1st Quarter 2014
The Fund posted modest gains for the first quarter of 2014, but trailed the broader equity market (as represented by its S&P 500 Index benchmark). The performance of the portfolio’s underlying holdings was actually quite good relative to the index, but the cost of our hedging strategy using Put and Call options limited overall returns. Put options, for example, that the portfolio owned in order to help protect the value of the portfolio should the market were to decline significantly had a negative effect on performance during the quarter. The strategy seeks to balance risk and reward, and it is something we remain committed to and will not waiver from in order to capture short-term incremental returns.
The benefit of that strategy was easier to see during the final month of the quarter. The Fund significantly outperformed the S&P 500 in March, with the portfolio’s hedges still firmly in place, as volatility in the market increased. The hedging strategy allows us to remain focused on a value approach to stock-picking that emphasizes dividend-paying companies. In that regard, the weighted-average yield of the stocks in the portfolio were 50% higher than the benchmark on an indicated annual basis. In addition, by most traditional measures of valuation the portfolio as a whole is more attractively valued than the index overall. The combination of this value approach and the hedging strategy has led to noticeably less volatility (as measured by standard deviation) than the market.
Two-thirds of the excess performance of the portfolio’s underlying holdings came from stock selection, while the other third was attributable to sector allocation. The best performing stocks were in three sectors Materials, Technology and Utilities. Interestingly, Utilities had the biggest negative impact on the portfolio last quarter, suggesting that the market experienced a meaningful rotation in sector leadership at the beginning of 2014. Picks within the Consumer Discretionary sector detracted from results during the quarter.
We are loath to make directional calls on the market, short-term or otherwise, relying instead on the confidence we have in the long-term outlook of the individual stocks in the portfolio. We believe that our hedging strategy is a better tactical approach than making top-down market calls or shifting portfolio exposures when we think equity markets may be vulnerable. Instead, we rely on Put options as the best way to help protect the value of the Fund against adverse moves in the market. With a strong focus on value investing and the use of options to hedge the portfolio, we believe the Fund is able to provide competitive risk-adjusted returns over the long haul.
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.