2nd Quarter 2014
Stocks continued their march higher in the second quarter. The Fund underperformed the 5.12% advance of the Russell 1000 Index benchmark. Underperformance relative to the benchmark was primarily due to weak stock selection. Poor stock selection in the Industrials, Materials and Consumer Discretionary sectors offset strong stock selection in the Information Technology and Health Care sectors. Sector allocation was also slightly negative due to the lack of exposure to the Utilities sector, the second-best performing sector in the Russell 1000 Index.
Winners and Losers
Two of the Fund’s holdings in the Industrials sector were among the top five detractors to performance for the quarter, namely Chicago Bridge & Iron and Middleby Corp. During the period, Chicago Bridge & Iron was negatively impacted by unfavorable research reports that questioned accounting practices related to the Shaw acquisition and the potential need for a material write-down. Shares of Middleby, a manufacturer of commercial foodservice equipment, missed consensus earnings estimates due to temporary issues related to Viking Range, a company Middleby acquired in December 2012. Lastly, within the Consumer Discretionary sector, the Fund’s holding in Best Buy disappointed and we sold the Fund’s position as the headwind in retail was too strong for new management to execute the company’s restructuring.
Within the Information Technology sector, social media company Facebook has been a strong performer in the Fund’s portfolio. We believe the company offers a significant competitive advantage based on scale, an enormous collection of data and a strong senior management team that has developed a loyal culture. We see the continued shift toward online targeted and mobile advertising as potential catalysts for the shares going forward. Within the Health Care sector, two portfolio holdings were among the top five contributors to performance during the quarter, Allergan and Gilead Sciences. Shares of Allergan were up after a hostile bid from Valeant Pharmaceuticals and Pershing Square Capital to acquire the company. Gilead Sciences turned in stronger-than-expected financial performance from the recent launch of Sovaldi for the treatment of Hepatitis C.
We initiated a position in networking giant Cisco Systems in the second quarter. It was the only new stock to reach full-position status. Cisco Systems is a leading provider of internet communications equipment. The company’s routers and switches offer the robust capabilities necessary to move huge volumes of internet traffic, something that has grown increasingly complex due to the exploding growth in high-speed voice, video and data traffic. The company’s aggressive acquisition campaign over the past decade took the company in too many different directions and created confusion within its customer base. However, the experienced management team is beginning to undertake the changes needed to refocus on customer needs, which we believe should reinvigorate revenue growth.
Two full positions were sold from the portfolio in the second quarter. Company-specific issues led to the sale of Best Buy, as previously mentioned, and Athenahealth. For Athenahealth, the resignation of the company’s chief financial officer was a major departure within the senior management ranks, which led us to exit the position and use the proceeds for other investment opportunities.
We believe that the domestic economy should rebound from its first quarter -2.9% gross domestic product (GDP) report and are encouraged by the level of optimism we have seen and heard in recent reports and conference calls from many of the companies held in the portfolio. In our view, the Fund’s portfolio is well positioned to take advantage of an ongoing domestic recovery. We have increased exposure to economically sensitive companies and have been trimming positions in more classically defensive names, primarily due to valuation.
TAMRO Capital Partners
As of June 30, 2014, Chicago Bridge & Iron comprised 1.75% of the portfolio’s assets, Middleby Corp. – 1.53%, Facebook – 2.91%, Allergan – 1.34%, Gilead Sciences – 3.20%, and Cisco Systems – 1.92%
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.