4th Quarter 2012
The Fund declined slightly during the last quarter of 2012, trailing the broad market S&P 500 Index by less than a percentage point. As has been the case for most of the year, owning put options to guard against potential market downdrafts and selling call options that provide cash premiums but also cap the upside of the underlying equity holding were the primary drivers of underperformance. Indeed, the Fund’s underlying portfolio of dividend-paying, large-cap value oriented stocks actually posted a gain during the quarter. Most of those gains were a function of stock selection, with holdings in Technology, Industrials, and Consumer Staples providing the biggest boost. Stocks in the Utilities sector represented the bulk of the laggards from the equity segment.
We eliminated positions in Conagra, Eli Lilly, and Lowe’s from the Fund during the fourth quarter. All three had appreciated to a point where, mathematically, there was no economic value left because each was trading well above the strike prices of the call options that we had sold. Essentially those positions came to represent a proxy for cash. The proceeds of the sales were used to purchase what we considered more attractive opportunities in AT&T, Ford Motor, Norfolk Southern, Stryker, and Zimmer Holdings. Stryker and Zimmer are smaller holdings, and, taken together, represent the portfolio substitutes for Eli Lilly. The other three are closer to being full positions. Ford recently announced a doubling of its quarterly dividend, validating the fundamental premise for our decision to add it to the portfolio.
With these portfolio changes we have been able to add a modest amount of additional upside potential to the overall portfolio by substituting out-of-the money call option positions on the new holdings for the in-the-money calls on the replaced names. The combined cap-weighted yield of the new positions is roughly equal to that of the stocks sold, thus the portfolio lost nothing on a dividend-income basis but gained additional option premium and more appreciation potential as a result.
As of December 31, 2012, AT&T comprised 3.04% of the portfolio's assets, Ford Motor – 1.75%, Norfolk Southern – 2.23%, Stryker – 2.47%, and Zimmer Holdings – 0.80%.
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.