4th Quarter 2012
Led by European and Emerging Markets, global equities remained strong through the final quarter of 2012, pushing most indices to positive, mid-teen returns for the full year. By comparison, U.S. equities were held in relative check during the quarter, as the election and political posturing weighed on the domestic market. Investors balanced the prospect that the fiscal cliff stalemate would push the economy back into recession, even as economic indicators in key sectors—housing, employment, and manufacturing in particular—showed improving signs. Globally, economic growth in 2012 was slow and uneven but still positive, helped by the concerted and broad-based support from government central banks.
Small- and mid-caps stocks outpaced large-caps domestically during the fourth quarter, bringing the full year returns across the market-cap spectrum into a relatively narrow range (as measured by the Russell benchmarks). Sector performance within the growth indices was strongest within Industrials and Materials and, to a lesser extent, Consumer Discretionary. The latter two sectors also closed out 2012 among the top-performing industry groups for the year as a whole.
The Fund delivered positive returns for the quarter in outpacing its Russell 2000 Growth Index benchmark. For the full year, the portfolio substantially outperformed the benchmark. Stock selection was broadly positive across sectors for the year and strongest in the Healthcare, Technology, and Energy sectors during the fourth quarter.
Within Healthcare, acute care hospital names continued to boost performance. Tenet Health Care beat guidance all year long with the stock further boosted by the company’s fourth quarter announcement of a meaningful share repurchase plan for 2013. We decided to sell the position as the stock had soared up to that point during the year, gaining 30% in the fourth quarter alone. A sizeable position in Health Management Associates also aided returns.
Key performance drivers in Technology included anti-virus software developer AVG Technologies and IT services firm VeriFone Systems. A tie-up with Yahoo!, announced in December, keyed the advance for AVG. In Energy, Gulfport Energy and Oasis Petroleum contributed to positive comparisons for the quarter and the year.
Offsets to the positive performance during the fourth quarter were primarily in individual names, but rolled up to the sector level the Fund did lag by a small margin in Consumer Discretionary and Materials. The modest shortfall in Materials was attributable mostly to an underweight stake in the sector, but shares of specialty metals producer Allegheny Technologies dropped roughly 10%. Shutterfly and Arctic Cat were two of the weaker names in the Consumer Discretionary sector offsetting holdings in the retailer sub-group that were generally positive.
Our strategy seeks to achieve competitive returns by identifying unrecognized growth potential wherever it exists across all industry sectors. We seek to identify firms with high-quality business models, distinct competitive advantages, proven management teams, and significant growth potential. Revenue growth, margin expansion, and the ability to positively surprise and revise estimates are key characteristics in the portfolio’s holdings. We want these firms to have duration and sustainability of these characteristics based on their competitive positions in the industry. Our success stems from the experience and focus of our investment team, who possess extensive knowledge of small-cap companies and their key industry drivers.
Lee Munder Capital Group, LLC
As of December 31, 2012, Tenet Health Care comprised 0.00% of the portfolio's assets, Health Management Associates – 5.07%, AVG Technologies – 2.00%, Verifone Systems – 1.33%, Gulfport Energy – 2.30%, Oasis Petroleum – 0.52%, Allegheny Technologies – 0.00%, Shutterfly – 1.69%, and Arctic Cat – 1.96%.
Note: Small-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.