By Eric Cinnamond, Portfolio Manager, River Road Asset Management

The prices of small cap stocks approached or exceeded record levels during the first quarter of quarter 2012. Small-cap valuations appear elevated within the Russell 2000 and S&P 600 Indices based on aggregate price/earnings ratios. Unlike 2011, when periods of volatility in the small-cap market created opportunity, volatility was practically nonexistent during the first quarter, with the CBOE Market Volatility Index (VIX) reaching a five-year low in March. Periods of low volatility and near-record prices often cause investors to become complacent with regards to risk. We take the opposite view and believe risk levels increase when volatility is low and prices are high. In running an opportunistic strategy, we welcome volatility as it often coincides with risk becoming attractively priced. As the high cash level at the ASTON/River Road Independent Value Fund (ARIVX) would suggest, we do not believe, on average, that investors in our small-cap universe are being adequately compensated for the risk being assumed.

We believe managing risk is one of the most important factors in determining long-term investment results. Establishing when to assume risk, what kind of risk to take, and what required rate of return to demand for accepting risk are the cornerstones of our investment process. The ability to assume risk and refrain from accepting risk requires flexibility and patience. In the current environment, with small-cap prices rising consistently and trading near record highs, it is increasingly difficult to remain patient and disciplined. Lagging peers and benchmarks can result in career risk and performance anxiety for any portfolio manager willing to go against the herd. These professional and relative risks can cause conformity and, in our opinion, are counterproductive in managing the risk that matters most—the risk of permanent capital loss.

We believe an accurate valuation is essential in reducing the risk of permanent capital loss. Most of our valuations are calculated by discounting the future free cash flows of a business to present value. Although discounting future free cash flows is a common form of equity valuation, our process differs from most in that we use normalized assumptions. We normalize future free cash flows in an attempt to smooth the booms and busts associated with an economic or industry cycle. The cash-flow cycles of most businesses are nonlinear and have differing degrees of cyclicality. Therefore, to reduce valuation error, we believe it is important to avoid forecasting peak or trough cash flows far into the future. Instead of extrapolating recent results, we attempt to determine the amount of free cash flow a business will generate annually, on average, over an economic cycle. With corporate profits at record levels, we believe that extrapolating current operating margins and cash flows may provide overly optimistic and inaccurate valuations.

In addition to normalizing free cash flow, we use a required rate of return, or discount rate, in our valuation model that we believe properly reflects the operating risks of each business under review. We demand a higher rate of return for a business with more volatile and less certain future free cash flows. Conversely, we require a lower rate of return for a more stable business with more certain future free cash flows. Our required rate of return is typically calculated by combining the rate of return required as a debt holder, plus an equity risk premium. Interestingly, the required rates of return we demand are often similar to the internal investment hurdle rates used by many of the businesses we follow and value. Historically, that rate has been between 10% and 15%. In essence, the required rate of return assumption we use in our valuation model is our absolute return objective for our equity investments.

In an environment with rising small-cap prices, record corporate profits, and low interest-rates, it is tempting to adjust our cash flow and required rate of return assumptions in order to increase our business valuations. Higher valuations would allow us to justify purchasing more of the holdings on our Focus List and reduce the portfolio’s high cash position. Before adjusting our cash flow and required rate of return assumptions, however, we would need to be convinced that the cash flow cycle and the risks to cash flows have been permanently altered. We believe there is insufficient evidence to support the assumption that the current cash flow cycle and the risks to these cash flows are materially different than past cycles. Instead of manufacturing opportunities by altering our valuation methodology, we believe patience is the preferable course of action.

The Fund’s current high cash levels (53% as of March 31, 2012) illustrate our patient stance. This is in stark contrast to the average equity mutual fund’s cash level, which is near a record low of 3.6% according to the Investment Company Institute.  Holding a large cash position is not an attempt to time the market’s direction, but is a direct result of the lack of opportunity we believe is in our small-cap universe. As a strategy that focuses on absolute returns, it is essential that we limit mistakes caused by overpaying for small-cap equities.  In addition to protecting capital when prices are high, cash allows the Fund to act decisively, without the need to liquidate existing holdings, when opportunities arise. In other words, in addition to reducing risk, we believe the ability to hold cash aids our effort to maximize future returns.   

Although small-cap stock prices have increased and profits remain elevated, our perception of risk has not changed. Instead of altering our valuation methodology to fit the short-term fluctuations in small-cap prices and corporate profits, we will remain patient and allocate portfolio cash only when we feel appropriately compensated. We believe patience is one of the most difficult investment disciplines to practice, but one of the most important. Until volatility returns and prices improve, it is likely that the portfolio will remain defensively positioned. In the meantime, we will continue to refine our list of high-quality, small-cap businesses that we look forward to owning in the portfolio in the future.

The information contained in this article first appeared as part of the First Quarter 2012 Commentary for the ASTON/River Road Independent Value Fund and is provided by River Road Asset Management (“River Road”), a subadviser utilized by Aston Asset Management, LP (“Aston”). River Road is not an affiliate of Aston and their views do not necessarily reflect those of Aston.

This material is not intended to be a forecast of future events, does not constitute investment advice, and is not intended as a recommendation to buy or sell any security. Investors should consult their investment professional regarding their individual investment program. Since the date of this report, economic factors, market conditions and River Road’s views of the prospects of any particular investment may have changed.  Investors should consider the investment objectives, risks and associated costs carefully before investing. Forward-looking information is subject to certain risk, trends, and uncertainties that could cause actual results to differ materially from those predicted. Past performance is no guarantee of future results.

Note: Small- and mid-cap stocks are considered riskier than large-cap stocks due to greater potential volatility and less liquidity. Value investing often involves buying the stocks of companies that are currently out of favor that may decline further.

Before investing, carefully consider the Fund’s investment objectives, risks, charges and expenses. Contact (800) 992-8151 for a prospectus or a summary prospectus containing this and other information. Read it carefully.

Aston Funds are distributed by Foreside Funds Distributors LLC.

1st Quarter 2012

Improving U.S. economic trends that began during the fourth quarter of 2011 continued into early 2012, sparking a rally in equities. Job creation accelerated, business executives were more confident, and consumer spending increased. Consumer confidence reached its highest point since 2007, in part because the housing market may have bottomed, although it will still take several years to return to normal. In addition, a European sovereign debt crisis was averted as authorities approved an additional Greek bailout. U.S. interest-rates edged higher during the first quarter as the market speculated on an earlier than anticipated tightening of interest-rate policy. Washington’s failure to extend tax cuts and unemployment benefits, however, could have a major negative impact on U.S economic growth. Although Congress will ultimately have to address this fiscal cliff, the dysfunction in Washington makes any meaningful progress unlikely until after the election.

Most major domestic equity indices posted double-digit gains during the quarter, with the Fund’s Russell Midcap Value Index benchmark gaining more than 11%. The value benchmark lagged its growth index counterpart due to its higher weighting in poorly performing utility stocks and a lower weighting in software and biotech stocks, which rose sharply. Last year’s laggards led the market higher as cyclical sectors, including Consumer Discretionary, Technology, and Materials led the rally. Consistent with an improving economy, low-quality stocks and those with smaller market-caps were the best performers during the period.

The Fund trailed its benchmark owing to many of the factors that led to its outperformance during the fourth quarter of 2011. Stock selection within Financials, Technology, Healthcare, and Consumer Discretionary were the key detractors from relative performance. Stock selection and a lower weighting in bank stocks hurt as all over-capitalized banks, including the portfolio’s holdings, lagged their less-capitalized peers. In addition, the performance of several Real Estate Investment Trust (REIT) investments was depressed as the companies took advantage of the strong equity market to fund future growth. Among Technology stocks, InterDigital lagged as the strategic process the company started earlier last year ended without a deal to sell the entire company. The firm continues to pursue the sale of its non-core patents, however. The absence of biotech stocks hurt relative returns within Healthcare. Lastly, shares of retailer American Eagle Outfitters lagged as the intense promotional environment in teen retail negatively affected results and guidance.

Notable contributors to relative performance included stock selection in the Industrials and Materials sectors, as well as the Fund’s underweight position in Utilities. Holdings in Atlas Air Worldwide, U.S. Antimony, and Kaman Corp all produced strong returns as these industrial firms tend to be leveraged to stronger economic growth. Materials company FMC moved higher on strong results, while Silgan Holdings’ cash rich balance sheet makes it a prime takeover candidate, leading the market to anticipate a deal announcement.

Portfolio Highlights

Two holdings that highlight our focus on finding companies with solid fundamentals at opportunistic valuations are ValueClick and Entertainment Properties. Global digital marketing firm ValueClick focuses on increasing brand awareness and acquiring new customers for the world’s largest advertisers. The company provides marketers with a comprehensive toolkit designed to increase client customer web browsing, shopping, and purchasing activity. Despite competition from Google, which has just half of ValueClick’s market leading share, affiliate marketing is the company’s crown jewel with high margins and multiyear contracts. We established the Fund’s position last year as the company languished preceding the return of its former CEO to re-focus the company. With an attractive business model, substantial free cash flow, and a sound management team, with think the stock’s valuation can rise to the level of its peers as they execute their business plan.

Entertainment Properties is a REIT which acts as a developer, owner, lessor, and financier focused on providing triple net lease financing to entertainment venues and charter schools. We first looked at the company after the 2008 credit crisis limited its access to the capital markets, effectively derailing several of its development projects and increasing vacancies in retail properties. The silver lining was that the credit crisis also significantly increased the number and attractiveness of investment opportunities in its theater financing business and greatly reduced competition. With a high single-digit yield at the time of investment, the dividend payout itself provided the Fund with almost half of our targeted return. Since then, the company has successfully worked out of many of its troubled assets and redeployed its capital into new investments. As the firm continues to clean up its portfolio and redeploy its capital at attractive rates of return, and as the market becomes more comfortable with its charter school investments, we think its valuation should rise and approach that of its triple net lease peers.

Outlook

We believe that U.S. economic growth will be moderate, short-term interest rates will stay low, and inflation will remain benign. Despite the recent strength in equity markets, our outlook is sanguine as investors start to move from bonds into stocks based on compelling relative valuations. Although merger and acquisition activity remains depressed, the strength shown in the economy and the high-yield bond and stock markets should stimulate activity for the balance of the year. Recently, company management teams for a number of the holdings in the portfolio have become much more active in redeploying their cash flow in accretive ways, including acquisitions and share repurchases. We believe these actions bode well for the future and can aid 2012 results.

The Cardinal Capital Team

As of March 31, 2012, InterDigital comprised 1.81% of the portfolio's assets, American Eagle Outfitters – 0.00%, Atlas Air Worldwide – 3.78%, U.S. Antimony – 0.00%, Kaman – 0.00%, FMC – 3.36%, Silgan Holdings – 4.30%, ValueClick – 2.15%, and Entertainment Properties – 1.56%.

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.

1st Quarter 2012

Moderately better than anticipated economic results combined with additional monetary stimulus in both the United States and Europe fueled a major rally in equity markets during the first quarter of 2012. The broad market S&P 500 Index gained more than 12% during the period, powered by a rebound in banking stocks in the Financials sector and strong gains by Apple and Qualcomm within Technology. Thus far, the stock market in 2012 has been predominately led by last year’s weaker performers, and not the higher quality issues that outperformed in 2011. Consumer Discretionary stocks gained more than the market during the quarter, while Energy was among the notable laggard among the major sectors.

Yields on Treasury bonds increased during the quarter, and we believe they are likely to remain range-bound at higher levels into the second quarter. Interest-rates have been drifting higher as liquidity conditions improved following the European Central Bank’s extension of three-year loans to European banks. As a result, investors have been enticed to seek higher returns in riskier assets, selling Treasury bonds as a source of funds. Indeed, Corporate bonds significantly outperformed during the period, and we expect they will continue to perform better than Treasury bonds as investors seek incremental yield in a low interest-rate environment.

Big Apple

The Fund trailed its composite 60% S&P 500 Index/40% Barclays US Government Credit Index benchmark during the quarter as the portfolio’s quality-equities bias was not rewarded as it was in 2011. An underweight stake in Technology, particularly in Apple, served as a drag on relative performance. Although a top-10 holding in the portfolio that we increased early in the quarter following the company's outstanding fiscal first quarter earnings report, Apple appreciated considerably leading us to trim the stock twice. Also within Technology, Google declined during the period, detracting from performance. The company announced several planned changes to its core web search product and appropriation of user data for socialization and targeting of ads across sites, leading us to substantially reduce the portfolio’s position.

Elsewhere, a substantial overweight allocation to the more-defensive Consumer Staples sector negatively affected performance as that area lagged the market. Lackluster stock selection within Consumer Discretionary, with exception of TJX Companies, also weighed on returns. Finally, the Fund did not own any stocks in the rebounding Financials sector. The sector’s small representation in the benchmark, however, resulted in only a modest drag to performance.

An underweight position in Energy and solid stock selection within Industrials and Materials benefited relative performance. Engineering and construction firm Fluor delivered steady gains from the beginning of the years through its late-February earnings report. Chemical materials company Monsanto jumped sharply follwing its earnings report in early January in outperforming the overall sector. Within Healthcare, Medco Health Solutions rose strongly as it became clear that the company’s announced merger with Express Scripts would gain approval. 

New Additions

We established four new stock positions in the portfolio during the quarter, two in Technology and two in Consumer Discretionary. We think enterprise storage company EMC will benefit from increased spending on storage due to incremental growth from mobile data access, the move to private, public and hybrid cloud architectures, and rapid growth of unstructured data from sources such as social networking. eBay is the operator of the world's largest online marketplace and leader in online payments via its PayPal subsidiary. We see the company benefiting from the continued robust growth of online commerce and PayPal's proliferation, both online and at point-of-sale and mobile spaces. 

The new additions within Consumer Discretionary were Amazon.com and casino resort operator Las Vegas Sands. We purchased Amazon after a significant pullback in the stock. Although profit margins are under pressure in the near- to intermediate-term due to the company’s heavy investments in international fulfillment capacity and technology infrastructure, cost leverage is on the horizon with increasing third-party sales, in-market penetration of new international markets, and the continued migration to digital consumption of media products. We think the company has ample opportunity for expansion into international markets and continues to benefit from rapid growth in existing markets. Las Vegas Sands generates approximately 90% of its revenue and profit from the fast growing Asian and Emerging Markets. The company has strong earnings momentum, as the productivity of recent property openings continues and free cash-flow should improve as capital expenditures taper off. 

Notable increases to current positions during the quarter included Costco, General Electric, and Oracle. We added to the portfolio’s position in Costco after the stock pulled back about 10% from a recent high due to investor concern surrounding tougher comparisons for gasoline sales and currency issues from foreign expansion, as well as the company’s focus on price competitiveness. We believe the price investment is a proactive way to drive traffic and loyalty, and not a response to competitive weakness. In addition, the company’s ample cash balance allows it the flexibility to increase share repurchases, and a recent membership fee increase offsets some of the currency issues and the lesser top-line benefit from gasoline sales. 

We added to GE several times during the quarter, notably after the company’s fourth quarter results and the Federal Reserve’s stress test results. Reported earnings demonstrated improvement in its industrial division margins and strong orders in late-cycle businesses.  In addition, while GE was not subject to the Fed’s stress tests, GE Capital ended 2011 with a Tier 1 common equity ratio above the average of the 19 institutions that were subject to the test. The additional cash from GE Capital implies the company has the flexibility to significantly increase its dividend payout ratio, pay a special dividend, and/or repurchase shares. 

After trimming Oracle early in the quarter due to diminished relative earnings growth following the company’s fiscal second quarter miss late last year, we added back to the position after its  fiscal third quarter earnings report. Business should continue to rebound at the firm as long as enterprise spending remains relatively stable. We think the stock can perform well based on easing seasonal comparisons as it enters its historically strongest quarter of the year, the ramping up of new product cycles for Exa-series and Fusion apps, a significant expansion in its sales force, and a stock price that has lagged the rest of the market over the past six months.

Industrial Sales, Consumer Trims

Two positions were sold during the period. Given its successful quarter Fluor approached our estimate of fair value, prompting us to exit the position as the uncertain economic outlook is unlikely to lead to an expansion in its price/earnings multiple. Also within Industrials, we eliminated Emerson Electric from the portfolio as the company is struggling with both internal execution issues (specifically its Network Power business unit) and mixed-end market trends (particularly in Europe). 

We trimmed a number of the portfolio’s consumer-oriented holdings for a variety of fundamental reasons. McDonald’s was reduced due to position size and the expectations that the company will likely experience cost-related headwinds that may cap gains in the stock in the near- to intermediate-term. Nike and TJX were reduced as both stocks had performed well on a relative basis and traded near all-time highs. 

Staples stocks Procter & Gamble and PepsiCo were also trimmed. P&G was reduced given the company’s skew towards developed markets and as we continue to wait for a sustained inflection point in operating profit growth. Pepsi was reduced after a boost in the stock following significant management and operational changes. The company’s earlier fourth quarter earnings led to diminished relative earnings growth. Thus, we took advantage of strength in the stock to reduce the position. Finally, we trimmed medical-device maker Stryker on diminished earnings visibility as patients continue to postpone elective orthopedic procedures.

Outlook

Although broad stock market indices have delivered strong gains thus far in 2012, we expect a more challenging environment for stocks in the period ahead. Global growth has slowed and will likely be sluggish for the remainder of the year. The U.S. economy benefited from an unusually mild winter during the first quarter of 2012 that spurred unexpected growth, with more moderate growth expected for the remainder of the year. Meanwhile, Europe has most likely entered into a recession. With global growth slowing and corporate profit margins at record levels, we believe investors will be disappointed to find that corporate profit expectations for both the intermediate and longer-term periods are generally too high. Lastly, investors will have to contend with significant political uncertainty until U.S. voters determine which candidates are most capable of addressing the United States’ large budget deficit, high national debt, and high unemployment problems.

On the fixed-income side, as economic growth continues at a moderate pace and the Federal Reserve approaches the end of Operation Twist, in which it has been selling short-maturity bonds in favor of longer-maturity bonds, we expect that the yield on 10-Year US Treasury Bonds may drift modestly higher. We believe that further increases will be contained by continued de-leveraging, contributing to below-trend economic growth. The presidential election and uncertainty about the election outcome’s effect on fiscal policies are also likely to contribute to a range-bound environment for Treasury yields. Thus, we continue to maintain a duration (a measure of interest-rate sensitivity) in the bond portfolio that is shorter than the benchmark and favor high-quality, intermediate Corporate bonds.

Montag & Caldwell Investment Counsel

As of March 31, 2012, Apple comprised 2.99% of the portfolio's assets, Qualcomm – 3.00%, Google – 1.37%, TJX Companies – 1.85%, Fluor  – 0.00%, Monsanto – 1.80%, Medco Health Solutions – 1.80%, EMC – 0.69%, eBay – 0.61%, Amazon.com – 1.06%, Las Vegas Sands – 0.93%, Costco – 1.97%, General Electric – 1.83%, Oracle – 0.91%, McDonald’s – 2.07%, Nike – 0.85%, Procter & Gamble – 2.08%, PepsiCo – 1.72%, and Stryker – 1.90%.

Note: The Fund is subject to stock and bond risk, and its value can decline through either market volatility or a rise in interest rates.

There is no guarantee that a company will pay out or continue to increase its dividends.

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.

1st Quarter 2012

Positive Market Momentum

Positive momentum from the fourth quarter of 2011 carried over into the first quarter of 2012 as U.S. equity prices surged higher. Sustained central bank liquidity in Europe and the U.S. appeared to have rekindled investor animal spirits and tolerance for more risky assets. Moreover, a rebirth of U.S. job growth, acceptable Gross Domestic Product (GDP) figures, contained inflation reports, and a decent corporate earnings season further helped to propel equity prices higher. Financial stocks captured center stage during the quarter in delivering an impressive 22% total return as financial companies were the prime beneficiaries of the economic and monetary trends.

REITS, as represented by the Fund’s FTSE/NAREIT All Equity REIT Index benchmark, only gained 10.5%, after surging more than 15% during the fourth quarter 2011. Thus, while REITs did well in an absolute sense, they lagged the Financials sector overall by a wide margin. As noted in last quarter’s commentary, REITs represent important proportions of the Russell 2000 and S&P 500 Financials Indices and generalist investors, not to mention the financial media, often conflate REITs with small-cap stocks and/or financial stocks. Although REITs moved in tandem with the smaller companies and Financials during the late 2008/early 2009 financial meltdown, REITs outdistanced both in the latter half of 2009 and all of 2010 and 2011. Given their simple, transparent, real estate ownership intensive business model, we think that over longer time spans (i.e. the multiple years in a typical real estate cycle) REITs have delivered performance akin to commercial real estate returns. During the past 10 years, the Fund’s benchmark handily bested both the Russell 2000 Index and S&P 500 Financials sector.

The Fund moderately outpaced its benchmark during the period as it outperformed in each month of the quarter to get off to a solid start in 2012. Security selection within the Lodging, Healthcare, and Industrials sectors aided that outperformance the most. Strategic Hotels & Resorts was one of a handful of Lodging REITs that contributed to returns, with Strategic surging more than 15% in January alone. The avoidance of two large-cap Healthcare names that underperformed their peers as well as the benchmark also benefited relative performance. Meanwhile, a sizeable position in small-cap Sabra Health Care REIT delivered outsized returns. A similar parallel unfolded within Industrials as large-cap Prologis began faltering in March. The Fund benefited as we reduced the portfolio’s position to zero while a growing position in small-cap STAG Industrial boosted performance.

Elsewhere, NYC office landlord SL Green Corp. advanced double-digits, while the exclusion of lagging self-storage property landlord Public Storage enhanced returns. Holdings in the Mall sector constituted the one notable lagging area for the portfolio.

Outlook

Given REITs’ current and probable access to attractively priced debt and equity capital, we think the industry is poised for appealing growth and total returns. The access to capital allows for accretive investment in acquisitions and highly pre-leased development, while firming rental rates and rising occupancy levels bolster per share cash flow growth. The visibility and trajectory of REIT cash flows generated by their professionally managed portfolios of high-quality commercial real estate have been enhanced over the past three years as the industry reduced debt levels and bolstered the sector’s financial strength. Once again, the publicly traded REIT model is attracting investor attention, aiding the Fund’s benchmark in reaching a new all-time high in market capitalization, eclipsing the prior peak in 2007.

REITs shot ahead during the first quarter and investors should not expect nearly 10% quarterly returns from this asset type. However, considering the REIT industry’s balance sheet health, access to capital, lack of new competing supply, dividend growth potential, improving portfolio occupancy levels, modest discount to NAV, and fair Cash Available for Distribution (CAD)/Funds from Operations (FFO) multiples, we think REITs remain well positioned to potentially deliver positive total returns in 2012 and beyond. 

Harrison Street Securities
Chicago, IL

As of March 31, 2012, Strategic Hotels & Resorts comprised 2.36% of the portfolio's assets, Sabra Healthcare – 2.18%, ProLogis – 0.00%, STAG Industrials – 2.54%, SL Green – 5.29%, and Public Storage – 0.00%.

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. 

1st Quarter 2012

In its March 13, 2012 directive, the Federal Reserve indicated that information received since its January 15 meeting suggests the U.S. economy had expanded moderately. It cited a notable decline in the unemployment rate and a continued increase in business fixed investment as leading to moderate growth in the coming quarters. Despite these positive improvements, the Fed affirmed its stance towards a highly accommodative monetary policy, and once again commented that low utilization rates and a subdued outlook for inflation over the medium run warranted exceptionally low interest-rate levels through late 2014. The Fed also noted that the recent increase in oil and gasoline prices would likely push up inflation temporarily, but that it anticipated that price increases would remain within its target limits.

The Fund outgained its Barclay’s Capital US Aggregate Bond Index benchmark by a sizeable margin during the quarter. Outperformance was driven by an overweight stake to Corporates, which was the best performing sector of the fixed-income market on both an absolute and a duration-adjusted basis during the first quarter as spreads tightened. The portfolio was also overweight better performing lower-quality, investment-grade securities. During the first three months of 2012, BBB-rated securities outperformed AAA-, AA-, and A-rated securities—and by a wide margin in the case of AAA bonds.  

The favorable returns were offset somewhat by our bar-bell portfolio strategy as the yield curve shifted in a bear-steepening fashion during the quarter. In this environment, longer-dated securities underperformed. Intermediate Treasuries outperformed long Treasuries by more than five percentage points as the yield on the 30-year US Treasury Bond increased in reaching its highest level since September 2011.

The persistently low rates of nominal Treasury yields continue to hold real Treasury rates (nominal rates adjusted for inflation) negative beyond 10 years in maturity.  In our view, short-term Treasury securities carry a large inflation risk with little margin for error. Accordingly, we think it is prudent to utilize instruments such as Treasury Inflation Protected Securities (TIPS), Corporate bonds and Floating-rate notes, all of which offer defensive characteristics against rising inflation, interest-rates, or both. 

Taplin, Canida & Habacht (TCH)

Miami, Florida

Note: Bond funds are subject to interest rate and credit risk similar to individual bonds. As interest rates rise or credit quality suffers, an investor is susceptible to loss of principal.

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. 

1st Quarter 2012

The beginning of 2012 saw a resurgence of investor risk appetite. Growing optimism for a healthy U.S. economic recovery helped fuel the reversal of investor sentiment, despite mixed global economic data and headline news during the quarter. Events that were thought of as potential market triggers for a sell-off in risk assets were shrugged off by the market. Investors largely ignored rating agency downgrades of the European Financial Stability Facility and nine eurozone sovereign country ratings (including France losing its AAA rating), the International Monetary Fund (IMF) lowering global growth targets, and oil supply pressures—including possible military action against Iran’s nuclear ambitions. Risk assets were supported by a strong technical bid with cash being put to work as investors sought out higher yields. 

Amid this environment of increasing Treasury rates and surging “risk-on” assets, notably low-quality U.S. equities, the Fund gained ground and outperformed its Barclays Capital U.S. Aggregate Bond Index benchmark during the quarter. Contributing to that outperformance was security selection and an underweight position in the U.S. Treasuries, an overweight position in the Mortgage Backed Security (MBS) sector aided by both Agency and non-Agency securities, and healthy gains within Emerging Market debt.

The lone area of relative underperformance came from the Credit sector, where the Fund remained defensively positioned with underweight stakes in Banking and Finance, and had no European Bank exposure. This hurt as market sentiment remained upbeat during the rally and the “yield grab” mentality continued to hold sway with fixed-income investors throughout the quarter.

U.S. Government Securities

The Government market spent the first half of March on track to repeat its narrow, range-bound performance of January and February, but that pattern changed abruptly at the conclusion of the Federal Reserve’s March 13 meeting. The Fed dashed persistent expectations of some form of additional monetary easing, sending Treasury yields sharply higher. The 10-year Treasury yield rose to its highest level since October 2011, and above the top of the range established in recent months, before partially recovering by quarter end.

Yields ended the first quarter higher across the board as the yield curve steepened. The steeper yield curve was not kind to longer dated securities, and returns became progressively more negative with increasing term-to-maturity. Inflation-indexed Treasuries suffered a modest hiccup relative to conventional notes and bonds in March but performed significantly better over the entire quarter.

Mortgage-Backed Securities

The MBS market experienced the sale of more than $18 billion of non-Agency MBS by Maiden Lane. These auctions were tremendous successes. In addition, the Federal Housing Administration (FHA) introduced a new streamline refinance program, while the US Treasury was busy introducing another round of mortgage relief programs (HAMP 2.0 and HARP 2.0), and talk of more quantitative easing (QE3) was back on the table as well.

Agency securities in the Fund benefitted from higher income streams and slight price gains despite the slight rise in interest-rates during the quarter. The Freddie Mac and Fannie Mae sectors slightly outperformed Ginnie Maes. All of these sectors were influenced in various ways by changes with regards to prepayments. For Fannie and Freddie, they are now showing the effects of the HARP 2.0 mortgage relief program at faster speeds. The Ginnie Mae sector is dealing with the upcoming changes by FHA for Mortgage Insurance Premiums. The proposed changes will make older vintage FHA loans more likely to refinance and newer FHA loans less likely to refinance.

Prepayment speeds increased throughout the quarter owing primarily to HARP 2.0. Although speeds have picked up the past few months, they are nowhere near where they were in the past during “refinancing windows”. The fact remains that while most borrowers have economic incentive to refinance, many of these borrowers would have to come up with cash in order to refinance. This is due to the tightening of underwriting standards in conjunction with real estate valuations being down by more than 30% during the past 4 years. This situation will not change unless nationwide incomes or real estate valuations rise. We do not believe either of those events will occur to a meaningful extent any time in the near future. As such, the only way prepayment speeds will approach speeds seen in those previous “refinancing windows” would be if the government got more involved and initiated something new and different for mortgage borrowers. We do not foresee this happening in the immediate future either. If real estate valuations were to go down 10% to 15% from current levels, then government involvement would become more likely.

The non-Agency MBS market continued to perform well and shrink at the same time. The volume of non-Agency supply for the month of March was impressive. Even though Maiden Lane had finished its auction of mortgage paper in February, the strong results and equally strong demand for the product continued into March. Volume mostly came from a few European and domestic bank liquidations. With the overall improvement in pricing, it appears that the time for some of these investors to exit the market has arrived.

Finally, a number of banks agreed to a mortgage settlement with an unprecedented 49 state Attorneys General that amounted to more than $25 billion in fines. Other than speculation, there were no details released about the suit during the quarter until March 15. It appears that some of the concerns about this settlement voiced by investors seemed to be evident in the details, including the potential use of investor funds to pay the fines levied against the banks. The banks will only be paying out $5 billion of the $25 billion settlement in cash, while doing modifications for the bulk of the $20 billion remainder. Therefore, if a bank reduces the principal balance of a mortgage by $100, for example, that sum would get credited toward the bank’s fine. If the bank reduces principal on a loan serviced for others (typically for a non-Agency security), however, they would receive only a $45 credit towards their fine. To investors—who played no part in the legal conversation or had any responsibility for the robo-signing fiasco that the settlement cures—this credit is akin to paying with actual investor funds. Thus, investors are viewing this as another bank bailout.

Emerging Markets Fixed-Income

The Fund’s allocation to Emerging Market (EM) fixed-income aided relative returns for the portfolio as the group outperformed the overall benchmark. The EM sector is solely in US Dollar denominated assets with overweight stakes to Corporate and Investment Grade issues. All three EM debt subsectors—external sovereign, corporate debt, and local currency bonds—posted positive returns during the quarter, despite mixed results in March. Local currency bonds led the way with a gain of more than 7%, the bulk of which came in January as EM currencies rallied after the European Central Bank’s Long-Term Refinancing Operations (LTRO) auction in December. Corporate debt was the next best performing areas, returning 5%, followed closely by sovereign bonds. In both groups the high yield sub-index outperformed its investment grade counterpart. In addition, all three EM debt subsectors benefited from strong inflows to the asset class during the quarter. 

Although performance was strong during the first quarter, we suspect the rest of 2012 could be more challenging as negative global risks remain looming in the background. The second LTRO auction helped to improve interbank lending and eased credit concerns across the European Union, though growth data remains sluggish. In addition, the directional uncertainty of Europe and a U.S. recovery will continue to weigh on the external demand of China’s exports. While we do not believe China will experience a hard landing, a slowing growth landscape will likely have direct effects on commodity producing Emerging Market countries. Over the upcoming quarters, we expect that the new issue pipeline will provide attractively priced opportunities. We will seek to take advantage of these new issues as well as any pricing anomalies that may occur if the market environment becomes more turbulent.

Global Developed Credit

Excess returns for U.S. credit relative to Treasuries were impressive during the first quarter. Investment grade credits outperformed Treasuries by more than 3%, while high-yield credit outgained Treasuries by nearly 6%. U.S. credit began to show some signs of moderation in March on the heels of mixed economic data. In addition, sovereign fears seem to be flaring mildly given Spain’s budget issues and Portugal. There seems to be some concern developing that spring 2012 spring is shaping up to be a carbon copy of the springs of 2011 and 2010. This idea is arguably gaining acceptance as prices for risky assets move higher, especially when coupled with developing risks in China, the Middle East, higher gas prices, and an always developing situation in Europe.

With respect to the broader U.S. economy, the data flow has been mixed, featuring stronger than expected personal spending and sentiment, but softer than expected business spending and personal income. Overseas, uncertainty in Europe remains. In particular, there has been increasing speculation over how problems in Portugal, Spain, and Italy would be resolved as Europe weathers the financial crisis. Sentiment was lifted last week as European finance ministers finalized additional funding to be made available for new programs beyond the €200 billion already being provided. In addition, with the upcoming elections in both France and Greece there are significant risks that the new governments will be less committed to austerity measures and the European Union process. Another risk facing markets is the conclusion of Moody’s downgrade review of banks with global capital markets operations which is scheduled for completion during the week of May 14. In Moody’s opinion, these operations face challenges that are not yet fully captured in their current ratings. 

DoubleLine Capital LP
Los Angeles, California

Note: Bond funds are subject to interest rate and credit risk similar to individual bonds. As interest rates rise or credit quality suffers, an investor is susceptible to loss of principal.

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.

1st Quarter 2012

Stocks Extend Rally

Stocks delivered one of the best first quarter performances on record in 2012, extending the rally that began in October 2011 and lifting most major indexes to new 12-month highs. The Nasdaq exchange led with an astonishing 18% return, its best first quarter performance since 1991, while the S&P 500 Index gained more than 12%—its best first quarter since 1998. Surprisingly, the small-cap Russell 2000 Index lagged the large-cap oriented Russell 1000 Index during the quarter—a rare occurrence amid a period of such strong returns.

The key drivers of the equity rally have been widespread, including improved U.S. economic data, attractive corporate earnings growth, easing concerns over the Eurozone crises, and the extraordinary liquidity provided by major central banks across the globe. The “risk-on” nature of the recent rally is almost certainly the result of monetary stimulus and is evident in the continuing high-beta (volatility), low-quality leadership themes. For the most part, the laggards of 2011 surged during the first quarter of 2012.

Within the S&P 500 Index, for example, the highest-beta stocks (fifth quintile) gained nearly 20% during the first quarter versus only 4% for the lowest-beta stocks (first quintile)—a remarkable gap.  Investors should note, however, that high-beta leadership faded in March, which may be a sign that the current quantitative easing (QE)-fueled risk trade has run its course. According to BofA/Merrill Lynch, low-quality stocks also outperformed during the first quarter. Among their universe of approximately 1,600 stocks, low-quality stocks gained 14% compared with 10.6% for their high-quality group. 

Dividend Headwinds

After a strong showing in 2011, dividend stocks sharply underperformed during the first quarter (according to Ned Davis Research) as the lowest yielding companies in the S&P 500 outperformed the highest yielding by more than 12 percentage points. This gap is the widest noted since the 2009 rally and clearly highlights the relative headwinds dividend-focused strategies faced the last few months.

The degree of underperformance of dividend-paying stocks was a bit surprising considering the fundamental strength of the group. A total of 307 companies in the S&P 500 increased or initiated dividends during the last 12 months. As earnings growth has slowed, the payout ratio has finally begun to climb, though it still remains well below its long-term average. As expected, the low growth environment has prompted companies to shift the focus of capital allocation from organic growth projects toward distributions to shareholders. Even Apple initiated a regular dividend in March, finally addressing shareholder criticisms that too much cash was accumulating on the firm’s balance sheet.

The Fund noticeably underperformed its Russell 3000 Value Index benchmark as a result. The underperformance was consistent with historical results during periods in which dividend-paying stocks lag the broader market. As we have outlined in the past, there will be times when the dividend focus of the portfolio helps performance (2011) and times when it is a significant relative drag (second quarter of 2009). Dividend strategies have experienced periods of underperformance in each of the last three calendar years. We expect that as the current risk rally fades, the relative performance of dividend paying stocks, and the Fund, will come back into favor similar to that experienced following each of the prior periods.

Nine of the 10 economic sectors in the Russell 3000 Value posted a positive total return for the quarter. The sector level performance demonstrated the growth bias as the cyclical Financials, Consumer Discretionary, and Technology sectors posted the highest total returns, while more-defensive Utilities, Telecommunications, and Consumer Staples posted the lowest.

Both stock selection and sector allocation had a negative impact on relative performance, with Financials detracting the most owing to an underweight position and stock selection. After a weak showing in 2011, diversified financial services stocks was the best performing industry in the benchmark, rallying 43% during the quarter. Limited exposure to the group was one of the primary drivers of the Fund’s overall underperformance in the sector. Other significant sources of underperformance were from an overweight in Consumer Staples and stock selection within Consumer Discretionary. Notable individual detractors from performance were railroad company Norfolk Southern, integrated energy company Entergy, and Verizon Communications.

Norfolk Southern reported strong results, repurchased stock, and raised its dividend during the quarter but shares were weak due to a sharp decrease in coal carloads (approximately a third of the company’s revenue) as utilities increasingly switched to cheaper natural gas. Management believes that the customers within their network that would switch to natural gas have already done so and they do not expect further displacement in 2012. We maintained the portfolio’s position.

Despite Entergy’s mix of regulated and unregulated assets, the continued decline in natural gas prices during the quarter and nuclear relicensing concerns weighed heavily on the stock. The limited positive impact that lower natural gas prices have on the firm’s regulated operations was more than offset by the increased pricing pressure in the wholesale generation business. To protect itself from further declines Entergy has hedged more than 80% of its wholesale output for 2012 and 2013. Nuclear re-licensing negotiations will likely remain an overhang on the stock. Still, we maintained the Fund’s small position in the stock.

In the wake of a strong earnings report, Verizon performed well through much of the quarter but declined during the last two weeks of March. There was little specific news, but the pullback may be related to rumors around the Federal Communication Commission’s (FCC) review of the firm’s purchase of wireless spectrum from a consortium of cable companies. Regardless of the FCC review outcome, we continue to believe Verizon is well-positioned due to their network quality and strategic execution. 

Tech Stalwarts

Only two of 10 economic sectors aided relative returns during the quarter, with an underweight position and mostly strong stock selection within Energy providing the most significant outperformance. A couple of well-known technology names were among the top individual contributors.

Intel was the portfolio’s top contributor following the firm’s January announcement of design wins on multiple mobile devices, including a Lenovo smartphone and a multi-device relationship with Motorola Mobility (which has agreed to be acquired by Google). Analysts have long been skeptical of Intel’s ability to penetrate the phone and tablet markets due to the concern that Intel’s chips consume too much power, leading to short battery life for mobile devices. Recent technological advances by the company have addressed this issue, making their chips more competitive with those of ARM Holdings—opening a new, high-growth market for their products. Following the firm’s subsequent strong earnings announcement, we increased our calculated Absolute Value on the stock and maintained it as the Fund’s top holding.

Microsoft was another top performer after reporting strong quarterly results in January and guiding towards higher margins in fiscal 2012. Sentiment on Microsoft’s growth prospects has improved as investors look forward to the release of Windows 8 and Office 15, as well as the potential for the PC refresh cycle to pick back up in fiscal 2013. In addition, the Xbox 360 platform generated significant buzz following the launch of a suite of video streaming services including Hulu Plus, HBO Go, SyFy, and Bravo.

Among the contributors from Energy was offshore drilling company Seadrill. The stock performed well during the quarter as day-rates for ultra-deepwater drilling rigs continued to climb and management explored a separate listing for its Brazilian subsidiary to create value for shareholders. The firm has raised its dividend in eight of the last nine quarters. We trimmed and eventually sold the position at a significant premium to our assessed Absolute Value.

Portfolio Positioning

Six new positions were established and five eliminated during the quarter. Turnover remained relatively low and there were only modest changes in sector positioning. The weighting in Energy decreased primarily due to the above mentioned sale of Seadrill, increasing the portfolio’s relative underweight to the benchmark to more than five percentage points. The rapid growth of dividend payments in the Technology sector has resulted in a larger exposure than we would have expected when the Fund was launched. The recent establishment of a significant regular dividend by growth darling Apple suggests that dividends may finally be shrugging off the negative stigma long held by tech investors.

The purchase of Hasbro and Thomson Reuters, along with increases in American Greetings and National CineMedia, more than offset a reduction in Cracker Barrel Old Country Stores and the sale of McDonald’s within Consumer Discretionary. The net result following these transactions was an increase in the Fund’s relative overweight by the end of the quarter.

Thomson Reuters is a leader in the global information-services industry, providing content and data to financial, legal, tax and accounting, scientific, and healthcare professional markets worldwide. The firm is #1 or #2 in nearly all of the markets it participates in, which tend to be oligopolistic. For instance, the Westlaw legal database is firmly entrenched in law school curriculums, only has three rivals (of which Lexis-Nexis is the largest), and possesses a scope and scale that would be very difficult for any new competitor to replicate. The company’s products are critical to clients’ day-to-day operations, creating significant switching costs and high customer loyalty.  Because of its subscription-based business model, approximately 86% of revenues are recurring, providing investors with a stable stream of cash flow.

Thomson Reuters has struggled to integrate following its 2008 merger, disappointing investors and leading to the replacement of its CEO in December 2011. In addition, financial services customers have been slow to adopt its new Eikon market data product due to stability, performance, and functionality problems. We believe the company overpromised and under-delivered on the Eikon launch, but that new CEO James Smith, a 25-year company veteran, is bringing a more vigorous focus to this key product. We calculated the stock was trading at a 29% discount to our assessed Absolute Value with a healthy yield at the time of initial purchase.

Outlook

During the first week of March, the market experienced its first significant pullback of the year. With little new information, the minor correction appeared to be the cumulative result of the reduced growth forecast for China, slightly weaker U.S. economic reports, and investor concern about rising gasoline prices. Congressional testimony by Federal Reserve Chairman Ben Bernanke also weighed on the markets when he failed to mention additional asset purchases. Although the market recovered from the early March correction and moved on to set new multi-year highs, the events surrounding the correction highlighted what we believe are the three most significant near-term threats to higher stock prices—high valuations, rising gasoline prices, and no additional quantitative easing.

At the end of the first quarter, the Fund’s top-20 holdings were trading at 93% of our calculated Absolute Value. We believe the limited discount in the portfolio reflects both the strong market recovery and the heightened demand for dividend-paying stocks in this zero-interest rate environment. Looking at the combined components of the S&P 500 and S&P 400 Midcap Indices, there is a clear tradeoff between yield, valuation, and growth. The highest yielding stocks are trading at a significant premium despite having a lower expected long-term growth rate. This relationship suggests a myopic focus on near-term income needs without the proper concern for the expected long-term total return. For this reason, our bottom-up, value-driven investment process has favored what we view as larger, steadier dividend-payers over more expensive, higher-yielding stocks in recent quarters. 

According to Laffer Associates, the current level at which household budgets will get “slammed” by rising gasoline prices, significantly increasing the likelihood of a recession, is $3.22 (wholesale, series—Conventional Gasoline, NY Harbor, Regular). In February, the price was $3.04; in March, it was $3.17. Economic growth has averaged between -2.8% and -0.5% during the six quarters following a spike in gasoline prices above this household budget-busting level.  Thus far in 2012, offsetting warm weather and lower heating costs have eased the consumer pain of higher gasoline prices. A sustained spike in gasoline prices from those experienced in March, however, would present a significant threat to a continued economic recovery, especially if the unseasonably warm weather continues through the summer months.

The withdrawal of monetary stimulus also poses a threat to the recovery and may be linked to rising oil prices. When the Federal Reserve first hinted at QE2 in August 2010, markets rallied sharply. Leading that initial rally were cyclical industries, small-cap stocks, and high-beta stocks. After approximately five months, the market experienced a modest correction, rebounded briefly, and then fell sharply. When the initial high-beta rally ended it was marked by a sharp rise in commodity prices, most notably oil.

Essentially, the initial impact of QE2 was to inflate financial assets (boosting consumer net worth, confidence, and spending). The rally in financial assets was relatively brief, however, and gave way to a sharp rise in oil and other commodity prices. The recent rally was sparked by the announcement of a massive long-term refinancing operation (LTRO) from the European Central Bank and the effect on equity markets has been the same as QE2. The current rally is approximately six months old and has been led by the same high-beta, highly-cyclical stocks. Similarly, the rally is beginning to buckle following a sharp rise in oil prices. Without strong economic growth, market participants fear that withdrawing stimulus will prompt a slide back into recession.

In summary, we continue to believe the market is in the middle stage of a low growth recovery.  This means the pace of earnings growth will likely slow in the months ahead and the recent strong economic data we have experienced will moderate.  It also means that equity market volatility will likely increase in the months ahead. Stocks, however, have come a long way from their recent lows and are likely due for a correction.  Both our internal measures of value, as well as trusted external measures, show the market is overvalued.

Admittedly, we are frustrated by the resurgence in low-quality, high-beta leadership. This leadership theme is highly unusual for the current stage of the recovery and we believe directly attributable to the massive flood of liquidity by the major central banks. There is no way of knowing when the central banks will stop providing additional QE. In the absence of a recession, we believe the Fed is likely to continue reining in expectations for further QE, setting the stage for higher rates over the next 12 to 24 months. Any such signals from the Fed are likely to result in near-term volatility, as investors struggle to decide whether the current recovery can be self-sustaining.

The wild cards are oil and, as the year progresses, uncertainty around the federal budget cliff.  Further increases in oil prices are likely to weigh heavily on the economy. If oil prices experience a sustained move higher, we may have seen the high in stocks for the year. If oil prices stabilize around current prices, however, there may be room for a bit more upside before year-end, especially if investors like the outcome of the elections in November. With regard to the fiscal cliff, it is difficult to speculate whether Congress will be able to successfully pass an extension of current tax rates prior to higher rates going into effect.  If no extension is passed, we believe stocks are likely to come under significant pressure.

From a portfolio perspective, we remain pleased with the quality and positioning of the Fund’s holdings, which are focused on stable growth, attractive valuations, and healthy balance sheets. We don’t think the underperformance of dividend stocks is likely to persist for long, as in the past any near-term correction has favored dividend-paying stocks on a relative basis. According to Ned Davis Research, non-payers only tend to lead dividend payers in the first six months of a cyclical bull market. So even if a correction is not forthcoming, we have reached the point in the market cycle where non-payers have tended to cede leadership in the past.

River Road Asset Management

11 April 2012

As of March 31, 2012, Apple comprised 0.00% of the portfolio's assets, Norfolk Southern – 2.04%, Entergy – 0.90%, Verizon Communications – 1.61%, Intel – 2.88%, Microsoft – 1.41%, Seadrill – 0.00%, Hasbro – 0.49%, Thompson Reuters – 0.98%, American Greetings – 0.83%, National CineMedia – 0.81%, Cracker Barrel Old Country Stores – 0.77%, and McDonald’s – 0.00%.

Note: Funds that invest in small- and mid-cap stocks are considered riskier than large-cap stocks due to greater potential volatility and less liquidity. The Fund seeks to invest in income-producing equity securities and there is no guarantee that the underlying companies will continue to pay or grow dividends.

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.

1st Quarter 2012

Domestic equities recorded another strong quarter to begin 2012, as steady improvement in employment data, manufacturing, and some signs of firming in the housing market all contributed to a more favorable economic backdrop in the U.S. Although the sovereign debt crisis continues to be the focus in European economies and European markets, its impact on U.S. equities appeared more muted in recent months as U.S. stocks instead advanced on the improved domestic outlook. The large-cap oriented S&P 500 Index gained more than 12% during the first quarter, slightly outpacing the small-cap Russell 2000 Index.

Sector performance was broadly positive in the U.S. throughout the period, with tightly bunched and double-digit returns seen across most industry groups. Only Utilities, which had been a beneficiary of a flight-to-quality trade during the second half of last year, failed to generate a positive return.  The Technology and Consumer Discretionary sectors were especially strong, and growth indexes outperformed their value counterparts.

The Fund gained more than 16% during the first quarter, outpacing its Russell 2000 Growth Index benchmark by a significant margin. Stock selection drove most of the favorable performance, most notably in the Technology and Consumer Discretionary sectors. IT service companies, semiconductor/equipment stocks, and software names all contributed meaningfully to the outperformance within Technology. Electronic payment device-maker Verifone Systems benefited from the broader adoption of smart card payment technologies, and specifically gained on news that MasterCard would incentivize merchants to adopt the chip-based EMV technology. Semiconductor company Microsemi advanced on the launch of a new system synchronization technology, while software firms Kenexa and Ariba also delivered strong results.

Jarden, Knology, Office Depot, and Shutterfly were the key drivers within Consumer Discretionary. The market reacted well to consumer products conglomerate Jarden’s stock buyback plan and the company’s improving revenue outlook. Shares of regional cable operator and telecomm provider Knology advanced on speculation that the company was exploring a sale and attracting interest from private equity investors. Office Depot benefited from takeover speculation as well. Lastly, Shutterfly had a strong quarter, helped by its bid for Kodak’s Gallery photo processing service and an earnings report that beat analyst estimates. 

Performance shortfalls during the quarter came mainly from a handful of stocks in the Healthcare and Industrials sectors. Shares of Vanguard Health Systems and Tenet Healthcare both underperformed the health sector by a noticeable amount, with Vanguard stock recording a modest decline. Healthcare IT firm Allscripts-Mysis Healthcare Solutions disappointed the market with its February earnings report, also detracting from performance. Commercial earth imaging firm DigitalGlobe was the notable underperformer in Industrials. The stock fell on an earnings shortfall and a more general concern about a difficult government funding environment.  

Andrew Morey
Lee Munder Capital Group, LLC

As of March 31, 2012, Verifone Systems comprised 1.87% of the portfolio's assets, Microsemi – 2.35%, Kenexa – 2.84%, Ariba – 2.16%, Jarden – 1.53%, Knology – 5.48%, Office Depot – 2.11%, Shutterfly – 2.75%, Vanguard Health Systems – 1.26%, Tenet Healthcare – 2.10%, Allscripts Healthcare Solutions – 2.20%, and DigitalGlobe – 0.86%.

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.

1st Quarter 2012

Financial markets experienced one of the best quarters of the decade as a result of further government and Federal Reserve stimulus. Low interest-rates and renewed optimism were the general themes as unemployment numbers and corporate earnings showed signs of improvement, while the fear of a foreign debt meltdown subsided. Other positive indicators included bullish technical indicators and the fact we are in a Presidential election year, which has typically been good for financial markets as incumbents tend to do what they can to bolster the economy and their image. 

Although seemingly optimistic, many of these popular indicators are misleading. For example, unemployment ignores the under-employed—those people who no longer file or no longer qualify for unemployment benefits. More worrisome is the ongoing debt situation in Europe, where even many of the stronger economies continue to assume more debt from domestic banks and the weaker European countries. The debt-to-GDP (Gross Domestic Product) ratio of most European countries is at historical highs with little hope of repayment. In other words, the problem has not gone away, it has only been deferred and is growing in magnitude.

Market crashes occur when the general populace realizes their expectations are wrong. Throughout the 1980s and 1990s the market delivered record returns. In 2000, investor expectations of corporate earnings growth, fueled by the media and over-zealous research analysts, came to a screeching halt. Twelve years later the S&P 500 Index is at nearly the same price level it was back then, while the NASDAQ remains below its high watermark set that year.

The reality is that little has changed since the beginning of the financial crisis in 2008. High levels of personal and government debt remain. Little has changed in the economy or improved in the fundamentals of corporations. Little has changed in politics of our country. What has changed is the bullishness of investor sentiment and technical indicators, but these indicators can change quickly without the backing of a strong economy and corporate earnings.

The Fund substantially lagged its composite benchmark (35% Russell 3000 Index/35% MSCI ex-US Index/30% Barclay’s Capital Aggregate Bond Index) during the first quarter. The portfolio’s defensive posture—more than 50% weighting in cash and short-term Treasury Bills—weighed on performance as equities gained double-digits. Our risk model continues to signal an above normal probability for significant losses. Thus, the portfolio remains at a relatively conservative level. It is our experience that the more that markets rise within a short time period, the more likely that risks have as well.

Smart Portfolios

Seattle, WA

Note: The Fund invests in exchange-traded funds (ETFs) which are securities of other investment companies. An ETF seeks to track the performance of an index by holding all or a sampling of the securities on that index.  An ETF may not be able to replicate an index exactly since returns may be reduced by transaction costs, expenses and other factors while the index has none.  The Fund invests in many different areas of the market, each of which may involve its own element of risk. Use of aggressive ETF investment techniques such as futures contracts, options on futures contracts and forward contracts may expose an underlying fund to potentially dramatic changes (losses) in the value of its portfolio. Credit risk or default risk could negatively affect the Fund’s share price.  Inverse or ‘short’ ETFs seek to profit from falling market prices and will lose money if the market benchmark index goes up in value. Leveraged ETFs seek to provide returns that are a multiple of a benchmark and can increase risk exposure relative to the amount invested and can lead to significantly greater losses than a comparable unleveraged portfolio.

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.

1st Quarter 2012

The first quarter of 2012 was generally a low-quality, “risk-on” quarter where smaller, riskier stocks led the charge amid a broad rally that saw most major indices post double-digit gains. As profiled by Steven DeSanctis of Bank of America/Merrill Lynch, within the Russell 2000 Value Index the largest market-cap quintile of stocks underperformed the smallest quintile by eight percentage points, companies in the highest quintile for return-on-equity (ROE—a measure of earnings quality) lagged the lowest quintile by six percentage points, and high-beta (volatility) stocks in the first quintile gained 17% versus only 5% for the lowest quintile. Moreover, stocks priced at less than $5 (typically considered lower quality) gained 23%, companies with no earnings 15%, and those with no dividend outperformed dividend-payers by four percentage points.

Aside from the defensive-oriented Utilities sector, all sectors within the Fund’s Russell 2000 Value Index benchmark were positive—with six posting double-digit gains. The rally was led by the Consumer Discretionary, Materials, and Healthcare sectors, while Utilities, Energy, and Consumer Staples lagged the overall index. All in all, it was not a good relative environment for the higher-quality names that comprise the bulk of the Fund’s portfolio, which lagged its benchmark by more than two percentage points. Some of these lower-quality trends did ebb in March, however, and the Fund gained considerable ground during the month against the index.

Lagging Consumer Picks

Sector allocation was modestly negative during the quarter, with an underweight position in Consumer Discretionary and an overweight stake in the poor performing Consumer Staples sector serving as the biggest drags. Stock selection detracted from performance within the consumer sectors as a number of the portfolio’s holdings were hit by higher costs and we have struggled to find palatable specialty-retail exposure within the Consumer Discretionary sector. Lancaster Colony, which we continue to think is a wonderful company, struggled with high commodity costs within Staples. Matthews International was the weakest holding in the Discretionary, as company earnings faced pressure from higher raw material costs. The portfolio also performed relatively poorly in solid performing Materials where an overweight position wasn’t enough to overcome lagging stock picks. Schnitzer Steel has put up disappointing results of late, with weaker than expected volumes and margins in its core recycling segment.

Stock selection in Technology and Financials was the primary positive contributor to relative returns during the quarter. Electronic payment software developer ACI Worldwide reported earnings above expectations and also completed its acquisition of competitor S1 during the quarter. Fuse manufacturer, and top-10 holding, Littelfuse notched impressive gains on continued solid results. Despite being underweight Financials in general, and strong performing REITs in particular, holdings led by insurance provider Protective Life’s helped the group to modestly outperform the benchmark sector as well as the overall Index.

Portfolio Positioning

During the quarter we initiated positions in five stocks, most notably MKS Instruments, Thermon Group, and Innophos Holdings. MKS is a company we have followed and admired for several years as a leading sub-systems supplier to the semiconductor and other advanced process industries (solar, LED, flat panel display, medical, environmental). At the time of purchase the company had a high return-on-invested-capital (ROIC) with sizeable net cash on its balance sheet. The company has been a consistent free cash flow generator, with positive free cash flow in 15 of the past 16 years.

Texas-based Thermon is a global provider of highly engineered thermal solutions, known as heat tracing, for process industries. The company’s products provide an external heat source to pipes, vessels, and instruments for the purposes of freeze protection, temperature maintenance, environmental monitoring, and surface snow and ice melting. The company generates solid free cash flow and appears attractively valued on expected earnings growth near 20% over the next few years. Innophos is a leading producer of specialty grade phosphates used in food, pharmaceutical, and industrial markets. The company has a clean balance sheet with low net debt. The business is relatively slow growth, but stable, with emerging market strength and has the potential for capital deployment through its strong cash flow and unlevered balance sheet. We think earnings can grow at around a 10% rate, with possibilities for more robust growth through acquisitions.

Four holdings were sold during the quarter, including Highwoods Properties, Standard Microsystems, Cantel Medical, and Brady. Highwoods was a small position that we decided to eliminate to focus on other REIT holdings. We sold Standard Micro and Cantel as they appeared to be fairly overvalued. We have been increasingly frustrated with the results at Brady over the past few years and decided to deploy the funds elsewhere where we had greater conviction.

Outlook

Given the headwinds caused by the strength in the lower-quality segment of the small-cap market and the dramatic rebound of many of 2011’s poorer performers, we were generally pleased with the relative performance of the portfolio during the first quarter. In recent meetings with company management teams, we detect a greater sense of optimism over U.S. business trends. We continue to hear references to increased merger and acquisition activity in the small-cap pipeline, from which we think the Fund could benefit. Although concerns over slower economic growth in China, still tenuous sovereign debt issues in Europe, and a potentially nasty election circus in the U.S., we believe small-caps can build on the gains realized during the period. We are cognizant, however, that given the robust performance of the past six months we may be in for a digestive pause. Still, we see long-term potential given the reasonable valuation of the portfolio, solid free cash flow generation, and generally healthy balance sheets. 

Silvercrest Asset Management Group
New York, NY

As of March 31, 2012, Lancaster Colony comprised 2.03% of the portfolio's assets, Matthews International  – 1.66%, Schnitzer Steel – 1.51%, ACI Worldwide – 2.53%, LittleFuse – 2.64%, Protective Life’s – 2.85%, MKS Instruments – 1.81%, Thermon Group – 1.72%, and Innophos Holdings – 2.01%.

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.

1st Quarter 2012

The portfolio got off to a slow start in January, but had two solid months in February and March to close the gap and finish the quarter slightly ahead of the Fund’s Russell 2000 Growth Index benchmark. Holdings in the Consumer Discretionary sector were the stellar performers despite rising gasoline prices that reached their highest levels ever during a first quarter. Three of the Fund’s larger holdings led the way as women’s specialty apparel Francesca’s, specialty mattress firm Select Comfort, and big box cosmetics chain ULTA Salon all delivered tremendous gains after each reported strong quarters and gave solid forward-looking guidance. Stock selection within Healthcare also positively contributed to performance led by Vivus, which received a favorable FDA panel ruling regarding its new obesity drug, Qnexa. These panel rulings are rarely overruled and final approval is expected in July.

Holdings in Technology trailed the market, despite strong performances from application software firms such as ACI Worldwide. One of the Fund’s biggest disappointments was communications equipment firm Finisar, which lost ground during the quarter as fears that capital spending from the big telecomm carriers would not materialize.

Looking ahead, we do not expect macroeconomic worries to fade away anytime soon, and expect some choppiness to surface during the upcoming quarters from a new set of worries—the U.S. presidential election, the Supreme Court decision on the healthcare mandate, and the upcoming fiscal cliff from mounting federal debt and the expiration of the Bush tax cuts in January 2013. We didn’t include gasoline prices as we think they may have run their course already, but if we are wrong they will definitely go into the negative column.

That being said, we believe the U.S. equity market is still the place to be as Europe is teetering on the edge of recession, Emerging Markets are slowing down, and 10-year Treasuries yielding only 2%. The continuing fear is contagion in Europe. Although Spanish and Italian yields have started to blow out again, interbank rates both here and across the Atlantic are doing nothing and are well off their highs. Meanwhile, U.S. corporate profits are at an all-time high.

All in all, we were satisfied with the first quarter and believe that we have a solid stable of companies in the portfolio that can continue to report earnings above expectations and drive future estimates ever higher. In addition, we think there are enough macro pieces falling into place that could entice the mountain of cash parked on the sidelines or in low-yielding bonds back into equities over the course of the next 12 to 18 months.

B. Anthony Weber                 Charles F. Mercer, Jr. CFA              Michael E. Johnson, CFA

April 11, 2012

As of March 31, 2012, Francesca’s comprised 2.47% of the portfolio's assets, Select Comfort – 2.86%, Ulta Salon – 2.42%, Vivus – 1.65%, ACI Worldwide – 2.19%, and Finisar – 1.14%.

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.

1st Quarter 2012

Forget About Spring, It Feels Like Summer

Stocks sizzled in the first three months of 2012, delivering the best first quarter return since 1998 (as represented by the broad market S&P 500 Index). Forgive us if we suggest that perhaps we have seen this movie before—a strong first quarter in the markets followed by a sharp correction as fundamentals weaken. Is it different this time?  We are optimistic the economic expansion will follow through. We see consumers slowly waking up from their four-year slumber. Looking at retail sales growth, consumer spending has improved, while U.S. unemployment has receded to 8.2% as of March 2012. Consumer sentiment data corroborates this trend with its highest reading since the recovery began in 2009. Furthermore, the Federal Reserve’s recent bank stress test reflects improved capital ratios and the ability of major financial institutions to withstand a severe downdraft in the economy. This places U.S. banks in the lead relative to their European counterparts. In addition, the Federal Reserve and most central banks globally are providing ample liquidity to help boost economic growth. Although volatility will likely remain a factor this year, corrections should provide us opportunities to add to portfolio positions. We believe signs point to the U.S. leading global economies toward expansion.

A rising tide lifted all boats during the quarter as all sectors in the portfolio delivered positive absolute returns as the Fund slightly trailed its Russell 1000 Index benchmark. Stock selection in Healthcare and Consumer Staples, as well as underweight positions in Utilities and Telecommunications aided relative returns the most.

Apple, Athenahealth, and JPMorgan Chase were the three biggest individual contributors to performance during the period. Strong demand for the iPhone4 led to revenue and earnings results above guidance, fueling a surge in the tech/consumer products giant. Healthcare practice management and billing IT firm Athenahealth rebounded from its December correction after reporting strong top- and bottom-line growth relative to its guidance. We continue to think the company’s highly ranked software-as-a-service model is well suited for the small physician space, and that it can continue to gain market traction. JPMorgan passed the Federal Reserve stress test and reported better than expected earnings results.

The biggest drag on relative performance was stock selection within Consumer Discretionary and Technology, as well as residual cash amid the strong rally. For-profit education company DeVry saw a decline in enrollment that led to a revenue and earnings miss within Consumer Discretionary. Weak carrier spending decreased visibility for the products of telecommunications software firm Acme Packet, contributing to its earnings miss. We eventually sold the position in favor of better relative opportunities. In addition, weak natural gas prices negatively affected operating results at energy firms Range Resources and Southwestern Energy, detracting from performance.

Portfolio Positioning

As we like to reiterate, the portfolio is broadly diversified with sector allocations resulting from opportunities we identify at the stock level through our bottom-up, fundamental analysis and valuation work. The most notable shifts during the quarter were further additions to the Financials sector based on attractive valuations for leading companies and an increase in Consumer Discretionary after a long hiatus. As consumer spending continues to improve, we think there is an opportunity for significant margin expansion among Consumer Discretionary companies where many could reap the benefits of multi-year cost reduction efforts. Decreases in Industrials and Technology were based on profit taking in individual positions. The three largest sectors in the Fund as a percentage of assets at the end of March were Financials, Technology, and Healthcare.

Four stocks were purchased during the quarter and reached full-position status—Amazon.com, BMC Software, Goldman Sachs, and United Natural Foods. Amazon shares have recently underperformed the broader market on concerns about management’s ramp up in investments to support future growth. Although near-term profitability will likely be challenged, we believe these investments present a near-term margin and free cash flow trough that should allow for attractive improvement in operating fundamentals as the company’s top line growth leverages incremental overhead. We view Amazon as a best-in-class, disruptive innovator led by visionary management that will continue to take share from bricks and mortar retailers.

Software and IT services company BMC Software recently refocused its strategy to accelerate growth and profitability from its software licensing and maintenance business model. The success of cloud computing is spreading to enterprise IT environments where corporations demand “private clouds” in which services, applications, and data are managed in a more secure environment than typical off-site cloud environments. With its long history of superior mainframe-to-server service, we think BMC is uniquely qualified to deliver private cloud infrastructure to companies seeking such an edge. A sluggish global economy combined with choppy execution has caused the stock to lag consumer IT high-flyers. We believe the more favorable long-term trends as well as the company’s unique expertise will likely drive renewed revenue and earnings growth acceleration.

Although Goldman is being forced to adapt to a regulatory and market environment that will limit profitability, we believe the firm’s robust capital position and talent base will enable it to outperform its peers, take market share overseas, and drive earnings higher as the economy and capital markets continue to improve. Importantly, concerns about the firm’s long-term return potential appear to be priced into the stock. United Natural Foods is the largest distributor of natural and organic foods in the United States. The company’s profitability has been depressed due to the build-out of its distribution network and the initiation of a number of new, large relationships. We believe the recently won business and significant infrastructure investment can lead to higher revenues and profitability going forward. The natural and organic foods category is growing much more rapidly than the consumer staples space overall, leaving the company well positioned to produce superior financial performance over time.

Four full positions—Dell, Resarch In Motion, Riverbed Technology, and Texas Roadhouse—were sold from the portfolio during the quarter in addition to the previously mentioned Acme Packet. The primary reason for all the sales was the identification of better relative opportunities. In the case of Research In Motion, we also believed that the continuing decline in market share for the Blackberry would make any possible recovery an uphill battle.

Opportunities in Large-Caps

Many worry the market has come too far too fast, both year-to-date and from its March 2009 bottom. We would like to point out how little the market has actually returned over a much longer period of time, despite robust growth in corporate revenues and earnings. Consider that from January 1, 2000 through December 31, 2011, the total return of the S&P 500 Index has been less than 1%. In other words, after 12 years an investor in the index would have found themselves in essentially the same spot. We think the weak relative performance of U.S. equities during that period was largely due to overenthusiasm for the asset class in 2000. In late 2000, the S&P 500 was trading north of 24 times earnings, while offering a yield of only 1.2%. What is worth noting is the financial performance of the companies in the index during this time period and its effect on valuation. From 2000 through 2011, revenues grew 56.7% from $6.5 trillion to $10.1 trillion and earnings leapt 88.4% from $453 billion to $853 billion. In turn, valuations plummeted with the S&P 500 trading at 13.6 times earnings at year-end 2011 with a yield of 2.1%. As we enter the second quarter of 2012, we continue to view U.S. equities as an under-owned asset class offering both good value and robust financial performance.

TAMRO Capital Partners
Alexandria, Virginia

As of March 31, 2012, Apple comprised 4.76% of the portfolio's assets, Athenahealth – 2.47%, JPMorgan Chase – 2.77%, DeVry – 1.32%, Acme Packet – 0.00%, Range Resources – 1.98 %, Southwestern Energy – 1.55%, Amazon.com – 2.86%, BMC Software – 1.51%, Goldman Sachs – 1.95%, and United Natural Foods – 2.05%.

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.

1st Quarter 2012

It was a good quarter for international equities, with the Fund’s MSCI EAFE Index benchmark rising 11% during the first three months of 2012. All regions within the index posted gains during the period, with Europe ex-UK the best performing region. The United Kingdom was the worst performing region, though it still managed to deliver positive returns of more than 7%. The big winner overseas, however, was Emerging Markets which rose by slightly more than 14% during the quarter.

On a sector level, Consumer Discretionary and Financials were the best performing sectors rising more than 19% and 16%, respectively. Telecommunications was the worst performing area, and the only sector that lost ground during the quarter.

Tech and Energy Boost

The Fund slightly outperformed its benchmark during the quarter aided mainly by favorable stock selection in Europe ex-UK and in the Technology and Energy sectors. Strong performances by oil giant Royal Dutch Shell and uranium miner Paladin Energy overcame weak performances from holdings in precious metals mining companies in the Materials sector. The overall stock selection effect for the quarter was neutral.

Asset allocation was a drag on relative performance during the quarter. An underweight position in Europe ex-UK, the best performing region, detracted from returns. Despite having successful stock picking, an overweight stake in the overall lackluster Energy sector as well as being underweight Consumer Discretionary didn’t help.

Other areas of weakness included Emerging Markets stocks and stock selection in Japan. Holdings in Emerging Markets included a Canadian listed stock that hindered returns in the group, while a holding in Nippon Telegraph & Telephone was the main factor behind results in Japan.

There were few changes to the portfolio during the quarter. We exited a position in Korean internet company NHN for better growth opportunities for the portfolio. We also sold a longstanding holding in Japanese personal products company Unicharm. The stock had been a good performer for the portfolio but we felt that its growth potential could no longer justify its rich valuation. The proceeds from that sale were used to purchase East Japan Railway. We think the company has good growth prospects from rising commuter traffic on its main rail lines, and also stands to benefit from its large property portfolio and debt refinancing opportunities.

Another Japanese stock added to the portfolio was technology firm Tokyo Electron. The company produces semiconductor equipment and is a beneficiary of the rapid growth in smartphones and tablet computers owing to its strong structural position.

ECB Rescue

We think there were two main drivers behind the excellent start that international equities had to the year. The first was the vast amount of money provided by the European Central Bank (ECB) to the European banking system via the Long-Term Refinancing Operation (LTRO). The second was the string of good economic data that has been coming out of the US recently.

Without a doubt the LTRO has made a difference for Europe. At the end of 2011 many of Europe’s banks, along with the economy, were heading for a crisis. The banks needed to improve their capital positions while facing €900 billion of wholesale refinancing in 2012. The result was that many banks began to rapidly reduce their leverage by disposing of assets. This threatened a spiral of falling asset prices as all banks clamored to sell, and risked seeing Europe starved of bank lending. This was the position in late 2011.

By providing €1 trillion of LTRO financing the ECB has eliminated the major part, if not all of, the refinancing risk for European banks for this year, thus avoiding a European banking crisis in 2012. Banks, the thinking went, would now no longer have an imperative to rapidly reduce their assets and would be able to continue to extend loans to customers.

The first part is certainly true. The risk of a European banking crisis in 2012 has been re-priced at a much lower probability and this has led to a sharp recovery in risk asset prices around the world. This has benefited European bank share prices, of course, but also peripheral European sovereign debt, Emerging Market asset prices (where much of the bank de-leveraging had been focused), and global asset prices in general.

The hoped for improvement in European bank lending, however, is not happening yet. The ECB recently released data showing that growth in lending to non-financial corporations continues to decline. It appears that some of the LTRO money has been used to buy European sovereign debt, especially in Spain, and a lot has been parked on deposit with the ECB—with little making its way into the real economy.

This continues to trouble us because it means that European economic growth will continue to grind lower, though not as rapidly as it appeared it would several months ago. And we continue to expect that Europe will have a recession this year due to the very weak economies of peripheral Europe.

Bright Spot—the U.S.?

A brighter spot economically has been the U.S. where improvement in a number of indicators, especially employment indicators has given investors hope that the U.S. can lead the global economy to a sustainable recovery. We continue to believe that the U.S. is in the midst of a continued economic recovery, but that it will remain weaker than the recoveries we have typically seen in the post-World War II period.

Part of our caution on the strength of the U.S. recovery is that we recognize that this is the first economic recovery in the post-World War II period that has happened in the midst of a general de-leveraging of the economy. Our overarching thesis since late 2008 has been that the de-leveraging of the economy would create a headwind and result in trend growth at a lower level than expected. We have not yet seen any data to change our view of this.

The other part of our caution is our belief that recent U.S. economic data has been flattered by a very mild winter in much of the country. Mild temperatures probably allowed some labor intensive construction work that normally waits for spring to be brought forward, flattering the employment data. Mild temperatures meant that U.S. home heating bills this winter were likely significantly lower (some commentators believe by almost $30 billion to $40 billion). This has probably provided a boost to household disposable incomes, flattering retail spending data. Data in coming months should help reveal what impact the weather has had, but we remain alert to the risk that our caution is misplaced.

China Concern

The main source of concern for markets in the short-term has shifted from Europe to China as fears have increased about the magnitude of the correction in real estate prices and the scale of the associated slowdown in Gross Domestic Product (GDP) growth. The hope remains that we are nearing the point of a major policy response by the Chinese authorities, but we would caution against getting too optimistic about this. This is a year of significant political transition in China, and with their stated intention of shifting the economy away from its heavy reliance on construction and infrastructure spending towards consumption and healthcare related areas the government may prove less accommodating than many hope.

Overall, the first quarter was characterized by equity markets rising as improving economic hopes and large monetary stimulus helped overcome the risks posed by the high refinancing requirements of European banks and governments. As yet we have not seen significant overall improvement in the earnings outlook for companies. This means that the strong equity markets have been due to a re-rating of equity valuations and a lowering of the equity risk premium.

This together with the continued fiscal austerity that we will see in Europe for the remainder of this year means that it is prudent to be a bit cautious and not expect further equity gains to be as easy to achieve as they were during the first quarter. Nevertheless, we continue to underline how supportive to markets the current policies of the key central banks are, and we see little likelihood that these policies will change soon. This coupled with ongoing moderate economic growth in the US is likely to continue to frustrate more bearish investors.

We continue to believe that genuine growth stocks will look increasingly attractive in the low economic growth environment that we expect for most developed markets and that these stocks will increasingly attract premium valuations. As a result, we remain focused on investing in companies and themes that can deliver sustainable growth. The structural imbalances currently present in the global economy and the aggressive monetary responses that central banks have used in response, continue to create investment opportunities. We hope to exploit these opportunities using all of the top-down and bottom-up tools of our investment process. 

Baring Asset Management
London, UK

As of March 31, 2012, Royal Dutch Shell comprised 1.40% of the portfolio's assets, Paladin Energy – 1.37%, Nippon Telegraph & Telephone – 0.00%, East Japan Railway – 1.46%, and Tokyo Electron – 1.48%.

Note: Investing in foreign markets involves the risk of social and political instability, market illiquidity, and currency volatility.

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.

1st Quarter 2012

Forget About Spring, It Feels Like Summer

Stocks sizzled in the first three months of 2012, delivering the best first quarter return since 1998 (as represented by the broad market S&P 500 Index). Forgive us if we suggest that perhaps we have seen this movie before—a strong first quarter in the markets followed by a sharp correction as fundamentals weaken. Is it different this time?  We are optimistic the economic expansion will follow through. We see consumers slowly waking up from their four-year slumber. Looking at retail sales growth, consumer spending has improved, while U.S. unemployment has receded to 8.2% as of March 2012. Consumer sentiment data corroborates this trend with its highest reading since the recovery began in 2009. Furthermore, the Federal Reserve’s recent bank stress test reflects improved capital ratios and the ability of major financial institutions to withstand a severe downdraft in the economy. This places U.S. banks in the lead relative to their European counterparts. In addition, the Federal Reserve and most central banks globally are providing ample liquidity to help boost economic growth. Although volatility will likely remain a factor this year, corrections should provide us opportunities to add to portfolio positions. We believe signs point to the U.S. leading global economies toward expansion.

The Fund outperformed its Russell 2000 Index benchmark during the quarter as stocks continued to move higher and added to the advance from the fourth quarter of last year. Strong stock selection overcame underweight positions in the two top-performing sectors of the benchmark. Overall, sector allocation was slightly positive as zero exposure to Utilities aided returns as that sector was one of the few areas of the market to lose ground. Financials and Industrials were strong contributors on an absolute basis, while holdings in Materials and Financials were the biggest contributors relative to the index.

Westlake Chemical, Athenahealth, and Coinstar were the three biggest individual contributors to performance during the period. Westlake, within the Materials sector, was the beneficiary of low natural gas prices, the basis for its low feedstock prices relative to oil-based feedstock, as well as its offer to acquire rival Georgia Gulf. Healthcare practice management and billing IT firm Athenahealth rebounded from its December correction after reporting strong top- and bottom-line growth relative to its guidance. We continue to think the company’s highly ranked software-as-a-service model is well suited for the small physician space, and that it can continue to gain market traction. Coinstar was the beneficiary of a new business alliance with Verizon, an increase in market share, and good earnings relative to guidance.

Positions in Consumer Staples and Energy detracted the most from relative performance, as did residual cash held amid the strong rally. Private label food distributor Treehouse Foods within Consumer Staples underperformed after a revenue and earnings miss during the quarter due to higher costs and a mix shift toward lower margin goods. In Energy, natural gas producer Bill Barrett suffered from the effect of weak natural gas commodity prices on earnings. The stock was sold during the quarter as a source of capital for more attractive relative opportunities.

Portfolio Positioning

As we like to reiterate, the portfolio is broadly diversified with sector allocations resulting from opportunities we identify at the stock level through our bottom-up, fundamental analysis and valuation work. The most notable shifts during the quarter were a decline in the weightings of the Technology and Industrials sectors due to profit taking and an increase in Consumer Discretionary as valuation and fundamental improvements led to new purchases. The three largest sectors in the Fund as a percentage of assets at the end of March were Consumer Discretionary, Financials, and Industrials. We view Financials as still providing opportunities to invest in leading companies at attractive valuations. As consumer spending continues to improve, we think there is an opportunity for significant margin expansion among Consumer Discretionary companies where many could reap the benefits of multi-year cost reduction efforts.

Three stocks were purchased during the quarter and reached full-position status—Chico’s FAS, MDC Holdings, and Waddell & Reed Financial. Following years of robust growth and market share gains, woman’s apparel retailer Chico’s fell out of favor with investors given overexpansion, heightened competition and weaker merchandising, which led to years of free cash-flow and return on invested capital deterioration that was compounded by the economic recession. A new management team was put in place three years ago to direct a multi-year restructuring in response to an activist shareholder. In our view, the stock represents an attractive, late-stage restructuring opportunity with an attractive valuation combined with evidence of a successful turnaround that offers additional long-term opportunity.

Homebuilder MDC has responded to the depressed industry conditions of the last few years by dramatically reducing operating costs and maintaining a very liquid balance sheet. As the housing market firms, we believe profitability at MDC can improve dramatically as its strong financial position allows it to opportunistically invest for growth. Asset manager Waddell & Reed manages approximately $80 billion in a variety of asset classes for individual and institutional investors. Led by a tenured management team, the company has historically produced strong relative investment performance. Management has also returned capital to shareholders via a consistently increased dividend and share buybacks, and we believe the stock is supported by a compelling valuation and yield.

Five full positions were sold from the portfolio in addition to the previously mentioned Bill Barrett during the quarter. Aaron’s and Colonial Properties were sold primarily due to valuation, while asset manager GAMCO Investors was used as a source of capital to fund more attractive relative opportunities. Software companies RightNow Technologies and SuccessFactors both received buyout offers and were trading very close to their buyout prices. RightNow was purchased by Oracle for $43 per share and SuccessFactors was bought by SAP for $40 per share. 

TAMRO Capital Partners
Alexandria, Virginia

As of March 31, 2012, Westlake Chemical comprised 2.55% of the portfolio's assets, Athenahealth – 2.62%, Coinstar – 2.76%, Treehouse Foods – 1.95%, Bill Barret – 0.00%, Chico’s FAS  – 1.85%, MDC Holdings  – 1.64%, and Waddell & Reed Financial  – 2.52%.

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.

1st Quarter 2012

Moderately better than anticipated economic results combined with additional monetary stimulus in both the United States and Europe fueled a major rally in equity markets during the first quarter of 2012. The Fund’s Russell 1000 Growth Index benchmark advanced more than 14% during the period, outpacing the broader market S&P 500 Index by more than two percentage points. Thus far, the market in 2012 has been predominately led by last year’s weaker performers, and not the higher quality issues that outperformed in 2011.

The Technology and Financial sectors were the major drivers of the first quarter rally, powered by a rebound in banking stocks and strong gains in Apple and Qualcomm. Consumer Discretionary stocks also gained more than the market, while Energy was the biggest laggard among the major sectors of the benchmark.

Big Apple

The Fund significantly trailed the benchmark during the quarter as the portfolio’s quality bias was not rewarded as it was in 2011. An underweight stake in Technology, particularly in Apple, served as a drag on relative performance. Although a top-10 holding in the portfolio that we increased early in the quarter following the company's outstanding fiscal first quarter earnings report, Apple appreciated considerably leading us to trim the stock twice as it exceeded our 5% maximum position size. By quarter end, the company had more than a 6% weighting in the Russell 1000 Growth Index, meaning that the Fund is structurally underweight the stock versus the benchmark as we adhere to our disciplined risk control measures. Also within Technology, Google declined during the period, detracting from performance. The company announced several planned changes to its core web search product and appropriation of user data for socialization and targeting of ads across sites, leading us to substantially reduce the portfolio’s position.

Elsewhere, a substantial overweight allocation to the more-defensive Consumer Staples sector negatively affected performance as that area lagged the market. Lackluster stock selection within Consumer Discretionary, with exception of TJX Companies, also weighed on returns. Finally, the Fund did not own any stocks in the rebounding Financials sector. The sector’s small representation in the benchmark, however, resulted in only a modest drag to performance.

An underweight position in Energy and solid stock selection within Industrials and Materials benefited relative performance. Engineering and construction firm Fluor delivered steady gains from the beginning of the years through its late-February earnings report. Chemical materials company Monsanto jumped sharply follwing its earnings report in early January in outperforming the overall sector. Within Healthcare, Medco Health Solutions rose strongly as it became clear that the company’s announced merger with Express Scripts would gain approval. 

New Additions

We established four new positions in the portfolio during the quarter, two in Technology and two in Consumer Discretionary. We think enterprise storage company EMC will benefit from increased spending on storage due to incremental growth from mobile data access, the move to private, public and hybrid cloud architectures, and rapid growth of unstructured data from sources such as social networking. eBay is the operator of the world's largest online marketplace and leader in online payments via its PayPal subsidiary. We see the company benefiting from the continued robust growth of online commerce and PayPal's proliferation, both online and at point-of-sale and mobile spaces. 

The new additions within Consumer Discretionary were Amazon.com and casino resort operator Las Vegas Sands. We purchased Amazon after a significant pullback in the stock. Although profit margins are under pressure in the near- to intermediate-term due to the company’s heavy investments in international fulfillment capacity and technology infrastructure, cost leverage is on the horizon with increasing third-party sales, in-market penetration of new international markets, and the continued migration to digital consumption of media products. We think the company has ample opportunity for expansion into international markets and continues to benefit from rapid growth in existing markets. Las Vegas Sands generates approximately 90% of its revenue and profit from the fast growing Asian and Emerging Markets. The company has strong earnings momentum, as the productivity of recent property openings continues and free cash-flow should improve as capital expenditures taper off. 

Notable increases to current positions during the quarter included Costco, General Electric, and Oracle. We added to the portfolio’s position in Costco after the stock pulled back about 10% from a recent high due to investor concern surrounding tougher comparisons for gasoline sales and currency issues from foreign expansion, as well as the company’s focus on price competitiveness. We believe the price investment is a proactive way to drive traffic and loyalty, and not a response to competitive weakness. In addition, the company’s ample cash balance allows it the flexibility to increase share repurchases, and a recent membership fee increase offsets some of the currency issues and the lesser top-line benefit from gasoline sales. 

We added to GE several times during the quarter, notably after the company’s fourth quarter results and the Federal Reserve’s stress test results. Reported earnings demonstrated improvement in its industrial division margins and strong orders in late-cycle businesses.  In addition, while GE was not subject to the Fed’s stress tests, GE Capital ended 2011 with a Tier 1 common equity ratio above the average of the 19 institutions that were subject to the test. The additional cash from GE Capital implies the company has the flexibility to significantly increase its dividend payout ratio, pay a special dividend, and/or repurchase shares. 

After trimming Oracle early in the quarter due to diminished relative earnings growth following the company’s fiscal second quarter miss late last year, we added back to the position after its  fiscal third quarter earnings report. Business should continue to rebound at the firm as long as enterprise spending remains relatively stable. We think the stock can perform well based on easing seasonal comparisons as it enters its historically strongest quarter of the year, the ramping up of new product cycles for Exa-series and Fusion apps, a significant expansion in its sales force, and a stock price that has lagged the rest of the market over the past six months.

Industrial Sales, Consumer Trims

Two positions were sold during the period. Given its successful quarter Fluor approached our estimate of fair value, prompting us to exit the position as the uncertain economic outlook is unlikely to lead to an expansion in its price/earnings multiple. Also within Industrials, we eliminated Emerson Electric from the portfolio as the company is struggling with both internal execution issues (specifically its Network Power business unit) and mixed-end market trends (particularly in Europe). 

We trimmed a number of the portfolio’s consumer-oriented holdings for a variety of fundamental reasons. McDonald’s was reduced due to position size and the expectations that the company will likely experience cost-related headwinds that may cap gains in the stock in the near- to intermediate-term. Nike and TJX were reduced as both stocks had performed well on a relative basis and traded near all-time highs. 

Staples stocks Procter & Gamble and PepsiCo were also trimmed. P&G was reduced given the company’s skew towards developed markets and as we continue to wait for a sustained inflection point in operating profit growth. Pepsi was reduced after a boost in the stock following significant management and operational changes. The company’s earlier fourth quarter earnings led to diminished relative earnings growth. Thus, we took advantage of strength in the stock to reduce the position. Finally, we trimmed medical-device maker Stryker on diminished earnings visibility as patients continue to postpone elective orthopedic procedures.

Outlook

Although broad stock market indices have delivered strong gains thus far in 2012, we expect a more challenging environment in the period ahead. Global growth has slowed and will likely be sluggish for the remainder of the year. The U.S. economy benefited from an unusually mild winter during the first quarter of 2012 that spurred unexpected growth, with more moderate growth expected for the remainder of the year. Meanwhile, Europe has most likely entered into a recession. While Emerging Markets should still show above-average growth, economic trends there have also weakened due to the sluggish growth in the developed world.  With global growth slowing and corporate profit margins at record levels, we believe investors will be disappointed to find that corporate profit expectations for both the intermediate and longer-term periods are generally too high. Lastly, investors will have to contend with significant political uncertainty until U.S. voters determine which candidates are most capable of addressing the United States’ large budget deficit, high national debt, and high unemployment problems.

We believe that a rotation toward higher-quality growth stocks such as those held in the Fund is a reasonable expectation looking ahead. Amid a challenging market environment these stocks could do particularly well as their valuations are attractive and their earnings growth is more assured. We see these companies as well positioned to provide long-term, sustainable growth and in many cases offer very attractive dividend yields in an environment where both growth and income yield are likely to be scarce.

Montag & Caldwell Investment Counsel

As of March 31, 2012, Apple comprised 4.99% of the portfolio's assets, Qualcomm – 4.44%, Google – 1.94%, TJX Companies – 3.04%, Fluor  – 0.00%, Monsanto – 2.92%, Medco Health Solutions – 2.85%, EMC – 1.07%, eBay – 0.99%, Amazon.com – 1.63%, Las Vegas Sands -1.49 %, Costco – 3.22%, General Electric – 3.00%, Oracle – 1.50%, McDonald’s – 3.00%, Nike – 1.44%, Procter & Gamble – 3.42%, PepsiCo – 2.80%, and Stryker – 2.95%.

Note: Growth stocks are generally more sensitive to market moves and thus may be more volatile than other stocks.

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.

1st Quarter 2012

U.S. equities rose almost without interruption during the first quarter, resulting in a gain of more than 12% for the broad market S&P 500 Index. Despite a lingering sense of distrust of the market, especially after last year’s roller-coaster ride, investors became increasingly encouraged by mounting evidence that: 1) the U.S. economy was making steady, albeit slow progress; 2) China’s economy was in the process of making a “soft” landing; and 3) the European Central Bank’s (ECB) Long Term Refinancing Operation had succeeded in defusing a liquidity crisis in the European banking system. Furthermore, the latest round of debt restructuring and belt-tightening in Greece was completed, which at least bought more time for the country despite its bleak long-term prospects.

Note, however, that there were significant divergences within the market. The Financials and Technology sectors rose 22% and 21.5% respectively, while gains in Consumer Staples, Energy, and Telecommunications were only in the low single-digits, and Utilities actually declined. Not to be overlooked is the impact that Apple had on the S&P 500. That one stock, which jumped 48% during the quarter, accounted for more than one-tenth of the return of the index. In this “risk-on” environment, the Barclays Capital US Treasury Long Index lost 5.8%. As economic indicators and the markets strengthened, the price of the 30-year US Treasury fell as yields rose from a low of 2.9% in January to nearly 3.5% by mid-March.

Core Holdings Deliver

The Fund outperformed its HFRX Equity Hedge Index benchmark during the quarter. The portfolio’s core long/short and long-biased managers generated solid returns, providing more than half of the Fund’s overall gain. A holding in a globally-oriented manager also did well, but this was a relatively small allocation within the portfolio.

Credit-related strategies produced consistent results as the high-yield market continued to improve and spreads generally narrowed. Holdings in global fixed-income managers were also positive, but performance varied depending on exposures to Emerging Markets and other international sovereigns. Elsewhere, the portfolio’s merger arbitrage managers tended to make relatively steady progress throughout the quarter as increased merger & acquisition activity improved, though modest spreads limited the upside.

In contrast, Global Macro, Managed Futures, and Commodities allocations in the Fund had mixed results. Managed Futures strategies generally remained out of synch. A new long/short commodity allocation did prove to be additive, however. Although returns for the overall group were negative for the period, the impact on performance was limited due to the small size of the allocation.

Risk Management

Risk management is integral to the our investment approach at the Fund, and it continued to meet the parameters of the three key risk guidelines—Daily Volatility, Monthly Drawdowns, and Net Equity Exposure—that we have outlined. Returns stayed within our guideline volatility band of
+/- 1% per day during the entire quarter. Positive gains were achieved for each month during the quarter, thus there was no monthly drawdown that might have otherwise required adjustments in exposures. Due to the unpredictable impact of potential public policy moves on the financial markets, we have maintained the portfolio’s net equity exposure at approximately 35% for several quarters. This is the mid-point in the net equity exposure range of 20% to 50% that we set as a guideline at the inception of the Fund.

Given the Fund’s hedged approach and modest net equity exposure (averaging approximately 36% during the quarter), it participated in the market’s upside but to a lesser degree than a pure long-only equity strategy. Nevertheless, the Fund’s performance was significantly less volatile than the S&P 500 (as measured by standard deviation).

Portfolio Review

The overall structure of the portfolio was largely stable throughout the quarter. The only explicit change was to marginally increase the allocations to the Global Macro, Managed Futures, and Commodities areas by adding a discretionary global macro fund and two model-driven long/short commodity funds. The allocation to these areas provide access to a variety of trend following, quantitative, and fundamental trading-oriented strategies across a wide range of asset classes, including equities, fixed-income, interest-rates, currencies, metals, energy, and industrial and agricultural commodities. Historically, such strategies have tended to be less correlated to other strategies, especially during market corrections. We added to this strategy area with the aim of enhancing its diversification, though each of the new positions was relatively small. Overall, the allocation for the strategy was increased to 11.5%.

Equity-oriented holdings accounted for 47% of assets in the portfolio at the end of March, little changed from December. Although this is the largest single asset group 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. We continue to focus our allocations on core managers with relatively more stable risk/return characteristics.

The combined allocation to Hedged Credit and Strategic Fixed Income was maintained at 25% during the quarter. Of the two, Hedged Credit has been the larger allocation at 15%, reflecting improved valuations and solid fundamentals. We have kept the allocation to Strategic Fixed Income at 10%. Holdings in this area 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. While opportunities have been attractive, these strategies tend to have somewhat higher volatility.

Outlook

The good news is that the U.S. economy has been showing welcome signs of resilience, China appears to be on course for a “soft landing,” and the Europeans are finally grappling with their dual sovereign debt/bank credit problems. The corporate sector generally remains flush with cash, and despite the exposure of European banks to sovereign risks, the global financial system is on a much sounder footing than it was in 2008. The bad news is that even though Greece managed to cross the “finish line” in its recent race for bailout funding, there are additional “obstacle courses” to get through, not just for Greece but for peripheral Europe, notably Spain.

Fiscal retrenchment in Europe as well as in the U.S. could dampen economic prospects, as would a slowdown in China and other Emerging Markets. Rising oil prices would compound these concerns. Although equity markets have had much to be cheered about, there is a risk that complacency has been creeping back into the investment environment. We would not be surprised to see a renewed bout of volatility if economic data or corporate earnings begin to disappoint. 

The investment landscape has brightened in response to signs of fundamental progress in the global economy generally and the situation in Europe in particular. However, such progress continues to be modest and fragile. We therefore have maintained a diversified mix of strategies within the Fund. These strategies are spread across equity-oriented, credit-oriented, and arbitrage strategies, as well as macro and managed futures, with different degrees of correlation and market sensitivity. We believe that this approach is well positioned to live up to its history of producing attractive risk-adjusted returns over time. 

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, 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.

1st Quarter 2012

Rebound Continued

Global equity markets continued to rebound from last year’s third quarter lows driven by stronger U.S. economic data and a break from bad news out of Europe. The Fund slightly lagged its S&P MidCap 400 Index benchmark in gaining more than 13% during the quarter. Overall, the contribution from holdings to absolute returns was broad-based as 15 stocks gained more than 20%. Only three stocks posted losses during the period.

Three technology firms were among the top-five contributors to performance during the quarter, including Itron and CA. Itron provides smart metering solutions to utility companies to collect data for billing systems, analyze usage, and perform remote connect/disconnects. The company reported fourth quarter revenue and earnings results that were much better than consensus estimates. Although growth in North America has slowed, we think the company is positioned to benefit from strength in the Asia-Pacific region and to a lesser extent in Europe and Latin America. IT management software firm CA delivered better than expected revenue and earnings per share, and announced a capital allocation plan consisting of dividend payments (3.6% yield) and a share repurchase program.

Another notable performer was medical development company Charles River Labs. The firm assists pharmaceutical, biotech, and research labs in drug discovery and the testing of their products. During the quarter, the company announced it was engaged in a strategic review of its business strategy, leading to market speculation of a possible split of its two main business units, which could unlock value.

Tough Times

The three stocks that declined during the quarter were The New York Times Company, FMC Technologies, and Southwest Airlines. In addition, Pearson and Lincare Holdings posted only meager gains in underperforming the benchmark.

The New York Times Company’s stock decline owes primarily to the lack of any relevant news and the ongoing search for a new CEO. The company successfully launched a paid digital subscription service a year ago and just reported more than 450,000 digital subscribers. Print subscribers are up as well as home deliveries grew during the fourth quarter of 2011. In our view, the stock appears substantially undervalued.

Deep-sea oil production equipment provider FMC Technologies reported lower than expected earnings citing higher project costs and expenses. These execution issues are in part a function of higher volumes and the challenges associated with managing growth—including adding employees. Revenues met expectations and the book-to-bill ratio rose from the prior quarter. The stock decline followed a 39% gain during the fourth quarter of 2011.

Despite higher fares and significantly reduced capacity, high fuel costs due to current oil prices weighed on airline profitability, including that of Southwest Airlines. Southwest is the sixth largest US airline and ranks first in the number of originating passengers boarded. The company has one of the best overall customer service records in the industry, operating a low-cost, point-to-point model without added fees. We expect the company to see increased revenue from improved business travel and a better domestic footprint after it integrates AirTran (an acquisition completed May 2011).

Positioning and Outlook

The Fund sold two positions during the first quarter—Pearson and PerkinElmer. Pearson delivered substantial gains during the portfolio’s holding period from August 2003 through March 2012, more than doubling that of the broad market S&P 500 Index. The stock reached our valuation target and was near the top end of our mid-cap market capitalization range of $15 billion. PerkinElmer doubled from April 2009 through February 2012, again significantly outperforming the S&P 500. The company’s acquisition strategy made the company less focused on its primary business than we prefer. Elsewhere, we took advantage of short-term price fluctuations to rebalance the portfolio, trim stocks with higher valuations, and add to more attractively valued stocks.

As the market continued to rise during the first quarter, the macro environment remains mixed. The most recent Federal Reserve minutes suggest a reduced chance of further monetary stimulus. This reflects a more positive opinion of the underlying economy. The U.S. presidential election adds an element of uncertainty. News out of Europe remains mixed, with the European debt crisis far from over in spite of larger safety nets and promises of sovereign debt reform. With all of the focus on broader trends, the coming earnings season could offer some surprising stock moves based on unexpected company specific news. Alcoa provided the first significant example. The aluminum producer (aircraft, cars, beverage cans) surprised Wall Street by announcing a much better than expected quarter. Alcoa mentioned that most industrial sectors looked strong in North America.

We remain positive on the outlook for North America. The economic recovery is continuing. Despite strong equity returns in the preceding two quarters, valuations continue to remain attractive. By our calculation, the portfolio trades at less than 13 times 2012 earnings, below that of the Fund’s benchmark and the S&P 500. Corporate balance sheets remain strong generally, with many companies continuing to return cash to shareholders through increased dividends and stock repurchase activity.

Fairpointe Capital

Thyra E. Zerhusen, Chief Investment Officer
Marie L. Lorden, Portfolio Manager
Mary L. Pierson, Portfolio Manager

As of March 31, 2012, Itron comprised 3.19% of the portfolio’s assets, CA – 1.83%, Charles River Laboratories – 2.41%, The New York Times Company – 2.83%, FMC Technologies – 2.55%, Southwest Airlines – 2.50%, Pearson – 0.00%, Lincare Holdings – 1.52%, and Alcoa – 0.00%. 

Note: 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.

1st Quarter 2012 

Best First Quarter for Stocks Since 1998

Despite the continued overhang of European sovereign debt, slowing emerging economies, and political uncertainty in the U.S., the first three months of 2012 was the best first quarter for stocks since 1998. For the second straight quarter, equity markets posted double-digit gains, with the Fund’s Russell 1000 Value Index benchmark up more than 11%. Attractive valuations coupled with improved economic reports from the U.S. drove investors to equities, though growth companies outperformed their value counterparts by nearly 350 basis points.

Nine out of 10 benchmark sectors were positive during the period, with five sectors posting double-digit returns. Given the improving sentiment and uptick in economic activity, more cyclical areas of the market took leadership positions. Financials and Consumer Discretionary led the market higher as both gained more than 15%. Financials were aided by the recovery in banks as they continue to work through bad loans and improve their capital position, while economic optimism led investors to bid up Consumer Discretionary companies with attractive valuations. More defensive areas of the market trailed as investors flocked to companies poised to take advantage of improved economic conditions. The Utilities and Telecom sectors significantly trailed, posting negative and only slightly positive returns respectively, as investors demanded higher growth prospects.

The Fund outperformed its benchmark during the quarter fueled by enthusiasm for potential economic improvement that drove investors towards more economically sensitive companies and sectors. A substantial overweight stake in Technology was the largest contributor to performance as we have thought that valuations and fundamentals within the space have long justified significant ownership. Stock selection within Financials and a zero weight in Utilities were also major contributors to relative performance. The results of the Federal Reserve’s bank “stress tests”, improving news on the European sovereign debt front, and improved capital positions further boosted banking holdings.

Apple Shines

Apple was the best individual performer during the quarter as the company continues to drive sales through their Ipad, Ipod, and Mac product lines. Results at the company were particularly positive as the company announced that it would begin paying a dividend while also initiating a share repurchase program.

Western Digital and Citigroup were the two other standout performers. The FTC gave Western approval to proceed with its acquisition of Hitachi Global Storage Technology pending asset sales to Toshiba. The company also recovered faster than expected after flooding in Thailand that interrupted production of its hard drives, which helped to raise expectations for revenue, earnings, and market share. Citigroup’s stock was higher as the company reported earnings that showed improvement in lending and a reduction in losses on bad loans. The company also continues its slow but steady recovery, reporting net income 6% higher than in 2011.

Stock selection detracted from performance on the whole, however, as holdings in Healthcare and Consumer Discretionary trailed the overall market. Pharmaceutical stocks were notable detractors as Eli Lilly, Bristol Myers, and Merck all dealt with significant patent issues. Bristol Myers is navigating the loss of Avapro and Plavix this year, with more patent expirations expected in the near future. The company also suffered a setback when the FDA failed to approve a new class of diabetes drug the company was jointly developing, asking for more information before they could reach agreement. Bristol did acquire Inhibitex during the quarter to help bolster the company’s pipeline, but it came at a sizable premium.

Within Consumer Discretionary, Gamestop hurt performance as the video game retailer’s business model continued to come under attack. The company reported in-line earnings but softness in its used-game business. Concerns continue to surround the viability of the used-game business as game makers look to digital downloads and restrictions around used-game sales to protect new game sales.

Elsewhere, new holding Hewlett-Packard was the biggest individual detractor as the company reported earnings that were sharply lower from a year ago and warned of continued weakness going forward. The company also announced plans to combine its personal computing and printing divisions in an effort to improve sales.

Valuations Remain Compelling

Despite the strong positive results from stocks during the first quarter, we believe valuations remain compelling based on both traditional measures and Cornerstone’s proprietary valuation work. Cornerstone’s Fair Value Model now indicates that 71% of the stocks in its 800 stock universe are undervalued relative to their normalized value. Using normalized earnings, we now calculate the average discount of that universe to be 68% of fair value. The current equity risk premium (the projected excess equity return over a risk-free rate) for the Model is now at 9% versus an historical average of 3%. Along with valuation, other positives factors for stocks include accommodative central banks, record low interest-rates, and record corporate earnings.

Aside from normal additions and trims, we added two new positions to the portfolio during the quarter—eBay and Hewlett-Packard. Following a series of missteps and management turnover, HP is now one of the most attractive stocks in the portfolio based on our valuation work. The stock is valued as though it were a broken company in perpetual decline. It is rare for a large-cap, industry-leading firm in good financial condition like HP to look this attractive. We believe that the opportunity lies within the gap between the perception of it as a broken company and the current reality of it being a market-leader in three of its business units (PCs, printers, and x86 servers). It has a relatively clean balance sheet with operating cash flow of more than $12 billion for the most recently completed fiscal year. Furthermore, a renewed focus on operational excellence and disciplined capital allocation under new CEO, Meg Whitman, is consistent with our investment thesis. That is, our valuation work suggests a very low bar has been set for HP, and the company does not need to do anything heroic for the stock to work.

Ebay is transforming its business model from an online auction marketplace for unique items to a provider of technology driven e-commerce services to retailers. The company retains a large user base, global reach, and brand awareness, and has a strong balance sheet as well as very compelling valuation. As the parent company of Paypal, it also operates a global payments platform that enables secure and quick payments that is attractive to online retailers.

We sold two positions from the portfolio during the quarter—Chubb and Flextronics. Both relative and absolute valuations for high-quality insurer Chubb now appear more in-line with historic averages. The market seems to be pricing in considerable pricing improvement due to catastrophic losses that typically drive premiums higher. Electronics manufacturer Flextronics faces rising pressure due to higher input costs and increased competition.

Concluding Comments

As the market has produced double-digit returns in each of the past two quarters, investors could be forgiven for thinking stocks are due for a breather. A number of issues still overhang the economic and market environment with looming elections in the U.S. and abroad, slowing emerging economies, and the indebtedness of troubled European governments. Cornerstone does not attempt to forecast these macroeconomic events or when their conclusions will be realized. Rather, we attempt to identify successful companies trading at attractive valuations given low expectations in an effort to protect capital. We think there are a significant number of industry-leading, strong cash-flow generating companies trading at reasonable valuations that offer compelling opportunities for patient and disciplined investors.

Cornerstone Investment Partners

As of March 31, 2012, Apple comprised 4.99% of the portfolio’s assets, Western Digital – 3.61%, Citigroup  – 4.20%, Eli Lilly – 3.23%, Bristol Myers – 2.20%, Merck – 3.82%, Gamestop – 1.28%, Hewlett-Packard – 2.65%, and eBay – 2.03%

Note: Value investing often involves buying the stocks of companies that are currently out of favor that may decline further.

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.

1st Quarter 2012 

Global equity markets began 2012 on a positive note as a degree of stabilization in the eurozone and continued strong economic news from the U.S. buoyed stocks, as did the lack of a ‘hard landing’ in China. This meant that many markets, both developed and emerging, saw double-digit returns during the first quarter of the new year.

The Fund kept pace by posting more than 10% return for the period, though it lagged its MSCI EAFE & Emerging Market Index benchmark by roughly a percentage point. Returns benefited from exposure to both developed and emerging markets as well as the portfolio’s more cyclical economic tilt—with positions in the Materials and Technology sectors being the biggest contributors to performance. In addition, a favorable allocation and solid stock picking in developed markets such as Hong Kong, Japan, and the Netherlands produced strong returns.

Among the top individual holdings for the quarter were Norwegian fertilizer company Yara International, Russian steelmaker Norilsk Nickel, and Japanese industrials stock Komatsu. We viewed their success as further evidence of the sector rotation we have seen since the end of last year, with Materials and Industrials stocks rebounding strongly from a difficult 2011.

Overall, the Fund remains positioned for a continuation of growth in Emerging Markets, particularly China and Russia, where the portfolio is overweight and we see potent growth opportunities continuing through 2012. By our calculation, the Russian market is currently trading at just six times earnings, which is a 44% discount to the Emerging Markets average. We believe there is a huge amount of upside in Russia due to this discount, with improving corporate governance and the regulation of state industry likely to be high on the government’s agenda in 2012. As always, the Fund seeks exposure to global leaders across all sectors of the market that have strong balance sheets and continue to grow and diversify into new markets. 

Robin Geffen, Fund Manager & CEO
Neptune Investment Management

As of December 31, 2011, Yara International comprised 2.46% of the portfolio's assets, Norilsk Nickel – 1.67%, and Komatsu – 2.86%.

Note: Investing in foreign markets involves the risk of social and political instability, market illiquidity, and currency volatility. Holdings in emerging markets entail the further risk of unstable legal systems, increased volatility, and even 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.

1st Quarter 2012 

The Fund lagged the broader equity market (as represented by the S&P 500 Index) amid a strong double-digit rally during the first quarter of 2012. The rally is a continuation of the upward swing in stocks from the fourth quarter of last year which began after a summer of severe volatility and losses in 2011. The portfolio’s focus on higher-yielding stocks such as utilities and large healthcare companies that cushioned some of the blow from last summer have acted as a drag on returns during the market surge. The Fund’s secondary strategy of owning put options as a hedge against sudden downswings in the market also hurt relative performance in the generally rising market.

As expected, and as we have seen in the past, the Fund tends to lag during market rallies due to our primary strategy of writing individual, out-of-the-money call options on the portfolio’s underlying holdings. As stocks rise, the option strike price effectively caps the return on those individual positions, limiting some of the upside potential of the portfolio. We are willing to make that sacrifice in exchange for the premiums garnered and the lessening of volatility over the longer market cycle. Although the upside potential is reduced somewhat, when option positions are called we have the opportunity to re-invest the proceeds in holdings and/or sell additional call options to continue to participate in an appreciating market.

At this time, we think it is inappropriate to increase the risk profile of the underlying portfolio after a substantial rally. We remain focused on income from both the dividends of the Fund’s underlying equity holdings and the premiums from the call options we write as a means of staying firmly in the “risk-off” (i.e. relatively defensive) portion of the equity market. Given the opportunity to change holdings as they are called away, one of the things we have focused on is to increase the current dividend yield of the portfolio through newer purchases.

Although results can lag over short time periods, such as during the past quarter, we think the long-term benefits of our risk management focus using call and put options are evident. The Fund has delivered less volatility than the S&P 500 (as measured by standard deviation) its January 2008 inception, which has contributed to its outperformance over the broader index during the time.

Ron Altman                                                   
Senior Portfolio Manager                            

Note: By selling covered call options, the Fund limits its opportunity to profit from an increase in the price of the underlying stock above the exercise price, but continues to bear the risk of a decline in the stock. A liquid market may not exist for options held by the Fund. If the Fund is not able to close out an options transaction, it will not be able to sell the underlying security until the option expires or is exercised. While the Fund receives premiums for writing the call options, the price it realizes from the exercise of an option could be substantially below a stock’s current market price. Premiums from the Fund’s sale of call options typically will result in short-term capital gain taxes, making it ill suited for investors seeking a tax efficient investment. The use of derivatives by the Fund to hedge risk may reduce the opportunity for gain by offsetting the positive effect of favorable price movements. There is no guarantee that derivatives, to the extent employed, will have the intended effect, and their use could cause lower returns or even losses to the Fund. 

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.

Montag & Caldwell seeks steady growth opportunities among mid-cap stocks.

By Kerry O'Boyle, Aston Asset Management

Montag & Caldwell Investment Counsel has been investing in growth stocks for a long time—more than 65 years. Since the early 1970s they have developed a strategy focused on identifying companies, mostly large-caps, with long-term sustainable earnings growth trading at discount prices. Much of their success has come from the blending of strong company fundamentals and attractive valuations with short-term earnings momentum as a catalyst. In recent years, notably with the launch of the ASTON/Montag & Caldwell Mid Cap Growth Fund (AMCMX), Montag has applied this process to picking mid-cap stocks. Although the firm has analyzed mid-caps for quite some time in surveying the landscape for growth stocks, what’s new is investors’ ability to benefit directly from their growth expertise with mid-sized companies.

The Mid-Cap Advantage 

One of the primary reasons Montag developed a mid-cap strategy comes from a greater appreciation for the risk/reward potential of mid-caps as an asset class, as outlined by Fund co-manager Scott Thompson in his commentary The Mid-Cap Advantage. In comparing the Russell Midcap and Russell 2000 Indices, Thompson describes how mid-cap stocks occupy a “sweet spot” in the market-capitalization spectrum having historically offered greater stability and less volatility than small-caps stocks while typically superior growth than larger companies. Mid-sized companies are more likely to have exited the early, high-risk stage of their life cycles and settled into a phase of steadier growth. Such companies have often successfully established their footprint in the marketplace, yet have not reached such a size that growth becomes a challenge, as often happens with more mature firms.

Montag has been able to take advantage of this market sweet spot because the firm has historically researched companies with market-capitalizations down to $3 billion. It was only a minor adjustment to bring that screen down to $2 billion to encompass the full mid-cap universe. The mid-cap Fund’s mandate is to invest in stocks between $2.5 billion and $10 billion. Otherwise, the research process is exactly the same as Montag’s flagship growth fund, the ASTON/Montag & Caldwell Growth Fund (MCGFX), which has a 17-year track record.

That process uses an 11-factor financial score—including historical long-term growth, earnings predictability, balance sheet strength, and profitability—to measure firm quality and serve as the basis for a stock-specific discount rate that’s the key to Montag’s valuation model. Montag developed this model after the crash of the so-called Nifty Fifty stocks during the 1970s revealed the need to consider absolute valuations in addition to relative valuation measures (such as price/earnings ratios) to better understand the risk of each investment. Seeking the best combination of quality, earnings growth, and valuation (both relative and absolute) allows them to adjust to differing market conditions, with relative earnings momentum serving as a timing element for a company’s growth potential and value to be recognized by the market.

Subtle Differences 

Although Montag researches all growth stocks in essentially the same way, there are some differences in how the mid-cap portfolio is constructed to better suit the requirements of that more dynamic area of the market. The most obvious distinction is that there are more holdings in the mid-cap Fund because of the greater potential for volatility. Individual company news can cause much larger swings in stock prices for mid-caps than is typically the case for large-caps. This is especially true for one- or two-product/service firms that are more sensitive to changes in their businesses than larger, more-diversified companies. This business momentum can work both ways, to the upside or the downside, and holding more names helps as a check on overall portfolio volatility. With 45 to 65 holdings, though, the Fund is still more concentrated than its typical mid-growth fund peer, reflecting Montag’s conviction in its stock-picking process.

Fund co-managers Thompson and Andy Jung also point to the different characteristics of the mid-cap market that a growth manager must be aware. Jung notes that there are more opportunities to find growth in smaller industries and niche areas of the market than are typically available to large-cap investors. For instance, the Montag Mid Cap team has found growth opportunities in areas like specialty chemicals and auto parts, areas not typically represented in the large-cap oriented flagship Aston/Montag Fund.

In addition, sector positioning can sometimes play less of a role in the mid-cap Fund. Jung says that one can’t necessarily make the same generalizations related to defensiveness or cyclicality about certain sectors as with large-caps. A notable example of this is in the Healthcare sector. Traditionally a low-beta (volatility), defensive area of the market driven by huge pharmaceutical companies, within mid-caps Healthcare contains more cyclical, higher-beta biotech firms and capital equipment/instrument makers. This can make it a more volatile area in which to invest, and more subject to economic cycles.

Earnings Predictability 

It is the volatility in the market since the financial crisis of 2008 that has Montag especially focused on earnings predictability in its mid-cap portfolio these days. Amid what many now refer to as a muddle-through economy of slow economic growth Jung believes that the consistency of company earnings has become a distinguishing factor in picking mid-cap stocks. The idea is to own companies with a proven track record of producing solid results regardless of the economic environment, which adds to the confidence that these companies can continue to deliver. Montag keeps an eye on Value Line’s earnings predictability measure, which is a 40-quarter weighted average of a company’s standard deviation of earnings. They also prefer companies with cleaner balance sheets (i.e. low debt) to show that they are not “cheating” (using leverage) to achieve growth, which may distort a firm’s true growth potential.

One typically pays more for what are perceived to be steadier companies, but in this uncertain economic environment the confidence in more consistent earnings is likely worth it over the long haul. That was reinforced in 2008 and 2009, when mid-caps with consistent earnings were knocked down along with all the rest in the volatility and market turmoil of the period. The stock of Varian Medical Systems, for example, was hard hit during the third quarter of 2008. Yet the company continued to grow earnings by 10% throughout the economic crisis, giving the team the confidence to stick with it, as that growth subsequently powered a strong recovery in the stock.

Next Generation 

Montag & Caldwell’s formal venture into picking mid-cap stocks is also important in demonstrating the depth of talent at the venerable asset manager. Co-managers Thompson and Jung represent the next generation of stock-pickers at Montag. The firm has grown and prospered for several decades under the guidance of veteran manager Ron Canakaris, but it recognizes the need for its younger investment professionals to show their talent at running a portfolio. Thompson has been with Montag for more than 19 years, progressing from research analyst to co-Director of Research at the firm. Jung is the other co-Director of Research, having joined Montag as a research analyst a decade ago after working on both the sellside and buyside for several years. He brings the perspective of having seen firsthand how others manage growth portfolios which helps in understanding the market, and fostered an even greater appreciation for a firm like Montag unified behind one process for identifying investment opportunities.

Given the experience of Thompson and Jung and the long history of Montag as growth investors, the ASTON/Montag & Caldwell Mid Cap Growth Fund represents less of a “new trick” than an extension of a tried and true process for selecting growth stocks. Having identified the potential advantages of investing in mid-caps, Montag has carefully crafted a strategy that leverages its expertise in finding companies with quality growth characteristics. Thus, the Fund can serve as an aid to investors seeking to diversify their own portfolios across a greater range of growth companies.

Kerry O'Boyle is an Investment Strategist with Aston Asset Management. Prior to joining Aston he wrote on a variety of investment topics as a mutual fund analyst for Morningstar, Inc. He is a graduate of the U.S. Naval Academy, and holds an M.A. in Liberal Arts from St. John's College, Annapolis, MD.

As of February 29, 2012, Varian Medical Systems comprised 1.51% of the portfolio’s assets. Holdings are provided for informational purposes only and should not be deemed as a recommendation to buy or sell any security mentioned.

Note: Small- and mid-cap stocks are considered riskier than large-cap stocks due to greater potential volatility and less liquidity. Growth stocks are generally more sensitive to market moves and thus may be more volatile than other stocks. Parameters set by the subadvisor are not a fundamental policy of the Fund and are subject to change at any time.

Before investing, carefully consider the Fund’s investment objectives, risks, charges and expenses. Contact (800) 992-8151 for a prospectus or a summary prospectus containing this and other information. Read it carefully.

Aston Funds are distributed by Foreside Funds Distributors LLC. 

1st Quarter 2012

The Fund got off to a solid start to the year in January only to see Apple, which we did not hold in the portfolio, rocket 48% during the quarter. Apple, which grew to comprise 6.6% of the Fund’s Russell 1000 Growth Index benchmark, accounted for almost 20% of the index’s return during the period, most of which came in February and March. We sold Apple from the portfolio in October, after the company disappointed in its third quarter reporting. We didn’t want to face the risk of a miss from the crucial holiday quarter, which in retrospect turned out to be the wrong call as they blew that number out.

Apple now carries the distinction of being the fifth name in history to move above the 4% mark within the S&P 500, as it now comprises 4.4% of that index. The four previous names were Microsoft, GE, Exxon, and Cisco, none of which could stay above that 4% level for more than a year (according to the Leuthold Group). Could Apple be the first to buck this trend? No doubt, but the stock is up six-fold from March of 2009 and 57-fold since April of 2004. It is not exactly undiscovered. Instead, we have chosen to own Qualcomm, a major beneficiary of the success of the iPhone, but more importantly the clear winner of the next generation 4G LTE rollout world-wide. We also chose Microsoft, which will introduce Windows 8 this fall and incorporate a lot of the same touch functionality that Apple has introduced.

The Fund ended the quarter modestly trailing its benchmark. Other than Apple, most other areas of the portfolio performed fairly well. Stock picking within Consumer Discretionary was the main contributor led by Ralph Lauren, which reported a better than expected quarter. Previously mentioned tech firms Qualcomm and Microsoft also contributed positively, both delivering gains of more than 24%. A significant overweight to Financials led by American Express helped returns as well.

Looking ahead, we do not expect macroeconomic worries to fade away anytime soon, and expect some choppiness to surface during the upcoming quarters from a new set of worries—the U.S. presidential election, the Supreme Court decision on the healthcare mandate, and the upcoming fiscal cliff from mounting federal debt and the expiration of the Bush tax cuts in January 2013. We didn’t include gasoline prices as we think they may have run their course already, but if we are wrong they will definitely go into the negative column.

That being said, we believe the U.S. equity market is still the place to be as Europe is teetering on the edge of recession, Emerging Markets are slowing down, and 10-year Treasuries yielding only 2%. The continuing fear is contagion in Europe. Although Spanish and Italian yields have started to blow out again, interbank rates both here and across the Atlantic are doing nothing and are well off their highs. Meanwhile, U.S. corporate profits are at an all-time high.

We believe that we have a solid stable of companies in the portfolio that can continue to report earnings above expectations and drive future estimates ever higher. We have built the portfolio around a variety of themes that include mobile communications and payment systems, multinational consumer brand names, and infrastructure plays that we think will benefit from the vast build out required to get the vast supply of tight oil and natural gas to market. In addition, we think there are enough macro pieces falling into place that could entice the mountain of cash parked on the sidelines or in low-yielding bonds back into equities over the course of the next 12 to 18 months. 

Charles F. Mercer, Jr. CFA               B. Anthony Weber                 Michael E. Johnson, CFA
April 11, 2012

As of March 31, 2012, Apple comprised 0.00% of the portfolio's assets, Microsoft – 5.00%, General Electric – 0.00%, Exxon Mobile – 0.00%, Cisco – 2.19%, Qualcomm – 5.56%, Ralph Lauren – 3.90%, and American Express – 3.27%.

Note: Growth stocks are generally more sensitive to market moves and thus may be more volatile than other stocks.

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.

1st Quarter 2012 

The Fund substantially outperformed its Russell 1000 Value benchmark during a first quarter that saw most broad equity indices deliver double-digit returns. Portfolio holdings in eight out of 10 sectors outperformed their respective benchmark sector and/or the overall index. The only sector that underperformed was Telecommunications, where the Fund had no exposure. Overall, stock selection was positive and sector allocation was slightly negative.

Performance for the benchmark itself was fairly broad with five sectors—Financials, Consumer Discretionary, Technology, Materials, and Industrials—outperforming the overall index. All sectors had a positive return with the exception of last year’s leading sector, Utilities. Utilities declined 1.6% as it appeared that investors favored less defensive area of the market given greater confidence that the U.S. economy might be recovering.

Strong Tech Showing

The three portfolio sectors with the greatest contribution to returns during the quarter were Technology, Healthcare, and Industrials. Five out of six holdings in Technology outperformed, while Healthcare fared similarly well with four out of five stocks outperforming their sector peers. Industrials performed well with an eclectic mix of companies benefiting from a more favorable economic environment.

The three top individual contributors were Apple, Copa Holdings, and Federated Investors. Apple continues to surge on better than expected fundamentals coupled with the initiation of a share buyback program and the announcement of the firm’s first ever dividend, which broadened its appeal to a wider shareholder base. Copa Holdings, parent of Copa Airlines, continued to deliver solid results within Industrials despite concerns over fuel prices. The valuation of Federated Investors rebounded from what we considered a draconian discount at the end of last year based on an outcome regarding potential reserves for money market funds that ignored the diversified and profitable nature of the bulk of its businesses. Each of these stocks remains in the portfolio as we continue to view them as value creating opportunities.

The sectors with the weakest contribution to performance were Financials, Energy, and Telecom. Only Financials produced an overall negative contribution, as a significant underweight position in the sector relative to the benchmark overcame eight percentage points of excess return from stock selection. Positions in Energy and Telecom managed to slightly outperform the benchmark.

The biggest individual detractors from performance were RPC, Caterpillar, and Campbell Soup. Oil well service and equipment provider RPC suffered from concerns about the stability of oil prices. The drop in Caterpillar’s stock reflected investors’ concerns about global growth. The defensive characteristics of Campbell Soup became less prized amid a potentially more robust domestic economic situation. Of the three, only Campbell Soup was sold during the period.

Corning Out, CBOE In

In addition to Campbell Soup, notable sales from the portfolio during the quarter included Corning and Eli Lilly. The stocks eliminated were due to sector adjustments and/or valuation/fundamental issues. These changes were primarily driven by the dynamic interrelationships of the sectors as we position the portfolio to exploit value creating opportunities. As we share regarding our investment philosophy, “We have a core process but no core holdings.”

New positions were initiated in trading exchange CBOE Holdings, credit card issuer Discover Financial Services, and Caterpillar. Each stock was purchased after first being identified as a value creating opportunity followed up with fundamental analysis to vet out the potential as a portfolio holding.

On a sector level, the result of this and related activity during the quarter was an increase in the portfolio’s exposure to Financials, Energy, Consumer Staples, and Industrials and a decrease in Telecom, Technology, and Materials. The Fund’s biggest sector overweight position remains Energy, followed by Consumer Staples and Technology. The most significant underweight was Financials, though less so, and the portfolio had no exposure to Telecom or Utilities at the end of the period.

Outlook

The first quarter began with quite a bit of fanfare. The economy appeared to be picking up, unemployment declined, and Greece did not fall off the face of the earth—staving off a technical default. The Republican nomination process seems to be cascading to an end. The rest of the world appears to be growing at a less aggressive pace. Questions are being answered in the market, which fills the information vacuum that the market abhors. Did things get dramatically better over night? No. But, as is said, it is always darkest before the dawn as if a new day is not ever going to emerge again.

We are pleased that many of the Fund’s holdings, such as Federated—which delivered less than satisfying returns during the fourth quarter—reversed the trend in a meaningful fashion. We dare not run a victory lap because we understand the fickle nature of the market. She loves me. She loves me not. In the first quarter, she loved me. The next quarter is a new day.

We are glad to see that the recovery, although still being somewhat dismissed by some, appears to be gaining solid traction. Corporations are still trading at attractive levels with cash hoards that should eventually find a way to generate additional shareholder value.

We believe the portfolio is positioned well on a fundamental and valuation basis to take advantage of the current environment. The stocks in the portfolio represent holdings in solid companies that we think still have a level of disbelief priced in that makes them opportune investments. Once the aura of attraction fades, we will take profits and redeploy into other, similar opportunities that have yet to catch the market’s fancy.

With such a strong gain to start the year, a pullback would make sense. But, we think that over the long-term an upward direction is more sensible. We are not market prognosticators but as allocators of investor capital, we do pay attention. And the alternatives to equities are not quite as attractive. Thus, perhaps 2012 will be a favorable year for equity holders.

Randell A. Cain, CFA
Principal and Portfolio Manager
Herndon Capital Management

April 9, 2012

As of March 31, 2012, Apple comprised 3.39% of the portfolio's assets, Copa Holdings – 3.60%, Federated Investors – 3.06%, RPC – 0.62%, Caterpillar – 0.93%, CBOE Holdings – 1.00%, and Discover Financial Services – 1.03%.

Note: Value investing involves buying the stocks of companies that are out of favor or are undervalued. This may adversely affect the Fund's value and return.

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.

1st Quarter 2012

Stocks Extend Rally

Stocks delivered one of the best first quarter performances on record in 2012, extending the rally that began in October 2011 and lifting most major indexes to new 12-month highs. The Nasdaq exchange led with an astonishing 18% return, its best first quarter performance since 1991, while the S&P 500 Index gained more than 12%—its best first quarter since 1998. The Russell 2000 Index kept pace with the S&P 500, in delivering its best first quarter since 2006 and ninth best on record. Surprisingly, the Russell 2000 lagged the large-cap oriented Russell 1000 Index during the quarter—a rare occurrence amid a period of such strong returns.

The key drivers of the equity rally have been widespread, including improved U.S. economic data, attractive corporate earnings growth, easing concerns over the Eurozone crises, and the extraordinary liquidity provided by major central banks across the globe. The “risk-on” nature of the recent rally is almost certainly the result of monetary stimulus and is evident in the continuing high-beta (volatility), low-quality leadership themes. For the most part, the laggards of 2011 surged during the first quarter of 2012.

Within the S&P 500, for example, the highest-beta (volatile) stocks as grouped by quintile gained nearly 20% during the first quarter versus 4% for the lowest-beta stocks—a remarkable gap. Low-quality and distressed stocks also rallied. According to BofA/Merrill Lynch, low-quality outperformed high-quality by more than 3 percentage points while Morningstar’s distressed stock universe rose nearly 30%.

As might be expected amid such a strong rally, long-short equity strategies underperformed long-only strategies. The HFRX Hedged Equity Index gained only 3.9% during the quarter versus nearly 13% for the Fund’s long-only Russell 3000 Index benchmark. The Fund bested the HFRX index by nearly two percentage points, but severely lagged the long-only benchmark during the brief period. Since its May 2011 inception, however, the Fund has outperformed both the benchmark and the HFRX Index, the latter by a significant margin.

Underperformance during the quarter was primarily driven by the portfolio’s net long equity exposure and, to a lesser extent, stock selection. With an average net long equity exposure of slightly more than 50% during the period we expected to generate greater than half of the market’s return. The portfolio captured only 46% of the market’s return due to the performance of the short portfolio. The short portfolio consisted of stocks with challenged business models that tended to be high-beta and low-quality, areas which rallied the most during the quarter.

Long Portfolio

The long-only portion of the portfolio increased nearly 13% during the period, with an average exposure of 75%. The stocks with the highest contribution to long portfolio performance were Microsoft, General Motors, and Liberty Interactive Corp. After several years of neglect investors finally embraced Microsoft’s consistent dividend increases, AAA-rated balance sheet, and PC dominance. Although tablets have commanded attention with eye-opening growth rates, tech research firm Gartner predicts healthy 2012 PC growth from which Microsoft stands to benefit. The Fund still holds the stock, but we trimmed the position given the strong rise in price.

General Motors made massive cuts to rationalize its cost structure during its bankruptcy in July 2009, allowing it to remain profitable through the demand cycle. The stock rallied during the quarter as the underfunded status of its pension was in much better shape than feared. In our analysis, the stock still traded only marginally above its net cash and investments during the first quarter. Liberty announced during the quarter that it would convert to two tracking stocks in order to highlight the value of its QVC home shopping network. Chairman John Malone will likely continue his proven track record of aggressively repurchasing shares in the tracking stock structure. We maintained the portfolio’s position.

The stocks with the lowest contribution to long portfolio return during the quarter were Newmont Mining, Cloud Peak Energy, and Patterson-UTI Energy. Leading gold producer Newmont declined after reporting a weak fourth quarter that missed expectations. Specifically, production remains stagnant, costs are rising, and 2012 guidance was uninspiring. We think that bebasement of fiat currency combined with stagnant gold supply growth supports a long-term tailwind for gold, and Newmont investors should benefit due to its gold-linked dividend policy. Coal producer Cloud Peak suffered from rapidly declining natural gas prices that have put pressure on coal as power generators increasingly switch to cheaper natural gas. Although Cloud Peak hedged more than 90% of its expected 2012 production and 60% of its expected 2013 production, longer-term coal prices continue to decline. As one of the biggest losers in the portfolio, we sold the stock.

We invested in Patterson-UTI near the end of the quarter after the stock materially underperformed the market. The company is a top-three onshore domestic driller for oil and natural gas, and a leading pressure pumping provider. The stock remained under pressure as investors continued to associate it with natural gas drilling and lower natural gas prices. The firm, however, has upgraded its rig fleet over the last four years and now 60% of its rigs drill for liquids, most under long-term contracts. We added to the stock during the quarter in building toward the portfolio’s target position size.

Short Portfolio

The short portion of the portfolio increased 15% during the quarter, negatively affecting performance, with an average exposure of -22%. Individual short positions (hedges excluded) gained nearly 19%, materially detracting from returns as high-beta and distressed stocks rallied. Pulte Group, AOL, and Western Refining were the three biggest negative contributors to the short portfolio.

Several positive comments from multiple homebuilders resulted in a rally for the industry, including Pulte. The company is one of the largest and most levered homebuilders in the industry and has a history of poor capital allocation. We believe that falling home prices and rising cancellation rates will continue to be problematic for homebuilders, but exited the position as the stock hit our stop-loss price in complying with our short portfolio risk controls.

AOL rallied after hiring Evercore Partners to find a buyer for its patent portfolio, despite widely varying estimates of the worth of those patents. The market was also excited about the firm’s double-digit advertising revenue growth during the fourth quarter of 2011, ignoring the easy prior year comparisons. Subscriber revenue, where the company generates virtually all of its cash flow, declined 18% and the company saw another executive departure. We maintained the portfolio’s short position.

Independent oil refiner Western Refining only owns “non-complex” refineries, which means it is unable to process a wide variety of crude oils. It is currently benefiting from its ability to buy crude at discounted West Texas Intermediate (WTI) prices and sell its oil based on Brent pricing.  We do not think WTI prices will remain discounted forever and will revert to its historical mean as new infrastructure capacity comes online. We exited the position per our short-covering discipline after it hit our stop-loss price.

Positions with the highest contribution to return in the short portfolio were the United States Natural Gas ETF (UNG), Best Buy, and R.R. Donnelley & Sons. As happened last quarter, during periods of contango (a condition where the price of a forward or futures contract is greater than the expected spot price at contract maturity) the net asset value of UNG deteriorated as the ETF rolled its futures contracts. As a result, the ETF has historically captured more of the downside moves in natural gas prices and less of the upside movements in the commodity. Best Buy’s stock declined after reporting a dismal fiscal fourth quarter that missed expectations. The company surprised Wall Street with negative same-store sales and remains the poster-child for “showrooming”—customers visiting a store only to test out products that they then purchase cheaper from an online competitor. As the world’s largest printer, R.R. Donnelley continues to suffer as the decline in printing accelerated. We closed the position as it approached our Absolute Value, though it remains on our Watch List in the event that yield-hungry investors bid the stock up to a premium valuation.

Positioning and Outlook

Our discount-to-value indicator for the portfolio remained in a relatively tight range around 75% and the Fund did not experience a material drawdown during the quarter. As a result, the portfolio remained within its normal net long equity exposure range of 50% to 70%. As the market rose during the quarter, we naturally increased the short portfolio and were excited to add several ignored, high-quality large-cap stocks to the long portfolio. Although net long equity exposure only increased from 51% to 54% during the period, gross market exposure (overall long plus short positions) increased from 85% to 109%. 

On the long side, out-of-favor or underfollowed stocks left behind during the market’s unwavering rise during the period primarily consisted of stocks that require sum-of-the-parts analysis (which does not easily lend itself to Wall Street sell-side coverage) and energy-related opportunities. Long exposure increased from 68% to 82% as the team discovered several new, compelling long ideas. Despite plummeting natural gas prices, we were thrilled to add to the Fund’s energy portfolio. We believe our ability to short structurally flawed ETFs, like UNG, hedges out commodity price risk. In addition, we believe we can capitalize on a market correction using a nearly 20% cash stake to build existing long positions and initiate positions in new long ideas without having to sell anything to raise funds.

We also took advantage of the market rally to increase the individual short portfolio from -15% to -25% as the market focused on those companies we consider to have the most “serious operating problems,” which represent our favorite short opportunities. Our unrealized loss discipline identified a risk exposure to cyclical stocks and we transitioned some of the short portfolio to a broader list of securities. With multiple consumer measures (average earnings, disposable income, savings rate, etc.) at 12-month lows we felt comfortable building a larger position in consumer-oriented short positions. With investors also starved for yield, the portfolio has a sizeable short position in select REITs, rural telecom providers, and other stocks that cannot support their dividend from cash flow. We believe junk rallies provide attractive opportunities to short fundamentally challenged businesses at attractive valuations.

Although global economic growth moderated during the quarter, the domestic economy continued its slow and steady expansion with an historically warm winter serving as a tailwind. Rising gasoline prices, insider selling, interest rates, and investor complacency, however, have been associated with meaningful stock market volatility and drawdowns in the past. We believe our robust risk management, stock selection, and nimble net market exposure are ideal for such an environment. Until the market refocuses on these risks, however, we expect to stay within our normal net long equity range of 50% to 70%. 

River Road Asset Management
9 April 2012

As of March 31, 2012, Microsoft comprised 1.51% of the portfolio's assets, General Motors – 2.76%, Liberty Interactive – 3.14%, Newmont Mining – 2.50%, Cloud Peak Energy – 0.00%, Patterson-UTI Energy – 2.88%, Pulte Group – (0.00%), AOL – (1.68%), Western Refining – (0.00), The United States Natural Gas Fund ETF – (0.92%), Best Buy – (0.86%), and R.R. Donnelley & Sons – (0.00%).

Note: Short sales may involve the risk that the Fund will incur a loss by subsequently buying a security at a higher price than which it was previously sold short. A loss incurred on a short sale results from increases in the value of the security, thus losses on a short sale are theoretically unlimited. Value investing often involves buying the stocks of companies that are currently out-of-favor that may decline further. Investing in exchange traded and closed end funds are subject to additional risk that shares of the underlying fund may trade at a premium or discount to their net asset value.

Parameters set by the Subadviser are not a fundamental policy of the Fund and are subject to change at any time.

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.

1st Quarter 2012

Stocks Extend Rally

Stocks delivered one of the best first quarter performances on record in 2012, extending the rally that began in October 2011 and lifting most major indexes to new 12-month highs. The Nasdaq exchange led with an astonishing 18% return, its best first quarter performance since 1991, while the S&P 500 Index gained more than 12%—its best first quarter since 1998. The Russell 2000 Index kept pace with the S&P 500, its best first quarter since 2006 and ninth best on record. The small-cap index has rallied more than 37% from its October 2011 low and closed the quarter within 4% of its all-time high. Surprisingly, the Russell 2000 lagged the large-cap oriented Russell 1000 Index during the quarter—a rare occurrence amid a period of such strong returns.

The key drivers of the equity rally have been widespread, including improved U.S. economic data, attractive corporate earnings growth, easing concerns over the Eurozone crises, and the extraordinary liquidity provided by major central banks across the globe. The “risk-on” nature of the recent rally is almost certainly the result of monetary stimulus and is evident in the continuing high-beta (volatility), low-quality leadership themes.

Within the Fund’s Russell 2500 Value Index benchmark, for example, the highest-beta stocks (fifth quintile) returned nearly 18% during the first quarter versus 4.5% for the lowest-beta stocks (first quintile)—a remarkable gap. From a quality perspective, the lowest return-on-equity (ROE) stocks outgained the highest 14% to 12%. Non-dividend paying stocks also outperformed stocks that pay a dividend by more than four percentage points. Investors should note, however, that high-beta leadership faded in March, which may be a sign that the current quantitative easing (QE) fueled risk trade has run its course.

Active managers delivered impressive performance during the period despite a dismal March.  According to BofA/Merrill Lynch and Lipper Analytical Services, 65% of active small-value managers outperformed the Russell 2000 Value Index, but only 21% outperformed in March. The significant underperformance by active managers in March appears to have coincided with the higher-beta leadership beginning to fade in the small-cap universe. We first commented in early 2011 that, based on similar performance statistics, small-value managers appear to have adopted a higher risk profile than has historically been witnessed. We concluded this trend would likely result in managers underperforming as the QE-driven risk trade diminished. Our conclusion was evident during the corrections that occurred in the second and third quarters of 2011, and again as the high-beta leadership faded in March.

2011 Part Deux?

The Fund noticeably lagged the benchmark during the quarter. The relative underperformance is disappointing, but understandable given the leadership of extremely high-beta stocks in the market. As expected, relative performance began to improve as high-beta leadership began to fade toward the end of the period. The Fund experienced a similar trend during 2011. The Fund lagged the benchmark appreciably during the first quarter of that year as well, as high-beta stocks led the market sharply higher. Once the QE2-fueled rally began to fade midyear, however, the portfolio outperformed. Although we believe the final 2012 market and portfolio returns will be significantly better than 2011, we expect a similar pattern of improved relative performance to emerge as the risk trade fades.

The sectors with the lowest contribution to relative returns during the quarter were Industrials and Financials. Industrials suffered from poor stock selection, while Financials lagged as a result of both stock selection and the portfolio’s underweight allocation.

Among the biggest individual detractors from performance were Brink’s, Ruddick, and two Energy-related stocks, all of which posted losses amid the strong rally. Global security provider Brink’s continued to suffer from pricing and volume pressures in its North American segment, driven by aggressive competition. As a result, the company announced a significant cost savings plan to revive the segment’s margins. In addition, the firm plans to meet the obligation to its underfunded company pension plan primarily with equity. Although the cost of equity issuance at these levels is expensive and dilutive, debt issuance is not an option given the company’s desire to maintain its investment grade balance sheet, the inability to tax-efficiently repatriate its foreign earnings, and the poor cash flows of its North American business. We trimmed the portfolio’s position due to lower conviction in the company’s capital allocation strategy.

Top-holding Ruddick, which officially changed its name to Harris Teeter Supermarkets on April 2, reported strong first quarter results, but its share price momentum slowed in 2012 after being one of the portfolio’s top performing holdings in 2011. We think it remains a well-run company with strong fundamentals and a solid balance sheet. It remains a high-conviction holding in the portfolio.

Cloud Peak Energy and Rex Energy both declined double-digits within the lagging Energy space. Coal producer Cloud Peak suffered from rapidly declining natural gas prices that have put pressure on coal as power generators increasingly switch to cheaper natural gas. Although Cloud Peak hedged more than 90% of its expected 2012 production and 60% of its expected 2013 production, a sustained period of low natural gas prices could permanently affect demand for coal. Small, independent natural gas company Rex Energy unexpectedly announced a poorly executed secondary equity offering to pay down debt. We trimmed both positions in the portfolio as a result of their respective issues.

Soaring Retail

An underweight allocation and positive stock selection in Utilities and an overweight allocation to the surging Consumer Discretionary sector were the primary positive contributors to relative performance.  Four of the Fund’s five top individual contributors—Ascena Retail Group, Big Lots, Pep Boys, and Madison Square Garden—came from the Consumer Discretionary sector.

Ascena which operates the dressbarn, maurices, and Justice specialty apparel chains reported strong holiday results, while favorable spring sales trends led the company to raise its earnings guidance for fiscal year 2012. The company has repurchased 2% of its outstanding shares year-to-date, and management is seeking accretive acquisitions. Closeout retailer Big Lots reported strong domestic same-store sales growth that exceeded management’s previous guidance. The outperformance was driven by improving trends in most major merchandise categories with seasonal and furniture posting the largest gains. The firm also reported lower than expected losses in its newly acquired Canadian stores. We trimmed both of these high conviction holdings as each approached our respective calculated Absolute Value.

Pep Boys, a national retail chain of automotive service centers, announced an agreement to be acquired by a private equity firm on January 30 at a 24% premium over the previous day’s closing price. The deal valued the company at a discount to our assessed multiple and $18 Absolute Value. Still, we were able to exit the position at a significant gain prior to quarter-end.

Madison Square Garden Company (MSG) owns the New York Knicks, the New York Rangers, the “World’s Most Famous Arena,” and affiliated regional sports networks. MSG shares moved higher from increased fan interest in the New York Knicks, largely due to the play of new point guard Jeremy Lin. This helped resolve a heated renegotiation with Time Warner Cable, resulting in new contract terms favorable to MSG.  

There was no material change to the Fund’s sector positioning during the period. Eleven new holdings were added to the portfolio, and five sold, during the quarter. The purchases were widely diversified across industry groups. Of the stocks sold, three had achieved their Absolute Value price targets, one received a buyout offer and was subsequently sold, and one was sold due to accumulated losses.

One of the investments sold in February, medical equipment manufacturer Integra LifeSciences Holding, was purchased in January. The stock surged higher following our initial analysis allowing us to acquire only a small position. Unable to justify buying more at the much higher price, we sold the small position near the stock’s assessed Absolute Value.

Factors Weighing on the Market

During the first week of March, the market experienced its first significant pullback of the year when the Russell 2000 Index closed down 2% on March 6—more than 5% below its February high. The chief culprit appeared to be investor concern about rising gasoline prices, but Congressional testimony by Federal Reserve Chairman Ben Bernanke didn’t help. Although the small-cap market recovered from the early March correction, and moved on to set a new 12-month high, the events surrounding the correction highlighted what we believe are the three most significant near-term threats to higher stock prices—high valuations, rising gasoline prices, and no additional quantitative easing.

The March correction was preceded by a warning from our discount-to-Absolute Value indicator. Historically, and particularly over the past five years, the portfolio’s discount-to-AV has been a highly prescient indicator of impending market corrections and exceptional buying opportunities. By early February, the small-cap market had gained more than 12% on the year and the portfolio’s discount-to-value indicator moved above 80%—historically a point at which valuations are unattractive and rallies begin to buckle. From February 3 through March 6, the Russell 2000 declined more than 5% and the indicator moved below 80%. By quarter end, however, the index had rebounded and the indicator was near its historical high of 82%.

According to Laffer Associates, the current level at which household budgets will get “slammed” by rising gasoline prices, significantly increasing the likelihood of a recession, is $3.22 (wholesale, series—Conventional Gasoline, NY Harbor, Regular). In February, the price was $3.04; in March, it was $3.17. Economic growth has averaged between -2.8% and -0.5% during the six quarters following a spike in gasoline prices above this household budget-busting level.  Thus far in 2012, offsetting warm weather and lower heating costs have eased the consumer pain of higher gasoline prices. A sustained spike in gasoline prices from those experienced in March, however, would present a significant threat to a continued economic recovery, especially if the unseasonably warm weather continues through the summer months.

The withdrawal of monetary stimulus also poses a threat to the recovery and may be linked to rising oil prices. When the Federal Reserve first hinted at QE2 in August 2010, markets rallied sharply. Leading that initial rally were cyclical industries, small-cap stocks, and high-beta stocks. After approximately five months, the market experienced a modest correction, rebounded briefly, and then fell sharply. When the initial high-beta rally ended it was marked by a sharp rise in commodity prices, most notably oil.

Essentially, the initial impact of QE2 was to inflate financial assets (boosting consumer net worth, confidence, and spending). The rally in financial assets was relatively brief, however, and gave way to a sharp rise in oil and other commodity prices. The end of the rally also coincided with our discount-to-value reading of 82%.

The recent rally was sparked by the announcement of a massive long-term refinancing operation (LTRO) from the European Central Bank and the effect on equity markets has been the same as QE2. The current rally is approximately six months old and has been led by the same high-beta, highly-cyclical stocks. Similarly, the rally is beginning to buckle following a sharp rise in oil prices.

Conclusion

In summary, we continue to believe the market is in the middle stage of a low growth recovery.  This means the pace of earnings growth will likely slow in the months ahead and the recent strong economic data we have experienced will moderate.  It also means that equity market volatility will likely increase in the months ahead. Stocks, however, have come a long way from their recent lows and are likely due for a correction.  Both our internal measures of value, as well as trusted external measures, show the market is overvalued. In the absence of a surge in oil prices or European crisis, the correction may not be especially deep or long, but at these levels is likely to occur.

Admittedly, we are frustrated by the resurgence in low-quality, high-beta leadership. This leadership theme is highly unusual for the current stage of the recovery and we believe directly attributable to the massive flood of liquidity by the major central banks. There is no way of knowing when the central banks will stop providing additional QE. In the absence of a recession, we believe the Fed is likely to continue reining in expectations for further QE, setting the stage for higher rates over the next 12 to 24 months. Any such signals from the Fed are likely to result in near-term volatility, as investors struggle to decide whether the current recovery can be self-sustaining.

The wild cards are oil and, as the year progresses, uncertainty around the federal budget cliff.  Further increases in oil prices are likely to weigh heavily on the economy. If oil prices experience a sustained move higher, we may have seen the high in stocks for the year. If oil prices stabilize around current prices, however, there may be room for a bit more upside before year-end, especially if investors like the outcome of the elections in November.

With regard to the fiscal cliff, it is difficult to speculate whether Congress will be able to successfully pass an extension of current tax rates prior to higher rates going into effect.  If no extension is passed, we believe stocks are likely to come under significant pressure.   

From a portfolio perspective, we remain pleased with the quality and positioning of our holdings, which are focused on stable growth, attractive valuations, healthy balance sheets, and other characteristics we believe the market will reward in the months ahead.  

River Road Asset Management
9 April 2012

As of March 31, 2012, Brink’s Co. comprised 2.01% of the portfolio’s assets, Ruddick – 3.90%, Cloud Peak Energy – 0.79%, Rex Energy – 0.41%, Ascena Retail Group – 2.22%, Big Lots – 3.80%, Pep Boys – 0.00%, Madison Square Garden Co. – 3.42%, and Integra Lifesciences – 0.00%.

Note: Small-cap stocks are considered riskier than large-cap stocks due to greater potential volatility and less liquidity. Value investing often involves buying the stocks of companies that are currently out of favor that may decline further.

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. 

1st Quarter 2012

Stocks Extend Rally

Stocks delivered one of the best first quarter performances on record in 2012, extending the rally that began in October 2011 and lifting most major indexes to new 12-month highs. The Nasdaq exchange led with an astonishing 18% return, its best first quarter performance since 1991, while the S&P 500 Index gained more than 12%—its best first quarter since 1998. The Russell 2000 Index kept pace with the S&P 500, its best first quarter since 2006 and ninth best on record. The small-cap index has rallied more than 37% from its October 2011 low and closed the quarter within 4% of its all-time high. Surprisingly, the Russell 2000 lagged the large-cap oriented Russell 1000 Index during the quarter—a rare occurrence amid a period of such strong returns.

The key drivers of the equity rally have been widespread, including improved U.S. economic data, attractive corporate earnings growth, easing concerns over the Eurozone crises, and the extraordinary liquidity provided by major central banks across the globe. The “risk-on” nature of the recent rally is almost certainly the result of monetary stimulus and is evident in the continuing high-beta (volatility), low-quality leadership themes.

Within the Fund’s Russell 2000 Value Index benchmark, for example, the highest-beta stocks (fifth quintile) returned 17% during the first quarter versus nearly 5% for the lowest-beta stocks (first quintile)—a remarkable gap. From a quality perspective, the lowest return-on-equity (ROE) stocks outgained the highest 18% to 11%. Non-dividend paying stocks also outperformed stocks that pay a dividend by nearly five percentage points. Investors should note, however, that high-beta leadership faded in March, which may be a sign that the current quantitative easing (QE) fueled risk trade has run its course.

Active managers delivered impressive performance during the period despite a dismal March.  According to BofA/Merrill Lynch and Lipper Analytical Services, 65% of active small-value managers outperformed the Russell 2000 Value, but only 21% outperformed in March. The significant underperformance by active managers in March appears to have coincided with the higher-beta leadership beginning to fade in the small-cap universe. We first commented in early 2011 that, based on similar performance statistics, small-value managers appear to have adopted a higher risk profile than has historically been witnessed. We concluded this trend would likely result in managers underperforming as the QE-driven risk trade diminished. Our conclusion was evident during the corrections that occurred in the second and third quarters of 2011, and again as the high-beta leadership faded in March.

2011 Part Deux?

The Fund noticeably lagged its Russell 2000 Value Index benchmark during the quarter. The relative underperformance is disappointing, but understandable given the leadership of extremely high-beta stocks in the market. As expected, relative performance began to improve as high-beta leadership began to fade toward the end of the period. The Fund experienced a similar trend during 2011. The Fund lagged the benchmark appreciably during the first quarter of that year as well, as high-beta stocks led the market sharply higher. Once the QE2-fueled rally began to fade midyear, however, the portfolio outperformed. Although we believe the final 2012 market and portfolio returns will be significantly better than 2011, we expect a similar pattern of improved relative performance to emerge as the risk trade fades.

The sectors with the lowest contribution to relative returns during the quarter were Financials and Consumer Staples. Both sectors suffered from poor stock selection. Financial services firm SWS Group saw its brokerage business continue to suffer from lower interest-rates and declining trading volumes. Its bank segment, however, continues to improve the credit quality of its loan portfolio, leading us to stick with the stock in the portfolio as it still trades at an attractive discount.

In absolute terms, some of the biggest individual detractors from performance were Brink’s, Ruddick, and two Energy-related stocks, all of which posted losses amid the strong rally. Global security provider Brink’s continued to suffer from pricing and volume pressures in its North American segment, driven by aggressive competition. As a result, the company announced a significant cost savings plan to revive the segment’s margins. In addition, the firm plans to meet the obligation to its underfunded company pension plan primarily with equity. Although the cost of equity issuance at these levels is expensive and dilutive, debt issuance is not an option given the company’s desire to maintain its investment grade balance sheet, the inability to tax-efficiently repatriate its foreign earnings, and the poor cash flows of its North American business. We trimmed the portfolio’s position due to lower conviction in the company’s capital allocation strategy.

Ruddick, which officially changed its name to Harris Teeter Supermarkets on April 2, reported strong first quarter results, but its share price momentum slowed in 2012 after being one of the portfolio’s top performing holdings in 2011. We think it remains a well-run company with strong fundamentals and a solid balance sheet. It remains a high-conviction holding in the portfolio.

Cloud Peak Energy and Rex Energy both declined double-digits within the lagging Energy space. Coal producer Cloud Peak suffered from rapidly declining natural gas prices that have put pressure on coal as power generators increasingly switch to cheaper natural gas. Although Cloud Peak hedged more than 90% of its expected 2012 production and 60% of its expected 2013 production, a sustained period of low natural gas prices could permanently affect demand for coal. Small, independent natural gas company Rex Energy unexpectedly announced a poorly executed secondary equity offering to pay down debt. We trimmed both positions in the portfolio as a result of their respective issues.

Soaring Retail

An underweight allocation and positive stock selection in Utilities and an overweight allocation to the surging Consumer Discretionary sector were the primary positive contributors to relative performance.  Four of the Fund’s five top individual contributors—Ascena Retail Group, Big Lots, Pep Boys, and Madison Square Garden—came from the Consumer Discretionary sector.

Ascena which operates the dressbarn, maurices, and Justice specialty apparel chains reported strong holiday results, while favorable spring sales trends led the company to raise its earnings guidance for fiscal year 2012. The company has repurchased 2% of its outstanding shares year-to-date, and management is seeking accretive acquisitions. Closeout retailer Big Lots reported strong domestic same-store sales growth that exceeded management’s previous guidance. The outperformance was driven by improving trends in most major merchandise categories with seasonal and furniture posting the largest gains. The firm also reported lower than expected losses in its newly acquired Canadian stores. We trimmed both of these high conviction holdings as each approached our respective calculated Absolute Value.

Pep Boys, a national retail chain of automotive service centers, announced an agreement to be acquired by a private equity firm on January 30 at a 24% premium over the previous day’s closing price. The deal valued the company at a discount to our assessed multiple and $18 Absolute Value. Still, we were able to exit the position at a significant gain prior to quarter-end.

Madison Square Garden Company (MSG) owns the New York Knicks, the New York Rangers, the “World’s Most Famous Arena,” and affiliated regional sports networks. MSG shares moved higher from increased fan interest in the New York Knicks, largely due to the play of new point guard Jeremy Lin. This helped resolve a heated renegotiation with Time Warner Cable, resulting in new contract terms favorable to MSG.  

Portfolio Positioning

Six new holdings were added to the portfolio during the quarter. These positions were widely diversified across industry groups with all but one, funeral services provider Service Corp. International (SCI), having a market-cap of less than $1 billion. We also strategically increased 11 existing positions, with the largest increases being made in True Religion Apparel, Dreamworks Animation SKG, and DST Systems.

Six positions were sold. Three had achieved their Absolute Value price targets, one received a buyout offer and was subsequently sold, and two were sold due to either accumulated losses and/or a negative change in our fundamental outlook for the firm. One of the investments sold in February, medical equipment manufacturer Integra LifeSciences Holding, was purchased in January. The stock surged higher following our initial analysis allowing us to acquire only a small position. Unable to justify buying more at the much higher price, we sold the small position near the stock’s assessed Absolute Value.

The only material change in sector positioning was a decrease in the Fund’s Consumer Staples stake, which reflected both underperformance in the group, as well as the sale of private label beverage manufacturer Cott and canned fruit and vegetable processor Seneca Foods.

Factors Weighing on the Market

During the first week of March, the market experienced its first significant pullback of the year when the Russell 2000 Index closed down 2% on March 6—more than 5% below its February high. The chief culprit appeared to be investor concern about rising gasoline prices, but Congressional testimony by Federal Reserve Chairman Ben Bernanke didn’t help. Although the small-cap market recovered from the early March correction, and moved on to set a new 12-month high, the events surrounding the correction highlighted what we believe are the three most significant near-term threats to higher stock prices—high valuations, rising gasoline prices, and no additional quantitative easing.

The March correction was preceded by a warning from our discount-to-Absolute Value indicator. Historically, and particularly over the past five years, the portfolio’s discount-to-AV has been a highly prescient indicator of impending market corrections and exceptional buying opportunities. By early February, the small-cap market had gained more than 12% on the year and the portfolio’s discount-to-value indicator moved above 80%—historically a point at which valuations are unattractive and rallies begin to buckle. From February 3 through March 6, the Russell 2000 declined more than 5% and the indicator moved below 80%. By quarter end, however, the index had rebounded and the indicator was near its historical high of 82%.

According to Laffer Associates, the current level at which household budgets will get “slammed” by rising gasoline prices, significantly increasing the likelihood of a recession, is $3.22 (wholesale, series—Conventional Gasoline, NY Harbor, Regular). In February, the price was $3.04; in March, it was $3.17. Economic growth has averaged between -2.8% and -0.5% during the six quarters following a spike in gasoline prices above this household budget-busting level.  Thus far in 2012, offsetting warm weather and lower heating costs have eased the consumer pain of higher gasoline prices. A sustained spike in gasoline prices from those experienced in March, however, would present a significant threat to a continued economic recovery, especially if the unseasonably warm weather continues through the summer months.

The withdrawal of monetary stimulus also poses a threat to the recovery and may be linked to rising oil prices. When the Federal Reserve first hinted at QE2 in August 2010, markets rallied sharply. Leading that initial rally were cyclical industries, small-cap stocks, and high-beta stocks. After approximately five months, the market experienced a modest correction, rebounded briefly, and then fell sharply. When the initial high-beta rally ended it was marked by a sharp rise in commodity prices, most notably oil.

Essentially, the initial impact of QE2 was to inflate financial assets (boosting consumer net worth, confidence, and spending). The rally in financial assets was relatively brief, however, and gave way to a sharp rise in oil and other commodity prices. The end of the rally also coincided with our discount-to-value reading of 82%.

The recent rally was sparked by the announcement of a massive long-term refinancing operation (LTRO) from the European Central Bank and the effect on equity markets has been the same as QE2. The current rally is approximately six months old and has been led by the same high-beta, highly-cyclical stocks. Similarly, the rally is beginning to buckle following a sharp rise in oil prices.

Conclusion

In summary, we continue to believe the market is in the middle stage of a low growth recovery.  This means the pace of earnings growth will likely slow in the months ahead and the recent strong economic data we have experienced will moderate.  It also means that equity market volatility will likely increase in the months ahead. Stocks, however, have come a long way from their recent lows and are likely due for a correction.  Both our internal measures of value, as well as trusted external measures, show the market is overvalued. In the absence of a surge in oil prices or European crisis, the correction may not be especially deep or long, but at these levels is likely to occur.

Admittedly, we are frustrated by the resurgence in low-quality, high-beta leadership. This leadership theme is highly unusual for the current stage of the recovery and we believe directly attributable to the massive flood of liquidity by the major central banks. There is no way of knowing when the central banks will stop providing additional QE. In the absence of a recession, we believe the Fed is likely to continue reining in expectations for further QE, setting the stage for higher rates over the next 12 to 24 months. Any such signals from the Fed are likely to result in near-term volatility, as investors struggle to decide whether the current recovery can be self-sustaining.

The wild cards are oil and, as the year progresses, uncertainty around the federal budget cliff.  Further increases in oil prices are likely to weigh heavily on the economy. If oil prices experience a sustained move higher, we may have seen the high in stocks for the year. If oil prices stabilize around current prices, however, there may be room for a bit more upside before year-end, especially if investors like the outcome of the elections in November.

With regard to the fiscal cliff, it is difficult to speculate whether Congress will be able to successfully pass an extension of current tax rates prior to higher rates going into effect.  If no extension is passed, we believe stocks are likely to come under significant pressure.   

From a portfolio perspective, we remain pleased with the quality and positioning of our holdings, which are focused on stable growth, attractive valuations, healthy balance sheets, and other characteristics we believe the market will reward in the months ahead.  

River Road Asset Management
9 April 2012

As of March 31, 2012, SWS Group comprised 0.57% of the portfolio’s assets, Brink’s Co. – 1.94%, Ruddick Corp. – 4.00%, Cloud Peak Energy – 0.79%, Rex Energy – 0.31%, Ascena Retail Group – 2.25%, Big Lots – 3.86%, Pep Boys – 0.00%, Madison Square Garden Co. – 3.52%, Service Corp International – 0.40%, True Religion Apparel – 0.84%, Dreamworks Animation SKG – 1.32%, DST Systems – 3.06%, and Integra Lifesciences – 0.0%.

Note: Small-cap stocks are considered riskier than large-cap stocks due to greater potential volatility and less liquidity. Value investing often involves buying the stocks of companies that are currently out of favor that may decline further.

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.

1st Quarter 2012

Stocks Extend Rally

Stocks delivered one of the best first quarter performances on record in 2012, extending the rally that began in October 2011 and lifting most major indexes to new 12-month highs. The Nasdaq exchange led with an astonishing 18% return, its best first quarter performance since 1991, while the S&P 500 Index gained more than 12%—its best first quarter since 1998. The Russell 2000 Index kept pace with the S&P 500, its best first quarter since 2006 and ninth best on record. The small-cap index has rallied more than 37% from its October 2011 low and closed the quarter within 4% of its all-time high. Surprisingly, the Russell 2000 lagged the large-cap oriented Russell 1000 Index during the quarter—a rare occurrence amid a period of such strong returns.

The key drivers of the equity rally have been widespread, including improved U.S. economic data, attractive corporate earnings growth, easing concerns over the Eurozone crises, and the extraordinary liquidity provided by major central banks across the globe. The “risk-on” nature of the recent rally is almost certainly the result of monetary stimulus and is evident in the continuing high-beta (volatility), low-quality leadership themes.

Within the Fund’s Russell 2000 Value Index benchmark, for example, the highest-beta stocks (fifth quintile) returned 17% during the first quarter versus nearly 5% for the lowest-beta stocks (first quintile)—a remarkable gap. From a quality perspective, the lowest return-on-equity (ROE) stocks outgained the highest 18% to 11%. Non-dividend paying stocks also outperformed stocks that pay a dividend by nearly five percentage points. Investors should note, however, that high-beta leadership faded in March, which may be a sign that the current quantitative easing (QE) fueled risk trade has run its course.

Active managers delivered impressive performance during the period despite a dismal March.  According to BofA/Merrill Lynch and Lipper Analytical Services, 65% of active small-value managers outperformed the Russell 2000 Value, but only 21% outperformed in March. The significant underperformance by active managers in March appears to have coincided with the higher-beta leadership beginning to fade in the small-cap universe. We first commented in early 2011 that, based on similar performance statistics, small-value managers appear to have adopted a higher risk profile than has historically been witnessed. We concluded this trend would likely result in managers underperforming as the QE-driven risk trade diminished. Our conclusion was evident during the corrections that occurred in the second and third quarters of 2011, and again as the high-beta leadership faded in March.   

Cash Anchor

Nine of 10 economic sectors in the benchmark posted a positive total return during the quarter. Consumer Discretionary posted the highest gains, while Utilities actually delivered modest losses. The Fund significantly underperformed the benchmark in delivering modest positive returns. The poor relative performance was a result of the portfolio’s cash holdings and security selection as the portfolio remained defensively positioned.

The largest individual negative contributor was energy exploration and production company Bill Barrett. Despite record production, cash flow, and reserves in 2011, the firm’s stock declined as natural gas prices reached a 10-year low at the beginning of 2012. Although a sustained period of low natural gas prices would eventually affect Bill Barrett’s cash flows, we believe the company has taken appropriate measures to weather the sharp decline in prices. During the past two years, management has focused its drilling program on natural gas liquids and oil, increasing its reserve diversification, and improving its average realized price on production. In order to ensure sufficient funding to support further natural gas liquids and oil exploration, the company issued $400 million in bonds maturing in 2022. Lastly, management hedged 65% of the company’s 2012 natural gas production in an effort to protect cash flows from further declines in natural gas prices. Our valuation of Bill Barrett’s natural gas and oil reserves remains unchanged and we expect to continue to hold the position.

Other individual detractors from performance included energy drilling contractor Patterson-UTI Energy and Tellabs. Similar to Bill Barrett, investors are concerned that lower natural gas prices would negatively affect Patterson-UTI’s business going forward. Indeed, the risk of a prolonged period of low natural gas or oil prices could negatively impact rig utilization. We use normalized (adjusted for cyclical ups and downs) calculations in assessing the required rate of return on prospective investments, and believe we have taken lower rig utilization and other risks into consideration when valuing Patterson-UTI. We will own and consider cyclical businesses assuming they pass two criteria—they have a strong balance sheet and the ability to generate positive cash flow throughout an economic cycle. Tellabs passed the first test with $1 billion in cash and no debt.  Although it has historically passed the second requirement, its business turned cash flow negative in 2011 and we sold the stock as a result.   

Among the top contributors during the quarter were Federated Investors, American Greetings, and Constellation Brands. Although asset manager Federated continues to be negatively affected by the impact of the extraordinarily low interest-rate environment on its sizeable money market business, a sustained economic recovery could cause the Federal Reserve to increase the Fed Funds rate sooner than expected. We believe investor anticipation of higher short-term interest rates was the main reason for Federated’s strong stock performance. Regardless of this possible earnings catalyst, we sold the position as it reached our calculated valuation.

American Greetings is the number two market leader in the greeting card industry. In our opinion, there was not sufficient news or a change in fundamentals to justify the increase in its stock price during the period. We believe the increase was a result of its depressed valuation created by poor stock performance in 2011 and the strong performance of Consumer Discretionary stocks. Our valuation and the Fund’s position size remained unchanged. Constellation’s strategy of focusing on its core premium brands and divesting underperforming businesses has increased its operating margins and free cash flow, which it then used to reduce debt and buy back stock—improving its balance sheet and leading us to increase our calculated valuation. Although we continue to believe the business will generate meaningful free cash flow in the future, we reduced the position as it approached that valuation.

Portfolio Positioning

Cash levels increased from 47% at the beginning of the quarter to 53% by the end of March. As the small-cap market marched higher with little interruption several holdings approached or exceeded their valuations and were either reduced or sold. With few stocks on our potential buy list trading below our calculated valuations, new purchases during the quarter were limited.  The Fund remains defensively positioned as we await a more favorable pricing environment. 

The largest new position added during the quarter was contract research organization (CRO) Covance, the second-largest provider of outsourced research and development services to pharmaceutical and biotechnology companies. The firm is unique in the industry as one of the few CROs that has a significant presence in both early-stage (45% of revenue) and late-stage (55% of revenue) drug development. During the past several years, a challenging early-stage funding environment has significantly affected Covance’s operating results, reducing margins in this segment due to lower utilization and increased pricing pressure. Its late-stage central lab also experienced elevated levels of cancellations that resulted in declining revenue. Furthermore, management recently announced several large IT projects that will increase capital expenditures and operating expenses over the next two years.

Despite these operating risks, Covance has a strong market share, attractive positioning in the industry, and a strong balance sheet. Using normalized margin assumptions for both the early- and late-stage segments as well as the expected future benefits from the firm’s large investment in IT, our free cash flow estimate for Covance is significant. By applying a conservative discount rate to these future free cash flows, we believe our calculated value appropriately compensates us for these assumed risks.

Thoughts on Managing Risk

The prices of small cap stocks approached or exceeded record levels during the quarter. Small-cap valuations appear elevated within the Russell 2000 and S&P 600 Indices based on aggregate price/earnings ratios. Unlike 2011, when periods of volatility in the small-cap market created opportunity, volatility was practically nonexistent during the first quarter, with the CBOE Market Volatility Index (VIX) reaching a five-year low in March. Periods of low volatility and near-record prices often cause investors to become complacent with regards to risk. We take the opposite view and believe risk levels increase when volatility is low and prices are high. As an opportunistic strategy, we welcome volatility as it often coincides with risk becoming attractively priced. As the Fund’s high cash level would suggest, we do not believe, on average, that investors in our small-cap universe are being adequately compensated for the risk being assumed.

We believe managing risk is one of the most important factors in determining long-term investment results. Establishing when to assume risk, what kind of risk to take, and what required rate of return to demand for accepting risk are the cornerstones of our investment process. The ability to assume risk and refrain from accepting risk requires flexibility and patience. In the current environment, with small-cap prices rising consistently and trading near record highs, it is increasingly difficult to remain patient and disciplined. Lagging peers and benchmarks can result in career risk and performance anxiety for any portfolio manager willing to go against the herd. These professional and relative risks can cause conformity and, in our opinion, are counterproductive in managing the risk that matters most—the risk of permanent capital loss.

We believe an accurate valuation is essential in reducing the risk of permanent capital loss. Most of our valuations are calculated by discounting a business’s future free cash flows to present value. Although discounting future free cash flows is a common form of equity valuation, our process differs from most in that we use normalized assumptions. We normalize future free cash flows in an attempt to smooth the booms and busts associated with an economic or industry cycle. The cash-flow cycles of most businesses are nonlinear and have differing degrees of cyclicality. Therefore, to reduce valuation error, we believe it is important to avoid forecasting peak or trough cash flows far into the future. Instead of extrapolating recent results, we attempt to determine the amount of free cash flow a business will generate annually, on average, over an economic cycle. With corporate profits at record levels, we believe that extrapolating current operating margins and cash flows may provide overly optimistic and inaccurate valuations.

In addition to normalizing free cash flow, we use a required rate of return, or discount rate, in our valuation model that we believe properly reflects the operating risks of each business under review. We demand a higher rate of return for a business with more volatile and less certain future free cash flows. Conversely, we require a lower rate of return for a more stable business with more certain future free cash flows. Our required rate of return is typically calculated by combining the rate of return required as a debt holder, plus an equity risk premium. Interestingly, the required rates of return we demand are often similar to the internal investment hurdle rates used by many of the businesses we follow and value. Historically, that rate has been between 10% and 15%. In essence, the required rate of return assumption we use in our valuation model is our absolute return objective for our equity investments.

In an environment with rising small-cap prices, record corporate profits, and low interest-rates, it is tempting to adjust our cash flow and required rate of return assumptions in order to increase our business valuations. Higher valuations would allow us to justify purchasing more of the holdings on our Focus List and reduce the portfolio’s high cash position. Before adjusting our cash flow and required rate of return assumptions, however, we would need to be convinced that the cash flow cycle and the risks to cash flows have been permanently altered. We believe there is insufficient evidence to support the assumption that the current cash flow cycle and the risks to these cash flows are materially different than past cycles. Instead of manufacturing opportunities by altering our valuation methodology, we believe patience is the preferable course of action.

The Fund’s current high cash levels (53% as of March 31, 2012) illustrate our patient stance. This is in stark contrast to the average equity mutual fund’s cash level, which is near a record low of 3.6% according to the Investment Company Institute.  Holding a large cash position is not an attempt to time the market’s direction, but is a direct result of the lack of opportunity we believe is in our small-cap universe. As a strategy that focuses on absolute returns, it is essential that we limit mistakes caused by overpaying for small-cap equities.  In addition to protecting capital when prices are high, cash allows the Fund to act decisively, without the need to liquidate existing holdings, when opportunities arise. In other words, in addition to reducing risk, we believe the ability to hold cash aids our effort to maximize future returns.   

Although small-cap stock prices have increased and profits remain elevated, our perception of risk has not changed. Instead of altering our valuation methodology to fit the short-term fluctuations in small-cap prices and corporate profits, we will remain patient and allocate portfolio cash only when we feel appropriately compensated. We believe patience is one of the most difficult investment disciplines to practice, but one of the most important. Until volatility returns and prices improve, it is likely that the portfolio will remain defensively positioned. In the meantime, we will continue to refine our list of high-quality small cap businesses that we look forward to owning in the future.     

River Road Asset Management
8 April 2012

As of March 31, 2012, Bill Barrett comprised 2.64% of the portfolio's assets, Patterson-UTI Energy – 1.55%, Tellabs – 0.00%, Federated Investors – 0.00%, American Greetings – 1.82%, Constellation Brands – 1.79%, and Covance – 2.14%.

Note: Small-cap stocks are considered riskier than large-cap stocks due to greater potential volatility and less liquidity. Value investing often involves buying the stocks of companies that are currently out of favor that may decline further.

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. 

1st Quarter 2012

It would be an understatement to say the market got off to a good start in 2012. Indeed, it was the strongest first quarter in more than a decade, with major market indices moving to new recovery highs. We think the origins of the rally can be traced back to several events that occurred during the final months of 2011. First, investor macroeconomic perceptions clearly shifted during the fourth quarter of last year into early 2012. Following the U.S. debt downgrade in August and ongoing saga of the EU sovereign debt crisis, fears of recession were pervasive late last year. As fall turned to winter, however, macroeconomic data pointed toward stability which, in turn, helped assuage investor anxieties about global economic growth. Second, and perhaps as important, the European Central Bank (ECB) and European policy makers tackled banking system liquidity fears with the introduction of their own version of quantitative easing, the Long Term Refinancing Operation (LTRO), in December. LTRO provided needed funding to banks across Europe that were facing increased borrowing costs and funding pressures as concerns continued to mount over the Continent’s debt crisis. Rising confidence and ample liquidity provided the elixir the market needed to produce a strong rally to start 2012. 

Consistent with past liquidity-fueled rallies, higher-beta (volatility), low absolute share price, lower-quality stocks led the way. According to Bank of America/Merrill Lynch Quantitative Strategy research analyst Subramanian Savita, stocks ranked B or worse in their quality rankings handily outperformed those stocks ranked B+ or better by a margin of more than three percentage points during the quarter. Against that backdrop, the Fund fully participated in the rally without compromising its focus on quality.

Although quality was a headwind during the period, our experience has been that investing in high-quality stocks has served investors well over time. Companies that can sustain high returns and above-average earnings growth without substantial financial leverage are likely to eventually be rewarded by investors, especially when economic growth remains below trend. 

Lagging Industrials

The Fund lagged its Russell Mid Cap Growth Index benchmark by a little more than a percentage point in delivering absolute gains of more than 13% during the quarter. This modest underperformance relative to the benchmark was roughly split between sector allocation and stock selection. Stock selection within the Materials, Industrials and Healthcare sectors served as the main drag on relative performance, along with a roughly 5% stake in cash. Holdings in Jacobs Engineering, Donaldson, and Robert Half were the primary individual detractors within Industrials.

Varian Medical Systems and Edward Lifesciences lagged the strong gains of the broader Healthcare sector. We increased the portfolio’s stake in Varian as the stock pulled back towards the bottom of its historical range on lackluster fourth quarter results and investor concerns regarding the impact of austerity measures on hospital capital spending in Europe. Total orders were still up a solid 6%, and management reiterated its confidence in delivering solid double-digit earnings growth.

Energy was the biggest positive contributor to relative performance, resulting mostly from stock selection on the back of strong gains in Core Laboratories and Oceaneering. Performance also benefited from strong stock-picking in the Consumer Discretionary sector, which was one of the best performing areas of the market during the quarter. Chipotle Mexican Grill has been one of the Fund’s best performers the last several years. We sold the position during the period as our investment process dictates that once a stock reaches a 20% premium to our estimate of intrinsic value, we take action to meaningfully reduce or eliminate the position. Although fundamental trends at Chipotle are strong, the good news appeared to be fully priced into the stock, leaving the shares vulnerable to a meaningful correction should fundamental trends moderate even slightly. Tractor Supply and TJX Companies were other notable contributors within the sector that were reduced as they approached or exceeded our estimated fair value and traded at the upper end of their historical price/earnings ranges. 

Portfolio Positioning

Trading activity during the quarter was moderate.  We sold two other holdings in the portfolio in addition to the aforementioned Chipotle—investment banking boutique Lazard and publishing company John Wiley & Sons. Lazard reported disappointing fourth quarter results as economic and market uncertainty dampened the company’s merger and acquisition (M&A) and asset management businesses. At the same time, the company has struggled with compensation levels.  The result has been a significant deterioration in relative earnings momentum. Earnings momentum similarly deteriorated at John Wiley, leading us to exit the entire position. 

New positions in SM Energy and Warnaco Group were added to the portfolio during the quarter. For oil/gas exploration and production company SM we expect growth in coming years to be driven by two of the most attractive shale oil plays in the continental U.S., Eagle Ford and Bakken. Warnaco is an apparel design and manufacturing concern with key brands such as Calvin Klein, Speedo, and Chaps. The Calvin Klein brand should be a cornerstone of growth the next few years as the company expands its international distribution.

We continue to believe U.S. economic growth is sustainable but likely to remain sluggish for an extended period of time given the ongoing de-leveraging of household, financial, and public sector finances, along with increased regulation and potentially higher taxes in 2013. We also expect overall corporate profit growth to slow in 2012, as peak profit margins combine with below trend economic growth to cause a broad deceleration in earnings growth. We think high-quality companies with a proven ability to generate strong profits across the economic and profit cycle will be rewarded in the period ahead. 

M. Scott Thompson, CFA                  Andrew W. Jung, CFA
April 5, 2012

As of March 31, 2012, Jacobs Engineering  comprised 2.25% of the portfolio’s assets, Donaldson – 1.87%, Robert Half – 2.54%, Varian Medical Systems – 2.03%, Edwards Lifesciences – 1.48%, Core Laboratories – 2.23%, Oceaneering International – 2.08%, Tractor Supply – 1.11%, TJX Companies – 1.01%, SM Energy – 1.12%, and Warnaco Group – 1.00%.

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.

1st Quarter 2012 SMA Commentary

Forget About Spring, It Feels Like Summer

Stocks sizzled in the first three months of 2012, delivering the best first quarter return since 1998 (as represented by the broad market S&P 500 Index). Forgive us if we suggest that perhaps we have seen this movie before—a strong first quarter in the markets followed by a sharp correction as fundamentals weaken. Is it different this time?  We are optimistic the economic expansion will follow through. We see consumers slowly waking up from their four-year slumber. Looking at retail sales growth, consumer spending has improved, while U.S. unemployment has receded to 8.2% as of March 2012. Consumer sentiment data corroborates this trend with its highest reading since the recovery began in 2009. Furthermore, the Federal Reserve’s recent bank stress test reflects improved capital ratios and the ability of major financial institutions to withstand a severe downdraft in the economy. This places U.S. banks in the lead relative to their European counterparts. In addition, the Federal Reserve and most central banks globally are providing ample liquidity to help boost economic growth. Although volatility will likely remain a factor this year, corrections should provide us opportunities to add to portfolio positions. We believe signs point to the U.S. leading global economies toward expansion.

A rising tide lifted all boats during the quarter as all sectors in the portfolio delivered positive absolute returns as the strategy slightly trailed its Russell 1000 Index benchmark. Stock selection in Healthcare and Consumer Staples, as well as underweight positions in Utilities and Telecommunications aided relative returns the most. The biggest drag on relative performance was stock selection within Consumer Discretionary and Technology, as well as residual cash amid the strong rally.

Portfolio Positioning

As we like to reiterate, the portfolio is broadly diversified with sector allocations resulting from opportunities we identify at the stock level through our bottom-up, fundamental analysis and valuation work. The most notable shifts during the quarter were further additions to the Financials sector based on attractive valuations for leading companies and an increase in Consumer Discretionary after a long hiatus. As consumer spending continues to improve, we think there is an opportunity for significant margin expansion among Consumer Discretionary companies where many could reap the benefits of multi-year cost reduction efforts. Decreases in Industrials and Technology were based on profit taking in individual positions. The three largest sectors in the portfolio as a percentage of assets at the end of March were Financials, Technology, and Healthcare.

Four stocks were purchased during the quarter and reached full-position status. The shares of one online retailer have recently underperformed the broader market on concerns about management’s ramp up in investments to support future growth. Although near-term profitability will likely be challenged, we believe these investments present a near-term margin and free cash flow trough that should allow for attractive improvement in operating fundamentals as the company’s top line growth leverages incremental overhead. We view the firm as a best-in-class, disruptive innovator led by visionary management that will continue to take share from bricks and mortar retailers.

A software and IT services company recently refocused its strategy to accelerate growth and profitability from its software licensing and maintenance business model. The success of cloud computing is spreading to enterprise IT environments where corporations demand “private clouds” in which services, applications, and data are managed in a more secure environment than typical off-site cloud environments. With a long history of superior mainframe-to-server service, we think the firm is uniquely qualified to deliver private cloud infrastructure to companies seeking such an edge.

Four full positions were sold from the portfolio during the quarter. The primary reason for all the sales was the identification of better relative opportunities. In the case of one tech stock, however, we also believed that the continuing decline in market share for its main product would make any possible recovery an uphill battle.

Opportunities in Large-Caps

Many worry the market has come too far too fast, both year-to-date and from its March 2009 bottom. We would like to point out how little the market has actually returned over a much longer period of time, despite robust growth in corporate revenues and earnings. Consider that from January 1, 2000 through December 31, 2011, the total return of the S&P 500 Index has been less than 1%. In other words, after 12 years an investor in the index would have found themselves in essentially the same spot. We think the weak relative performance of U.S. equities during that period was largely due to overenthusiasm for the asset class in 2000. In late 2000, the S&P 500 was trading north of 24 times earnings, while offering a yield of only 1.2%. What is worth noting is the financial performance of the companies in the index during this time period and its effect on valuation. From 2000 through 2011, revenues grew 56.7% from $6.5 trillion to $10.1 trillion and earnings leapt 88.4% from $453 billion to $853 billion. In turn, valuations plummeted with the S&P 500 trading at 13.6 times earnings at year-end 2011 with a yield of 2.1%. As we enter the second quarter of 2012, we continue to view U.S. equities as an under-owned asset class offering both good value and robust financial performance.

TAMRO Capital Partners

Alexandria, Virginia

1st Quarter 2012 SMA Commentary

The strategy got off to a solid start to the year in January only to see a major technology company, which we did not hold in the portfolio, rocket 48% during the quarter. The stock, which grew to comprise 6.6% of the portfolio’s Russell 1000 Growth Index benchmark, accounted for almost 20% of the index’s return during the period, most of which came in February and March. We had sold the stock from the portfolio in October, after the company disappointed in its third quarter reporting. We didn’t want to face the risk of a miss from the crucial holiday quarter, which in retrospect turned out to be the wrong call as they blew that number out.

That tech stock now carries the distinction of being the fifth name in history to move above the 4% mark within the S&P 500, as it now comprises 4.4% of that index. None of the four previous names could stay above that 4% level for more than a year (according to the Leuthold Group). Could this one be the first to buck this trend? No doubt, but the stock is up six-fold from March of 2009 and 57-fold since April of 2004. It is not exactly undiscovered. Instead, we have chosen to own other tech firms that are major beneficiaries of the growing wireless and product trends.

The portfolio ended the quarter modestly trailing its benchmark. Other than the previously mentioned tech stock, most other areas of the portfolio performed fairly well. Stock picking within Consumer Discretionary was the main contributor. A significant overweight to Financials helped returns as well.

Looking ahead, we do not expect macroeconomic worries to fade away anytime soon, and expect some choppiness to surface during the upcoming quarters from a new set of worries—the U.S. presidential election, the Supreme Court decision on the healthcare mandate, and the upcoming fiscal cliff from mounting federal debt and the expiration of the Bush tax cuts in January 2013. We didn’t include gasoline prices as we think they may have run their course already, but if we are wrong they will definitely go into the negative column.

That being said, we believe the U.S. equity market is still the place to be as Europe is teetering on the edge of recession, Emerging Markets are slowing down, and 10-year Treasuries yielding only 2%. The continuing fear is contagion in Europe. Although Spanish and Italian yields have started to blow out again, interbank rates both here and across the Atlantic are doing nothing and are well off their highs. Meanwhile, U.S. corporate profits are at an all-time high.

We believe that we have a solid stable of companies in the portfolio that can continue to report earnings above expectations and drive future estimates ever higher. We have built the portfolio around a variety of themes that include mobile communications and payment systems, multinational consumer brand names, and infrastructure plays that we think will benefit from the vast build out required to get the vast supply of tight oil and natural gas to market. In addition, we think there are enough macro pieces falling into place that could entice the mountain of cash parked on the sidelines or in low-yielding bonds back into equities over the course of the next 12 to 18 months.

Charles F. Mercer, Jr. CFA               B. Anthony Weber                 Michael E. Johnson, CFA

January 12, 2012

1st Quarter 2012 SMA Commentary

The strategy substantially outperformed its Russell 1000 Value benchmark during a first quarter that saw most broad equity indices deliver double-digit returns. Portfolio holdings in eight out of 10 sectors outperformed their respective benchmark sector and/or the overall index. The only sector that underperformed was Telecommunications, where the strategy had no exposure. Overall, stock selection was positive and sector allocation was slightly negative.

Performance for the benchmark itself was fairly broad with five sectors—Financials, Consumer Discretionary, Technology, Materials, and Industrials—outperforming the overall index. All sectors had a positive return with the exception of last year’s leading sector, Utilities. Utilities declined 1.6% as it appeared that investors favored less defensive area of the market given greater confidence that the U.S. economy might be recovering.

Strong Tech Showing

The three portfolio sectors with the greatest contribution to returns during the quarter were Technology, Healthcare, and Industrials. Five out of six holdings in Technology outperformed, while Healthcare fared similarly well with four out of five stocks outperforming their sector peers. Industrials performed well with an eclectic mix of companies benefiting from a more favorable economic environment.

The sectors with the weakest contribution to performance were Financials, Energy, and Telecom. Only Financials produced an overall negative contribution, as a significant underweight position in the sector relative to the benchmark overcame eight percentage points of excess return from stock selection. Positions in Energy and Telecom managed to slightly outperform the benchmark.

There were two notable sales from the portfolio during the quarter. The stocks eliminated were due to sector adjustments and/or valuation/fundamental issues. These changes were primarily driven by the dynamic interrelationships of the sectors as we position the portfolio to exploit value creating opportunities. As we share regarding our investment philosophy, “We have a core process but no core holdings.”

New positions were initiated in a trading exchange, credit card issuer, and an industrial conglomerate. Each stock was purchased after first being identified as a value creating opportunity followed up with fundamental analysis to vet out the potential as a portfolio holding.

On a sector level, the result of this and related activity during the quarter was an increase in the portfolio’s exposure to Financials, Energy, Consumer Staples, and Industrials and a decrease in Telecom, Technology, and Materials. The biggest sector overweight position remains Energy, followed by Consumer Staples and Technology. The most significant underweight was Financials, though less so, and the portfolio had no exposure to Telecom or Utilities at the end of the period.

Outlook

The first quarter began with quite a bit of fanfare. The economy appeared to be picking up, unemployment declined, and Greece did not fall off the face of the earth—staving off a technical default. The Republican nomination process seems to be cascading to an end. The rest of the world appears to be growing at a less aggressive pace. Questions are being answered in the market, which fills the information vacuum that the market abhors. Did things get dramatically better over night? No. But, as is said, it is always darkest before the dawn as if a new day is not ever going to emerge again.

We are pleased that many of the portfolio’s holdings, such as Federated—which delivered less than satisfying returns during the fourth quarter—reversed the trend in a meaningful fashion. We dare not run a victory lap because we understand the fickle nature of the market. She loves me. She loves me not. In the first quarter, she loved me. The next quarter is a new day.

We are glad to see that the recovery, although still being somewhat dismissed by some, appears to be gaining solid traction. Corporations are still trading at attractive levels with cash hoards that should eventually find a way to generate additional shareholder value.

We believe the portfolio is positioned well on a fundamental and valuation basis to take advantage of the current environment. The stocks in the portfolio represent holdings in solid companies that we think still have a level of disbelief priced in that makes them opportune investments. Once the aura of attraction fades, we will take profits and redeploy into other, similar opportunities that have yet to catch the market’s fancy.

With such a strong gain to start the year, a pullback would make sense. But, we think that over the long-term an upward direction is more sensible. We are not market prognosticators but as allocators of investor capital, we do pay attention. And the alternatives to equities are not quite as attractive. Thus, perhaps 2012 will be a favorable year for equity holders.

Randell A. Cain, CFA

Portfolio Manager

1st Quarter 2012 SMA Commentary

Financial markets experienced one of the best quarters of the decade as a result of further government and Federal Reserve stimulus. Low interest-rates and renewed optimism were the general themes as unemployment numbers and corporate earnings showed signs of improvement, while the fear of a foreign debt meltdown subsided. Other positive indicators included bullish technical indicators and the fact we are in a Presidential election year, which has typically been good for financial markets as incumbents tend to do what they can to bolster the economy and their image. 

Although seemingly optimistic, many of these popular indicators are misleading. For example, unemployment ignores the under-employed—those people who no longer file or no longer qualify for unemployment benefits. More worrisome is the ongoing debt situation in Europe, where even many of the stronger economies continue to assume more debt from domestic banks and the weaker European countries. The debt-to-GDP (Gross Domestic Product) ratio of most European countries is at historical highs with little hope of repayment. In other words, the problem has not gone away, it has only been deferred and is growing in magnitude.

Market crashes occur when the general populace realizes their expectations are wrong. Throughout the 1980s and 1990s the market delivered record returns. In 2000, investor expectations of corporate earnings growth, fueled by the media and over-zealous research analysts, came to a screeching halt. Twelve years later the S&P 500 Index is at nearly the same price level it was back then, while the NASDAQ remains below its high watermark set that year.

The reality is that little has changed since the beginning of the financial crisis in 2008. High levels of personal and government debt remain. Little has changed in the economy or improved in the fundamentals of corporations. Little has changed in politics of our country. What has changed is the bullishness of investor sentiment and technical indicators, but these indicators can change quickly without the backing of a strong economy and corporate earnings.

The strategy substantially lagged its composite benchmark (35% Russell 3000 Index/35% MSCI ex-US Index/30% Barclay’s Capital Aggregate Bond Index) during the first quarter. The portfolio’s defensive posture—more than 50% weighting in cash and short-term Treasury Bills—weighed on performance as equities gained double-digits. Our risk model continues to signal an above normal probability for significant losses. Thus, the portfolio remains at a relatively conservative level. It is our experience that the more that markets rise within a short time period, the more likely that risks have as well.

Smart Portfolios

Seattle, WA

1st Quarter 2012 SMA Commentary

Stocks Extend Rally

Stocks delivered one of the best first quarter performances on record in 2012, extending the rally that began in October 2011 and lifting most major indexes to new 12-month highs. The Nasdaq exchange led with an astonishing 18% return, its best first quarter performance since 1991, while the S&P 500 Index gained more than 12%—its best first quarter since 1998. Surprisingly, the small-cap Russell 2000 Index lagged the large-cap oriented Russell 1000 Index during the quarter—a rare occurrence amid a period of such strong returns.

The key drivers of the equity rally have been widespread, including improved U.S. economic data, attractive corporate earnings growth, easing concerns over the Eurozone crises, and the extraordinary liquidity provided by major central banks across the globe. The “risk-on” nature of the recent rally is almost certainly the result of monetary stimulus and is evident in the continuing high-beta (volatility), low-quality leadership themes. For the most part, the laggards of 2011 surged during the first quarter of 2012.

Within the S&P 500 Index, for example, the highest-beta stocks (fifth quintile) gained nearly 20% during the first quarter versus only 4% for the lowest-beta stocks (first quintile)—a remarkable gap.  Investors should note, however, that high-beta leadership faded in March, which may be a sign that the current quantitative easing (QE)-fueled risk trade has run its course. According to BofA/Merrill Lynch, low-quality stocks also outperformed during the first quarter. Among their universe of approximately 1,600 stocks, low-quality stocks gained 14% compared with 10.6% for their high-quality group. 

Dividend Headwinds

After a strong showing in 2011, dividend stocks sharply underperformed during the first quarter (according to Ned Davis Research) as the lowest yielding companies in the S&P 500 outperformed the highest yielding by more than 12 percentage points. This gap is the widest noted since the 2009 rally and clearly highlights the relative headwinds dividend-focused strategies faced the last few months.

The degree of underperformance of dividend-paying stocks was a bit surprising considering the fundamental strength of the group. A total of 307 companies in the S&P 500 increased or initiated dividends during the last 12 months. As earnings growth has slowed, the payout ratio has finally begun to climb, though it still remains well below its long-term average. As expected, the low growth environment has prompted companies to shift the focus of capital allocation from organic growth projects toward distributions to shareholders. Even a major technology firm initiated a regular dividend in March, finally addressing shareholder criticisms that too much cash was accumulating on the firm’s balance sheet.

The strategy noticeably underperformed its Russell 3000 Value Index benchmark as a result. The underperformance was consistent with historical results during periods in which dividend-paying stocks lag the broader market. As we have outlined in the past, there will be times when the dividend focus of the portfolio helps performance (2011) and times when it is a significant relative drag (second quarter of 2009). Dividend strategies have experienced periods of underperformance in each of the last three calendar years. We expect that as the current risk rally fades, the relative performance of dividend paying stocks, and the strategy, will come back into favor similar to that experienced following each of the prior periods.

Nine of the 10 economic sectors in the Russell 3000 Value posted a positive total return for the quarter. The sector level performance demonstrated the growth bias as the cyclical Financials, Consumer Discretionary, and Technology sectors posted the highest total returns, while more-defensive Utilities, Telecommunications, and Consumer Staples posted the lowest.

Both stock selection and sector allocation had a negative impact on relative performance, with Financials detracting the most owing to an underweight position and stock selection. After a weak showing in 2011, diversified financial services stocks was the best performing industry in the benchmark, rallying 43% during the quarter. Limited exposure to the group was one of the primary drivers of the portfolio’s overall underperformance in the sector. Other significant sources of underperformance were from an overweight in Consumer Staples and stock selection within Consumer Discretionary. Notable individual detractors from performance were a railroad company, an integrated energy firm, and a major telecomm stock.

Only two of 10 economic sectors aided relative returns during the quarter, with an underweight position and mostly strong stock selection within Energy providing the most significant outperformance. A couple of well-known technology names were among the top individual contributors. Among the contributors from Energy was an offshore drilling company that performed well during the quarter as day-rates for ultra-deepwater drilling rigs continued to climb and management explored a separate listing for its Brazilian subsidiary to create value for shareholders. The firm has raised its dividend in eight of the last nine quarters. We trimmed and eventually sold the position at a significant premium to our assessed Absolute Value.

Portfolio Positioning

Six new positions were established and five eliminated during the quarter. Turnover remained relatively low and there were only modest changes in sector positioning. The weighting in Energy decreased primarily due to the sale of the above mentioned stock, increasing the portfolio’s relative underweight to the benchmark to more than five percentage points. The rapid growth of dividend payments in the Technology sector has resulted in a larger exposure than we would have expected when the strategy was launched. The recent establishment of a significant regular dividend by a tech darling suggests that dividends may finally be shrugging off the negative stigma long held by growth investors.

Outlook

During the first week of March, the market experienced its first significant pullback of the year. With little new information, the minor correction appeared to be the cumulative result of the reduced growth forecast for China, slightly weaker U.S. economic reports, and investor concern about rising gasoline prices. Congressional testimony by Federal Reserve Chairman Ben Bernanke also weighed on the markets when he failed to mention additional asset purchases. Although the market recovered from the early March correction and moved on to set new multi-year highs, the events surrounding the correction highlighted what we believe are the three most significant near-term threats to higher stock prices—high valuations, rising gasoline prices, and no additional quantitative easing.

At the end of the first quarter, the portfolio’s top-20 holdings were trading at 93% of our calculated Absolute Value. We believe the limited discount in the portfolio reflects both the strong market recovery and the heightened demand for dividend-paying stocks in this zero-interest rate environment. Looking at the combined components of the S&P 500 and S&P 400 Midcap Indices, there is a clear tradeoff between yield, valuation, and growth. The highest yielding stocks are trading at a significant premium despite having a lower expected long-term growth rate. This relationship suggests a myopic focus on near-term income needs without the proper concern for the expected long-term total return. For this reason, our bottom-up, value-driven investment process has favored what we view as larger, steadier dividend-payers over more expensive, higher-yielding stocks in recent quarters. 

According to Laffer Associates, the current level at which household budgets will get “slammed” by rising gasoline prices, significantly increasing the likelihood of a recession, is $3.22 (wholesale, series—Conventional Gasoline, NY Harbor, Regular). In February, the price was $3.04; in March, it was $3.17. Economic growth has averaged between -2.8% and -0.5% during the six quarters following a spike in gasoline prices above this household budget-busting level.  Thus far in 2012, offsetting warm weather and lower heating costs have eased the consumer pain of higher gasoline prices. A sustained spike in gasoline prices from those experienced in March, however, would present a significant threat to a continued economic recovery, especially if the unseasonably warm weather continues through the summer months.

The withdrawal of monetary stimulus also poses a threat to the recovery and may be linked to rising oil prices. When the Federal Reserve first hinted at QE2 in August 2010, markets rallied sharply. Leading that initial rally were cyclical industries, small-cap stocks, and high-beta stocks. After approximately five months, the market experienced a modest correction, rebounded briefly, and then fell sharply. When the initial high-beta rally ended it was marked by a sharp rise in commodity prices, most notably oil.

Essentially, the initial impact of QE2 was to inflate financial assets (boosting consumer net worth, confidence, and spending). The rally in financial assets was relatively brief, however, and gave way to a sharp rise in oil and other commodity prices. The recent rally was sparked by the announcement of a massive long-term refinancing operation (LTRO) from the European Central Bank and the effect on equity markets has been the same as QE2. The current rally is approximately six months old and has been led by the same high-beta, highly-cyclical stocks. Similarly, the rally is beginning to buckle following a sharp rise in oil prices. Without strong economic growth, market participants fear that withdrawing stimulus will prompt a slide back into recession.

In summary, we continue to believe the market is in the middle stage of a low growth recovery.  This means the pace of earnings growth will likely slow in the months ahead and the recent strong economic data we have experienced will moderate.  It also means that equity market volatility will likely increase in the months ahead. Stocks, however, have come a long way from their recent lows and are likely due for a correction.  Both our internal measures of value, as well as trusted external measures, show the market is overvalued.

Admittedly, we are frustrated by the resurgence in low-quality, high-beta leadership. This leadership theme is highly unusual for the current stage of the recovery and we believe directly attributable to the massive flood of liquidity by the major central banks. There is no way of knowing when the central banks will stop providing additional QE. In the absence of a recession, we believe the Fed is likely to continue reining in expectations for further QE, setting the stage for higher rates over the next 12 to 24 months. Any such signals from the Fed are likely to result in near-term volatility, as investors struggle to decide whether the current recovery can be self-sustaining.

The wild cards are oil and, as the year progresses, uncertainty around the federal budget cliff.  Further increases in oil prices are likely to weigh heavily on the economy. If oil prices experience a sustained move higher, we may have seen the high in stocks for the year. If oil prices stabilize around current prices, however, there may be room for a bit more upside before year-end, especially if investors like the outcome of the elections in November. With regard to the fiscal cliff, it is difficult to speculate whether Congress will be able to successfully pass an extension of current tax rates prior to higher rates going into effect.  If no extension is passed, we believe stocks are likely to come under significant pressure.

From a portfolio perspective, we remain pleased with the quality and positioning of the strategy’s holdings, which are focused on stable growth, attractive valuations, and healthy balance sheets. We don’t think the underperformance of dividend stocks is likely to persist for long, as in the past any near-term correction has favored dividend-paying stocks on a relative basis. According to Ned Davis Research, non-payers only tend to lead dividend payers in the first six months of a cyclical bull market. So even if a correction is not forthcoming, we have reached the point in the market cycle where non-payers have tended to cede leadership in the past.

River Road Asset Management

14 January 2012

1st Quarter 2012 SMA Commentary

Improving U.S. economic trends that began during the fourth quarter of 2011 continued into early 2012, sparking a rally in equities. Job creation accelerated, business executives were more confident, and consumer spending increased. Consumer confidence reached its highest point since 2007, in part because the housing market may have bottomed, although it will still take several years to return to normal. In addition, a European sovereign debt crisis was averted as authorities approved an additional Greek bailout. U.S. interest-rates edged higher during the first quarter as the market speculated on an earlier than anticipated tightening of interest-rate policy. Washington’s failure to extend tax cuts and unemployment benefits, however, could have a major negative impact on U.S economic growth. Although Congress will ultimately have to address this fiscal cliff, the dysfunction in Washington makes any meaningful progress unlikely until after the election.

Most major domestic equity indices posted double-digit gains during the quarter, with the portfolio’s Russell Midcap Value Index benchmark gaining more than 11%. The value benchmark lagged its growth index counterpart due to its higher weighting in poorly performing utility stocks and a lower weighting in software and biotech stocks, which rose sharply. Last year’s laggards led the market higher as cyclical sectors, including Consumer Discretionary, Technology, and Materials led the rally. Consistent with an improving economy, low-quality stocks and those with smaller market-caps were the best performers during the period.

The strategy trailed its benchmark owing to many of the factors that led to its outperformance during the fourth quarter of 2011. Stock selection within Financials, Technology, Healthcare, and Consumer Discretionary were the key detractors from relative performance. Stock selection and a lower weighting in bank stocks hurt as all over-capitalized banks, including the portfolio’s holdings, lagged their less-capitalized peers. In addition, the performance of several Real Estate Investment Trust (REIT) investments was depressed as the companies took advantage of the strong equity market to fund future growth.

Notable contributors to relative performance included stock selection in the Industrials and Materials sectors, as well as an underweight position in Utilities. Three industrial stocks produced strong returns as these types of firms tend to be leveraged to stronger economic growth. One holding within Materials was boosted by its cash-rich balance sheet, which makes it a prime takeover candidate, leading the market to anticipate a deal announcement.

Portfolio Highlights

One of the holdings that highlights our focus on finding companies with solid fundamentals at opportunistic valuations is a well-known global digital marketing firm that focuses on increasing brand awareness and acquiring new customers for the world’s largest advertisers. The company provides marketers with a comprehensive toolkit designed to increase client customer web browsing, shopping, and purchasing activity. We established the portfolio’s position last year as the company languished preceding the return of its former CEO to re-focus the company. With an attractive business model, substantial free cash flow, and a sound management team, with think the stock’s valuation can rise to the level of its peers as they execute their business plan.

Another example of our opportunistic approach comes from a triple net lease REIT which acts as a developer, owner, lessor, and financier focused on providing financing to entertainment venues and charter schools. We first looked at the security after the 2008 credit crisis limited its access to the capital markets, effectively derailing several of its development projects and increasing vacancies in retail properties. The silver lining was that the credit crisis also significantly increased the number and attractiveness of investment opportunities in its theater financing business and greatly reduced competition. With a high single-digit yield at the time of investment, the dividend payout itself provided the strategy with almost half of our targeted return. Since then, the company has successfully worked out of many of its troubled assets and redeployed its capital into new investments. As the firm continues to clean up its portfolio and redeploy its capital at attractive rates of return, and as the market becomes more comfortable with its charter school investments, we think its valuation should rise and approach that of its triple net lease peers.

Outlook

We believe that U.S. economic growth will be moderate, short-term interest rates will stay low, and inflation will remain benign. Despite the recent strength in equity markets, our outlook is sanguine as investors start to move from bonds into stocks based on compelling relative valuations. Although merger and acquisition activity remains depressed, the strength shown in the economy and the high-yield bond and stock markets should stimulate activity for the balance of the year. Recently, company management teams for a number of the holdings in the portfolio have become much more active in redeploying their cash flow in accretive ways, including acquisitions and share repurchases. We believe these actions bode well for the future and can aid 2012 results.

The Cardinal Capital Team

1st Quarter 2012 SMA Commentary

Rebound Continued

Global equity markets continued to rebound from last year’s third quarter lows driven by stronger U.S. economic data and a break from bad news out of Europe. The strategy slightly lagged its S&P MidCap 400 Index benchmark in gaining more than 13% during the quarter. Overall, the contribution from holdings to absolute returns was broad-based as 15 stocks gained more than 20%. Only three stocks posted losses during the period.

Three technology firms were among the top-five contributors to performance during the quarter. A firm that provides smart metering solutions to utility companies to collect data for billing systems, analyze usage, and perform remote connect/disconnects reported fourth quarter revenue and earnings results that were much better than consensus estimates. Although growth in North America has slowed, we think the company is positioned to benefit from strength in the Asia-Pacific region and to a lesser extent in Europe and Latin America. An IT management software firm also delivered better than expected revenue and earnings per share, and announced a capital allocation plan consisting of dividend payments and a share repurchase program.

Another notable performer was medical development company that assists pharmaceutical, biotech, and research labs in drug discovery and the testing of their products. During the quarter, the company announced it was engaged in a strategic review of its business strategy, leading to market speculation of a possible split of its two main business units, which could unlock value.

The three biggest detractors to performance actually all declined during the quarter. The stock in a major newspaper company dropped primarily to the lack of any relevant news and the ongoing search for a new CEO. The company successfully launched a paid digital subscription service a year ago and just reported more than 450,000 digital subscribers. Print subscribers are up as well as home deliveries grew during the fourth quarter of 2011. In our view, the stock appears substantially undervalued.

A deep-sea, oil production equipment provider reported lower than expected earnings citing higher project costs and expenses. These execution issues are in part a function of higher volumes and the challenges associated with managing growth—including adding employees. Revenues met expectations and the book-to-bill ratio rose from the prior quarter. The stock decline followed a sizeable gain during the fourth quarter of 2011.

Despite higher fares and significantly reduced capacity, high fuel costs due to current oil prices weighed on airline profitability, including one of the portfolio’s holdings. The company has one of the best overall customer service records in the industry, operating a low-cost, point-to-point model without added fees. We expect it to see increased revenue from improved business travel and a better domestic footprint after it integrates a recent acquisition.

Positioning and Outlook

The strategy sold two positions during the first quarter. One delivered substantial gains during the portfolio’s more than eight-year holding period, more than doubling that of the broad market S&P 500 Index. The stock reached our valuation target and was near the top end of our mid-cap market capitalization range of $15 billion. The other doubled from April 2009 through February 2012, again significantly outperforming the S&P 500. The company’s acquisition strategy made it less focused on its primary business than we prefer. Elsewhere, we took advantage of short-term price fluctuations to rebalance the portfolio, trim stocks with higher valuations, and add to more attractively valued stocks.

As the market continued to rise during the first quarter, the macro environment remains mixed. The most recent Federal Reserve minutes suggest a reduced chance of further monetary stimulus. This reflects a more positive opinion of the underlying economy. The U.S. presidential election adds an element of uncertainty. News out of Europe remains mixed, with the European debt crisis far from over in spite of larger safety nets and promises of sovereign debt reform. With all of the focus on broader trends, we think the coming earnings season could offer some surprising stock moves based on unexpected company specific news.

We remain positive on the outlook for North America. The economic recovery is continuing. Despite strong equity returns in the preceding two quarters, valuations continue to remain attractive. By our calculation, the portfolio trades at less than 13 times 2012 earnings, below that of the its benchmark and the S&P 500. Corporate balance sheets remain strong generally, with many companies continuing to return cash to shareholders through increased dividends and stock repurchase activity.

Thyra E. Zerhusen, Managing Director and Portfolio Manager

Marie L. Lorden, Co-Portfolio Manager

Mary L. Pierson, Co-Portfolio Manager

CHICAGO – March 27, 2012 – Aston Asset Management, LP (Aston) is pleased to announce that it has promoted Mark Kim, CFA to Managing Director, Southeast Region where he will be responsible for external sales. Aston has also hired Nick Heethuis as a Regional Account Manager supporting the Northeast Region. Aston intends to add several new Regional Account Managers (internal sales professionals) to their staff over the next six months.

“Aston’s assets under management have tripled over the last three years to over $10.5 billion,” said Joe Hays, Partner and National Sales Manager of Aston. “Many diligence analysts, gatekeepers and chief investment officers of our clients hold CFA designations as well as other advanced degrees. We have built a sales team that is comfortable interacting at a high level with these professionals and Mark will be a valuable addition to that team.

Mr. Kim has been with Aston for seven years. He is a graduate of the University of Illinois and has earned the Chartered Financial Analyst designation (CFA). Mr. Heethuis previously worked at Genworth Financial and Jackson National. He is a graduate of Grand Valley State University in Michigan and is currently enrolled in the MBA program at Loyola University in Chicago.

Aston continues to see growth from its two largest domestic equity funds, the ASTON/Montag & Caldwell Growth Fund (MCGFX, MCGIX) and the ASTON/Fairpointe Mid Cap Fund (CHTTX, ABMIX). Aston is also well positioned in the alternative space, which has experienced an explosion in demand. The ASTON/Lake Partners LASSO Alternatives Fund (ALSNX, ALSOX), a multi-strategy alternative fund, has climbed to over $250 million, and will soon have a three year mutual fund track record. The ASTON/M.D. Sass Enhanced Equity Fund (AMBEX, AMDSX), a hedged equity fund, was rated 5-stars by Morningstar for the 3-year period ended February 29, 2012 out of 72 Long-Short Equity Funds. Last year, Aston launched three new mutual funds: the ASTON/River Road Long-Short Fund (ARLSX) on May 4, 2011, the ASTON/DoubleLine Core Plus Fixed Income Fund (ADBLX, ADLIX) on July 18, 2011, and the ASTON/Silvercrest Small Cap Fund (ASCTX, ACRTX) on December 27, 2011.

To request more information contact Tony Kono at (973) 850-7323 or moc.cnirpcj@onokt. 

Morningstar Rating Criteria: For each fund with at least a three-year history, Morningstar calculates a Morningstar Rating based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a fund’s monthly performance (including the effects of sales charges, loads, and redemption fees), placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating is derived from a weighted-average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. © Morningstar, Inc.

Past performance is no guarantee of future results.

Aston Asset Management, LP

Headquartered in Chicago, Illinois, Aston provides investment management services to the mutual fund and managed accounts markets by carefully selecting, monitoring and marketing experienced boutique investment managers, who seek to achieve consistent investment performance using disciplined investment processes and best in class business standards. From the initial due diligence on an investment manager to the launching of a new Aston Fund, we take measured steps to ensure congruence between the requirements of Aston, the capabilities of the subadviser and the needs of clients. As of February 29, 2012, Aston is the adviser to twenty-six mutual funds with total net assets of approximately $10.4 billion. Our funds are distributed nationally through intermediaries including registered investment advisors, model platforms, broker-dealers, consultants, retirement platforms and wealth management teams.

Risk Disclosure: ASTON/Montag & Caldwell Growth Fund - Growth stocks are generally more sensitive to market moves and thus may be more volatile than other stocks.

ASTON/Fairpointe Mid Cap Fund - Mid-cap stocks are considered riskier than large-cap stocks due to greater potential volatility and less liquidity.

ASTON/Lake Partners LASSO Alternatives Fund - The Fund also incurs the risks of the underlying funds it invests in. Potential risks include the use of aggressive investment techniques and instruments such as options and futures, derivatives, commodities, credit-risk, and short-sales that taken alone are generally considered riskier than conventional market strategies. Use of these aggressive investment techniques 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. Volatility is found by calculating the annualized standard deviation of daily change in price. Drawdown helps to determine the peak-to-trough decline during a specific period of an investment quoted as the percentage between the peak the trough. Stop loss guidelines are designed to limit an investor’s loss on a security position. It is a practice of selling a security when it reaches a certain price.

The ASTON/M.D. Sass Enhanced Equity Fund - By selling covered call options, the Fund limits its opportunity to profit from an increase in the price of the underlying stock above the exercise price, but continues to bear the risk of a decline in the stock. A liquid market may not exist for options held by the Fund. If the Fund is not able to close out an options transaction, it will not be able to sell the underlying security until the option expires or is exercised. While the Fund receives premiums for writing the call options, the price it realizes from the exercise of an option could be substantially below a stock’s current market price. Premiums from the Fund’s sale of call options typically will result in short-term capital gain taxes, making it ill-suited for investors seeking a tax efficient investment. The use of derivatives by the Fund to hedge risk may reduce the opportunity for gain by offsetting the positive effect of favorable price movements. There is no guarantee that derivatives, to the extent employed, will have the intended effect, and their use could cause lower returns or even losses to the Fund.

The ASTON/River Road Long-Short Fund - Short sales may involve the risk that the 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. A loss incurred on a short sale results from increases in the value of the security; losses on a short sale are theoretically unlimited. Investing in exchange traded and closed end funds are subject to additional risk that shares of the underlying fund may trade at a premium or discount to their net asset value per share. Convertible preferred securities are subject to the risks of equity securities and fixed income securities. Derivatives can be highly volatile and involve risk in addition to the risk of the underlying reference security. Investing in the securities of foreign issuers involves special risks and considerations not typically associated with investing in U.S. companies.

Top Alternative Strategies For Today's Market 

On March 27, 2012 – Rick Lake, portfolio manager of the ASTON/Lake Partners LASSO Alternatives Fund was interviewed by Greg Greenberg of TheStreet.com.

Click Here To Watch Video on TheStreet.com

Aston Funds has no editorial control over the content of video, subject matter, and timing of the video and is independent of The Street.com.  Opinions are as of the broadcast date and are subject to change at any time based on market or other conditions.

VIX is the ticker symbol for the Chicago Board Options Exchange Market Volatility Index, a popular measure of the implied volatility of S&P 500 index options.  It represents one measure of the market's expectation of stock market volatility over the next 30 day period.  

How to Play Low Volatility

On March 23, 2012 – Rick Lake, portfolio manager of the ASTON/Lake Partners LASSO Alternatives Fund was interviewed on CNBC’s Closing Bell.

Click Here To Watch Video on CNBC.com

Aston Funds has no editorial control over the content of video, subject matter, and timing of the video and is independent of The Street.com.  Opinions are as of the broadcast date and are subject to change at any time based on market or other conditions.

VIX is the ticker symbol for the Chicago Board Options Exchange Market Volatility Index, a popular measure of the implied volatility of S&P 500 index options.  It represents one measure of the market's expectation of stock market volatility over the next 30 day period.  

ASTON/MD Sass Enhanced Equity Fund featured on TheStreet.com

On March 6, 2012 – Ronald Altman, portfolio manager of the ASTON/MD Sass Enhanced Equity Fund was interviewed by Greg Greenberg of TheStreet.com.

Click Here To Watch Video on TheStreet.com

Aston Funds has no editorial control over the content of video, subject matter, and timing of the video and is independent of The Street.com.  Opinions are as of the broadcast date and are subject to change at any time based on market or other conditions.

Portfolio Manager Tim Holland ASTON/TAMRO Diversified Equity Fund Interviewed

Click Here To Watch Video on CNBC.com

Aston Funds has no editorial control over the content of video, subject matter, and timing of the video and is independent of CNBC.  Opinions are as of the broadcast date and are subject to change at any time based on market or other conditions.

Managing risk-adjusted returns is the key to long-term investment success

By Kerry O'Boyle, Aston Asset Management

Alternative funds are all the rage these days, and for good reason—there is a sound investment rationale behind their inclusion in a portfolio. The difficulty for most investors is in understanding just what an alternative investment is and how best to fit Alternatives in with a traditional portfolio of stocks and bonds. Opinions vary, as the relative newness of the asset class in mutual fund form and the myriad of strategies available makes it difficult to come up with a standard approach. Regardless, the basic justification for using Alternatives remains. They serve as a unique diversifier to traditional asset classes that can help improve the overall risk-adjusted returns of a portfolio.  

Alternatives Defined

Just what is an Alternative investment? At Aston, we define Alternatives as strategies focused on managing volatility and providing lower correlations to traditional asset classes using hedging techniques. The key to our interpretation is that risk management is an overarching theme in running the portfolio. Using Alternatives means something more than being just a different asset class than stocks and bonds, and relying on the traditional concept of diversification of volatility. Alternatives do that, of course, but they should also contribute to better risk-adjusted returns by managing and, ideally, lowering volatility inherently.

To accomplish this, we believe that Alternative strategies must actively manage risk and/or use some sort of hedging technique. Hedging, whether frequent, infrequent, or in between, comes in many forms regardless of the underlying securities used. Techniques employed include long-short, derivatives, options, futures, and in certain circumstances even leverage. Alternatives that actively manage risk without the direct use of hedging are typically described as Tactical Asset Allocation strategies. Here the focus is more on managing overall volatility through sector and asset rotation than on security selection or hedging. These two approaches—hedging and active risk management—define Alternatives as something more than merely a diversifier of long-only volatility.

Given that definition, some examples of what we do not consider alternative investments—Real Estate Investment Trusts (REITs), long-only foreign securities, convertible bonds, and Treasury Inflation-Protected Securities (TIPS)—may prove instructive. Despite their focus on real estate, a REIT is mainly a tax structure that closely resembles, and has relatively high correlations, with long-only equities. International or global portfolios that merely hedge back foreign currencies to the US dollar don't pass muster as utilizing an active hedging strategy. Although often used in arbitrage strategies that would be considered alternative, convertibles alone are merely a hybrid of long-only stock and bond characteristics. Finally, doubts still remain as to the actual inflation hedging benefits of TIPS, which in all other facets act like typical bonds.

Investors would also do well to note that Alternatives don't necessarily mean hedge funds. The term “hedge fund” can be a bit of a misnomer, as a number of hedge funds exist today that do not hedge. Such hedge funds may be aggressive and opportunistic, but without risk management as an integral part of their mandate. Although many hedge funds do employ alternative tools, understand that not all hedge funds are true Alternatives.

Volatility Effect

The case for Alternatives derives from their ability to dampen downside volatility while maintaining return potential over the long haul. The advantage of lower volatility rests with the common, though often overlooked, problem of asymmetry of returns—the return needed to recoup losses after a decline. For instance, an investor that suffers a portfolio loss of 25% requires a gain of 33% to get back to even, not a gain of 25%. A 33% loss needs a 50% gain, and after a loss of 50% a portfolio must double (100% gain) just to get back to where it started. By minimizing such drawdowns—how much a portfolio falls from peak to trough during a market decline—investors stand a better chance of improving the long-term returns of their portfolios.

The reason for this lies in the power of compounded returns. Since most investors don't walk away from the table at the end of each year, or after big windfalls or losses, the logic of compound annualized returns supports the case for minimizing downside volatility. By reducing drawdowns, investors retain a greater amount of principal on which to earn subsequent gains, even if they earn less on the upside. Thus, for example, an investor that generates returns of 15%, -10%, and 10% in three successive years outperforms a rival with returns of 30%, -25%, and 10% by more than two percentage points annualized, even though both investors achieved a simple average return of 5%.

Given the importance of minimizing downside volatility, a frequently asked question related to Alternatives is why wouldn't an investor simply use cash or short-term US Treasury bonds to reduce volatility instead? The answer to that question goes to the heart of why Alternative strategies have a place in any portfolio. By going to cash, an investor has removed volatility, but they have also eliminated return potential as well. With any significant moves into cash the onus then falls largely on an investor’s ability to consistently time getting in and out of the market correctly—an incredibly difficult proposition.

In regards to Treasuries or other short-term bonds, neither is completely without risk and both suffer return limitations. The recent financial crisis and debt buildup by the U.S. government has raised questions even about the stability of Treasuries, while near zero interest-rates have severely limited the return potential of short-term bonds. In addition, an added benefit for a number of Alternative strategies is the ability to dampen downside volatility while being less correlated with areas of the market considered relatively safe havens, such as bonds. This highlights how Alternatives offer diversification on many levels in potentially reducing volatility in a traditional portfolio structure.

Risk-Adjusted Returns

Ultimately, the goal isn't just to minimize potential volatility, but to enhance overall risk-adjusted returns. The risk one takes in achieving returns is important. Strong returns earned today taking great risk may prove fleeting and disappear tomorrow, while taking on too little risk may hamper the achievement of long-term portfolio goals. Too often, investors analyze returns and risk in isolation or consider past returns and past volatility as a proxy for the future. Adding a well-conceived Alternative strategy or group of strategies to a traditional portfolio can aid in dealing with this uncertainty, minimizing the need for timing decisions on the part of the investor and likely leading to more consistent long-term risk-adjusted results.

To accomplish this, however, investors must set proper expectations in their use of Alternatives. True Alternatives can offer reduced correlation and risk-managed exposure to traditional asset classes, meaning that such strategies are not likely to outperform during significant market rallies and investors shouldn’t expect them to. A common complaint with Alternative investments is that they come into favor during or after a market crash—when investor concern with risk and correlation is heightened—and then underperform during subsequent market rallies or don’t perform to elevated expectations. Although there is that potential, it seems to be more of a knock on investor behavior than Alternatives themselves.

The purpose of Alternatives is to help smooth out returns over the long run by accounting for risk, not to boost near-term performance. By focusing solely on performance instead of risk-adjusted returns some investors fall victim to a short-term mentality that leads to performance chasing and inconsistent results. What appears “wrong” in the short run can turn out to be correct on a risk-adjusted basis over the long haul. In combining Alternative strategies with a traditional portfolio of stocks and bonds investors can instill discipline in their investment process, curbing the urge to excessively time the market, and develop a consistent approach to enhancing long-term risk-adjusted returns through better management of downside volatility.

Kerry O'Boyle is an Investment Strategist with Aston Asset Management. Prior to joining Aston he wrote on a variety of investment topics as a mutual fund analyst for Morningstar, Inc. He is a graduate of the U.S. Naval Academy, and holds an M.A. in Liberal Arts from St. John's College, Annapolis, MD.

For more information about Aston Asset Management, LP and its subadvisers, please call 800-597-9704, or visit www.astonasset.com.

By M. Scott Thompson, Co-Director of Research, Montag & Caldwell Investment Counsel

During the past 30 years, mid-cap stocks have consistently provided superior investment returns with less volatility than small-cap stocks. Through December 31, 2011, the Russell Midcap Index had outperformed the small-cap oriented Russell 2000 Index for the one-, three-, five-, seven-, 10-, 15-, 20-, 25-, and 30-year periods, with less volatility (as measured by standard deviation) and superior Sharpe Ratios (a measure of risk-adjusted returns).¹  Perhaps more impressively, the Russell Midcap has beaten the Russell 2000 during every rolling 10-year period since 1978. This is notable as 10-year periods typically capture a full economic cycle of both recessionary and expansionary periods.

Unfortunately, we think many investors have missed out on that impressive track record. In our view, there’s a tendency by mutual fund investors to overlook mid-cap stocks when making their equity allocations. Typically, investors anchor their stock portfolios with large-cap stocks, for their perceived stability, while seeking more-aggressive growth among small-caps. Mid-caps are often an afterthought to be covered by the fringes of the large-cap and small-cap strategies. This approach, however, ignores the unique advantages of truly mid-sized companies and the combination of growth and durability that they can offer.

Market-Cap Sweet Spot 

We view mid-cap stocks as being in the “sweet spot” of the market-capitalization spectrum, offering greater stability and safety relative to small-caps and superior growth over larger companies. Mid-sized companies tend to have already exited the early, high-risk stage of their life cycles and have entered a period of steadier, perhaps even faster, growth. Relative to small-caps, mid-caps have achieved a certain level of business success in having established their footprint in the marketplace. Yet they remain nimble, not plagued by the girth that can challenge the growth prospects of more mature firms.

Mid-caps are apt to be on more secure financial footing than small-caps as well, generating superior free cash flows that can be used to support growth—either through reinvestment in the business or through acquisition. Small-caps tend to carry greater financial leverage while struggling to generate excess free cash, thereby placing them at greater risk. In addition, mid-caps generally have less trouble accessing credit markets for needed capital. Stronger balance sheets and cash flow can provide better support during economic downturns, allowing them to not only survive, but thrive as they emerge from such periods in stronger competitive positions compared with smaller, weaker rivals.

As a result, we think mid-cap stocks can be viewed as an asset class for all seasons. They tend to outperform small-caps during periods of economic contraction and heightened risk aversion, and outperform large-caps during expansionary periods characterized by greater risk taking.

Mid-Cap Growth

In today’s market environment we see a unique opportunity particularly for mid-cap growth stocks relative to their value counterparts. Following 10 years of outperformance by mid-value stocks (Russell Midcap Value Index) over mid-growth stocks (Russell Midcap Growth Index), we think most growth indicators are now trading at unusually attractive levels relative to value. The Russell Midcap Growth is presently at a 32% premium to its value counterpart on a price-to-trailing earnings per share basis, well below its 20-year historical average premium of 64%. Similarly, on relative price-to-sales basis, mid-growth is at an 85% premium to mid-value compared with a 20-year average premium of 111%.²

Simple mean reversion would suggest growth stocks have the potential to outperform going forward in order to drive relative valuations back to historically normal levels. We believe the current economic outlook presents the fundamental backdrop for this mean reversion to occur. A credit-constrained, slow-growth economy sets the stage for superior performance by those companies able to consistently deliver above-average earnings growth due to faster growing end-markets, an ability to fund growth internally, and a greater ability to increase market share (via unique product cycles and/or superior execution).

High-Quality Focus

In this vein, we also think the current environment for mid-caps favors high-quality companies over more speculative businesses. The current market rally has been led by lower-quality stocks since the financial crisis bottom in March 2009. The stocks that performed the best in 2009 and 2010 were characterized by their initial low share price, small size, high beta (volatility relative to the market/benchmark), and low return-on-equity (ROE—a common measure of quality based on a firm’s efficiency in generating profits for each unit of net assets).  In general, it was low-quality stocks that declined the most during 2008 and the first two months of 2009.

It is our belief that the economy has exited the speculative recovery phase of the economic cycle, when lesser quality stocks tend to do better, and has entered what we expect will be a more enduring, albeit slower growth, expansionary phase more conducive to quality firms. Due to the ongoing deleveraging of the household, financial, and public sectors of the economy, along with anticipated higher taxes and increasing government regulation, we expect this expansion will be halting and uneven at times and generally below par. As a result, we expect investors to seek out the stocks of companies that can deliver sustainable growth. Indeed, we saw evidence that this rotation to higher-quality began in 2011.

We believe those companies that are able to consistently deliver double-digit earnings growth over the course of a full cycle and those able to generate superior returns on capital with low levels of financial leverage will be rewarded with premium valuations going forward. We think such a return to favor for high-quality growth is particularly suited to Montag & Caldwell’s approach to picking mid-cap stocks.

¹ Source: Russell Investments and Third Party Performance Measurement Software

² Source: FactSet

The information contained in this article is provided by Montag & Caldwell Investment Counsel (“Montag & Caldwell”), a subadviser utilized by Aston Asset Management, LP (“Aston”). Montag & Caldwell is not an affiliate of Aston and their views do not necessarily reflect those of Aston.

This material is not intended to be a forecast of future events, does not constitute investment advice, and is not intended as a recommendation to buy or sell any security. Investors should consult their investment professional regarding their individual investment program. Since the date of this report, economic factors, market conditions and Montag & Caldwell views of the prospects of any particular investment may have changed.  Investors should consider the investment objectives, risks and associated costs carefully before investing.  Forward-looking information is subject to certain risk, trends and uncertainties that could cause actual results to differ materially from those predicted.  Past performance is no guarantee of future results. For more information about Aston Asset Management, LP and its subadvisors, please call 800-597-9704, or visit www.astonfunds.com.or visit www.astonfunds.com.

4th Quarter 2011

The Fund outperformed its Barclays Capital U.S. Aggregate Index benchmark during the fourth quarter of 2011. Holdings in investment-grade credit outperformed the market, while the government portion of the Fund performed in-line with the index. Both of these sectors continue to be underweight allocations in the portfolio relative to the benchmark. The Fund’s overweight allocation to Emerging Market fixed-income added to returns as well. Finally, the mortgage-backed securities (MBS) portion of the portfolio continued to outperform that area of the benchmark despite prices on non-Agency MBS remaining stagnant. Holdings in Agency MBS outperformed due to positions in longer duration Agency collateralized mortgage obligations (CMOs).

Global Developed Credit

It was a volatile year for corporate credit markets in 2011. Excess returns for both investment-grade and high-yield Corporate bonds were difficult to come by as corporate credit was unable to rival the returns posted by U.S. Treasury securities. Spreads widened for both areas during the year, and while issuance was active it was primarily at the front-end for high-yield. Volatility in early August shut down the high-yield market almost completely with only a fraction of new high-yield priced during the final five months of the year.

Investors seeking yield had little choice but to increase their risk exposure and, as a result, all-in yields in the high-yield market fell to their lowest level in history in May 2011. As market participants became increasingly focused on Europe, volatility escalated and performance suffered. In addition, default activity picked up during the fourth quarter and ratings migration momentum has decidedly swung downward, strongly suggesting that default rates may soon begin to rise.

We believe another year of global uncertainty awaits investors in 2012, driven not only by concerns in Europe but also by slowing domestic economic growth. During the fourth quarter, European Union (EU) leaders unveiled the fifth plan since May 2010 to address the sovereign debt problems in the region. The implementation of such a plan remains elusive and the immediate problems remain—Europe has approximately €1.1 trillion of EU government debt maturing in 2012, with half of that maturing in the first six months. Slowing European growth may be expected to impair U.S. exports and further cause the U.S. dollar to strengthen, thereby pressuring corporate profitability and corporate bond spreads. Added to that is a recent Bloomberg report highlighting that U.S. corporate profit growth in 2011 was the lowest in two years. Structural domestic economic issues persist, including a stubbornly high unemployment rate, deflating home prices, and huge state and local government budget gaps. Domestic economic concerns coupled with continuing problems in the eurozone will likely foster another year of low interest-rates and heightened volatility in the capital markets.

U.S. Government Securities

Volatility during the fourth quarter was sharply lower compared with the third quarter. The 10-year Treasury yield moved only five basis points during the period, while the 5-year Treasury yield dropped 13 basis points and the 30-year bond moved only 3 basis points. November and December were especially subdued, with only the occasional market-moving announcement from the eurozone and a gradual downtrend in yields. The Federal Reserve’s so-called ‘Operation Twist’ went forward without causing any turmoil in the marketplace.

Opportunities for profitable relative value trades declined during the quarter. Sliding volatility and the Federal Reserve’s buying drove this decline. In response, the portfolio’s government holdings shifted to more closely resemble that of the benchmark. Looking forward to 2012, we expect to favor the 7- to10-year maturity range. We think these issues offer the best risk/return tradeoff and stand to benefit most if the Federal Reserve adopts an inflation-targeted or interest-rate targeted strategy.

Emerging Markets Fixed-Income

Emerging Markets (EM)—external sovereign, corporate debt, and local currency—performed well overall during the fourth quarter, overcoming mixed returns for the month of December and throughout 2011. EM assets remained hostage to the European debt crisis that continued to unfold throughout the year. Securities traded in sympathy with news flowing out of the eurozone, with EM local currency bonds being most affected, while EM sovereign bonds were the most insulated. Uncertainty arising from the global macro backdrop in Europe, Asia, and the U.S. generally led investors to flock to the safe haven of U.S. Treasuries.

Late in December, the European Central Bank (ECB) provided a massive liquidity injection of €489.2 billion in cheap funding to more than 500 eurozone banks through its long-term refinancing program (3-year long-term refinancing operation—LTRO). The market briefly rallied and then traded off as it appeared banks were likely to recycle the liquidity back to the ECB and not put it to work in the economy. Rating downgrades, or the threat of downgrades, uncertainty surrounding the effectiveness of Europe’s most recent plan announced in early December, the magnitude of Europe’s ongoing slowdown and the seasonal “risk-off” trade all contributed to year-end market weakness. Going forward market participants want to know whether favorable sales, consumer sentiment, and improving job data out of the U.S. can be sustained, or if it is just seasonal strength waiting to slip away in the first quarter of 2012.

Mortgage-Backed Securities

There seemed to be four major causes of the “risk-on/risk-off” trade during 2011. First, the European turmoil, which affected all markets, has affected the non-Agency MBS market significantly due to that market’s credit sensitivity. Additionally, there is no good estimate on how much some of these European banks hold in the non-Agency MBS space and how much they could be forced to sell. Even considering some of the more aggressive estimates, we believe the amount could be absorbed going forward if the supply was not released all at once. It is our anticipation that the supply would be released on a more orderly basis.

Second, layer that turmoil with the new Basel 3 accords and the questions continue as to how much additional supply could be force sold into the market by those same banks. Basel 3 will increase the reserves in all these banks, and even though its full implementation does not begin until 2015, most European banks are already starting to implement these changes.

Third, throughout the year, the continuing decline in the value of housing has put pressure on the non-Agency market. Looking at some of the price action, we see a clear indication of this housing price decline. Granted, some of the price decline was the realigning of the underlying bond prices with overstated index prices, yet it isn’t hard to see that the value of most American real estate still hasn’t seen the bottom. This situation shows itself in the high level of delinquency and severity prints which continue to persist, especially in the subprime sector.

And finally, the potential introduction of the “Volker Rule”, a portion of the Dodd-Frank legislation passed by Congress in 2010, has had its potential unintended consequence on Wall Street. Non-Agency MBS positions have been reduced by more than 50% and Wall Street’s risk appetite cut back significantly. The result of this has been to remove a major price support in this space that has allowed prices to seek levels that investors are actually finding more compelling. Of course a reduction in liquidity is not the most sought after condition, but it can provide opportunistic situations to investors.

Although there were lawsuits, congressional investigations, more attorneys general headlines, and even more legislation introduced in 2011, nothing really came to adjudication in terms of Washington significantly affecting the MBS markets. Only the Bank of America settlement with 22 institutional investors actually came to fruition in 2011, and even that settlement has been called into question by the likes of the FDIC and the Federal Home Loan Bank that has sought to intercede in the settlement. This settlement is now in the appeals court to determine which jurisdiction (state or federal) has the final say in the matter, which could extend the outcome for at least six months.

The Agency MBS market underperformed the broader Barclays Capital U.S. Aggregate Bond Index during the fourth quarter and the Barclays Capital MBS Index was the worst performer out of the major sectors of the index in 2011. This underperformance is as expected given the fall in interest-rates during the year, since the Barclays Capital MBS Index has the lowest duration.

One substantial legislative process that found its way into the market, however, was the October FHFA announcement that provided an update to the Home Affordable Refinance Program (HARP) whose final guidelines were formally announced mid-November. Most borrowers have an economic incentive to refinance but cannot afford to make the changes in underwriting standards and/or loan-to-value (LTV) ratios. This dilemma is not lost on the U.S. government and there were multiple rumors throughout 2011 regarding a “Great Refi” plan to offer historic low rates to all mortgagees. What the market received instead was FHFA, which included eliminating the LTV cap of 125%. We think this change will only lead to an increase in Agency MBS prepayments by a 5 to 10 Conditional Prepayment Rate (CPR) per year, spanning the next few years. We expect that if there is further weakening in the national housing market, then the government will intervene. This intervention could lead to higher prepayment speeds, especially in higher coupon securities.

Commercial Mortgage-Backed Securities

The CMBS market experienced quite a tumultuous ride in 2011, a year where prices across the credit spectrum whipsawed alongside with macro markets and ultimately ended December with a fairly strong rally at the top of the capital stack. We continue to see tiering across deals in addition to a steepening credit curve as credit “cuspy” tranches, such as junior AAA CMBS (AJs) and below, continue to lag behind the outperformance in mezzanine AAA super senior CMBS (AMs) and last cash flow (LCF) super seniors. With that said, the market continues to chug along, albeit on a technical basis, as investors appear skittish on broader economic headlines.

On the commercial real estate (CRE) fundamental side, delinquency rates remained flat to slightly down due to a slower pace of deterioration coupled with servicer loan modifications. There continues to be increasing trends of servicer loan modifications which effectively splits a loan into pieces: an A note pays interest and a B note does not pay interest and is effectively a hope note. We view these types of modifications as worrisome due to the fact that the hope notes are effectively a delayed write-down for the trust and in the interim may show lower cumulative losses on a deal level then what is occurring in reality. On the commercial property valuation side, the latest Moody’s Commercial Property Price Index (CPPI) showed a 1.4% decrease in September. This may be skewed as transaction volume continues to remain low such that any large transaction may cause significant change in the index whether positive or negative.

Our investment focus for this sector remains largely the same, with an emphasis on security selection and in shorter duration assets. Unemployment continues to be a large contributing factor for CRE fundamentals and without any real improvement in the unemployment picture, real recovery in the CRE sector will be limited. 

DoubleLine Capital LP
Los Angeles, California

Note: Bond funds are subject to interest rate and credit risk similar to individual bonds. As interest rates rise or credit quality suffers, an investor is susceptible to loss of principal.

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. 

4th Quarter 2011

European Uncertainty

Uncertainty surrounding the health of European governments and financial institutions caused substantial volatility and weighed heavily on global financial markets in 2011. The month of December was no exception as investors continued to digest headlines, notably Standard & Poor’s (S&P) placing the long-term sovereign credit ratings of 15 countries within the European Monetary Union (EMU) on CreditWatch due to systematic stresses in the Eurozone.

Following the conclusion of its December meeting, the Federal Reserve stated that recent data suggests the U.S. economy had been expanding moderately though with some apparent slowing in global growth. The Fed did acknowledge that the unemployment rate remained elevated despite improvement in the conditions of the overall labor market. Moreover, it expected strains in financial markets to pose significant downside risk to the U.S. economic outlook, and thus was continuing its program to extend the average maturity of its holdings of securities as announced in September.

Throughout 2011, the Federal Reserve communicated its expectations for the U.S. economy with a fragile tone before finishing the year with a cohesive stance towards current monetary policy. In our view, it is unlikely that the Fed will move from accommodative policy during 2012, absent a significant decline in unemployment or a material change in long-term inflation expectations. Therefore, we do not foresee a change to the exceptionally low Federal Funds rate that the Fed has targeted through the middle of 2013.

Strong Corporates

The Fund outperformed its Barclays Capital US Aggregate Bond Index benchmark during the quarter as sector, credit-quality, and yield-curve selection all added value. The portfolio’s above-market exposure to the outperforming credit sector aided returns, with Corporate bonds besting duration matched Treasuries as spreads tightened modestly. Within credit itself, an overweight to lower-quality investment-grade securities helped as BBB-rated credit securities outperformed A-, AA-, and AAA-rated bonds by healthy margins.

A barbell portfolio structure also boosted returns as rates declined across the yield curve during the fourth quarter. In this environment, longer-dated securities outperformed with long-term US Treasuries outperforming intermediate Treasuries. All told, long Treasuries outperformed intermediate Treasuries by more than 23 percentage points during the full year, the largest margin on record.

Outlook

In 2011, investors dealt with the European uncertainty and persistent bouts of volatility with a flight to quality. In such a “risk-on/risk-off” environment, corporate bond spreads widened regardless of the issuer’s direct exposure to Europe, if any, as investors considered a potential disconnect between the domestic economy and those abroad.  Although the global nature of the European crisis cannot be overlooked, a significant portion of U.S. corporations carry little direct exposure to Europe, and an even greater number have been scaling back investment in Europe since before the crisis emerged. In our view, the outcome for U.S. corporate bonds is more contingent on the domestic economy and the degree to which sound financial discipline has allowed issuers to utilize the low interest-rate environment to improve their balance sheets. On a relative basis, corporate bonds issued by entities that have termed out liabilities, demonstrably reduced their debt burden, and continue to produce strong cash flow throughout the business cycle remain attractive. 

Taplin, Canida & Habacht (TCH)
Miami, Florida

Note: Bond funds are subject to interest rate and credit risk similar to individual bonds. As interest rates rise or credit quality suffers, an investor is susceptible to loss of principal.

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. 

CHICAGO – January 23, 2012 – Aston Asset Management, LP (Aston) has announced that its mutual fund assets under management exceeded $10 billion, as of the close of business on January 19, 2012.  Aston surpassed the $10 billion mark shortly after celebrating its five-year anniversary.  In 2011, Aston’s net sales ranked in the top fifty of all fund companies.¹ 

“We are pleased with what we have achieved in a relatively short period of time,” said Stuart D. Bilton, Chairman and Chief Executive Officer of Aston. “Our commitment to carefully selecting experienced investment managers with disciplined investment processes, and placing our clients’ interests first, has carried our shareholders and firm through the tough markets of the past five years.   We anticipate that these core values will allow Aston to continue to prosper for many years to come.”

Aston was established in December 2006 with the goal of offering investors high quality institutional managers in a mutual fund format. The history of Aston’s management team extends back to 1993, when Mr. Bilton founded the Chicago Trust Funds and hired Kenneth C. Anderson, now the Company’s President, as the firm’s first employee.  Aston currently employs 37 people, advises 26 funds and partners with 18 subadvisers.

Aston’s growth was fueled by its key strategy of forming partnerships with independent money managers. Aston nurtures these relationships by co-branding funds, working closely with the money managers to achieve strategic goals and distributing funds through extensive national networks of investment consultants, registered investment advisors, broker-dealers, model and retirement platforms, and wealth management teams.

“Aston could not have achieved $10 billion in assets under management without the hard work and strong commitment from every member of the Aston team, as well as the trust we have earned from our clients,” said Mr. Anderson. “While we are very pleased to have reached this milestone, we are not content to simply rest on our laurels. We will continue to diligently execute our strategy, working closely with our subadvisers to help our clients reach their investing goals.”

Aston has added several new mutual funds to its roster in the last year. The ASTON/River Road Long-Short Fund (ARLSX) was opened on May 4, 2011, with subadviser River Road Asset Management.  The ASTON/DoubleLine Core Plus Fixed Income Fund (ADBLX, ADLIX) led by portfolio manager Jeffrey Gundlach of DoubleLine Capital LP (DoubleLine) was launched on July 18, 2011.  DoubleLine considers the fund’s investment strategy to be the highest risk/reward fixed income strategy they employ, and is offered exclusively through Aston Funds. Finally, the ASTON/Silvercrest Small Cap Fund (ASCTX, ACRTX) was opened with subadviser Silvercrest Asset Management Group (Silvercrest) on December 27, 2011. 

In addition to the above, Aston’s full line-up of mutual funds include:

4th Quarter 2011

Heightened concerns over the fiscal condition of much of Europe continued during the final calendar quarter of 2011. Thus, volatility within capital markets continued as well, as investors painted with a very broad and emotional brush. The major surprise was the sudden spike to the upside during the first two weeks of October. The S&P 500 Index rose nearly 14% during the month. Remarkably, half that gain occurring in the first five trading days.

The old Wall Street adage, “markets climb a wall of worry” certainly held true. Looking at the news, there was—and is—much to cause investor concern. Since our Dynamic Portfolio Optimization™ (DPO) model is more intermediate term-oriented, it did not capture much of the abrupt October upside reversal in the markets. Having only dropped marginally during the third quarter when the broader U.S. market (represented by the S&P 500 Index) posted double-digit losses, the Fund correspondingly lagged for the fourth quarter following the rally.

The Fund trailed its composite benchmark (35% Russell 3000 Index/35% MSCI ex-US Index/30% Barclays Capital Aggregate Bond Index) significantly in delivering a small loss during the quarter. Performance was especially dampened by a sharp loss in the Market Vectors Russia ETF. Also contributing to the relatively poor returns were iShares Silver Trust and iShares MSCI Singapore Index, though both of those positions had been smaller weights in the portfolio than the Russian ETF. Among the positive contributors to performance were positions in iShares iBoxx $ High Yield Corporate Bond, PowerShares DB U.S. Dollar Index Bullish, and Health Care Select Sector SPDR.

In the terms of positioning, the most noteworthy changes in asset allocation during the quarter were an increase in Domestic Equity from 11% to 30% of assets and decrease in Domestic Fixed Income from 59% to 38% by year end.

For the full year 2011, the Fund slightly outperformed its custom benchmark in posting a small loss. Allocation changes put in place during the second and third quarters allowed the Fund to incur minimal losses during those respective quarters, especially in International Equity. Thus, while missing the abrupt fourth quarter rebound, the avoidance of earlier quarter losses allowed investors to experience less volatility with equal or better performance. Our model continues to warn of high levels of investment risk, so the Fund continues to maintain a relatively conservative stance overall. 

Smart Portfolios
Seattle, WA

As of December 31, 2011, Market Vectors Russia ETF comprised 0.00% of the portfolio's assets, iShares Silver Trust – 0.00%, iShares MSCI Singapore Index – 0.00%, iShares iBoxx $ High Yield Corporate Bond – 6.43%, PowerShares DB U.S. Dollar Index Bullish – 2.06%, and Health Care Select Sector SPDR – 2.13%.

Note: The Fund invests in exchange-traded funds (ETFs) which are securities of other investment companies.  An ETF seeks to track the performance of an index by holding all or a sampling of the securities on that index.  An ETF may not be able to replicate an index exactly since returns may be reduced by transaction costs, expenses and other factors while the index has none.  The Fund invests in many different areas of the market, each of which may involve its own element of risk. Use of aggressive ETF investment techniques such as futures contracts, options on futures contracts and forward contracts may expose an underlying fund to potentially dramatic changes (losses) in the value of its portfolio. Credit risk or default risk could negatively affect the Fund’s share price.  Inverse or ‘short’ ETFs seek to profit from falling market prices and will lose money if the market benchmark index goes up in value. Leveraged ETFs seek to provide returns that are a multiple of a benchmark and can increase risk exposure relative to the amount invested and can lead to significantly greater losses than a comparable unleveraged portfolio.

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.

4th Quarter 2011

Great Quarter, Tough Year

The Fund rebounded strongly during the fourth quarter in posting double-digit gains and outperforming its S&P MidCap 400 Index benchmark by more than four percentage points. The end-of-year surge somewhat eased a tough 2011 overall that saw the Fund underperform the benchmark by a wide margin.

The fourth quarter outperformance was encouraging: 18 stocks rose more than 20% and only four stocks declined. Top contributors included Akamai Technologies, Gannett, and H&R Block.  Long-time holding Akamai reported strong third quarter revenue growth and announced plans to acquire Cotendo, a competitor. We think the acquisition should have a positive impact on the firm’s margins. Broadcasting and publishing company Gannett (USA Today, television stations, regional newspapers, CareerBuilder) continues to generate strong cash flow and has a solid balance sheet, while we think its stock remains attractively valued with a low price/earnings multiple and a healthy dividend yield. H&R Block has refocused on its core business (assisted tax preparation) and divested itself of its non-core mortgage and broker/dealer businesses. The firm has been able to return cash to shareholders through share repurchases and a sizeable dividend.   

The worst performers for the quarter were three Healthcare stocks—Boston Scientific, Charles River Laboratories, and Forest Laboratories—all of which were in negative territory. Medical device company Boston Scientific declined after the company reported continued pricing pressure in its stent business. The firm is in the midst of a multi-year transition, with its stock remaining attractively valued with a current price/sales ratio well below its five-year historical average. Charles River is a provider of products and services that assist pharmaceutical and biotech companies in accelerating research and drug development. With market conditions for big pharmaceutical companies stabilizing, outsourcing to firms like Charles River is expected to pick up. We are encouraged by the company’s focus on key initiatives, which include controlling operating costs, improving free cash flow, and returning cash to shareholders.  In our view, the stock appears substantially undervalued at current levels. Forest Labs, a U.S.-based pharmaceutical company, continues to build out a significant product portfolio. Nine new drugs are in the pipeline to replace products coming off patent in 2012 and 2015. The company has implemented an accelerated share repurchase plan, and remains focused on restructuring efforts.   With the stock trading at only seven times estimated 2012 earnings, we think the risk/reward potential is compelling.

Buys and Sells

The Fund eliminated its remaining positions in FactSet Research Systems and URS Corp. during the quarter. FactSet had nearly doubled from its purchase in March 2008 to when we sold it in December, while the broader market (as defined by the S&P 500 Index) declined 3%. FactSet reached our valuation target and we think that its user base may decline with financial industry layoffs. Engineering firm URS declined during the portfolio’s holding period from April 2008 through November 2011, though less so than the overall market. We made the decision to exit URS due to the lack of federal and municipal funds available for infrastructure related projects.

At the end of October, the Fund initiated a position in global specialty pharmaceutical and medication delivery company Hospira, which had spun off from Abbott Laboratories in 2004. Just prior to the purchase, the firm had highlighted manufacturing issues at two of its facilities that depressed the stock and provided an attractive entry point. We expect the manufacturing issues to be resolved in the intermediate-term and believe the news is well discounted in the stock price. The valuation appears compelling with the stock trading at the low end of the company’s five-year range, at levels similar to 2004. 

Outlook and Perspective

The domestic economy has shown some encouraging signs recently. Employment numbers have improved, while U.S. auto sales grew 10% in 2011. For the first time in two decades GM, Ford, and Chrysler all reported increased market share in the same year. In January, long-term holding BorgWarner, a leading producer of highly engineered automotive products with a focus on improved engine performance and fuel efficiency, increased its 2012 guidance.

At the end of the third quarter, we commented on the historically cheap valuation of the portfolio. Even with the gains made during the fourth quarter, we think it continues to be attractively valued compared with the major mid-cap benchmarks and the S&P 500. The average price/earnings ratio of the portfolio is less than that of the benchmark and its overall price/earnings to growth (PEG) ratio is at the low end of its historical range. In addition, we think the portfolio holds companies with better balance sheets than the broader market, with a lower long-term debt-to-capital ratio than that of the S&P MidCap 400 and Russell MidCap Indexes. Given the stabilizing and improving U.S. economic environment and current fundamental characteristics in absolute and relative terms, we believe the portfolio is well-positioned. 

Fairpointe Capital

Thyra E. Zerhusen, Chief Investment Officer
Marie L. Lorden, Portfolio Manager
Mary L. Pierson, Portfolio Manager

As of December 31, 2011, Akamai Technologies comprised 4.25% of the portfolio’s assets, Gannett – 3.42%, H&R Block – 4.71%, Boston Scientific – 3.91%, Charles River Laboratories – 2.15%, Forest Laboratories – 2.70%, Hospira – 2.25%, and BorgWarner – 2.13%. 

Note: Mid-cap stocks are considered riskier than large-cap stocks due to greater potential volatility and less liquidity.

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.

4th Quarter 2011

U.S. Stocks—Time For a Close Up

Uncertainty about growth in the global economy made 2011 a year of volatility in the stock market. All year, headlines questioned whether there would be a double-dip recession in the U.S.  The fourth quarter saw the upside to that query as markets rallied globally. Small-cap stocks (Russell 2000 Index) led during that period, though large-cap stocks represented by the Fund’s Russell 1000 Index benchmark led for the year. The year-end strength came mostly during October, reflecting encouraging news on corporate earnings. This belied arguments for a double-dip. In addition, a pick-up in Gross Domestic Product growth and less hostile employment results corroborated views on a more constructive market outcome.

Last year we postulated that large-caps could be big in 2011 and that U.S. domestic stocks would be recognized and preferred by investors because of sentiment, valuation, and improving fundamentals. Well, the U.S. stock market (as defined by the large-cap oriented S&P 500 Index) was the best performing equity market for the year, and one of only two markets across the globe to post positive gains. This was the second year in a row where U.S. stocks in general provided superior returns on the global equity stage. It’s time for their close up! We think a trend seems to be developing that warrants further attention from investors.

Overall, though, it was a mixed year for investors. Large-cap stocks, particularly large-growth stocks, registered positive returns for the year, superseding small- and mid-caps among the respective Russell Indexes. But those returns were inconsequential from an absolute return perspective. Still, with an estimated 16% increase in corporate profits in 2011, (based on S&P 500 earnings) and a flat market, we continue to view valuations as compelling, particularly for large-caps. The factors that led us to be sanguine about large-caps heading into 2011 remain in place as we move into 2012. We think sentiment is positive as U.S. large-caps represent an under-owned asset class. Valuations and fundamentals both remain compelling according to our bottom-up analysis, with corporate balance sheets showing U.S. companies flush with cash that can provide necessary liquidity for flexibility.

It was a challenging year for the Fund, which lagged its benchmark substantially in posting a negative return. Poor stock selection in the Technology and Consumer Discretionary sectors was not offset by strength in other sectors. A deceleration in the economy created much of that weakness, but there were also company specific miscues. Specifically, product transitions are never easy and with Research In Motion the only thing in motion was its stock price on a downward path. We believed the company’s superiority in the enterprise space due to its secure network together with its overseas market share lead would provide a cushion. Unfortunately, competition from Google’s Android operating system and Apple’s iPhone and iPad caused the company to lose market share during the year. Yes, it is still part of the portfolio, as profitability and cash flow remain robust along with overall customer growth. A much delayed product transition should begin to take hold later this year and we think the transition should reawaken investor interest as the current valuation is discounting no improvement whatsoever in operating fundamentals. Stock selection in the Utilities and Financials sectors was also weak, but the Fund’s underweight position in Financials muted the impact.

On a positive note, stock selection in the Healthcare, Materials, and Industrials added to relative performance. Stock selection was strong in the Consumer Staples sector, but this benefit was largely offset by an underweight allocation to the sector.

Fourth Quarter Rally

The market rally that began in October led to strong absolute returns, with all sectors of the Russell 1000 and the Fund delivering positive returns. On a relative basis, the Fund was essentially flat in trailing the benchmark by roughly half a percentage point. Stock selection in the Consumer Discretionary, Consumer Staples, and Industrials sectors, as well as an overweight position to Industrials benefitted the portfolio.

Home Depot and Philip Morris International led the way in Consumer Discretionary and Staples, respectively. Home Depot reported solid quarterly results driven by continued strong sales comparisons, a dividend increase, and enhanced share repurchase activity. Favorable pricing and volume led to better than expected results for Philip Morris. Elsewhere, Google beat expectations and showed a reassuring focus on project expenses, boosting its stock. Energy firm EOG Resources was the top individual contributor to relative performance as earnings growth at the firm accelerated as crude oil and natural gas production rose more rapidly than anticipated.

The biggest drag on relative performance was an overweight stake and weak stock selection within Healthcare. Physician services firm Athenahealth issued 2012 guidance below expectations driven by reinvestment in the business. Healthcare IT firm Cerner fell on concerns about future booking trends and a shift toward lower margin businesses. Cerner had been a strong contributor to the portfolio since its initial purchase in 2008, with its forward-looking culture and significant investment in research and development that enabled it to remain at the forefront of automating (and in some cases transforming) healthcare operations for hospitals and other health care providers. We sold the portfolio’s position in November based on valuation.

Positioning

The portfolio remains broadly diversified, with sector allocations resulting from opportunities we identify at the stock level through our bottom-up fundamental analysis and valuation work. The most notable shifts during the quarter were a decline in the Healthcare sector weighting due to sales/profit-taking based on valuation and an increase in Technology. The major trend that has resonated within Technology is the move by corporations toward cloud computing to increase flexibility and efficiency. Those companies that facilitate that shift came into our valuation target range and provided the incremental opportunities. Technology ended the year with the largest sector allocation in the portfolio, followed by Financials and Industrials.

Although the Financial sector was the worst performing sector in the market in 2011, we began increasing the Fund’s exposure during the third quarter having identified what we believe to be clear leaders with compelling valuations. Importantly, while European banks need to raise additional capital, U.S. banks met their requirements a few years ago, thus placing them in a more competitive position. The exposure to Industrials is based on high-quality global leaders where economic uncertainty has depressed valuation.

During the quarter, four stocks reached full-position status either through purchase, appreciation, or a combination of the two. Apple has a unique ability to anticipate users’ wants, meet those wants with simple, easy-to-use functionality, and leverage marketing to create a buzz and level of cache to command a premium price. Now dominant in the mobile landscape, the firm has global trends at its back and a head start against rivals looking to crack the space. We believe that the company’s large cash position should enable premium pricing and high levels of profitability.

Dialysis services provider DaVita provides care to approximately 131,000 kidney failure and end-stage renal disease patients nationwide through nearly 1,700 outpatient centers. In our view, the company possesses competitive advantages given the stability of its business model, predictability of demand for its services, scale within the industry, strong track record of providing quality care, and a payment model that provides the company relative protection from draconian reimbursement pressure. In addition, we see longer-term opportunities for DaVita to gain market share from smaller operators that lack the clinical expertise to effectively operate in a healthcare environment that emphasizes risk management as opposed to fee for service. 

Four full positions, in addition to the previously mentioned Cerner, were sold from the portfolio during the fourth quarter. Amgen, Atwood Oceanics, and Corporate Executive Board were sold to fund purchases in other companies that we view as better relative investment opportunities.  After a steep third quarter decline, we took advantage of a sharp rebound in mining equipment maker Joy Global to sell the position and use the proceeds to add to stocks with greater potential.

2012 Outlook

We believe that U.S. stocks can potentially provide investors good-to-average returns for the upcoming year. We think that large-caps should have an edge over small- and mid-cap stocks due to superior valuation and improving fundamentals. The domestic economy will likely register continued subpar economic growth, and global markets will likely remain subdued due to credit issues in Europe and softness in export markets—a key driver for emerging economies.  As this is an election year, we believe there will continue to be volatility in the U.S. market. We hope to take advantage of any near term downward volatility to add to best-in-class companies at more compelling prices. 

TAMRO Capital Partners
Alexandria, Virginia

As of December 31, 2011, Research In Motion  comprised 1.04% of the portfolio's assets, Google – 3.03%, Apple – 2.12%, Home Depot – 2.17%, Philip Morris International – 2.50%, EOG Resources – 3.20%, Athenahealth – 2.20%, Cerner – 0.00%, and DaVita – 2.33%.

Note: Small- and mid-cap stocks are considered riskier than large-cap stocks due to greater potential volatility and less liquidity.

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. 

4th Quarter 2011

Year in Review

Uncertainty about growth in the global economy made 2011 a year of volatility in the stock market. All year, headlines questioned whether there would be a double-dip recession in the U.S.  The fourth quarter saw the upside to that query as markets rallied globally. Small-cap stocks in the Fund’s Russell 2000 Index benchmark led during that period, though large-caps (Russell 1000 Index) led for the year. The year-end strength came mostly during October, reflecting encouraging news on corporate earnings. This belied arguments for a double-dip. In addition, a pick-up in Gross Domestic Product growth and less hostile employment results corroborated views on a more constructive market outcome.

Last year we postulated that large-caps could be big in 2011 and that U.S. domestic stocks would be recognized and preferred by investors because of sentiment, valuation, and improving fundamentals. Well, the U.S. stock market (as defined by the large-cap oriented S&P 500 Index) was the best performing equity market for the year, and one of only two markets across the globe to post positive gains. This was the second year in a row where U.S. stocks in general provided superior returns on the global equity stage.

Small-caps in the benchmark finished the year down about 4%. The Fund was basically flat versus the benchmark for the year. Positive stock selection within Industrials, Healthcare, and Financials was offset by a lack of exposure to Utilities and an overweight position in the struggling Energy sector.

We believe that in a slow growing global economy consolidation is likely to take place, as leading companies grow market share and improve efficiencies by acquiring away competition. Small-caps have historically been the innovators in the domestic economy and we have seen many acquisitions in this universe, particularly in Technology, this past year.

Fourth Quarter Rally

Although markets rebounded during the fourth quarter and absolute returns were strong, the Fund trailed its benchmark for the period. The underperformance came primarily from negative stock selection within the Energy, Healthcare, and Consumer Discretionary sectors. In addition, the Fund’s overweight stake in Energy had a negative impact here as well.

Healthcare IT companies Quality Systems and Athenahealth were among the biggest individual detractors from performance. Concerns that the market for ambulatory electronic health records is more saturated than originally believed weighed on the stock of Quality Systems, while Athena’s management issued 2012 guidance below expectations driven by reinvestment in the business. Telecomm-related firms Acme Packet and Meru Networks were also notable detractors. Delayed orders caused Acme to reduce its quarterly guidance, and Meru missed its earnings target, despite record revenues, owing to expense pressures from sales and marketing.

On the positive side, Financials, Technology, and Industrials were the best performing sectors on both an absolute and relative basis. An overweight in Industrials benefited the portfolio overall, with holdings in Colfax and Westinghouse Airbrake Technologies (Wabtec) as the standouts. Colfax delivered better than expected sales and earnings growth, and further acceleration is expected as a result of a recent acquisition. Solid execution at Wabtec resulted in better than expected earnings and raised guidance.

The Fund benefited from three take-out offers for holdings in Technology: RightNow Technologies, DemandTech, and recently purchased SuccessFactors. All three companies are innovators in cloud computing, which as we have stated over the past several years is one of the strongest trends to hit technology in more than thirty years. Within Financials, top-10 holding Bank of the Ozarks reported better than expected quarterly results. 

Positioning

The portfolio remains broadly diversified, with sector allocations resulting from opportunities we identify at the stock level through our bottom-up fundamental analysis and valuation work. The most notable shifts during the quarter were a decline in the Healthcare sector weighting due to sales/profit-taking based on valuation and an increase in Technology as a result of appreciation from the buy-out offers mentioned above.  

Industrials, Financials, and Technology were the three largest sectors in the portfolio at quarter end. The opportunities we see in Industrials are related to infrastructure build-outs in Emerging Markets for water and energy as those economies continue to grow. Although the Financials sector within the Russell 2000 Index slightly outperformed the full index in 2011, we have identified what we think are high-quality companies within the sector that offer attractive valuations, particularly in the banking industry. We believe the U.S. is still “overbanked” and that consolidation within the industry is likely to continue.

During the quarter, seven stocks reached full-position status either through purchase, appreciation, or a combination of the two. Coinstar is an innovative leader in its eponymous automated coin counting service and the DVD kiosk business through its Redbox subsidiary. Despite impressive growth and market share gains through Redbox, the stock has been weak given a recent executive resignation as well as investor skepticism over management’s outlook and ability to execute a digital strategy. We believe Coinstar’s services offer value and convenience, and think the company is in an excellent position to enhance its competitive position given the demise of traditional brick and mortar video stores. Coinstar generates strong free cash flow and returns on capital.

Two other notable new full positions are in Amerigroup and Red Robin Gourmet Burgers. Amerigroup is the largest pure play Medicaid managed care organization (MCO) serving approximately two million members in 11 states. Although profit margins are being squeezed, we believe this risk is more than fully reflected in the valuation following the stock’s recent correction. In our view, Amerigroup is the best positioned MCO for Medicaid expansion as well as health reform and has competitive advantages relative to its peers given its cost leadership, focused business model, attractive geographic footprint, and strong management. Red Robin has suffered a series of management missteps, including overly aggressive new unit expansion through the economic downturn and poor overall execution. A new CEO and independent board members have recently joined the company to direct an ongoing restructuring effort in response to activist shareholder groups. We believe Red Robin is in the early stages of a turnaround, and are encouraged by the initial success from management’s new focused strategy.

Six full positions were sold from the portfolio during the fourth quarter. Blue Coat Systems, ESCO Technologies, Texas Industries, and Winnebago Industries were sold to fund purchases in other companies that we view as better relative investment opportunities. Cbeyond was sold in light of a shift in the company’s strategy that we believe entails execution risk. Quality Systems was sold due to valuation and better relative opportunities in the sector. Despite the weakness this quarter, the stock had delivered strong gains since its initial 2008 purchase.

2012 Outlook

We believe that U.S. stocks can potentially provide investors good-to-average returns for the upcoming year. We think that large-caps should have an edge over small- and mid-cap stocks due to superior valuation and improving fundamentals, though as noted previously small-caps can continue to benefit from industry consolidation. The domestic economy will likely register continued subpar economic growth, and global markets will likely remain subdued due to credit issues in Europe and softness in export markets—a key driver for emerging economies.  As this is an election year, we believe there will continue to be volatility in the U.S. market. We hope to take advantage of any near term downward volatility to add to best-in-class companies at more compelling prices. 

TAMRO Capital Partners
Alexandria, Virginia

As of December 31, 2011, Quality Systems comprised 0.00% of the portfolio's assets, Athenahealth – 2.23%, Acme Packet – 2.09%, Meru Networks – 0.29%, Colfax  – 2.85%, Westinghouse Airbrake Technologies (Wabtec)  – 2.10%, RightNow Technologies  – 0.67%, DemandTEch – 1.16%, SuccessFactors – 2.98%, Bank of the Ozarks – 2.80%, Coinstar – 2.21%, Amerigroup – 1.75%, and Red Robin Gourmet Burgers – 1.47%.

Note: Small-cap stocks are considered riskier than large-cap stocks due to greater potential volatility and less liquidity.

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.

4th Quarter 2011

After dropping double-digits during the third quarter, U.S. equity markets recovered nicely during the final quarter of the year, with both the broad-market S&P 500 Index and the Fund’s Russell 1000 Growth Index benchmark rallying more than 10%. After a sluggish first half of 2011, economic growth increased at a healthier rate during the second half of the year. A pick-up in consumer spending and ongoing solid gains in business investment contributed to third quarter economic growth, while fourth quarter real Gross Domestic Product (GDP) benefited from improved inventory and trade trends, along with continued gains in consumer spending.

Although the Eurozone debt crisis and the likelihood that Europe has entered a recession increase the risk to economic growth here in the U.S., we believe 2% GDP growth can be achieved in 2012. Job and income growth should be sufficient to support a moderate increase in consumer spending, but no more than that, as consumer debt levels remain high and personal savings rates are low. Business investment should experience another increase in 2012, supported by record levels of corporate profitability and some rebuilding of business inventories from 2011 levels. In addition, both housing starts and unit sales of autos and light trucks could show moderate improvement from depressed levels.

Still, the developed world simply has too much debt, and it will require time, patience, and sound fiscal policies to adequately reduce it in order to establish a solid foundation so that historical trend-line growth of closer to 3% can once again be achieved.

Up Year, Lagging Quarter

The Fund modestly underperformed the benchmark during the fourth quarter, but outgained the index for the full year 2011 amid an environment of heightened volatility and unexpected global developments. An overweight allocation to Consumer Staples and underweight position in Energy, which positively contributed to relative results for the year, were among the main causes for lagging the index during the quarter. With the exception of Kraft, stock selection also lagged within the Consumer Staples, further detracting from relative returns during the fourth quarter. 

Underweight positions in the surging Materials and Industrial sectors, an overweight to Healthcare, and cash also detracted from performance during the quarter. The Fund continues to hold a cash reserve, which served as a drag on returns amid a strong market rally, due to weak economic data and the limited availability of additional monetary and fiscal stimulus. 

Notable detractors among individual holdings included Oracle, Monsanto, and Bed Bath & Beyond. Oracle reported disappointing results, with earnings per share uncharacteristically missing consensus estimates by three cents. Results fell short across all products and geographies, leading us to trim the portfolio’s position. Monsanto was relatively weak within Materials even with higher inventories than forecasted, as corn stocks remain at multi-decade lows. With a less aggressive pricing strategy and several product cycles unfolding, we think the company seems poised to deliver strong volume/share gains even with modestly lower corn prices. Thus, we added to the position during the quarter. Bed Bath & Beyond disappointed some analysts’ high expectations for same store sales in its fiscal third quarter earnings report, despite upside in its earnings. We viewed the quarter favorably, with a healthy same-store sales increase on top of a series of strong numbers. We believe the company will be one of the faster growers among large-cap retailers and a long-term market share gain story, leading us to add to the position.

Overall stock selection in the Technology, Consumer Discretionary, and Energy sectors contributed positively to relative results for the quarter. Google, Visa, and Qualcomm within Technology all rose more than the sector. McDonald’s and Omnicom Group shined within Consumer Discretionary, with McDonald’s being reduced as the stock neared its all-time high and approached 5% of Fund assets. Omnicom was also eventually trimmed as about a third of its revenue comes from outside the U.S., which may be negatively affected by the European debt crisis.

Energy was the best performing sector in the index during the quarter. Although the Fund’s underweight position detracted overall from relative performance, stock selection within the sector outperformed. Among other individual stocks of note, pharmacy benefit manager Medco Health Solutions rose strongly. We increased the Fund’s position after the company reported earnings that exceeded expectations. We think the company should benefit from the announced merger with Express Scripts, which is expected to close during the first half of 2012. 

Buys and Sells

Three new positions were added to the portfolio during the quarter—Cisco Systems, General Electric, and Unilever. Networking firm Cisco has become more streamlined and focused, with its restructuring program expected to generate approximately $1 billion in annual cost savings.  We think strong free cash-flow and ample cash on its balance sheet can lead to higher dividends and increased share repurchases. The company is ideally positioned to benefit from continued growth in IP data traffic fueled by mobile, video and cloud technology.

We viewed diversified industrial manufacturer and service company General Electric as attractively valued given its nearly 4% dividend yield and leverage to late-cycle industries. In addition, we think conditions have improved at financial arm GE Capital. Unilever is a leading global consumer products company with a long tenure in Emerging Markets, faster growing regions that are now the source of 55% of the firm’s revenues. We think solid organic growth and a focus on improving operating margins could help the company to generate consistent double-digit earnings growth.

The position in JP Morgan, the Fund’s only Financials holding, was eliminated during the period. Although we had increased the position early in the quarter as the stock approached trough valuation levels from market lows in 1998, 2001 and 2008, we subsequently reduced and ultimately exited the position given its lack of relative earnings momentum.

Other noteworthy portfolio changes included the trimming of some Industrials and Technology names. Emerson Electric was reduced after the company reduced fiscal first quarter earnings guidance due to weaker than expected sales in its Network Power and Climate divisions. Fluor was trimmed after the stock rebounded nicely from recent lows and our concern about slowing economic growth. Within Technology, we eventually cut back on Accenture late in the quarter after having added to it earlier. A shift towards outsourcing versus consulting suggests to us entry into the later stages of the information technology services cycle. Finally, Apple was trimmed following the company’s uncharacteristic earnings miss. We believed upside was limited in the near-term as investors evaluated the competitive environment for the iPhone and iPad. 

Outlook

We expect a challenging and volatile stock market environment into the middle of 2012. With the U.S. economy expected to show very moderate growth, the European economy poised to enter a recession, and Emerging Market economies downshifting to reduced, but still above-average, rates of growth, global growth is slowing. Given this global slowdown and with corporate profitability already at record levels, investors are likely to be disappointed to find that corporate profit expectations for both the intermediate- and longer-term periods are generally too high. In addition to slowing economic and profit growth, investors will also have to contend with significant political uncertainty until U.S. voters determine which candidates can best solve our budget deficit, slower growth, and high unemployment problems. Clarity on these issues is unlikely until the middle of this year.

In our view, we are in the early stages of a rotation to higher-quality growth stocks such as those held in the Fund. In the challenging market environment that we expect in the months ahead, we believe these stocks may do particularly well as their valuations are attractive and their earnings growth is more assured. Longer-term, due to their financial strength and global diversification, we think these companies are positioned to provide sustained growth, and in many cases offer very attractive dividend yields in an environment where both growth and income yield will be scarce.

Montag & Caldwell Investment Counsel

As of December 31, 2011, Kraft Foods comprised 4.46% of the portfolio's assets, Oracle – 1.38%, Monsanto – 2.43%, Bed Bath & Beyond – 2.53%, Google – 4.73%, Visa – 2.94%, Qualcomm – 3.91%, McDonald’s – 4.21%, Omnicom Group – 2.11%, Medco Health Solutions – 2.52%, Cisco Systems – 1.89%, General Electric – 1.63%, Unilever – 1.30%, Emerson Electric – 1.42%, Fluor  – 1.32%, Accenture – 2.45%, and Apple – 4.06%.

Note: Growth stocks are generally more sensitive to market moves and thus may be more volatile than other stocks.

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.

4th Quarter 2011

Full of Sound and Fury

The stock market in 2011 will best be remembered as a market “full of sound and fury, signifying nothing.” A year that began with promise retreated mid-year before rebounding sharply during the fourth quarter, with the late surge helping to secure modest returns for the calendar year. Macroeconomic events whipsawed the markets throughout the year as the European debt crisis, Asian natural disasters, and U.S. political wrangling drove investors into seemingly all or nothing mode as the “risk on/risk off” theme dominated the markets. Correlations remained high throughout, with 90% or more of stocks moving in the same direction on 69 trading days (27% of the time) during the year. Daily volatility was also a common factor as investors tried to gauge the extent to which macro events would drive the overall market and economy. The market closed up or down more than 2% 35 times in 2011, nearly 14% of all trading sessions.

The Fund’s Russell 1000 Value Index benchmark gained 13.1% during the fourth quarter, as improved economic reports in the U.S. overshadowed the European debt crisis that has been ongoing for nearly two years. All 10 benchmark sectors were positive, with eight sectors posting double-digit returns. Given the improvement in sentiment and uptick in economic activity, more cyclical areas assumed leadership of the market. Energy led all sectors with an 18.4% return, as better than expected economic growth drove a 25% increase in crude oil prices. The Industrials and Materials sectors followed close behind, boosted by newfound economic optimism despite retreating commodity prices, persistent weakness in developed market demand, and mounting signs of Chinese real estate softness.

More defensive areas of the market trailed as investors flocked to companies poised to take advantage of improved economic conditions. Telecommunication stocks trailed the broader market as AT&T recovered from their failed acquisition of T-Mobile, while Verizon suffered through 4G network outages denting their reputation for reliability. Utilities and Consumer Staples were the next worst performing sectors in the Russell 1000 Value as investors sought faster growing companies with better prospects for expanding earnings in an economic upturn.

Winners and Losers

The Fund underperformed the benchmark during the quarter (though it beat the index handily for the year) as enthusiasm about potential economic improvement drove investors towards more economically sensitive companies and sectors. Stock selection within Technology, Consumer Discretionary, and Materials was the largest reason for the underperformance. Indeed, holdings in Technology were responsible for nearly half of the relative underperformance as Oracle and Flextronics International suffered from a disappointing earnings report and negative forecast, respectively.

Oracle was the biggest detractor as the company reported earnings below guidance on softness across business lines and geographies and numerous deals were pushed into future quarters. Tech equipment manufacturer Flextronics was essentially flat as the company experienced softness in sales as the quarter progressed, largely in semi-cap equipment, but spreading into networking and telecom from client capital expenditures being delayed due to economic uncertainty. The company also took a one-time charge to accelerate its departure from the PC ODM business.

An underweight stake in the Materials sector, along with stock selection, also hurt relative performance as investors rushed to own more economically sensitive positions regardless of valuation. Vale SA, the world’s largest iron ore producer, traded lower as the company continues to deal with project delays and capital expenditure inflation despite a positive cycle for iron ore. Weakness in China, slowing output, and lack of product diversification also continued to weigh on the shares, though we think the attractive valuation and low consumer iron ore inventory make it a compelling story.

Stock selection and an underweight position in Consumer Staples was the largest contributor to relative performance during the quarter, while positioning within the Healthcare sector and a lack of exposure to Utilities also aided returns. Among the top individual contributors were Google, Western Digital, and Royal Dutch Shell.

Google was the best relative performer as the company reported strong third quarter results on the back of strong search growth (especially paid clicks), significant net revenue growth both in the U.S. and abroad, improved operating margins for the first time in a year, notable mobile growth, and impressive product launches including Google+ (40 million members). The strong results and momentum have led to raised guidance for revenues and earnings in 2012.

Western Digital recovered faster than expected after flooding in Thailand interrupted production of its hard drives, which helped raise expectations for revenue, earnings, and market share. Despite weakness in the integrated oil area that was a detractor from performance in the Energy sector for the Fund overall, Royal Dutch Shell was higher as the company reported earnings above expectations. The company benefitted from higher oil prices and strong downstream results, and remains one of the more attractive names in the space with one of the highest yields.

Portfolio Positioning

Despite strong absolute returns during the quarter, valuations remain compelling in our view, both on traditional measures and Cornerstone’s proprietary valuation work. Cornerstone’s Fair Value Model now indicates that 78% of the stocks in our 800-stock universe are undervalued. Using normalized earnings, we calculate the average price for the universe at 70% of fair value.

Aside from normal additions and trims, we added one new position (Parker Hannifin) to the portfolio and exited one (Life Technologies) during the quarter. Parker Hannifin manufactures a full line of diversified motion and control technologies and systems, including fluid power systems, electromechanical controls and related components-hydraulics, pneumatics, and vacuums. This is a cyclical company, but it has a history of pricing power due to the value-add and high tech nature of their products. The firm has been focusing on rationalizing and controlling costs at some of their more expensive manufacturing plants in the EU in addition to a great deal of cost cutting in the past years. These actions should put them in a better position to weather further storms and/or benefit from an economic upturn. The company has historically retained its engineering talent through downturns to maintain their technology base. Although it has a history of acquisitions, most are only in the $50 to $200 million range. The lack of transformative acquisitions and its historical ability to integrate acquisitions alleviates the risk of overpaying for growth or suffering from massive integration issues.

Biotech equipment developer Life Technologies was sold as a lesser idea in the portfolio to be replaced by a higher-quality, more-diversified name that had been punished during the quarter. We see a lot of Industrial stocks “on sale” at this time, so while there wasn’t a tremendous amount of new information at Life Technologies, it no longer was one of our 30 best ideas given the dip in valuation elsewhere.

Concluding Comments

The turning of the calendar has historically been a time for the so-called “experts” to prognosticate about the direction of markets in an attempt to predict an unpredictable future. Cornerstone does not attempt to forecast macroeconomic events. Rather, Cornerstone attempts to identify those successful companies trading at attractive valuations because of low expectations in an effort to protect capital. The past 12 months have seen earnings among benchmark companies rising to record levels, yet opportunities remain compelling throughout our investable universe as investors fret over macro concerns. Recent volatility offers an opportunity to own large, well-known, market-leading companies with strong cash-flow generation and clean balance sheets at valuations rarely seen. Certainly there are concerns surrounding the equity market, but as history has demonstrated these challenges create buying opportunities for patient investors. As these concerns abate over time, we believe discipline and patience are likely to pay off as the prices of these companies revert closer to fair value.

Cornerstone Investment Partners

As of December 31, 2011, AT&T comprised 2.34% of the portfolio’s assets, T-Mobile – 0.00%, Verizon – 0.00%, Oracle – 3.81%, Flextronics International – 2.34%,  Vale SA  – 1.81%, Google  – 4.40%, Western Digital – 3.49%, Royal Dutch Shell – 3.73%, Parker Hannifin – 2.04%, and Life Technologies – 0.00%.

Note: Value investing often involves buying the stocks of companies that are currently out of favor that may decline further.

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.

4th Quarter 2011

4th Quarter 2011

Intense Volatility

The volatility that dominated the stock market in recent years did not abate during the fourth quarter. The market oscillated between fear and greed, declining each time the perceived liquidity or solvency risk in Europe grew, only to rebound after each intervention by the European Central Bank. By year end, the trailing 100-day volatility of the S&P 500 Index was at a level only seen three times (1987, 2002, and 2009) since the 1930s. In addition, the 12 downward corrections of at least 5% experienced by the Dow Jones Industrial Average during 2011 was nearly double the long-term average of seven per year. Although the S&P 500 Index surged ahead by nearly 12% during the fourth quarter, in the end there was little to show for all the volatility in 2011 as the S&P 500 ended the year at almost exactly the same point it started. 

During the quarter, the cyclical Industrials and Energy sectors led the broader market (S&P 500) in significantly outperforming defensive areas such as Telecommunication and Utilities. That was a stark reversal from the trend for the year leading up to the period. A preference for stable cash flows was clear in the strong performance of more defensive-oriented Utilities and Consumer Staples in 2011. The ongoing turmoil in European financial markets played a clear role in the massive underperformance of the Financials for the year.

Exiting the Drawdown Plan

The Fund, along with most hedged-equity strategies, underperformed its Russell 3000 Index benchmark during the quarter. The average net long equity exposure of the portfolio was 41%, slightly less than the 45% average since the Fund’s May 4, 2011 inception. Virtually all of the relative underperformance occurred in October during the exceptionally strong market rebound that produced most of the positive results for the quarter. Underperformance was driven by the portfolio’s net long equity exposure, not stock selection. The long-only portion of the portfolio outperformed the benchmark by more than two percentage points in October, and the short portfolio outperformed as well. In October, net long equity exposure averaged only 20%, well below its normal range, due to the execution of our Drawdown Plan during the market’s third quarter sell-off.

The Drawdown Plan is designed to lower volatility and protect capital as the market declines. We progressively reduce net long equity exposure as the portfolio declines from its high water mark. Until the market regains its positive momentum, the portfolio will stay below its normal net long equity range of 50% to 70%. During October, we began increasing net long equity exposure (Draw-Up Plan), officially bringing the net long equity exposure back within its normal range on October 31. We expect to significantly lag the market every time we emerge from the Drawdown Plan as we did in October. We think the Drawdown Plan’s performance should be evaluated in its entirety. The Fund significantly outperformed the Russell 3000 from the market peak in July through the end of October with less volatility and a much shallower drawdown.

Long Portfolio

Positive stock selection somewhat muted the underperformance caused by the net long equity exposure during the fourth quarter. Despite experiencing correlations that were more than double long-term averages, the Fund’s individual long and short positions outperformed the benchmark. The long-only portion of the portfolio gained 17% during the quarter with an average exposure of 78%. Amid the market rebound, the discount-to-value indicator that we use increased in the long portfolio from 68% to 74%.

The stocks with the highest contribution to long portfolio return during the quarter were Equifax, NeuStar, and Western Union. Equifax, which is the largest credit bureau in the U.S., reported another solid quarter with positive organic top-line growth and expanding margins. The firm has spent the past 100 years building a database of more than 300 million consumer credit records that would be virtually impossible to replicate. It is one of three firms that dominate the industry and its business model requires minimal maintenance expenditures, which allows it to convert 20% of every revenue dollar into free cash flow with strong earnings margins.

NeuStar manages phone number portability, call routing, area codes, and the unused inventory of phone numbers in North America. The company announced the acquisition of TARGUSinfo, the largest independent provider of Caller ID information services which helped to optimize its capital structure and reduce its dependence on its largest contract. We exited the Fund’s position opportunistically during the quarter.

A solid third quarter and the positive resolution of a tax case dating back to 2003 boosted the stock of Western Union, the global leader in money movement and payment services. The firm benefits from scale and 470,000 agent locations worldwide as the incremental cost of processing additional transactions is minimal. The company used its significant free cash flow to repurchase its stock and raise its dividend in 2011.

General Motors, gaming equipment manufacturer WMS Industries, and private label beverage company Cott Corp. were among the poorest contributors to performance. We re-established the Fund’s position in GM in November at significantly lower prices than when it was last held in July. That price was below the firm’s level of cash and investment on its third quarter balance sheet. Since emerging from bankruptcy in July 2009, the company made massive cuts to rationalize their cost structure allowing them to remain profitable through the demand cycle while generating $4 a share of free cash flow.

WMS traded down after it issued results that were below expectations due to product delays, pricing pressure, and a decline in average revenue per day in the participating machine segment. As a result, management lowered its revenue outlook for 2012. As the stock hit our predetermined stop-loss price, we sold the Fund’s position. High commodity costs negatively affected operating margins at Cott. In addition, juice volumes suffered materially as customers cut back on purchases in response to price hikes. Management expects further commodity cost pressure in 2012, and we eliminated the holding due to the buildup of significant losses.

Short Portfolio

The short portfolio gained 4.5% during the quarter with an average exposure of -37%.  The make-up of the short portfolio changed dramatically from the end of the third quarter of 2011, as we covered the large short position in the SPDR S&P 500 ETF (SPY) and replaced it with individual shorts from our watch list as they became overvalued. The individual short portfolio (excluding hedges) declined 1.4% during the period, benefiting overall portfolio returns.

Molycorp, The United States Natural Gas Fund (UNG), and Office Depot provided the best returns from the short portfolio. Rare earth oxide producer Molycorp tumbled as rare earth pricing declined more than 60% from summer highs due to slumping Chinese demand and an increase in China’s export quotas. Prices remain elevated compared to historical levels, however, and the market is expecting this to continue. We remain skeptical as demand has not grown in years and a massive increase in supply is expected to come online over the next couple of years. 

We selected U.S. Natural Gas, an ETF, as a hedge against the long portfolio’s natural gas exposure. It attempts to track natural gas prices through investments in natural gas futures contracts. During periods of contango (a condition where the price of the forward or futures contract is greater than the expected spot price at contract maturity), however, the net asset value slowly deteriorates as the ETF rolls its futures contracts. As a result, the ETF has historically captured more of the downside moves in natural gas prices and less of the upside movements in the commodity.

Office Depot continued to struggle as same-store sales were down year-over-year and operating margins were barely positive in the third quarter. At half the size of industry leader Staples, Office Depot lacks the bargaining power, distribution efficiencies, and scale advantages to exercise pricing power. They have endured multiple government investigations into its pricing practices and a lack of stability in the executive suite. The company intensifies its problems with more leverage than all of its peers. After covering the position late in the fourth quarter, we moved the stock back onto our watch list and look forward to re-entering the position if the stock becomes overvalued again.

The positions with the lowest contribution to short portfolio returns were the SPDR S&P 500 ETF, Life Time Fitness, and Liz Claiborne. In October, Liz Claiborne announced the sale of its Liz Claiborne, Monet, Kensie, Mac & Jac, and Dana Buchman brands to several unrelated parties. The transaction was transformational and significantly improved the company’s prospects. Before the transactions, the company had a significantly leveraged balance sheet and a portfolio of predominantly challenged brands. Although we were not relying on bankruptcy as part of our investment thesis, it was a potential outcome. After the transaction, financial strength was restored and the remnant brands, which are the firm’s strongest, will receive the undivided attention of management. We underestimated the value and buyer interest in the divested brands. Due to its improved prospects, we eliminated the short position during the quarter.

Life Time Fitness is one of the largest fitness club operators in the country. We re-established a short position during the quarter just ahead of the firm’s third quarter earnings announcement. The firm’s in-center revenue growth and attrition rate were better than expected, but we continue to believe that operating fitness centers is a challenged business model with subpar returns on invested capital. The company struggles to add new members to existing centers and leverage prevents significant center expansion, both of which limit growth opportunities.

The short position in the SPDR S&P 500 ETF was selected solely as a market proxy to achieve the desired net market exposure under the Drawdown Plan. We do not have an opinion on the valuation of the S&P 500 Index. The short position was completely eliminated as we exited the Drawdown Plan and individual short positions became overvalued during the quarter.

Outlook and Positioning

Although still dealing with a long-term deleveraging cycle, economic indicators in the U.S. are picking up as consumer confidence, industrial production, and unemployment show improvement.  The sputtering recovery must still contend with currency and economic issues in Europe as well as elevated oil prices. As we entered 2012, our valuation work suggested that equities were fairly valued and our net long equity exposure was within the normal range of 50% to 70%.

As the market rallied hard into the end of the year, we believe we found certain pockets of value being ignored by other investors. Many high-quality Healthcare companies with solid balance sheets and long histories of shareholder orientation were selling at levels close to those witnessed during the market panic of 2008-2009. As we meaningfully reduced the portfolio’s exposure to riskier stocks, we were pleased to find more defensive stocks trading at a discount to our assessed Absolute Values.

Our process was on full display during the fourth quarter. As the market collapsed during the third quarter, we aggressively reduced individual short positions as they neared our calculated Absolute Values. We shorted the SPDR S&P 500 to maintain low exposure to the market in the event the decline continued. As the market roared back during the fourth quarter, we completely covered the SPDR short and positioned the short portfolio with ideas like newspapers, printers, rural telecom providers, and airlines.

We designed our long-short strategy to be able to perform in a wide variety of market environments by leveraging River Road’s stock-picking ability and structured risk controls. The massive volatility of 2011 proved to be an excellent testing ground for this approach. The most important return driver, individual stock selection, drove performance results despite extraordinary correlations. Our primary risk control, the Drawdown Plan, tempered fourth quarter results, but ultimately served its purpose by lowering volatility and protecting capital as the market fell. Taken together, the Fund significantly outperformed the market (as defined by its Russell 3000 benchmark) since inception, with only 30% of the volatility. We suspect 2011’s historic volatility will continue into 2012 and provide sufficient opportunity to produce attractive risk-adjusted returns.

River Road Asset Management

15 January 2012

As of December 31, 2011, Equifax comprised 1.99% of the portfolio's assets, NeuStar – 0.00%, Western Union – 2.73%, General Motors – 2.05%, WMS Industries – 0.00%, Cott – 0.00%, Molycorp– (0.17%), The United States Natural Gas Fund ETF – (0.63%), Office Depot – (0.00%), SPDR S&P500 ETF – (0.00%), Life Time Fitness – (0.62%), and Liz Claiborne – (0.00%).

Note: Short sales may involve the risk that the Fund will incur a loss by subsequently buying a security at a higher price than which it was previously sold short. A loss incurred on a short sale results from increases in the value of the security, thus losses on a short sale are theoretically unlimited. Value investing often involves buying the stocks of companies that are currently out-of-favor that may decline further. Investing in exchange traded and closed end funds are subject to additional risk that shares of the underlying fund may trade at a premium or discount to their net asset value.

Parameters set by the Subadviser are not a fundamental policy of the Fund and are subject to change at any time.

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. 

4th Quarter 2011

Intense Volatility

The volatility that has dominated equity markets in recent years did not abate during the fourth quarter of 2011. The market oscillated between fear and greed, declining each time the perceived liquidity or solvency risk in Europe grew, only to rebound after each intervention by the European Central Bank. By year end, the trailing 100-day volatility of the broad-market S&P 500 Index was at a level only seen three times (1987, 2002, and 2009) since the 1930s. Looking at the Dow Jones Industrial Average, there were 12 downward corrections of at least 5% in 2011, nearly double the long-term average of seven per year.

Despite a double-digit surge during the fourth quarter, there was little to show for all the market volatility in 2011. The Fund’s Russell 3000 Value Index benchmark ended almost at exactly the same point it started in posting a slight loss. For the year, there was a clear preference for stable cash flows as the Utilities and Health Care sectors dominated. The ongoing turmoil in European financial markets played a clear role in the massive underperformance of the Financials sector.

Overall, 2011 marked the first year since 2007 that large-cap stocks (represented by the Russell 1000 Index) outperformed small-caps (Russell 2000 Index). Growth outperformed value in both large-caps and small-caps among the component Russell style indices. The highest yielding stocks in the S&P 500 outperformed the lowest yielding by nearly seven percentage points per Ned Davis Research.

According to BofA/Merrill Lynch, high-quality stocks outperformed low-quality stocks by more than 11 percentage points in 2011, with fundamental-driven strategies the clear winners. Cash return strategies, including dividend yield, return-on-capital, and stock repurchase significantly led the more risky high-beta (volatility), low-price, and high earnings per share estimate dispersion strategies.

Dividend performance for 2011 was supported by a strong fundamental backdrop. During the year, 298 companies in the S&P 500 initiated or raised their dividends at an aggregate rate of more than 19%, the fastest growth rate since 1977. At the same time, rapid earnings growth has driven the estimated payout ratio down to a near-historic low.

Fourth Quarter Rally

Interestingly, results during the fourth quarter were almost the exact opposite of the full year trends. The Russell 3000 Value surged more than 13% as cyclical sectors such as Energy and Industrials significantly outperformed more defensive oriented Telecommunication Services and Utilities sectors. Leadership shifted as small-caps outpaced large-caps. Small-cap value led the way during the quarter, countering the dominance of large-cap growth during the full year. In addition, the lowest yielding companies outperformed the highest yielding by nearly six percentage points. There was no clear pattern in the relative performance of high- or low-quality, while the relative performance of fundamental- and momentum-driven strategies was mixed.

The Fund lagged the benchmark during the fourth quarter, though those results didn’t dent by much its substantial outperformance for the year. Both sector allocation and stock selection had a negative impact on relative performance during the quarter. Stock selection within Energy and Industrials subtracted the most, primarily driven by positions in Ship Finance International and Nordic American Tankers in Energy and Waste Management, Iron Mountain, and United Technologies in Industrials.

Shipping companies Ship Finance and Nordic American were also the two biggest individual detractors to relative performance. Ship Finance charters out 61 marine vessels under long-term contracts that provide stable cash flows outside of the volatile day-rate spot market. We trimmed the position significantly in August due to accumulated unrealized losses and the risk defaults by its charterers posed to the dividend. The shares continued to decline as the downturn in the shipping industry intensified during the quarter. Some classes of ships operated at cash flow negative rates for a significant part of the quarter, triggering the bankruptcies of some highly levered operators. This prompted an additional reduction in the position in November. In December, the firm’s second largest charterer announced a financial restructuring and recapitalization. Our concern that Ship Finance would be forced to reduce charter rates and cut its dividend came to fruition. We immediately exited the small position that remained.

Similar industry challenges pressured Nordic American’s profitability, leaving investors questioning the sustainability of its quarterly dividend. In October, we significantly reduced the position due to accumulated unrealized losses. In November, the company reported a difficult third quarter, as average gross spot rates dropped more than 50% and operating cash flow turned negative. Unlike its shipping industry peers, however, the management of Nordic American has not employed significant amounts of leverage. This allows the company to deploy its balance sheet in a counter-cyclical manner to support the dividend and opportunistically acquire vessels.  The Board of Directors elected to maintain the dividend, using its credit facility to support the payout. Even after acquiring three ships in recent months, net debt per vessel remains relatively low. Although we are confident that the firm will survive the downturn and reward shareholders when industry conditions improve, the October trim prudently reduces the risk if we are wrong.

Strong stock selection and an underweight position in Financials provided the most significant boost to relative performance during the quarter. The portfolio benefited from limited exposure to the largest U.S. financial institutions and strong contributions from third quarter additions BlackRock and PNC Financial Services Group. 

The largest individual contributor was Genuine Parts, distributor of NAPA brand replacement auto parts, industrial parts, office products, and electrical supplies. The firm reported a record third quarter on solid contributions from all four segments. Management also gave strong guidance for the remainder of the year and noted favorable fundamentals for the auto aftermarket, which represents approximately 50% of its sales and operating profits. On the strong results, we increased our Absolute Value target and maintained the Fund’s position.

Other top contributors during the quarter included railroad company Norfolk Southern and offshore drilling company Seadrill.  Norfolk reported solid results for the third quarter, including all-time quarterly highs for both operating income and earnings. In early December, all but one of its outstanding labor contracts was resolved, ending the threat of a major rail strike. We increased our Absolute Value for the stock and maintained the position. Seadrill management offered a positive outlook and announced a dividend increase. The firm’s Board of Directors decided to integrate this year’s quarterly special dividend into the regular payout and increase it, its seventh increase in the past eight quarters. Given Seadrill’s strong fundamentals, growing payout, and favorable outlook, we maintained the position.

2011 Winners

The Fund’s outperformance for the year was broadly distributed. Both sector allocation and stock selection had a positive impact on relative performance, with allocation positive in six sectors and stock selection in seven. Financials had the most significant impact due to both positive stock selection and the underweight position. Although it was the worst performing sector in both the portfolio and the benchmark on an absolute basis, the Fund’s holdings bested the index by more than seven percentage points. This strong relative result was almost entirely attributable to the lack of exposure to four companies—Bank of America, Citigroup, Goldman Sachs, and JPMorgan Chase.

The top individual contributors for the year were Genuine Parts, Duke Energy, and McDonald’s. As the market declined in August 2011, Duke and other utility stocks rose as investors sought the relative safety of regulated utilities. Shareholders approved the proposed merger of Duke with Progress Energy during the third quarter, but the merger did not close in 2011 due to delays in obtaining regulatory approvals. The combination would increase the regulated earnings from under 75% to more than 85% of the total, increasing the predictability of future cash flows and creating the largest utility in the U.S. We trimmed the portfolio’s stake in Duke in December as it traded above our Absolute Value despite the indication that the merger would be delayed.

McDonald’s posted strong mid-single digit same store sales growth every quarter during the year, balancing targeted value promotions (e.g. McNuggets, Sweet Tea) and highly successful menu additions (new smoothie flavors, oatmeal) to drive higher traffic. The company also managed margin pressures well, selectively increasing prices to limit the impact of inflation in the cost of its grocery bill. The company’s Board of Directors authorized a sizeable dividend increase in November and the company continues to execute its share repurchase plan announced in September 2009. We reduced the position during the latter part of the year on multiple occasions as the stock traded at a significant premium to our Absolute Value calculation. 

Only two sectors, Healthcare and Energy, had a negative total effect on the relative results of the portfolio. An underweight position and stock selection in Healthcare both had an adverse impact on performance, with only one of seven holdings in the portfolio outperforming the overall sector. The modest underperformance in the Energy sector was attributable to the previously mentioned holdings in the shipping industry, with Nordic American Tankers and Ship Finance International among the biggest individual detractors for the year as well as the fourth quarter.

In addition, institutional asset manager Federated Investors detracted from performance owing to its significant share in money market funds. The Federal Reserve’s announcement of its intention to hold the federal funds rate at effectively 0% until at least mid-2013 impaired our investment thesis. It became clear that, over our investment horizon, the firm would have to maintain the fee waivers offered to its investors in order to keep money market fund yields at zero or slightly positive. Moreover, some of the firm’s money funds were invested in the certificates of deposit of troubled European banks. This increased our concerns about the credit quality of the funds as they stretched for yield. Given these factors, plus the accumulated unrealized losses, we eliminated the position from the portfolio during the third quarter.

A Bottom-Up Perspective

Our strategy employs a true bottom-up approach to allocations among sectors and market-capitalization groups, letting individual stock selection dictate overall portfolio positioning. Since 2009, a significant shift has occurred in the portfolio. The weighting of small-cap stocks declined as we incrementally found more opportunities among mid- and large-cap companies.  This shift was a significant contributor to relative results in 2011, as the Fund’s large-cap holdings dramatically outgained its small-caps. In addition, attribution highlights the strong outperformance of our large-cap dividend payers in outperforming the benchmark’s large-caps.

The low interest-rate environment in 2011 made it increasingly difficult to find companies with yields in excess of 5% that met our investment criteria and were not already trading at a premium to our calculated Absolute Value, causing exposure to those types of holding to drop well below the Fund’s historical range. In our view, the near frantic demand for alternative sources of income has resulted in MLPs and REITs trading more on a relative value basis, rather than an Absolute Value basis. 

There were only modest changes in the relative positioning of the Fund during the quarter, with turnover relatively low. The portfolio weighting in Energy decreased primarily as a result of the sale of Ship Finance and Spectra Energy, along with the reduction in Nordic American Tanker, more than doubling the relative underweight in the sector. The Fund’s overweight to Industrials increased owing to the introduction of Republic Services to the portfolio and an increase to the position in Lockheed Martin.

A total of five new positions were established during the quarter, the largest being Dr Pepper Snapple Group. Dr Pepper is number three in the North American liquid refreshment beverage business behind Coca-Cola and Pepsi. The Dr Pepper and 7UP brands are iconic leaders in their categories and the company has cobbled together commanding leadership positions in other flavored soda categories, including ginger ales (Canada Dry & Schweppes), orange sodas (Sunkist, Crush, Orangina), and root beers (A&W, IBC, Stewart’s, and Hires). Since being spun out of Cadbury in 2008, management has used the company’s significant cash flow to initiate and increase the dividend, repurchase shares, and pay down debt. Most recently, in May 2011, its Board of Directors announced a sizeable dividend increase. At the time of initial purchase, the stock was trading at a 10% discount to our assessed Absolute Value and had a 3.4% yield. 

Outlook

Our macroeconomic outlook has changed very little in recent months and, unfortunately, there is no reason to expect that the volatility that dominated 2011 will decline in 2012. Solvency issues in Europe remain largely unresolved and austerity efforts are having a negative impact on economic activity in the region. Saber rattling with Iran is intensifying, which threatens to add volatility to oil prices and could ultimately pressure the ongoing recovery in the U.S. In addition, just as we could not have anticipated the Japanese tsunami or Arab Spring, there are likely some surprises in store for the markets in 2012.

Almost unnoticed amid all the focus on Europe, the U.S. economy ended the year with surprisingly strong momentum. Unemployment claims remained below the critical 400k level, consumer sentiment rebounded, inflation declined, railcar loadings and steel production increased, and lastly, inventories reportedly surged providing an unexpected boost. The strength of the recent U.S. economic reports suggests the growth is more robust than in the past. This stands in stark contrast to the emerging recessionary pressures throughout much of Europe. It is unclear if this “decoupling” will continue in the coming year. For now, management teams of the companies we follow noted that visibility has declined but, to date, the actual impact on business has been minor.     

We think the fundamental outlook for dividend-focused strategies remains very strong. As noted at the beginning of this commentary, dividend growth accelerated during the fourth quarter at the fastest growth rate since 1977 and the payout ratio for the S&P 500 remained at historic lows.  We expect dividend growth will continue to be robust in 2012 due to the low payout ratio and increased investor demand for dividends. We continue to see significant press coverage and investor interest in dividend strategies due to strong performance and increasing demand for income in a zero interest rate environment.

That said, a number of articles in the press have begun to urge caution, noting that overly focusing on a stock’s dividend yield may lead to a poor outcome. We agree with this view. An investor whose sole concern is the relative yield of a relatively safe and predictable asset could end up taking on considerable interest-rate risk and may not be prepared for the capital losses that could occur. Buying an overvalued stock for yield is similar to buying a bond at a premium just because it has a higher coupon. The income stream may be attractive but there is a risk of capital loss that must be evaluated. This is why we employ a process that seeks to balance both valuation and yield. We believe demanding a discount at the time of purchase not only reduces downside risk, but also the Fund’s exposure to interest-rate risk and short-term investment fads. 

At the end of the third quarter, we noted that the discount-to-value in the portfolio after the summer pullback was attractive but not as compelling as in our other long-only strategies. Thus, we were not surprised that the Fund underperformed modestly as the market rallied sharply in October. By the end of 2011, the average discount-to-value was back to its second quarter level of 91% of our calculated Absolute Value. This is at the high end of its historical range and has been a good indicator that the portfolio is fairly valued.

In recent quarters we have noted that our focus remains on quality, stock selection, and risk management and this has not changed. Given our expectation that 2012 will be volatile, we see no reason to alter that focus in the near future. We view market pullbacks as opportunities to establish positions in companies previously not trading at steep enough discounts. We remain steadfast in concentrating on stocks with high and growing dividends, healthy balance sheets, and attractive valuations. 

River Road Asset Management

14 January 2012

As of December 31, 2011, Ship Finance International comprised 0.00% of the portfolio's assets, Nordic American Tankers – 0.38%, Waste Management – 1.90%, Iron Mountain  – 0.94%, United Technologies – 1.12%, BlackRock – 1.34%, PNC Financial Services Group – 0.79%, Genuine Parts – 2.29%, Norfolk Southern – 2.32%, Seadrill – 1.72%, Duke Energy – 1.53%, McDonald’s – 1.17%, Federated Investors – 0.00%, Republic Services – 0.96%, Lockheed Martin – 1.55%, and Dr Pepper Snapple Group – 0.98%.

Note: Funds that invest in small- and mid-cap stocks are considered riskier than large-cap stocks due to greater potential volatility and less liquidity. The Fund seeks to invest in income-producing equity securities and there is no guarantee that the underlying companies will continue to pay or grow dividends.

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.

4th Quarter 2011

The Fund performed strongly during the fourth quarter of 2011 in delivering positive returns and outpacing its MSCI EAFE & Emerging Markets Index benchmark. After an extremely weak and volatile third quarter, positive sentiment returned to global markets in October as hopes regarding a resolution to the Eurozone crisis increased. The Fund performed well thanks to notable performances by holdings in Russia and China. Moreover, overweight stakes in sectors linked to global growth themes—especially those exposed to domestic consumption within Emerging Markets—outperformed, with Energy in particular significantly contributing to the Fund's relative performance.

Volatility returned to the markets in November, however, as macroeconomic events primarily in the Eurozone and China once again dominated global news. Despite this, the Fund continued its strong performance with telecommunications stock China Mobile serving as one of the best performing holdings during the month.

The volatility continued in December, albeit in a more muted form, as the benchmark ended the month relatively flat. The Fund underperformed in December as the portfolio’s high exposure to Russia detracted from performance somewhat due to protests arising from the country’s disputed election.

Overall, we maintained our conviction in the portfolio’s positioning throughout this volatile period, focusing on both developed world companies with exposure to emerging market and global growth themes, as well as high-quality domestic emerging market stories. We made only one portfolio change during the period, selling a Russian metals producer in favor of a UK high street bank as we think the Financials sector has the potential for a short-term relief rally. Looking ahead, the Fund remains fully invested in what our research has identified as the highest quality sector leaders best able to benefit from underappreciated growth. 

Robin Geffen, Fund Manager & CEO
Neptune Investment Management

As of December 31, 2011, China Mobile comprised 2.99% of the portfolio's assets.

Note: Investing in foreign markets involves the risk of social and political instability, market illiquidity, and currency volatility. Holdings in emerging markets entail the further risk of unstable legal systems, increased volatility, and even less liquidity.

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.

4th Quarter 2011

The Fund outperformed the broad market S&P 500 Index by more than two percentage points during 2011, despite lagging the index sharply during the market's strong fourth quarter rally. All in all, we think results for the year clearly point to the benefit of the Fund’s strategy of selling calls and periodically owning put options in particularly volatile markets.

Covered call and put option positions added more than a percentage point to returns over the course of the full year. We think this performance underscores the positive impact of our option strategy over the long haul, despite the restraint on appreciation that it can produce during short periods of double-digit market increases as seen during the fourth quarter.

The Fund also benefited from its focus on larger, higher-dividend paying companies throughout the year, notably telephone/electric utilities and some healthcare companies. Even in the Technology sector, that dividend focus proved positive as companies like Intel and Microsoft did reasonably well from a total return point of view. In aggregate, the portfolio of underlying holdings aided the Fund's low-volatility profile, helping returns overall.

As we enter 2012, the portfolio remains overweight the same sectors that were dominant for the Fund last year—Utilities, large Healthcare companies, and high-dividend paying Technology companies. Given the ongoing problems in Europe, along with the continued acrimonious rhetoric emanating out of Washington D.C., it is our belief that a shift to a more aggressive investment posture is not warranted at this juncture. The valuation and dividend bias in our process is also keeping us oriented towards individual holdings that we consider higher-quality with lower volatility.

We think a bottom-up approach to selecting stocks, coupled with selling calls on individual holdings, has served investors well since the inception of the Fund. We see no justification in changing our fundamental approach to how we select underlying stock holdings, and until the US equity market embarks on a secular advance like the 1980s and 1990s, we believe this approach will continue to be rewarding for the patient and prudent investor who is also seeking income. 

Ron Altman                                                   
Senior Portfolio Manager                            

As of December 31, 2011, Intel comprised 0.91% of the portfolio's assets and Microsoft – 3.26%.

Note: By selling covered call options, the Fund limits its opportunity to profit from an increase in the price of the underlying stock above the exercise price, but continues to bear the risk of a decline in the stock. A liquid market may not exist for options held by the Fund. If the Fund is not able to close out an options transaction, it will not be able to sell the underlying security until the option expires or is exercised. While the Fund receives premiums for writing the call options, the price it realizes from the exercise of an option could be substantially below a stock’s current market price. Premiums from the Fund’s sale of call options typically will result in short-term capital gain taxes, making it ill suited for investors seeking a tax efficient investment. The use of derivatives by the Fund to hedge risk may reduce the opportunity for gain by offsetting the positive effect of favorable price movements. There is no guarantee that derivatives, to the extent employed, will have the intended effect, and their use could cause lower returns or even losses to the Fund.

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.

4th Quarter 2011

International equities, as defined by the Fund’s MSCI EAFE Index benchmark, rose more than 3% during the fourth quarter, helping to recover some of the losses that occurred during a poor third quarter. The global economic recovery is continuing, but at a weak pace and with the main risks that we have highlighted before—a European banking/sovereign default, a China slowdown, or a relapse into recession—still present.

The United Kingdom (UK) was the best performing region of the globe, gaining 9.1%, followed by Pacific ex-Japan region. Japan was the worst performing region in posting a loss of 3.8% during the period. Emerging Markets slightly outperformed the benchmark. On a sector basis, Energy was the best performing area in the benchmark in rising nearly 15%, followed by more modest gains in Consumer Staples and Healthcare. Utilities was the worst performing sector, dropping 4.5%.

Regional Boost

The Fund slightly outperformed its benchmark during the quarter as asset allocation by region and sector were both positive while stock selection was somewhat negative. An underweight position in Japan, an overweight stake in the UK, and an allocation to Emerging Markets marginally aided returns regionally. The positive effects of an overweight to Energy and underweight to Utilities were offset somewhat by an overweight position in the lackluster Technology sector.

Stock selection was negative owing mainly to holdings in the Materials sector and weak stock selection in the UK. Precious metals miners and agricultural commodity stocks suffered during the quarter on the back of weaker commodity prices. Within the UK, auto insurer Admiral Group dropped noticeably following a weak earnings report.

Those disappointments were offset by solid picks in Europe ex-UK and within Industrials and Healthcare. German pharmaceutical company Bayer AG and asset manager Julius Baer were the portfolio’s two best European stocks. Rolls Royce and Keppel performed well within Industrials, while Sanofi, Shire, and Teva Pharmaceutical were the standouts in Healthcare alongside Bayer.

Few changes were made to the portfolio during the quarter. The Fund received cash for its holding in software company Autonomy Corp following its acquisition by Hewlett Packard. The proceeds were then invested into German software company SAP. We believe SAP should continue to see good sales to corporate clients in 2012. 

The Fund sold its holding in Norwegian fertilizer producer Yara International. We still favor agricultural commodity exposure and continue to hold potash producers as well as seed and agricultural chemical companies, however, we felt that urea fertilizer prices looked extended and decided to exit the holding in Yara.

Europe in Trouble

Of the three market risks noted at the beginning—a European banking/sovereign default, a China slowdown, or a relapse into recession—Europe continues to dominate the headlines, and its problems continue to escalate and broaden. We began 2011 worried mostly about Greece and Ireland. Those countries have now been joined by Italy, Spain, Portugal, and Belgium. France is not immune to the crisis given that its banking sector has much exposure to Europe’s problem areas and the country’s AAA credit-rating is in jeopardy as a result.

The potential impact of the European sovereign debt crisis on the global economy is not trivial. History’s largest sovereign default was Argentina’s default on $82 billion of bonds in 2001. By comparison, outstanding Greek sovereign bonds are six times that amount and for Italy it is a staggering 33 times.

Looking at the economic issues for peripheral Europe, Greek unemployment is now at 17%, Spain is at 21%, Ireland is at 14% and Portugal is at 12%. Youth unemployment is approaching 40% for some in the region, and all of these economies are seeing weak growth that will likely lead to a recession in 2012. So the prospect of employment improving in the near term is unlikely.

In general, European policies over the past year have been designed not to bring a resolution to the issues, but to buy time in the hopes that a less painful solution to the crisis might appear—popularly referred to as the “kicking the can” approach. In our view, this cannot continue because peripheral European governments are now struggling to borrow on acceptable terms, because European banks are now struggling to fund themselves, and because unemployment is now leading to rising social unrest. To us, it looks like Europe will have to make some hard choices in 2012.

It is important not to be too negative about European equities, however, because we believe one of the choices that will be made in 2012 will be the European Central Bank (ECB) deciding to increase the amount of debt monetization it undertakes—effectively a victory of French interests over German interests at the ECB. This move would be quite supportive for European equities and has actually already begun. 

In December, the ECB launched a massive liquidity facility in its Long-Term Refinancing Operation (LTRO). The facility provides unlimited repurchase based lending for up to three years on qualifying collateral. It is mainly aimed at supporting the European banking sector, though we expect the resulting expansion of the ECB balance sheet to be broadly positive for equities.

China and the Global Economy

China’s economy continues to slow but its economic problems are not yet as critical as Europe’s. China also has more policy options, such as the Chinese government’s recently announced measures to stimulate domestic spending in 2012. We do not believe that this will include the housing sector where authorities have indicated they want to see prices come down to improve affordability. The resulting stimulus is unlikely to have the multiplier effect that the massive lending boom of 2008-2010 had, but it should still be a positive for the Chinese economy. Against this we expect the Chinese housing sector and related industries to continue to struggle.

For the global economy, the US has been the relative bright spot. A below trend gradual economic recovery continues. Given what is happening in Europe and China this has to be seen as a fragile recovery. Still, housing looks to be near its bottom, exports are recovering, and unemployment looks to be falling.

Growth Prospects

With this as our top-down view, the focus of the portfolio has been on the few areas of growth in an otherwise weak global growth environment and on areas where demand is less sensitive to the economic cycle—much the same as we have been saying for the past two years.

One of these areas is Internet-related companies. Online commerce continues to take market share away from conventional commerce. In international markets this trend has a long way to go. Despite the cycles that we see in overall spending, the market share gains by online commerce has given these companies a better growth rate of sales. We continue to look for new growth ideas in this area.

In Europe we continue to avoid owning banks, many of which are potentially insolvent. The liquidity provided to the banks by the ECB is merely life support, whereas the liquidity that reaches strongly capitalized companies with dominant positions in solid industries can lead to growth. We remain focused on finding more these strong companies that the crisis has left trading at attractive valuations relative to their level of growth, particularly those with exposure to US markets.

One example of this type of European company is German pharmaceutical company Bayer. It manufactures and sells its products globally and has one of the strongest new product pipelines in the pharmaceutical industry. After a strong fourth quarter it still only trades on a forward price/earnings ratio of not much more than 10 times earnings. 

We have also favored companies that are less dependent on bank funding. Companies with strong balance sheets that are self-funded out of their internally generated cash-flow have a funding advantage in the current climate of financial stress. This is particularly true of European firms, which tend to be much more dependent on bank lending for their growth. Many Energy and Healthcare companies fall into this category.

Neither gold miners nor agricultural commodity stocks performed well during the quarter, particularly in December. Still, we continue to like this part of the market. Both areas are driven by demand from factors other than the economic cycle, and both benefit from liquidity and loose monetary policy. Though liquidity had been tightening by the end of last year due to European bank deleveraging, the response by the ECB to expand their balance sheet, plus continued loose monetary policy conditions throughout the western world, will remain supportive for non-economically sensitive commodities. 

Baring Asset Management
London, UK

As of December 31, 2011, Admiral Group comprised 1.21% of the portfolio's assets, Bayer AG – 2.17%, Julius Baer Group – 1.90%, Rolls Royce – 1.57%, Keppel – 1.58%, Sanofi – 2.02%, Shire – 1.54%, Teva Pharmaceutical – 1.93%, and SAP AG – 1.59%.

Note: Investing in foreign markets involves the risk of social and political instability, market illiquidity, and currency volatility.

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.

4th Quarter 2011

Although US equity markets posted strong results during the fourth quarter, the investment environment continued to display the same roller-coaster volatility that characterized much of 2011. For example, while the broad market S&P 500 Index rose 11.8% by the end of the quarter, it had quite a ride getting there: The index climbed 13.7% from September 30 through October 27, then plunged 9.6% by November 25, only to jump back up 9.0% over the next eight trading days before moving sideways in a narrow range for the rest of December.

Given the Fund’s hedged approach and modest net equity exposure (approximately 37% at year-end), it performed well in gaining more than 4% while dampening volatility relative to the S&P 500. Furthermore, it outperformed its HFRX Equity Hedge Index benchmark, which posted a small loss for the quarter.

A significant portion of the Fund’s overall gain came from its core Hedged Equity and Long Bias managers, who captured the bulk of the rise in equities. Elsewhere, credit-related strategies delivered solid results as pressure on the high-yield market dissipated and credit spreads improved. Merger Arbitrage managers tended to make relatively steady progress throughout the quarter. Increased merger and acquisition (M&A) activity has helped improve the outlook for the strategy, but modest spreads continue to limit the upside. Strategic Fixed Income managers also were positive, but performance was mixed depending on exposures to emerging markets and other international sovereigns.

On the downside, Global Hedged Equity managers tended to lag, but these were small allocations within the portfolio. Hedged Futures/Commodities allocations were also under pressure for much of the quarter. Although returns were negative, the downside was fairly limited.

Positioning Update

During the fourth quarter, we re-deployed a large portion of the cash raised during the previous quarter in accordance with our risk management guidelines. Although the equity markets remained volatile, several alternative investment strategies began to stabilize and perform better as opportunities improved. This was particularly apparent for several of our underlying managers in the Hedged Equity and Hedged Credit areas, as well as in Merger Arbitrage and, to a lesser degree, Strategic Fixed Income. In contrast, Hedged Futures/Commodities were out of sync. Having entered the quarter with a defensive cash reserve of nearly 24%, the Fund’s cash allocation at year-end was 10.2%.

Equity-oriented funds accounted for 47.9% of the assets in the portfolio at the end of December, slightly more than at September 30. Although this is the largest single strategy allocation in the Fund, it is important to note that this broad category encompasses a diverse mix of Long Bias, Hedged, US Multi-Asset, and Global strategies. Having eliminated several Long Bias managers that had become especially volatile during the third quarter, we continued to focus allocations on core managers with relatively more stable risk/return characteristics.

Hedged Credit and Strategic Fixed Income allocations had been scaled back from nearly 22% at the end of June to slightly less than 10% by the end of September. By the end of December, however, the allocation was back to 25%. We re-built the Fund’s allocation to Hedged Credit during the quarter as valuations improved and fundamentals remained solid. We also increased Strategic Fixed Income, but only at the margin, and we have kept this allocation at a lower level than Hedged Credit. The funds in this area 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. Although opportunities had been created by the nearly one-sided flight to safety in fixed-income during the third quarter, conditions still tend to be unsettled.

Allocations to Hedged Futures/Commodities provide access to trend following, quantitative, and fundamental trading-oriented strategies in 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 strategies, especially during market corrections such as the one during the third quarter. Although our target allocation for this area has been 10%, it was actually less than 7% at year-end due to the elimination of one manager owing to a change in the structure of their investment program, which raised concerns about counter-party risk. Our intention is to re-build the Fund’s allocation going forward.

Outlook

The volatile and erratic behavior of markets over the past few quarters has made one thing abundantly clear—investor sentiment remains extremely sensitive to economic policy and political considerations. Markets slid on fears of policy inaction, dysfunction, and missteps, and then popped in reaction to decisive, concrete, and reassuring measures. Although solid corporate fundamentals and improved valuations for U.S. and Emerging Market equities present abundant opportunities for the long term, investors have been fixated on the day-to-day developments in Europe’s struggle to come up with a convincing approach to its sovereign debt situation. In turn, this has amplified the market’s reactions to global economic data, whether positive or negative.

Markets face a “tug of war.” On the one hand, the corporate sector generally remains flush with cash, and despite the exposure of European banks to sovereign risks, the global financial system is on a much sounder footing than it was in 2008. On the other hand, the drama in Europe is far from over, the U.S. lacks consensus on how to address its economic and fiscal problems, and China is still occupied with the very complex task of trying to engineer its own “soft landing.”

Markets therefore remain beholden to political events, which by nature are highly unpredictable. Consequently, an unusual degree of uncertainty continues to cast a shadow over the investment landscape. We therefore continue to maintain a diversified mix of strategies within the Fund, with different degrees of correlation and market sensitivity. We believe that this approach will lead to attractive risk-adjusted returns over time. 

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.

4th Quarter 2011

In 2011, the market experienced the third year out of the past four where the correlations of stocks within the broad market S&P 500 Index to the overall index spiked above the 80% level. This is unprecedented. Prior to the great recession of 2007 to 2009, this had only happened once since 1974—during the Crash of 1987. Furthermore, according to Jason Goepfort of sentimentrader.com there were 44 days in 2011 in which 90% of the trading volume in the market was either up or down. That was the most since 1946, when there were 46 occurrences. To our surprise, it was worse than 2008, which had only 35 occurrences. To put that into perspective, there were only 29 such days in the entire decade of the 1990s! Such an environment is difficult for our strategy.

In an environment where the instantaneous “risk on/risk off” mindset has taken hold, and Utilities are delivering 20% plus gains as the best performing sector, it’s not going to be a good year for this Fund. In our view, 2011 will be looked back on as an outlier. The mistake we made was to think that the double-dip recession scenario was off the table based on almost every measure of economic data. In retrospect, we were right, but that didn’t matter. Defensive and value-centric factors clearly ruled the day thanks largely to policy uncertainty in Washington and Europe.

The Fund substantially trailed its Russell 1000 Growth Index benchmark  during in the fourth quarter as November saw a resumption of the downward trend after the big move up in October, only to be followed by a flattish to down December both by the portfolio and the market. The biggest loser during the period was Rovi, the fully integrated digital entertainment company, which lowered guidance in November due to the fall off in some legacy business from Sonic Solutions. We had cut this position back in September to reduce risk, but a 43% loss during the quarter still hurt. The Fund still holds this position because we believe the core digital business is still growing at the healthy clip, with robust margins. It is an $800 million revenue company that has more than $1billion in advertising potential as the source of interactive programming guides for TVs across America. Rovi also earned the distinction of being the worst name in the portfolio for the year as well. The biggest contributor to relative performance was Dish Network, a new addition during the quarter that rose sharply after purchase.

Whatever sectors worked in 2009 and 2010 were relegated to the basement in 2011. The market theme was defense, as many feared the potential for a double dip recession that didn’t come. Nevertheless, we did an extremely poor job investing in Technology in the Fund during the year. The portfolio was positioned more for economic expansion with semiconductors as opposed to the more-defensive software-related area that was up modestly. Semiconductor holdings were down 27% for the year, costing the Fund more than nine percentage points in performance versus the benchmark. Energy holdings in the Fund were even worse than Technology, down 35%, owing to our atrocious timing. Several positions were purchased in late July just before the S&P downgrade of U.S. debt, and were the ultimate victims of the macroeconomic trade. Healthcare was one of the few bright spots, up 13% led by Humana, and adding positively to relative returns.

Although 2011 was a disappointing year, it has not tempered our enthusiasm for 2012 and beyond. We feel the Fund is positioned in several fast growing areas with the overall portfolio trading at 14 times next year’s earnings, which are forecasted to grow by more than 15%. The $64,000 question is whether markets will in some sense move back to a state of normality, and what that means for correlations.

Charles F. Mercer, Jr. CFA               B. Anthony Weber                 Michael E. Johnson, CFA

January 11, 2012

As of December 31, 2011, Rovi comprised 1.64% of the portfolio's assets, Dish Network – 4.80%, and Humana – 2.31%.

Note: Growth stocks are generally more sensitive to market moves and thus may be more volatile than other stocks.

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.

4th Quarter 2011

In 2011, the market experienced the third year out of the past four where the correlations of stocks within the broad market S&P 500 Index to the overall index spiked above the 80% level. This is unprecedented. Prior to the great recession of 2007 to 2009, this had only happened once since 1974—during the Crash of 1987. Furthermore, according to Jason Goepfort of sentimentrader.com there were 44 days in 2011 in which 90% of the trading volume in the market was either up or down. That was the most since 1946, when there were 46 occurrences. To our surprise, it was worse than 2008, which had only 35 occurrences. To put that into perspective, there were only 29 such days in the entire decade of the 1990s! Such an environment is difficult for our strategy.

In an environment where the instantaneous “risk on/risk off” mindset has taken hold, and Utilities are delivering 20% plus gains as the best performing sector, it’s not going to be a good year for this Fund. In our view, 2011 will be looked back on as an outlier. The mistake we made was to think that the double-dip recession scenario was off the table based on almost every measure of economic data. In retrospect, we were right, but that didn’t matter.

The Fund substantially trailed its Russell 2000 Growth Index benchmark  during in the fourth quarter as November saw a resumption of the downward trend after the big move up in October, only to be followed by a flattish to down December both by the portfolio and the market. The biggest loser during the period was Rovi, the fully integrated digital entertainment company, which lowered guidance in November due to the fall off in some legacy business from Sonic Solutions. We had cut this position back in September to reduce risk, but a 43% loss during the quarter still hurt. The Fund still holds this position because we believe the core digital business is still growing at the healthy clip, with robust margins. It is an $800 million revenue company that has more than $1billion in advertising potential as the source of interactive programming guides for TVs across America. Rovi also earned the distinction of being the worst name in the portfolio for the year as well.

The biggest contributor to relative performance during the quarter was Akorn, a generic pharmaceuticals company that is the second largest holding in the Fund. It has continued to put up solid quarters and enjoy a deep pipeline of drugs coming to market.

Whatever sectors worked in 2009 and 2010 were relegated to the basement in 2011. The market theme was defense, as many feared the potential for a double dip recession that didn’t come. Nevertheless, we did an extremely poor job investing in Technology in the Fund during the year. The portfolio was positioned more for economic expansion with semiconductors as opposed to the more-defensive software-related area that was up modestly. Semiconductor holdings were down more than 40% for the year, costing the Fund more than 10 percentage points in performance versus the benchmark. Performance within Industrials was also down, as anything the least bit economically sensitive seemed to be out-of-favor. Financials was a mixed bag, with the chief culprit to the downside the portfolio’s exposure to various hotel REITS. One bright spot was Post Properties, a multi-family apartment operator, which enjoyed one of its best years ever.

On the positive side for the full year, the portfolio’s Healthcare positions were up strongly, and holdings in Consumer Staples, Energy, and Materials contributed positively to results. Elizabeth Arden and Hain Celestial are the two Staples holdings that both delivered. Returns within Energy were driven by exposure to the oil fracking phenomenon, with names like Basic Energy and Key Energy the primary drivers. Materials benefited from Zagg, the maker of protective materials for electronic devices, and Kronos, a producer of titanium oxide producer that was in short supply last year.

Although 2011 was a disappointing year, it has not tempered our enthusiasm for 2012 and beyond. We feel the Fund is positioned in several fast growing areas with the overall portfolio trading at 16 times next year’s earnings, which are forecasted to grow significantly. This compares to 20 times for the index and earnings growth at a much slower pace. The $64,000 question is whether markets will in some sense move back to a state of normality, and what that means for correlations. 

B. Anthony Weber                 Charles F. Mercer, Jr. CFA              Michael E. Johnson, CFA
January 11, 2012

As of December 31, 2011, Rovi comprised 0.96% of the portfolio's assets, Akorn – 3.10%, Post Properties – 2.56%, Elizabeth Arden – 3.14%, Hain Celestial – 1.73%, Basic Energy – 1.40%, Key Energy – 1.18%, Zagg – 0.00%, and Kronos – 0.00%.

Note: Small-cap stocks are considered riskier than large-cap stocks due to greater potential volatility and less liquidity.

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.

4th Quarter 2011

One of the Most Volatile Years on Record

Stocks soared during the fourth quarter as investors responded to both improving U.S. economic trends and a series of actions taken by the European Central Bank intended to stabilize that region’s financial markets. Small-cap stocks led the rally, with the Russell 2000 Index gaining more than 15% versus just under 12% for the more large-cap oriented S&P 500 Index. For the full year 2011, however, large-cap stocks outperformed—with the S&P 500 and Russell 1000 indices posting modest gains versus a 4% loss for the Russell 2000. This marks the first year since 2007 that large-caps outperformed small-caps.

It was also a remarkably volatile year, with indices posting some of their best AND worst quarterly returns on record. According to Ned Davis Research, the trailing 100-day volatility of the S&P 500 was at a level only seen three times (1987, 2002, and 2009) since the 1930s. In addition, the 12 downward corrections of at least 5% experienced by the S&P 500 during 2011 was nearly double the long-term average. Among other major asset classes, US Treasury Bonds was the best performing for 2011, followed by Gold—last year’s leading asset class.

From a style perspective, growth outperformed value during 2011 among the component parts of the Russell 2000. This marks the third consecutive year that growth outperformed value. Defense was the best offense with Utilities and Health Care posting the highest total returns, while Telecommunications and Energy posted the lowest. Leadership transitioned to low-beta (volatility) and high-quality stocks—a stark contrast from the prior two years. Within the Fund’s Russell 2000 Value Index benchmark, the lowest beta stocks (first quintile) outgained the highest beta (fifth quintile) by a staggering 26 percentage points. From a quality perspective, stocks in the highest quintile for return-on-equity (ROE) returned 21 percentage points more than stocks in the lowest ROE quintile.

Another leadership theme during 2011 was dividends. According to BofA/Merrill Lynch analyst Savita Subramanian, dividend yield was the top performing quantitative strategy in the S&P 500, while within the Russell 2000 Value, dividend-payers bested non-payers by a healthy margin for the full year.

We noted early on in 2011 that given the market’s robust returns and high-beta/low-quality leadership, an unusually large percentage of small-cap value managers were outperforming the benchmark. From our perspective, that trend reflected not only heightened equity correlations, but also that value managers had jumped on the risk bandwagon. We warned that investors and their advisors should take note of the trend, as managers that were chasing risk were likely to underperform as the market transitioned into the mid-stage of the recovery. By the end of 2011, only 57% of active small-value managers had beaten the benchmark’s return.   

Fourth Quarter Rally

In a reversal of the year’s trend, the fourth quarter equity rally was accompanied by a resurgence in high-beta stocks, which had underperformed the previous two quarters. Value outperformed growth across all market-caps. Within the benchmark, the highest beta stocks (fifth quintile) surged ahead of the lowest beta stocks (first quintile) by 16 percentage points. Lower quality stocks (in terms of ROE) continued to lag, however. All 10 economic sectors within the benchmark posted a positive total return, with Industrials delivering highest the highest total return and Telecomm the lowest. 

The Fund substantially underperformed the benchmark during the quarter due to the portfolio’s cash position and ongoing defensive security selection. The strong recovery in the small-cap market that began in early October drove positive absolute returns.

The largest detractors from performance during the fourth quarter were American Greetings, Bill Barrett, and Federated Investors. Greeting-card company American Greetings declined after announcing disappointing third quarter earnings. Although the business generated higher than expected revenue growth, the cost to obtain this growth weighed heavily on operating margins. Our initial valuation assumed higher revenues and lower margins, but we did not expect the decline in margins to be so abrupt. While encouraged by American Greetings’ ability to grow revenues in a stagnant industry, we have slightly reduced our normalized free cash flow assumption until we can better determine the profitability of new business. We plan to update our valuation quarterly and continue to hold the position as long as the stock trades below that valuation calculation.

Natural gas spot prices declined 19% during the quarter, most likely contributing to exploration and production company Bill Barrett’s poor stock performance. Although Bill Barrett has hedged 50% of its 2012 production, an extended period of low natural gas prices would be concerning. We will continue to monitor this risk closely and expect to update our Bill Barrett valuation in early 2012. Federated’s money market business, which historically generated 50% of revenue, continues to be negatively affected by an extraordinarily low interest-rate environment. Earnings are likely to remain below normalized levels as Federated continues to waive a significant portion of the fees on its money market funds. The uncertainty is putting pressure on Federated’s stock, as is the industry’s widely publicized exposure to European banks. In August 2011, we reduced our normalized free cash flow assumption and corresponding valuation after the Federal Reserve indicated that short-term interest rates would remain depressed longer than we anticipated. We believe our revised valuation appropriately considers the risks noted above and the Fund continues to hold the stock.     

Among the Fund’s winners during the quarter were Brown & Brown, Core-Mark Holdings, and UniFirst. Brown & Brown, the seventh-largest domestic insurance agency, reported positive organic revenue growth in three of its four segments. Although total organic growth remained negative, the firm continued to demonstrate excellent cost controls and reported strong operating profitability. The company also raised its dividend and authorized its first ever stock repurchase program during the period. Core-Mark is a market leading distributor servicing convenience stores.  In November, it reported positive results that included solid sales growth and strong free cash flow generation. It also recently signed a contract with Couche-Tard, a leading convenience store operator based in Montreal, to service 980 convenience stores in the Southeast and Florida. 

Incorporated in 1950, UniFirst is a market leading manufacturer and distributor of workplace uniforms. Although unemployment remains elevated, the company continues to report positive revenue growth in its core laundry business, generating strong organic sales growth during its fiscal fourth quarter of 2011. We believe UniFirst has adapted to a challenging operating environment and continues to win new accounts and gain market share. Management expects sales and earnings growth to continue in 2012.     

Positive Year

Despite the lackluster quarter, the portfolio delivered solid gains for the year in outgaining the Russell 2000 Value by more than 13 percentage points as the benchmark lost ground in absolute terms during the year. The Fund’s results were driven by equity selection.

The top three contributors in the portfolio for the year were Aaron’s, Papa John’s International, and Total Systems Services. Aaron’s, one of the top two rent-to-own retailers, benefited from a stagnant economic environment and tight consumer credit which drove increased customer traffic throughout 2011. Pizza chain Papa John’s experienced strong sales comparisons in its network of stores throughout the year and improved profitability from its international operations. As the leading domestic third-party credit card processor, Total Systems Services posted favorable operating results, growth in same-client transactions, and increasing international market share. 

The bottom three contributors for the year were American Greetings, Federated Investors, and ManTech International. In addition to the specific fourth quarter woes noted earlier, American Greetings suffered from concerns about the future growth of the greeting card industry as well as reduced profitability associated with its increased distribution. ManTech, a leading provider of information technology services to the U.S. military and government agencies, performed poorly due to concerns about contract delays and future reductions in federal government spending.

Portfolio Positioning

Cash levels in the Fund increased from 41% at the beginning of the fourth quarter to 47% by the end of the year. The opportunities that began to appear towards the end of the third quarter were fleeting as small-cap stocks vaulted higher early in fourth, with the Russell 2000 Value increasing more than 14% in October alone. Although we were able to take advantage of the volatility in the third quarter by increasing position sizes and adding new holdings, in hindsight, our gradual approach to investing cash may have been too conservative. As an absolute return portfolio, however, our objective is to avoid being overly aggressive until we can find enough opportunities at prices that offer adequate returns relative to their risk.

Prices in our opportunity set of small-caps clearly improved during the fall, but in our opinion, did not decline to levels that provided the attractive potential returns necessary to validate aggressive positioning. The lack of the required discount-to-value was especially noticeable among the highest quality businesses that we look at. With high-quality small-caps now in favor, it is increasingly difficult to achieve absolute rates of return that we require on potential new positions. Thus, the portfolio remains defensively positioned as we await a more favorable pricing environment.

The largest new position added during the quarter was Steris, a leading provider of infection prevention and sterilization products. As the only domestic provider of a full line of sterilization equipment, Steris benefits from being an ideal partner for large hospital networks and group purchasing organizations. Although the firm’s capital equipment sales are inherently cyclical and driven by hospital capital spending, its new management team has successfully increased its mix of recurring consumable and service revenue while controlling expenses in a strong bid to raise margins. A recent product transition, among other factors, has depressed margins and free cash flow generation the past year. We think that Steris is an established market leader with a strong balance sheet and free cash-flow generation capability that sells at a sufficient discount to our calculated valuation.     

Outlook

The information gathered during the quarter from the 300 small-cap companies we follow continues to indicate a slow growth operating environment. The majority giving guidance for 2012 expect a business climate similar to that in 2011. On average, margins and cash flows remain resilient as companies performed well in what most call a “challenging” environment. Although many raw material prices moderated during the fourth quarter, costs on average remain higher year-over-year. Most of the businesses we follow successfully passed on higher costs to their customers, although some experienced volume declines. Several businesses noted concern regarding a possible slowdown in Europe and China, but have yet to see meaningful declines in business trends. Companies have also communicated an elevated level of uncertainty in their forecasts even though operating results are not expected to change meaningfully in the near future.

As investors search for certainty in an uncertain economic world, we believe investors may be overpaying for quality and, ironically, could be increasing their risk exposure in their attempts to reduce risk. A popular investment acronym used by growth investors is GARP, which stands for “growth at a reasonable price.” To fit our philosophy, we modified this acronym to QARP, or “quality at a reasonable price.” A high-quality business can be a poor investment if the price does not provide the investor with an adequate return relative to risk. Although higher quality small cap businesses often have less risk, they are not risk-free—like all investments, a suitable return potential remains necessary. 

Assuming investors continue to increase the price they are willing to pay for certainty in 2012, we expect to continue selling several of the portfolio’s core holdings that approach or exceed our valuation estimates. We plan to reinvest these proceeds into companies that we believe provide us with adequate potential returns relative to the risk assumed. Although several new positions in the portfolio have short-term operating challenges, such as the Steris product transition highlighted previously, we remain committed to only buying high-quality businesses. The Fund’s recent purchases have long operating histories, established market share positions, strong balance sheets, and a history of consistent free cash-flow generation.

The high degree of volatility in 2011 caused higher than expected turnover in the portfolio as the valuations of many of the small cap businesses we follow fluctuated meaningfully throughout the year. Assuming volatility remains elevated, we could experience above average levels of turnover in the portfolio again in 2012. With high cash levels and a long list of small-cap equity investments that we would like to own at more advantageous prices, we believe the Fund is well positioned to take advantage of future uncertainty and the resulting opportunities stock price volatility can bring.  

River Road Asset Management

6 January 2012

As of December 31, 2011, American Greetings comprised 1.83% of the portfolio's assets, Bill Barrett – 2.62%, Federated Investors – 1.24%, Brown & Brown – 2.53%, Core-Mark Holdings – 3.14%, UniFirst – 2.45%, Aaron Group's – 0.00%, Papa John’s International – 1.25%, Total Systems Services – 3.47%, ManTech International – 1.55%, and Steris – 1.43%.

Note: Small-cap stocks are considered riskier than large-cap stocks due to greater potential volatility and less liquidity. Value investing often involves buying the stocks of companies that are currently out of favor that may decline further.

Parameters set by the Subadviser are not a fundamental policy of the Fund and are subject to change at any time.

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. 

By Kerry O'Boyle, Aston Asset Management 

"You don't need to be an Aerospace Engineer to fly airplanes" 
 - Common saying at the U.S. Naval Academy

Becoming a pilot is a serious endeavor involving complex machines, intricate rules, and potentially hazardous situations. In most other professions, years and years of classroom work and testing would precede any attempt to actually perform in the real world. But that's not how we train our pilots.

Training for military pilots, for example, traditionally consists of only a few weeks of ground school learning the basics of the training aircraft, navigation, and air traffic rules. Trainees are then thrown behind the controls of the plane with an instructor in back, typically a practitioner himself serving only a brief tour as an instructor away from frontline duty. After only roughly a dozen flights, trainees are required to solo—fly alone for the first time.

Why does the military take this seemingly risky approach to training pilots? To be sure, flying requires the development of physical skills, which requires hands-on training, but that could be conducted using simulators. Often overlooked is another important factor—the need for experience in a highly dynamic environment. Flying is fast-paced, involving multiple variables and constantly changing situations. Feedback, whether physical or situational, must be assessed and analyzed in the context in which it is happening. Simply put, it's an environment in which experience counts for more than mere descriptive knowledge. You learn by doing.

Buy Low, Sell High

The same might be said for investing. Descriptive knowledge tells investors to buy low and sell high, but it is experience that shows them how to do it. Developing such experience can be time consuming, which is why many investors turn to mutual funds and experienced professionals for the selection of individual securities. Security selection, however, is but one facet of the investment process. Even investors that delegate the selection of individual securities to professional money managers need to develop skills in the construction and management of their entire portfolio. Like security selection, overall portfolio management requires practice and experience derived from being engaged hands-on in the process.

Unfortunately, too many investors take a buy-and-forget approach, put their portfolios on auto-pilot via calendar-based monitoring/re-balancing schemes or employ static quantitative models and then later are left to wonder why results were disappointing. Worse yet are simplistic rules of thumb (i.e. "an equity allocation should equal 100 minus your age") that deceive investors into thinking portfolio management requires little thought at all. Markets are dynamic and investors need to be continually learning from them in order to reinforce the best investment practices. It need not become a full-time job, but it does require some work and attention. Book knowledge and academic theory is not enough absent the ability to practice it in the real world.

Feedback Dilemma

The dilemma for most investors, unlike pilots, is that the feedback is rarely timely, let alone immediate. It may take years to know whether an investment decision made today is ultimately a positive one for a portfolio. In addition, opportunities for mutual fund investors to "practice" and gain experience are limited by these long time horizons involved in determining outcomes. Similarly, the feedback isn't physical, though it can be emotional, often making it difficult to decipher. Mistakes will be made, but the lessons often go unlearned and the experience squandered because the context and the original decision-making rationale have been lost.

To improve outcomes, individual investors need to develop an investment process and method for tracking decision-making in order to create a meaningful feedback loop from which genuine experience can be gained. Such a process would need to instill discipline yet be flexible enough to incorporate new lessons learned and experience gained. The lack of such a disciplined investment process may explain why many investors turn to market prognosticators or academic theories—despite being largely unproven in delivering practical results — as a cheap substitute for a rigorous and experienced investment approach.

Developing such an investment process can seem a daunting task for smaller investors, but it need not be so. Practical ideas on investing can be borrowed from proven investment practitioners with experience in dynamic market environments, provided that investors test that experience out for themselves in the context of their own unique investment situation. Beginners can start at a basic level, borrowing ideas from professionals and practicing on a small scale in a building block approach towards greater understanding and experience. Theories are incorporated only after being verified through practical experience. Many investors may have a hard time experimenting in such ways—fearing mistakes—but developing a process that keeps what works and discards what doesn't based on actual investment situations provides the lasting experience required for long-term success.

An example of a meaningful place to start would be for investors to engage in more frequent re-balancing of their portfolios centered on changes in the market instead of by the calendar. Seeing the results of the regular trimming of high-flyers and additions to stragglers among individual components in a portfolio would provide more data points for feedback. It also has the additional benefit of containing risk more closely around one's designated asset allocation and providing insight as to whether that allocation is appropriate. Although somewhat counter-intuitive, more frequent activity of this kind makes each individual decision less crucial to the overall outcome, dampening potential risk and volatility. Contrast that with a buy-and-forget approach, in which the initial buy decision becomes a dominant factor as the investment is left to be buffeted by the whim of market trends and asset allocations are allowed to drift.

Data Is No Substitute

Although experience can be borrowed to some extent, investors need to be careful not to attempt to manufacture experience through backward-looking data. In the age of fast computer processing and information at our fingertips, many have become over-reliant on simple numerical data as a substitute for actual experience. While cold, hard numbers can often tell a story, whether it tells the right story depends on a full understanding of the context of those numbers and whether all variables have been accounted for or recognized. Too often, people look at data in isolation or allow someone else to interpret the data for them without having a grasp of the full picture available.

Data that is meaningful is data developed and recorded from one's own actions, experience, or interpretation, and fully understood within the context it is provided. A defined investment process should incorporate decisions based on data and other factors, and a system should be developed for recording the context of these decisions and their subsequent investment outcomes in order to build an investor's own feedback loop.

Accountability

Although mutual fund investors delegate security selection to fund managers, they retain responsibility for the performance of their overall portfolios. All too often, the tendency is to blame fund managers for any failure of expectations or results—for "not being consistent" or for "not performing as they have in the past"—despite all the warnings of past performance not being a guarantee of future results. If it were that simple, investors using index mutual funds would be immune from poor results, and practical experience would lead most investors to indexing. But asset allocation, re-balancing, and the timing of buy and sell decisions at the portfolio level play key roles for all investors, making indexing less of a panacea than theory would suggest. In some ways it is akin to blaming a hammer for missing the nail. To be sure, some tools are better than others, but the user is ultimately accountable.

Whether mutual fund investors take on the role of overall portfolio manager or delegate that role to a financial advisor, practical portfolio management skills are required. Such skill doesn't come from buy-and-forget strategies or from one-size fits all academic or market theories. It comes from experience and close attention to detail gained from practice in a dynamic environment.

Pilots don't measure experience in age or years of service, but in hours—flight hours at the controls of an airplane. Only actual flight hours truly measure experience, and experience is what counts. Other professions are beginning to recognize the importance of such hours in their training as well. The trend in medicine is for medical students to see real patients earlier and earlier so as to develop experience in real world situations sooner—in other words, more hours with patients. To achieve their goals, investors need to do the same with their portfolios.

Kerry O'Boyle is an Investment Strategist with Aston Asset Management. Prior to joining Aston he wrote on a variety of investment topics as a mutual fund analyst for Morningstar, Inc. He is a graduate of the U.S. Naval Academy, and holds an M.A. in Liberal Arts from St. John's College, Annapolis, MD.

For more information about Aston Asset Management, LLC and its subadvisors, please call 800-597-9704, or visit www.astonasset.com

4th Quarter 2011

2011 Review

In 1986, legendary R&B singer Luther Vandross won a Grammy Award for the album The Night I Fell in Love in the category of Best R&B Vocal Performance for a Male singer. One of the memorable songs on that album was It’s Over Now. As the market finished 2011, I echoed that sentiment. After a thoroughly lackluster fourth quarter, the Fund ended the year essentially flat   (-0.54%; N shares) on an absolute return basis in underperforming its Russell 1000 Value Index benchmark (+0.39%) by less than a percentage point.

The market clearly maintained a strongly defensive bias for much of the year. Utilities performed like a gem with a 19% return during the year as investors embraced not only the defensive characteristics but also the attractive yields in that area of the market. The Fund had little exposure to Utilities due to the lack of what we consider value creating opportunities due to valuation concerns despite their yields. We are not of the mind that a prudent investor would purchase any of the companies at the levels current valuations suggest. Industrials and Materials were the two other sectors that hurt performance the most owing to economic growth concerns on a global basis related primarily to the European crisis.

The three sectors with the highest contribution for the year were Consumer Discretionary, Financials, and Consumer Staples. Consumer Discretionary holdings were predominantly focused on discount retailers such as TJX Companies and Ross Stores. A large underweight position in struggling Financials aided returns overall, while Consumer Staples held up well due to the defensive orientation of the sector.

Overall stock selection was negative, with Lazard, Federated Investors, and HollyFrontier among the biggest detractors. Financial firm Lazard was penalized for its exposure to Europe, about a third of its business mix, in addition to general exposure to market-related areas. Asset manager Federated has struggled with the low interest-rate impact on money market funds, where the firm is a dominant provider. Energy company HollyFrontier has seen spreads collapse on refining margins with the narrowing of the price differential between Brent and West Texas Intermediate crude. With the exception of Lazard, all remain portfolio holdings as we perceive the issues perplexing the companies as being temporary in nature.

The three top individual stock contributors were TJX Companies, Kinetic Concepts, and Marathon Oil. Previously mentioned TJX benefited from being a discount branded retailer able to offer lower prices to cost-conscious consumers. Medical technology firm Kinetic Concepts rose on a buyout offer, causing us to sell the position as the all-cash deal offered little additional upside. Marathon Oil benefited from a rise in oil prices during the fourth quarter. We continue to view both TJX and Marathon as value creating opportunities, and each remains a portfolio holding.

"You Treated Me So Bad"

Luther Vandross’ It’s Over Now also resonated as the Fund ended a run of five consecutive quarters of benchmark-beating performance in the recently concluded fourth quarter of 2011. During the period, we identified with one of the key parts of the chorus which was “You treated me so bad.” Although the Fund delivered its highest quarterly absolute return for the year, it was clearly behind the benchmark in finishing with the worst relative quarterly performance since inception.

Eight out of 10 sectors in the portfolio underperformed their respective sectors in the Russell 1000 Value, and/or the benchmark overall. The two sectors in the Fund that outperformed were Materials and Consumer Discretionary. Performance for the benchmark was fairly broad, with five sectors—Energy, Industrials, Materials, Consumer Discretionary, and Technology—outperforming. All of these sectors are typically thought of as having a pro-cyclical growth tilt. Eight out of 10 sectors yielded a double-digit absolute return with only Utilities and Telecom, bastions for yield-hungry investors, not hitting that mark as the market rebounded strongly.

Sector allocation for the Fund was positive, but stock selection was decidedly negative. Interestingly, the portfolio had positive sector contributions in all but two sectors—Consumer Staples and Industrials. Thus, for this quarter, the portfolio was in the right places in terms of sectors but at the wrong time in terms of the individual stocks.

The poor or untimely stock selection endemic across the portfolio particularly affected results within Industrials, Financials, and Consumer Staples. The Fund’s holdings were not well correlated to the risk-off, risk-on type of environment that dominated the market, primarily after October. Europe took center stage as the market progressed approximately 1.5% overall from November through December, while the portfolio declined slightly more than 3%. In our view, nothing much changed except market perception.

The biggest individual detractors included Avon Products, Warner Chilcott, and the previously noted Federated Investors. Execution issues plagued Consumer Staples stock Avon and specialty pharmaceutical company Warner Chilcott. Although we view many of these issues as temporary, the period of rectification has been extended. Avon has responded with the removal of its CEO. We have responded with the removal of both stocks from the portfolio, though we will continue to monitor them to see if they are worth revisiting later.

The three top contributing sectors during the fourth quarter were Utilities, Materials, and Telecom. Both Utilities and Telecom were well positioned from a sector standpoint with underweight positions, while an overweight stake in outperforming Materials was the best performing sector for the period. Marathon Oil, TJX, and Exxon Mobil were the top individual contributors, and all three remain portfolio holdings.

Positioning

As we reiterate as often as we can, we cannot predict the timing, duration or magnitude of outperformance. All we can do is try to position ourselves to achieve it. For three out of four quarters in 2011, we did just that. Although the streak of five consecutive quarters of outperformance has ended, we still believe that the portfolio is positioned to outperform over the long haul. Please note that nothing has changed with our process. One quarter of underperformance, regardless of the magnitude, does not justify undoing a process that we have employed professionally for more than a decade.

Stocks not previously mentioned that were eliminated due to sector adjustments and/or valuation or fundamental issues were Pepsico, Abbott Laboratories, Owens-Illinois, Joy Global, and 3M Corporation. These changes were primarily driven by the dynamic interrelationships of the sectors as we seek to position the portfolio to exploit value creating opportunities. As we like to share regarding our investment philosophy, “We have a core process but no core holdings.”

The relatively high number of stocks eliminated allowed for positions to be initiated in Express Scripts, Campbell Soup, Halliburton, and Eli Lilly among others. Each stock was purchased after first being identified as a value creating opportunity followed by our in-depth fundamental analysis of their potential as a portfolio holding.

The result of this and related activity during the quarter was that exposure to Energy, Healthcare, Materials, and Consumer Staples was increased. Exposure to Technology, Industrials, and Consumer Discretionary decreased, while all other sectors essentially remained the same given market appreciation or depreciation.

As a reminder, sector allocation decisions are made on the basis of the value creating opportunities that we find in the market rather than top-down, macroeconomic decisions. Due to this approach, the portfolio may look out of step with conventional thinking. Then again, we are not seeking conventional results. We expect our different approach to yield different, value-added results.

Outlook

Returning to the theme of Luther Vandross’ Grammy Award-winning album, I'm reminded of another song, Wait for Love, which begins with the lyrics:

Knowing love the way I do

I can say for certain that it’s true

There’s a chance for me and you

I surely feel like the time is near

The picture in my mind is very clear

I think love has brought us here

Looking ahead, it is clear that a confluence of issues is coming to a head. The economy, though wildly debated, appears to be headed in an upwardly sloping direction. Funny thing how we often forget that the economy is cyclical, as we become bogged down in believing that it can only move the same way infinitely. The economy appears to have rebounded from its lows with data suggesting that the environment is getting better at an accelerating pace. Thus, despite the negative spin that gives contrary market pundits popularity, I know that it is true that there is a chance for me and you to see the upside of the economic cycle.

Europe, however, has become the issue of the day as all wait to see if the European Union will become the European Dis-Union. Europeans suggest no, but it has become convenient and expedient for commentators to suggest otherwise. Nothing keeps the eyeballs on television than a controversial counterargument.

The presidential election could be one of historic proportions. The economy could be peaking just in time for President Obama to begin his victory lap. Or, if it falters, the Republican Party will have final confirmation for repudiating his tenure and legacy.

What is the constant theme in all of this? Time. Within a matter of months we should have better information to remove the knowledge vacuum that has allowed for a vortex of volatility that makes short-term investment decisions look idiotic or brilliant.

As Luther Vandross poetically sang, “The picture in my mind is very clear”. At Herndon Capital Management, what is clear is that we will continue to look through the noise and short-term issues to seek out value creating opportunities. This last quarter was gut-wrenching from the slow bleeding nature of the underperformance that began in November and ended in December. After being almost even with the Russell 1000 Value in October, it was a painful experience to watch the portfolio lose 10 to 30 basis points daily in a way that we are not accustomed. We persevered because we continue to believe that purchasing companies at a discount to what the fundamentals bear is the only true way investing is supposed to be undertaken. 

The picture clearly in my mind is that the Fund has a portfolio of attractively valued, solid fundamental companies in an economic environment that is improving with interest rates still at historic lows. The confluence of these variables could make 2012 a surprising market to the upside for investors. While love has not brought us here, consistency of process has. After the end of five consecutive quarters of outperformance, what did we learn from the turmoil in the fourth quarter? While we may pursue perfection in terms of outperformance, we will never achieve it. But, pursue it we will.

Randell A. Cain, CFA
Principal and Portfolio Manager
Herndon Capital Management

January 5, 2012

As of December 31, 2011, TJX Companies comprised 4.41% of the portfolio's assets, Ross Stores – 1.30%, Lazard – 0.00%, Federated Investors – 1.42%, HollyFrontier – 0.82%, Kinetic Concepts – 0.00%, Marathon Oil – 2.43%, Avon Products – 0.00%, Warner Chilcott – 0.00%, Exxon Mobil – 3.98%, Express Scripts – 2.23%, Campbell Soup – 2.11%, Halliburton – 1.90%, and Eli Lilly – 1.11%.

Note: Value investing involves buying the stocks of companies that are out of favor or are undervalued. This may adversely affect the Fund's value and return.

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.

4th Quarter 2011

Market Rebound

Stocks rebounded nicely off their early October lows as more encouraging economic data in the U.S. put to rest fears of a double-dip recession. European leaders also successfully bought themselves more time to deal with their systemic debt issues with a program allowing the European Central Bank to supply additional liquidity.

The fourth quarter capped a volatile year for stocks that saw a variety of exogenous events, including the tragic earthquake and tsunami in Japan, the Arab Spring revolts, the Washington debt ceiling stand-off and subsequent U.S. credit downgrade by S&P, an unfolding European sovereign debt crisis, and severe flooding in Thailand. In retrospect, it is quite remarkable that despite all these events that the broader stock market (as represented by the S&P 500 Index) eked out a small gain for the year. Through it all the U.S. economy continued to expand, albeit modestly, and corporate profits registered solid gains in helping to underpin stocks.

The heightened uncertainty these events created, however led investors to seek out safety and quality.  Defensive groups such as Consumer Staples and Utilities typically did well, while more cyclical sectors such as Financials and Materials did not. Fundamental factors such as low beta (volatility), high return-on-equity (ROE), and high dividend yield also tended to lead to superior share gains. According to Bank of America/Merrill Lynch, stocks rate B+ or better outperformed those rated B or worse by more than 11 percentage points in 2011, after lagging significantly the prior two years.

Among the Russell indices, mid-cap stocks outperformed large-caps but lagged small-caps during the quarter. For the year, it was the reverse as mid-caps performed better than small-caps but not large-caps. In terms of style, the Fund’s Russell Midcap Growth Index benchmark slightly lagged its Russell Midcap Value Index counterpart for both the quarter and the year, not altogether surprising given the quality bias in the market. Fortunately, the portfolio was well positioned for the shift to quality this year, resulting in a year of strong outperformance for the Fund relative to the benchmark.

Positive Territory

The portfolio delivered double-digit gains in besting the index during the quarter. For the year, the Fund managed to deliver positive returns while the benchmark lost ground. For both the quarter and full year, strong stock selection superseded sector allocation as the biggest contributor to performance versus the index. In particular, strong selection within Consumer Discretionary, Technology and Industrials led the way. Among the biggest individual contributors to relative performance were Industrial firms Robert Half International and Donaldson, Internet networking specialist F5 Networks in Technology, and Energy companies Oceaneering International and Core Labs.

An overweight stake further added to the outperformance within Industrials during the quarter with Jacobs Engineering and Joy Global contributing. Jacobs reported a solid September quarter that marked a further acceleration in bookings, revenue, and earnings growth, leading us to increase the portfolio’s position in the stock. We think Joy Global can continue to deliver above-average earnings growth, and increased the position amid periods of market weakness during the quarter when there were opportunities to add at an attractive valuation.

Underweight stakes in Energy and Materials—among the best performing areas of the index during the quarter— detracted from relative returns, while the performance of the Fund’s Healthcare holdings were mixed. Varian Medical Systems and Dentsply outpaced its sector peers, but Quality Systems, Waters, and St. Jude Medical lagged. Quality Systems corrected following strong year-to-date gains after the company indicated that market growth had transitioned primarily toward replacement activity versus organic growth. St. Jude announced that a promising new product, CardioMEMS, failed to win FDA Advisory Panel approval, diminishing future growth prospects. We sold the portfolio’s position following the news.

Notable individual detractors from performance included Newfield Exploration, Polycom, and Mead Johnson Nutrition. Oil and gas producer Newfield suffered, and was sold, after an earnings disappointment and significant downward revision to 2012 production forecasts undermined our original investment thesis. An earnings disappointment caused videoconferencing equipment maker Polycom to significantly underperform. We believe the setback to be transitory, presenting an opportunity for us to add to the position at more attractive prices.

Mead Johnson declined sharply late in the quarter as a bacteria scare involving the death of an infant in Missouri led Wal-Mart and other retailers to remove Mead Johnson’s Enfamil infant formula from store shelves while an investigation took place. We immediately trimmed the Fund’s position due to uncertainty regarding the source of the contamination and the length of the investigation. Fortunately, subsequent tests by both Mead Johnson and the FDA exonerated the company, meaning product sales could resume. We expect the financial impact of this incident will prove to be relatively minor and expect the shares to fully recover in time.

Positioning and Outlook

The Fund established one new position during the quarter in leading data warehousing vendor Teradata. We think the company is well positioned to capitalize on rapid growth in data collection and rising corporate adoption of business intelligence analytics.

Conversely, three positions were sold from the portfolio. In addition to Newfield Exploration and St. Jude Medical, asset manager Eaton Vance was eliminated. Eaton Vance reported an earnings disappointment that suggested to us that both cyclical and structural forces were at work against the company. We redeployed the proceeds from the sale into other financial firms such as Intercontinental Exchange and MSCI. We think Intercontinental stands to benefit from the migration of derivative/futures trading to exchanges, and MSCI continues to benefit from the trend towards passive investing and flows to ETF products.

Looking ahead, we expect the challenging and volatile stock market environment to continue until the middle of this year. Although recent data on U.S. employment and housing activity are encouraging, fears about the fallout from a potentially severe European recession, coupled with the possibility of hard landing in China, will likely keep investor risk aversion at elevated levels. By mid-year we are hopeful that investors will start to have a better sense of the likely outcomes of the fall elections and the implications for policy that will lead to necessary deficit and debt reduction, and ultimately, a pathway to healthy sustainable growth. In the meantime, we believe that we are in the early stages of a rotation towards higher-quality growth stocks such as those we seek for the portfolio. The valuations for these stocks remain attractive based on our work, and we think their earnings growth is more assured due to their financial strength, geographic diversification, and unique product cycles. 

M. Scott Thompson, CFA                  Andrew W. Jung, CFA

January 3, 2012

As of December 31, 2011, Robert Half comprised 2.74% of the portfolio’s assets, Donaldson – 2.88%, F5 Networks – 2.42%, Oceaneering International – 2.04%, Core Laboratories – 2.23%, Jacobs Engineering  – 2.37%, Joy Global  – 1.63%, Varian Medical Systems – 1.73%, Dentsply – 2.22%, Quality Systems – 1.75%, Waters – 1.85%, Polycom – 2.22%, Mead Johnson Nutrition – 0.97%, Teradata – 1.36%, Intercontinental Exchange – 1.99, and MSCI – 1.99%.

Note: Small- and mid-cap stocks are considered riskier than large-cap stocks due to greater potential volatility and less liquidity.

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.