3rd Quarter 2013
Another Solid Quarter
The U.S. stock market continued to perform well during the third quarter, led by smaller-capitalization stocks. The small-cap oriented Russell 2000 Index rose 10.2% during the period, while mid-caps (as represented by both the Russell Midcap Index and the Fund’s S&P Midcap 400 Index benchmark) gained more than 7% in outperforming the broad market but large-cap heavy S&P 500 Index.
The Fund outperformed its benchmark for the third consecutive quarter as it continued its strong performance in 2013. Positive contributions during the quarter were again broad-based with 20 holdings gaining more than 10%, and only one loser of more than 10%. The top contributor was the portfolio’s top holding at the beginning of the quarter, Boston Scientific, which continued to surge as investor perception has grown increasingly positive in focusing on the introduction of the firm’s new cardiovascular products.
Other top performers included long-term holdings Molex and Akamai Technologies. Molex is a global manufacturer of electronic connectors whose stock jumped after the firm agreed to be acquired by Koch Industries. Website performance enhancement and security provider Akamai continued to be a key beneficiary of the explosive growth in Internet traffic.
Solar panel and energy system provider First Solar was the largest negative performer. The stock had been the Fund’s top contributor the previous quarter, but gave back some of those substantial gains after a disappointing quarterly report and guidance in August.
Other notable detractors included McDermott International and Staples. McDermott is a global engineering and construction company serving the offshore oil and gas markets. With the stock trading just above book value, we took the opportunity to build a position during the first quarter. Admittedly, we were early, but continue to believe that the company will rebound as it addresses recent execution issues. Office products company Staples is the world’s second largest Internet retailer (after Amazon), but missed recent earnings expectations. The company is restructuring—adjusting its mix of bricks and mortar store exposure and its e-commerce business.
We think stock selection has become even more important with the strong market move thus far in 2013. During the quarter, we rebalanced the portfolio to keep valuations attractive, initiating new positions in AGCO, Citrix Systems, Xylem, Raymond James Financial, and FactSet, while eliminating only one position.
After a decade of making acquisitions, agricultural equipment manufacturer and distributor AGCO is now integrating those operations and focusing on improving profitability. Citrix is a leading provider of desktop virtualization and cloud networking solutions. Cloud networking offers strong growth potential for the firm and Citrix recently started shipping several new products, including mobile applications, which we expect to produce increased revenues and earnings. Xylem was spun out of ITT Corporation in 2011 and is a pure-play water company. The firm’s product offering includes wastewater pumps for residential, agricultural, and industrial uses. We think the increasing need for water infrastructure globally will continue to support an attractive growth story.
The Fund remains significantly underweight Financials, but the addition of Raymond James and FactSet increased exposure to this area. Diversified financial holding company Raymond James was trading at a discount to its peers, and we believe the company stands to benefit from additional synergies as a result of its Morgan Keegan acquisition. Although technically categorized as a Technology company, FactSet provides financial and analytical products to the investment community. The Fund has owned the stock before, and we think growth in mutual fund assets will enhance the company’s competitive position and lead to a more predictable subscription-based revenue stream.
We sold long-term holding Denbury Resources from the portfolio as the U.S.-based oil and natural gas producer faces a more challenging outlook.
Perspective and Outlook
Throughout the summer months the Federal Reserve talked about a stronger economy and lower unemployment rates, even hinting that quantitative easing (QE) would taper off. It was widely anticipated that the program would begin to phase out starting in September. That did not happen, however, as the pace of the economic recovery remained muted.
Each new headline out of Washington seems to lead to significant stock moves in either direction. This environment of volatility creates opportunities as stocks overreact to short-term or macroeconomic concerns. We strive to take advantage of these opportunities by buying stocks of companies with strong long-term fundamentals that become temporarily undervalued and by selling stocks that have reached our valuation targets. Although equity valuations have moved up and no longer trade at depressed levels, we think the portfolio remains attractively valued relative to its benchmark.
Fund Soft Close
The Fund will close to new investors on or about October 18, 2013. We made this decision to safeguard our investment process by maintaining assets under management at a reasonable level.
Thyra E. Zerhusen, Chief Investment Officer
Marie L. Lorden, Portfolio Manager
Mary L. Pierson, Portfolio Manager
As of September 30, 2013, Boston Scientific comprised 3.48% of the portfolio’s assets, Molex – 3.02%, Akamai Technologies – 2.74%, First Solar – 1.64%, McDermott International – 2.34%, Staples – 2.84%, AGCO – 1.67%, Citrix Systems – 1.28%, Xylem – 2.78%, Raymond James Financial – 1.63%, and FactSet – 0.99%.
Note: Mid-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.