ASTON/TAMRO Diversified Equity Fund
River Road Asset Management
In the third quarter of 2011, we wrote that “the current environment presents an exceptional investment opportunity”; that is not the case today. Small-cap stock valuations are at extreme levels, profit growth is weak and forward earnings expectations are declining. Federal Reserve policy remains a powerful tailwind for stocks which, combined with outflows from bonds, could deliver positive equity returns in 2014. However, fundamental risk is high and investors should allocate accordingly.
R. Andrew Beck
President, CEO and Senior Portfolio Manager
ASTON/River Road Dividend All Cap Value Fund · ASTON/River Road Dividend All Cap Value Fund II · ASTON/River Road Small Cap Value Fund · ASTON/River Road Select Value Fund · ASTON/River Road Long-Short Fund
Lee Munder Capital Group (LMCG) – U.S. Growth Team
2013 highlighted the case for small-cap stocks – most of the securities in our small-cap growth portfolio had significant increases in revenue while large companies struggled to add to the top line. Forward earnings multiples for the Russell 2000 Growth Index in 2015 are now approximately 18 times earnings compared with 15 times for the S&P 500 Index or a premium of about 20%. Given this growth and valuation backdrop we do not expect further multiple expansion in small-cap securities, but with decent growth rates in the high single digits or low double digits, we are reasonably optimistic about the outlook for small-cap growth stocks.
Andrew Morey, CFA
Partner and Portfolio Manager
ASTON/LMCG Small Cap Growth Fund
River Road Asset Management
Despite the sharp rise in small-cap stocks, the operating environment for most companies was subdued and inconsistent in 2013. While operating results continue to be mixed, margins and cash flows remain elevated. Generally, management guidance for 2014 is to expect a similar operating environment as in 2013. Small-cap stocks are expensive and it is difficult to find small-cap investments that adequately compensate for the risk assumed. Our focus list is expensive and trading at 24 times earnings and two-times sales. We are finding some value in out-of-favor sectors such as natural gas producers and mining companies but until volatility increases and valuations improve, we would expect cash levels to remain high in our portfolio.
Eric Cinnamond, CFA
Vice President and Portfolio Manager
ASTON/River Road Independent Value Fund
Silvercrest Asset Management
Overall, we find the U.S. equity market to be reasonably valued given current levels of interest rates, inflation expectations, and global economic activity. In general, fourth quarter commentary from company managements suggests a gradually improving U.S. economy, albeit with some adverse weather likely impacting first calendar quarter results; stabilization in Europe, and high, but decelerating trends in Asia (China). While smaller capitalization stocks appear generously valued relative to most historic norms, we find the excesses to be most prevalent in the higher growth, “story” stocks. Our portfolio investments, while not inexpensive, are, we feel somewhat undervalued for investors with a multi-year time horizon. Balance sheets remain generally strong, and companies continue to return free cash flow to shareholders through dividends and share repurchase. We remain hopeful of increased merger and acquisition activity, and believe many of our holdings would be attractive targets for larger companies and/or private equity investors.
Roger W. Vogel, CFA
Managing Director and Portfolio Manager
ASTON/Silvercrest Small Cap Fund
Baring Asset Management (Barings)
Developed markets performed very well in 2013, but analysts’ earnings expectations barely rose. Developed market companies will need to grow their earnings this year to justify their higher valuations. Emerging markets saw a decline in analyst earnings expectations and, not surprisingly, performed poorly. To see improvements in market valuation, emerging market companies will need to improve their earnings significantly in 2014. The great uncertainty in 2014 is the beginning of the end of extraordinary monetary policies which will affect valuations, economies and politics. Our focus will remain on identifying strong company level earnings growth which will come from strong end markets, idiosyncratic situations and non-cyclical growth.
David Bertocchi, CFA
International and World Equity Manager
ASTON/Barings International Fund
Lee Munder Capital Group (LMCG) – International Team
Emerging markets are less expensive than developed markets based on valuation multiples – currently price-earnings multiples are around 12 times earnings compared with 17.5 for the MSCI EAFE Index*. However emerging markets currently offer higher forecasted long-term earnings growth, albeit with significant volatility. Recent repricing has brought macro factors to the forefront, but we anticipate that this trend has just about run its course. It is easy to overreact to the recent problems with Brazil, Russia, India, China and Turkey and we expect market pressures to accelerate the economic and political reform processes in some of these countries.
*Morgan Stanley Capital’s Europe, Australasia and the Far East Index.
Gordon Johnson, PhD, CFA
Lead Portfolio Manager
ASTON/LMCG Emerging Markets Fund
Taplin, Canida & Habacht (TCH)
Our economic outlook is for moderate GDP growth in 2014. Continued improvement in the U.S., Europe and other developed markets should absorb the transition of emerging markets to slower growth rates. Inflation expectations are likely to remain low with the money multiplier effect constrained by tepid wage growth and a slower housing recovery. Commodity prices are no longer in a freefall, but they are unlikely to increase significantly in light of anemic global growth. As we move further into 2014 volatility and interest rates may increase as the taper timeline increases. However monetary policy transitions are notoriously prone to mistakes. While the Fed’s decision to reduce its purchases seems consistent with market expectations, interest rate volatility is unlikely to remain historically low. The early stages of tapering make it difficult to foresee lower interest rates, but absent tighter monetary conditions or surprise inflation, we do not see interest rates moving substantially higher over the interim.
Alan M. Habacht
ASTON/TCH Fixed Income Fund
Price-Earnings (P/E) Multiple or Ratio is a valuation ratio of a company’s current share price compared to its per-share earnings.
Earnings Per Share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company’s profitability. Forward earnings do not represent or predict the returns of the mutual funds.
This commentary is provided for informational purposes only and is not an endorsement of any security, mutual fund, sector, or index. The information contained herein was provided by Subadvisers utilized by Aston Asset Management, LP (“Aston”). The Subadvisers are not affiliates of Aston and their views do not necessarily reflect those of Aston. All views presented are current as of the date of this communication, but are subject to change.
There is no assurance that a mutual fund will achieve its investment objective. Funds are subject to market risk, which is the possibility that the market value of fund shares may be more or less than what an investor paid for them. Accordingly investors can lose money investing in a mutual fund.
It is not possible to invest directly in an index. Market indexes are unmanaged and are not available for direct investment.
The Russell 2000 Growth Index is an unmanaged index that contains the 2,000 smallest common growth stocks in the Russell 3000, which contains the 3,000 largest stocks in the U.S., based on total market capitalization. Indices are adjusted for the reinvestment of capital gains and income dividends.
The S&P 500 is an unmanaged index of 500 widely traded industrial, transportation, financial and public utility stocks.
The MSCI EAFE Index (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. & Canada.
Free- float methodology is a method by which the market capitalization of an index's underlying companies is calculated. Free-float methodology market capitalization is calculated by taking the equity's price and multiplying it by the number of shares readily available in the market
Past performance is not a guarantee of future results.
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