Manager Insight – Fairpointe April 2012 Update
By Fairpointe Capital LLC, Subadvisor to the ASTON/Fairpointe Mid Cap Fund
After two quarters of relatively good performance, the ASTON/Fairpointe Mid Cap Fund underperformed in April. Although a majority of the companies in the portfolio reported better than expected earnings leading to an increase in their stock prices, unexpected announcements by three of the portfolio’s largest holdings hurt performance.
Akamai beat their quarterly earnings expectations. This “beat”, however, was due to higher than expected revenues from their lower margin content-delivery-network business, causing overall margins to be lower than expected. Akamai’s higher margin value-added services now account for more than 50% of the company’s revenue due to recent growth trends. The company also announced that its CEO would be retiring by the end of 2013, which surprised the market and added some uncertainty to this actively traded stock.
H&R Block reported in-line results for the tax preparation season, which included some indications of competitive share gains. Unfortunately, the company also announced additional claims related to its former mortgage-lending subsidiary. This is a legacy issue for which the company has provided reserves. After speaking with the company and upon further analysis of the situation, we believe the company has sufficient reserves and resources set aside for a successful settlement of claims, which are nearing the end of their validity dates.
Finally, Itron was the top contributor to performance during the first quarter of 2012, but declined in April after the company reported quarterly revenue and earnings that were marginally below expectations. Its CEO also announced plans to retire before the end of an expected two-year term, adding uncertainty during the current restructuring period. Itron is a leading global provider of high tech smart meters for electricity, gas and water, benefitting from a broad trend by utilities and governments to monitor and manage energy usage. We think the stock appears substantially undervalued at current levels.
The short-term volatility of our holdings reflects in part the backdrop of uncertainty associated with current macroeconomic factors. We continue to think the portfolio overall remains attractively valued relative to its benchmark based on common valuation metrics. This gives us confidence that the Fund is well-positioned going forward on a longer-term basis.
As of April 30, 2012, Akamai comprised 3.28% of the portfolio’s assets, H&R Block – 3.81%, and Itron – 3.12%.
The information contained in this article is provided by Fairpointe Capital LLC (“Fairpointe”), a subadviser utilized by Aston Asset Management, LP (“Aston”). Fairpointe is not an affiliate of Aston and its 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 Fairpointe’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: 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 or a summary prospectus containing this and other information. Read it carefully.
Aston Funds are distributed by Foreside Funds Distributors LLC.