1st Quarter 2013 Commentary - ASTON/TCH Fixed Income Fund
1st Quarter 2013
The Fund outperformed its Barclays Capital U.S. Aggregate Bond Index benchmark during the quarter. Both sector allocation and security selection benefitted the portfolio, as an overweight position in Corporate bonds outperformed duration matched Treasuries. In addition, the portfolio was underweight mortgage-backed securities (MBS) which underperformed duration matched Treasuries despite continued purchases by the Federal Reserve due to investor concerns over rising interest rates. The Fund’s allocation to floating rate notes also aided performance, as these securities provide attractive incremental yield to the portfolio with little interest rate exposure.
The portfolio’s emphasis on longer dated investment grade securities was the biggest detractor from performance as the yield curve steepened during the quarter, amid positive signs of economic growth. From a quality perspective, an overweight to BBB-rated securities detracted from performance, as AA-rated securities outperformed that group and A- and AAA-rated bonds in general.
According to the Federal Open Market Committee (FOMC) of the U.S. Federal Reserve, recent data suggest that the United States economy may have returned to “moderate economic growth following a pause late last year” on positive economic indicators. Increases in household spending and business fixed investment were partially offset by “somewhat more restrictive” fiscal policy.
In our view, the Committee continues to broadcast an important message: the high-impact period for monetary policy solutions is behind us and that going forward the central bank cannot offset economic drag from fiscal policy concerns indefinitely. The central bank noted that inflation has been running below its longer-term targets, and it has a benign outlook for future inflation. The Committee voted to continue its purchases of mortgage-backed securities and Treasuries “until the outlook for the labor market has improved substantially in a context of price stability.”
Although the overall unemployment rate decreased during February, so did the participation rate. While the headline unemployment rate continues its steady decline, with fewer members of the labor force seeking employment it is unlikely the Federal Reserve views the overall results as a healthy labor market. Accordingly, it is unlikely we see a change in policies during the second quarter.
Taplin, Canida & Habacht (TCH)
Note: Bond funds are subject to interest rate and credit risk similar to individual bonds. As interest rates rise or credit quality suffers, an investor is susceptible to loss of principal.
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