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Apr 16 2014

1st Quarter 2014 Commentary - ASTON/Lake Partners LASSO Alternatives

1st Quarter 2014 

Although U.S. equities were positive in general during the first quarter, gains were limited and achieved only after pronounced volatility. The broad-market S&P 500 Index, for example, was up 1.8% for the period, but only after suffering a -5.7% drawdown by early February. The index rebounded 7.9% by early March, but then stalled into a very narrow trading range, finishing flat for the rest of the month.

Investor sentiment was beset by a combination of macroeconomic and policy concerns. On the macro front, the litany of issues was familiar: Would growth in Emerging Market economies continue to deteriorate, especially in China—a significant contributor to global growth? To what extent might currency weakness in the “Fragile Five” (Turkey, Brazil, India, South Africa, and Indonesia) lead to broader contagion? Would the Bank of Japan’s expansive monetary policy be undermined by the lack of structural reform and the upcoming hike in taxes? Could the European economy sustain even modest improvement in the face of deflationary pressures from a strong euro? Was the U.S. recovery sustainable, or was the apparent slowdown in recent months due to the harsh winter? Mixed signals from Federal Reserve Chair Yellen in her late-February congressional hearing and mid-March press conference compounded the sense of uncertainty even though markets were reassured after subsequent clarifications. In addition, the political conflict in Ukraine, with its potential for touching off a downward spiral of economic affects across Europe, became a new source of market worry.

Investor sentiment also faced internal market crosscurrents. Most significantly, in March there was a sharp rotation out of high growth and momentum-driven stocks, many of which suffered double-digit corrections. As a result, the performance spread between growth and value and between large-cap and small-cap stocks gapped open. For example, the large-cap oriented Russell 1000 Value Index was up 2.4% while the small-cap Russell 2000 Growth Index was down 2.5% during the month. It remains to be seen whether this is a short-term correction or the beginning of a longer-term trend.

After a difficult 2013, the first quarter of 2014 was broadly positive for fixed income markets. One of the most notable developments was the downward shift in the US Treasury yield curve. In particular, the yield on 10-year Treasuries declined from 3.03% at the end of December to 2.72% at the end of March. This move contributed significantly to the 1.8% rebound in the Barclays US Aggregate Bond Index during the quarter. 

Still Equities
The Fund posted modest gains during the period. As during the previous quarter, it trailed its HFRX Equity Hedge Index benchmark though significantly bested its peer group. Collectively, equity-oriented allocations accounted for the bulk of the portfolio’s return during the first quarter. The majority of the funds in this group outperformed the S&P 500. Notably, highly hedged funds tended to do better in March as the market rotated away from momentum-driven growth stocks to value. Only one holding was negative, as its global long/short strategy was out-of-sync, though its impact on overall results was limited.

Hedged Credit and Strategic Fixed Income strategies also were generally productive during the quarter, especially for funds with substantial exposure to corporate credit. Only one fund was slightly negative, due to its defensive positioning. Arbitrage allocations had little impact, while within Global Macro our underlying manager was slightly negative for the quarter. The strategy’s portfolio of diversified and eclectic sub-strategies, which cover multiple asset classes, exhibited limited traction during the period. 

Portfolio Overview
The Fund’s net long equity exposure increased marginally during the quarter, from approximately 35% at year-end to approximately 39% by the end of March. These levels were near the middle of our expected range of 20% to 50%. The marginal increase in net long equity exposure was attributable primarily to further diversifying the equity-related segment of the portfolio by adding to longer-biased funds. Overall, though, we continued to aim for a blend of strategy allocations intended to dampen the risk of renewed volatility in the financial markets.

There were only marginal adjustments to the strategy allocations themselves during the quarter. A diverse set of Long/Short Equity strategies continued to make up the core of the portfolio, representing just under 61% of assets at the end of March (up from 58% at the end of December). The combined allocation to Hedged Credit and Strategic Fixed Income strategies continued to be scaled back, down to 18% at the end of March versus 20% at year-end. The other notable change was a trim to Global Macro from 3.5% to 2.6%.

Although Long/Short Equity is the largest single strategy category in the Fund, it is important to note that this broad category encompasses a diverse mix of long-biased, hedged, multi-asset, and global strategies. Within this general category, we established a new position in a long-biased fund that takes a concentrated approach to special situations, many of which have balance sheet-related catalysts. We also reduced the allocation to a core fund that has been highly hedged.

We trimmed the allocation to Global Macro, represented by a global macro manager that uses a diverse set of quantitative and fundamental strategies across a wide range of asset classes, at the beginning of the quarter. We continued to avoid long/short commodities and trend-following strategies, as many of the funds in these areas have been out-of-sync with the markets.

The overall allocation to the Arbitrage category was maintained throughout the quarter at roughly 17% of assets, however we further diversified its composition mid-quarter by initiating a 2.5% allocation to an event-driven fund that follows an opportunistic, global strategy. This new position was funded by a reduction in the merger arbitrage allocation. Merger arbitrage continued to be represented by a fund that emphasizes smaller transactions. 

Outlook
The swings in equity markets so far this year illustrate how volatile investor sentiment can be, especially when valuations are as rich as they had become. During January (when the S&P 500 fell -3.5%), investors were distracted by fears of “currency contagion” among emerging economies and concern that China’s economy was slowing, while projections of improvements in developed economies were ignored. During February (when the S&P 500 rose 4.6%), the opposite came into play: the prospect of better growth in developed economies animated investors, while concerns about emerging economies became secondary. In March (when the S&P 500 struggled sideways but ended up 0.8%), the geopolitical tensions surrounding Ukraine weighed on markets, as did additional evidence of an economic slowdown in China, while signs of economic improvement in the US and steady monetary policy reassured investors.

Given that stocks generally had been “priced for perfection” at the beginning of the year, investors are increasingly sensitive to risks, including geopolitical conflict, negative economic surprises, or disappointing earnings. Furthermore, the Fed’s policy of tapering constitutes a sea change, to the extent that there will be less of the excess liquidity which has been so supportive of markets. Consequently, equities may do well, but a replay of last year’s strong uptrend is less likely, even as economic conditions improve.

It would not be surprising, then, to see further bouts of volatility. We therefore are maintaining a diversified mix of equity-oriented, credit-oriented, arbitrage, and macro strategies, with different degrees of correlation and market sensitivity. We believe that the LASSO strategy is well positioned to produce attractive risk-adjusted returns over time. 

 

Lake Partners, Inc.
Stamford, Connecticut


Note: The Fund is a fund-of-funds, and by investing in the Fund you incur the expenses and risks of the underlying funds it invests in. Potential risks from exposure to the underlying funds include the use of aggressive investment techniques and instruments such as options and futures, derivatives, commodities, credit-risk, leverage, and short-sales that taken alone are considered riskier than conventional market strategies. Use of aggressive investment techniques including short sales may expose an underlying fund to potentially dramatic changes (losses) in the value of its portfolio. Short sales may involve the risk that an underlying fund will incur a loss by subsequently buying a security at a higher price than the price at which the fund previously sold the security short.

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.

Resources

Aston History (212 KB, PDF)
Capabilities Brochure (1 MB, PDF)
Aston Style Box (48 KB, PDF)
Aston Subadvisers (488 KB, PDF)
Sales Map .pdf (2 MB, PDF)

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