4th Quarter 2013
The Fund delivered solid absolute returns, but substantially lagged its broad market S&P 500 Index benchmark during the fourth quarter and full year 2013. It did better relative to its hedged mutual fund peers, but still trailed for both periods. Underlying stock selection underperformed the benchmark during the fourth quarter, though it did slightly exceed the performance of the index for the year as a whole. Once again, amid the strong rally in equity markets, our strategy of writing (selling) call options against the underlying stock holdings detracted from relative returns.
The worst performing sectors for Fund, for both the quarter and the year, were Utilities and Energy, while Technology and Financial Services were positive contributors. The performances in Technology and Utilities almost exactly offset one another for the year as a whole.
The effect of selling call options on each position represented a limiting factor in term of our ability to keep pace with a double-digit increase in the market (as represented by the S&P 500). As the rally accelerated, we saw many of portfolio’s holdings exceed the strike price of the call option we sold. Unfortunately, when stock prices rise rapidly we cannot rotate either the option positions or the equity holding quickly enough to neutralize the impact of having a lid on the upside capture.
While we would have liked to have gained more in the just concluded period we are unwilling to make directional calls in order to generate higher overall returns. The basis of our strategy is to maintain a risk profile that is a reasonable balance between the upside capture of equities and the cash generation of options that can aid in cushioning returns during flat or down periods in equity markets. At this juncture, we believe the fund is properly balanced on a risk reward basis.
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.