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Apr 15 2011

1st Quarter 2011 Commentary - ASTON/Lake Partners LASSO Alternatives

1st Quarter 2011 Commentary

The Fund generated a solid gain during the first quarter of 2011. We are pleased that it captured nearly half of the S&P 500 Index’s return of almost 6% while maintaining a composite net equity exposure of less than 40% on average. Moreover, the Fund outperformed its HFRX Equity Hedge Index benchmark, which actually declined ‑3.1% during the period.

Since its April 1, 2009 inception through the end of March 2011, the Fund (I share class) has generated a cumulative gain of 28.8%, substantially more than its benchmark and peer group (the Morningstar Long-Short Category). As an asset allocation solution for alternative strategies, the Fund has thus far delivered on its goal of providing less volatility than conventional markets in a liquid format for investors. For example, since inception, the Fund’s annualized standard deviation of daily returns has been 6.6%, which is about one-third of the annualized standard deviation of 18.8% for the S&P 500.

Performance

Equity-related strategies were the largest contributors to the Fund’s returns during the quarter. Long-biased managers were especially productive, outperforming the S&P 500 on the strength of their stock selection and industry concentrations. Managers oriented towards growth and small-cap stocks did particularly well, even though technology stocks faced pressure in March.  Relatively hedged long/short strategies also participated in the market’s upside, though to a somewhat lesser degree depending on their net equity exposure.

Credit related strategies continued to provide solid performance. These strategies have tended to display more stable risk/return characteristics than equities, and thus helped to reduce volatility. Strategic fixed-income allocations continued to serve the Fund well as a source of relatively stable returns and diversification. Although the Fund’s small position in an interest-rate hedge (short US Treasuries) waxed and waned as yields moved within a somewhat limited range, it was flat overall during the quarter. We have maintained the position due to ongoing concerns associated with massive government debt issuance and deficits.

Holdings in merger arbitrage strategies generated relatively stable, moderate returns. Increased merger and acquisition activity helped improve the opportunity set, but modest spreads continued to limit the upside. Results for the managed futures and global macro allocations were mixed. March was especially challenging, as sharp but short-lived reversals in the equity and fixed-income markets as well as in certain commodity markets tripped up the trend-based quantitative models.

Positioning

In managing the portfolio over time, we have been proactive in adjusting the overall mix of strategies using an incremental approach as opportunities have shifted. During the first quarter, strategy allocations largely remained consistent, though there were a few limited manager changes.

Approximately 40% of the portfolio has been allocated to equity-oriented funds, using a mix of long-biased, hedged, and global strategies. As the economic recovery matures, the equity markets are more clearly differentiating between winners and laggards. Thus, the emphasis has been on utilizing managers who tend to be “bottom-up” stock pickers or who follow a fundamental, thematic investment approach. Value and growth disciplines are represented within this mix. In addition, we have included an allocation of about 9% to a US multi-asset fund that takes an eclectic, hedged approach to equities and credit. A small allocation was shifted to another existing position during the quarter because the fund in question was being closed by its sponsor for business reasons. 

Another 20% or so of the portfolio has been allocated to hedged-credit funds and 10% to strategic fixed-income offerings. While the hedged-credit funds have been focused on US high-yield and corporate credit, the strategic fixed-income funds tend to take a global approach, long and short, to a broad range of opportunities ranging from US mortgage-backed securities to Emerging Market debt. Underlying these allocations is a view that; 1) while corporate credit in the US continues to benefit from improved balance sheets and low default rates, narrower spreads warrant a certain degree of selectivity and caution; and 2) macroeconomic trends continue to create opportunities in fixed-income globally, especially as policy changes unfold in the US, Europe and emerging economies. During the quarter, a well-established but underperforming fund was reduced at the margin.

Roughly 10% of assets have gone towards hedged futures and commodities. These allocations provide access to trend following, quantitative, and fundamental, trading-oriented strategies among a wide range of financial futures and commodities—encompassing equity indices, fixed-income, interest-rates, currencies, metals, energy, and industrial & agricultural commodities. Historically, such strategies have tended to be less correlated to other investment approaches. Low-volatility merger arbitrage strategies have accounted for an allocation of about 7%. This group aims to take advantage of merger and acquisition activity as well as other corporate events or special situations. We recently initiated an allocation in the portfolio to a fund in the arbitrage area with a broader investment mandate than other funds in the group, providing greater access to income opportunities outside of merger arbitrage.

The balance of the portfolio, which has tended to be less than 5%, includes cash and several small tail-risk hedges. During the quarter, a very small volatility hedge was closed as the Options Exchange Market Volatility Index (VIX) failed to increase as much as expected. In addition, note that cash has thus far been a residual reflecting asset flows into the Fund rather than a deliberate strategic allocation.

Outlook

Throughout the quarter investors had to contend with an increasingly worrisome array of concerns with highly uncertain economic and geopolitical implications. Foremost among these were the events of March, which included the ongoing upheavals across North Africa and the Middle East, and the earthquake, tsunami, and nuclear disaster in Japan. The European Central Bank indicated it was planning to raise interest-rates, Portugal’s credit was downgraded, and the budget stalemate in the US Congress pointed to a possible government shutdown. Finally, oil and gold spiked higher, exacerbating concerns about the global recovery.

Despite everything that happened during the quarter and all the attendant uncertainties, markets in general were surprisingly resilient. It was as if investors, having survived the system-wide dislocations of the global credit crisis, no longer found the sighting of “black swans” remarkable anymore. Was this a simple case of March Mania, in which giddy heedlessness eventually leads to gloomy regret? Or was this evidence of the March of Monetary Stimulus, in which pervasive liquidity soothes all anxieties? 

As we have pointed out previously, the global economy has been recovering slowly but steadily, even as serious structural issues remain unresolved, including the US deficit, Europe’s credit woes, Japan’s disinflation and China’s mercantilist currency policy. If investor sentiment has been buoyed by liquidity, then the prospect of the end of the Fed’s quantitative easing program, which is scheduled for the end of June, may lead to a real change in the tide. Will that leave markets treading water—or struggling to stay afloat? Or will the winds of sustainable economic growth be sufficient to re-fill investors’ sails? We would like to think the latter, but the forecast is not entirely clear. Therefore we remain “cautiously constructive.” Judicious risk management and careful diversification, which are integral to the Fund’s investment process, continue to be important.  

Lake Partners, Inc.
Greenwich, 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 includes 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, carefully consider the fund’s investment objectives, risks, charges and expenses. Contact 800 992-8151 for a prospectus containing this and other information. Read it carefully. Aston Funds are distributed by BNY Mellon Distributors Inc.

Resources

Aston History (228 KB, PDF)
Capabilities Brochure (4 MB, PDF)
Aston Style Box (41 KB, PDF)
Aston Subadvisers (436 KB, PDF)
Sales Map .pdf (2 MB, PDF)

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