2nd Quarter 2014 Commentary - ASTON/Guardian Capital Global Dividend Fund
2nd Quarter 2014
Global Market Review
The Fund’s MSCI World Index benchmark delivered another quarter of positive returns, gaining more than 5% as markets grinded higher on lower trading volumes entering the summer months. U.S. stocks, as measured by the S&P 500 Index were up 5.2%, fueled by an improving economic scenario, while developed country foreign stocks (MSCI EAFE Index) rallied 4.3%. Emerging Market equities gained more than 6%. A new government in India was well received by the market, while China’s economic outlook has surprised on the upside despite vulnerability in the property market.
Global growth came in below economic forecasts for the first quarter. Gross Domestic Product (GDP) disappointed in both the U.S. and the core of the Eurozone. Inclement weather in the U.S., the drag on Japan’s economy from higher taxes, and the slowdown in China’s property sector contributed to the slowdown. Although the relentless drop in the U.S. unemployment rate from 7.0% in November to 6.1% in June has been a positive development, weak labour force growth accounted for part of the drop. Despite the weaker than expected growth, S&P 500 earnings were better than analyst’s expectations at the start of earnings season, more than offsetting winter weather-related estimate cuts.
All sectors reported better than expected earnings results with the biggest upside surprise from Utilities (a cold weather beneficiary), Healthcare, and Technology. Financials and Energy were in-line with expectations. Many U.S. companies highlighted underlying strength in the economy during the period, and analysts have thus become more positive on earnings and sales with revision ratios now at two-year highs. Earnings expectations are now rising faster for multinational companies for the first time in two years, with more upgrades than downgrades to stocks in the S&P 500 with the most foreign exposure. Seventy percent of these stocks beat expectations during the quarter, compared with less than 50% of pure domestic names.
The Fund delivered positive results since its mid-April inception through the end of the quarter. Seven sectors in the benchmark produced gains during the second quarter, with Consumer Discretionary, Industrials, and Financials lagging with slightly negative returns.
The strongest stock selection in the portfolio came from the Energy sector, where positions in Williams, Conoco Phillips, and Seadrill were strong performers. Williams was up significantly as it acquired the remaining 50% general partner interest and limited partner (LP) units in Access Midstream Partners in a cash deal. The transaction is expected to close during the third quarter of 2014. Tobacco holdings in Reynolds, Lorillard, and Altria within the Consumer Staples sector contributed to relative performance as those names rallied more than 10% on average.
Notable detractors from performance came from stock selection in Utilities (Electricite de France, Ameren), Financials (Fifth Third Bank, Axa Inusrance), and Consumer Discretionary (Wynn Resorts, Omnicom Group). Allocation effects were minimal overall.
We have positioned the portfolio to maintain a lower sensitivity to interest rate volatility. The rally in US 10-year Treasury Bonds seemed to be reversing toward quarter-end. As such, the Fund is slightly overweight Industrials, Utilities, and Consumer Staples, and underweight Consumer Discretionary, Financials and Technology.
In terms of geographic positioning, the portfolio is marginally overweight the U.S. and Europe, while underweight Japan. We continue to focus on companies that have a shareholder-yield friendly approach to cash management, as our strategy is geared towards dividend growth sustained by earning growth as well as a quality bias. Although yield for yield’s sake is not optimal in our opinion, we do seek higher yielding securities that fit our dividend strategy characteristics of Growth, Payment, and Sustainability (GPS).
Holdings turnover in the portfolio was minimal during the quarter given the Fund’s recent inception. We did add to the weighting in Utilities with the purchases of Ameren and Duke Energy. In addition, consumer goods conglomerate Unilever and natural gas supplier Targa Resources Partners were added to the portfolio in May.
Global developed markets appear to be transitioning to a safer and more sustainable second half to this economic expansion, driven more and more by a deleveraging private sector. In the Emerging Markets arena, the crucial transition to sustainable new growth models remains a work in progress. Deflation risks are beginning to subside in developed markets with U.S. core inflation having bottomed out and poised to move up slightly. With the European Central Bank (ECB) having just eased policy and the People’s Bank of China expected to ease more, the remaining global deflation scare is likely to disappear soon, though below-target inflation is still a worry for central banks.
We expect economic growth for the second half of 2014 to be stronger than the first half. Improved capital expenditures (CapEx) should drive the pickup in growth. CapEx has significantly accelerated this year as companies still hold large amounts of cash on their balance sheets and are in very strong positions fundamentally. Rising capacity utilization and business confidence signals faster business equipment investment. As the US Federal Reserve tapering remains on course, we believe that quality companies will begin to move forward in the market. Quality as a factor has underperformed the past few years given the excess liquidity supplied by the Fed. Low-quality companies with poor balance sheets and high leverage have been huge benefactors of its quantitative easing (QE) policy. We are starting to see this reverse, and believe that companies with strong fundamentals and balance sheets (i.e. quality companies) will be the standouts the next few years as QE ends and interest rates edge higher.
In Europe, GDP growth is solid in Germany, the UK, and Spain, but has been weak in France and Italy. Inflation remains too low with the European recovery lagging the U.S., though it is starting to show more signs of improvement. Valuations are attractive for many European stocks but a disciplined approach to stock selection is needed in the region. Many of the European companies we own are global in nature and therefore benefit from positive growth coming out of the U.S. Emerging Markets are still struggling with growth. China’s economic activity has modestly improved but remains fragile given its property market. In contrast with the East European countries, many Latin American economies are still struggling due to a combination of weaker growth in China, mixed commodity prices, and tougher external financing environment. The Fund does not currently have a position in Emerging Markets.
As of June 30, 2014, Williams comprised 1.65% of the portfolio's assets, Conoco Phillips –0.86%, Seadrill – 1.28%, Reynolds American – 0.84%, Lorillard – 1.90%, Altria – 1.30%, Electricite de France – 1.03%, Ameren – 0.71%, Fifth Third Bank – 1.52%, Axa – 1.46%, Wynn Resorts – 1.41%, Omnicom Group – 0.48%, Duke Energy – 0.73%, Unilever – 0.75%, and Targa Resources Partners – 0.29%.
Note: Investing in foreign and emerging market securities involve risks related to adverse political and economic developments unique to a country or a region and currency fluctuations. The Fund may be subject to investment style risk in that returns from dividend-paying, larger capitalization stocks can trail returns from the overall stock market for extended periods.
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.