3rd Quarter 2012 Commentary - ASTON/Harrison Street Real Estate Fund
3rd Quarter 2012
Following its second quarter sag, equity markets regained momentum and moved higher during the third quarter of 2012. Indeed, equities reached a three-year, post-financial crisis high in mid-September before partially retreating. The rally came despite that many of the bricks in the “wall of worry” remained just as evident during the third quarter as during the second. It would seem that recurrent assurances from the Federal Reserve regarding its extended, explicit pledge to sustain a broad, accommodative monetary policy and a low interest-rate environment trumped the enduring concerns about slowing global economic growth, the “Euro crisis,’ downward global earnings revisions by Wall Street, a slowing Chinese economy and so on.
Technology and large-cap stocks led the way for equities during the quarter. The technology centric NASDAQ Index advanced strongly in no small part due to the surge in Apple—the largest company by market capitalization in the world—which posted double-digit gains. The broad, large-cap oriented S&P 500 Index mostly kept pace with the NASDAQ as investors continued to favor the perceived stability of bigger companies. Although the Financials sector of the S&P 500 delivered impressive gains during the period, the Real Estate Investment Trusts (REITs) subset of the sector fared notably worse. REITs were up but lagged the broader indices, the exact opposite of what occurred during the second quarter when REITs outpaced the broader equity market.
The Fund outperformed its FTSE/NAREIT All Equity REIT Index benchmark during the quarter in gaining nearly two percent. Two small-cap holdings, Sabra Health Care REIT and industrial landlord STAG Industrial, delivered strong double-digit gains in boosting relative performance. Notable drags included holdings in two data centers, DuPont Fabros Technology and Digital Realty Trust.
As we have noted previously, many equity investors and the media frequently associate REITs with small- or mid-capitalization stocks and/or financial stocks, despite important differences in their relative performance records. Over short periods, REITs trade similarly to equities, including small-caps and financials, which is not surprising given that REITs are equities. But, with their simple, transparent real estate ownership intensive business model, over longer time spans (i.e. the multiple years in a typical real estate cycle) REITs have proven to deliver total returns akin to commercial real estate returns. Given their current access to attractively priced debt and equity capital, we think the REIT industry can continue to deliver appealing growth.
The visibility and trajectory of REIT cash flows, generated by their professionally managed portfolios of high quality commercial real estate, have improved during the last three and a half years as the industry reduced debt levels and extended debt durations, while reducing interest costs. We think investors have taken notice as REITs have performed well on an absolute and relative basis during that time. We continue to view the prospects for REITs as attractive.
Harrison Street Securities
As of September 30, 2012, Sabra Healthcare comprised 2.84% of the portfolio's assets, STAG Industrial – 1.40%, DuPont Fabros Technology – 2.66%, and Digital RealtyTrust – 3.38%.
Note: Small- and mid-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.