3rd Quarter 2013
The Fund posted modest gains during the third quarter, but underperformed its broad market S&P 500 Index benchmark. Stock selection negatively affected performance as the stock-only returns of the portfolio (which excludes the impact of our options strategy) lagged the index by a significant margin. The biggest detractors on a sector level were those areas typically considered the most defensive in nature—Telecom and Utilities. In addition, investments in the Consumer Discretionary sector contributed to underperformance.
Stock selection remained far ahead of the benchmark for the year-to-date through the end of September, however. This isn’t necessarily reflected in the Fund’s total return relative to the index given our hedging strategy, but we believe it is quite good in relation to other hedged equity strategies. Although that hedging has a high cost in terms of returns amid strong market rallies, it does not foreclose our ability to generate solid positive results while helping to insulate investors from potential market shocks.
We continue to find attractive stock opportunities that fit our value and income parameters. The underlying holdings in the portfolio on average have a significantly higher current yield than the S&P 500 and trade at a substantial discount to that index's price/earnings ratio. Therefore, we remain fully invested and hedged with both put and call options. Writing call options for cash premiums offers another source of return, though they also act as a limiting factor on the potential upside of individual holdings, while the put options represent a potential cushion against a meaningful retreat in the overall market from current levels. We continue to adjust both the call and put option exposure to extend upside performance capture while attempting to limit overall risk.
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.