4th Quarter 2013
The U.S. stock market continued to perform well during the fourth quarter in capping off one of its best calendar year performances in 2013. The Fund’s S&P MidCap 400 Index benchmark was up 8.3%, compared to 10.5% for the large-cap oriented S&P 500 Index and 8.7% for small-cap Russell 2000 Index. The Fund continued its strong run as well in outperforming both the small- and mid-cap indices during the quarter.
Fourth Quarter Review
As we have seen all year, the performance contribution during the quarter was broad-based, with 25 stocks in the portfolio gaining more than 10% and only four stocks down more than 10%. The top contributor was one of the Fund’s largest holdings, The New York Times Company, up nearly 27% during the quarter and 87% for the full year. Investor perception has turned more positive as the company has introduced a successful digital pay model and repositioned itself as a strong global brand. The company continued to benefit from improved print and digital circulation growth, which now represents more than 50% of revenue. In addition, advertising revenue is expected to rebound as the economy strengthens.
Water technology firm Xylem was another top contributor after beating quarterly estimates. The company’s products include wastewater pumps for residential, agricultural, and industrial uses. The increasing need for water treatment and purification globally should continue to support secular growth. Another top performer included First Solar, which beat revenue and earnings expectations, while raising full-year guidance.
Detractors from performance during the quarter included Jabil Circuit, Nuance Communications, and Akamai Technologies. Electronic manufacturing company Jabil reported disappointing earnings in December. Revenues from two large clients were lower than anticipated, coinciding with a planned divestiture of an aftermarket repair business representing more than a $1 billion in revenue. Jabil is making capacity adjustments over the next two quarters to reduce fixed costs, while free cash flow is strong and the company has authorized a sizeable share buyback.
Nuance is the leader in speech recognition technology enabling voice transcription (speech-to-text) in the mobile, automotive, healthcare and PC markets. Nuance is transitioning to an on-demand subscription business model (from perpetual license), resulting in lower near-term revenue recognition. Thus, the stock traded at a discount to its historical valuations. We added to the portfolio’s position during the quarter as we expect the company to benefit from the increased adoption of speech-to-text technology.
Three stocks were added to the portfolio during the portfolio—Alcoa, Edwards Lifesciences, and Polypore. Alcoa is the largest global aluminum producer, generating 10% of the world’s supply, and has a leading position in the automotive and aerospace industries. We think the company’s value added products should reduce exposure to commodity pricing and expect strong revenue and earnings growth as worldwide economies recover. The stock became particularly attractive after it was eliminated from the Dow Jones Industrial Average at the end of September. Indeed, the holding was among the top-5 gainers for the Fund during the quarter.
Heart value manufacturer Edwards Lifesciences has a history of leading the development of cardiovascular devices. Their Sapien heart valve is designed to replace diseased aortic valves through a less complicated procedure than open-heart surgery. Polypore manufactures specialized microporous membranes used in separation and filtration processes. Membrane separators are a key component in lithium batteries used in electric-powered vehicles.
Two stocks were eliminated from the portfolio during the quarter after previously announced takeovers were completed. Belo Corporation was acquired by Gannett (also a portfolio holding), and Molex was acquired by Koch Industries.
Perspective and Outlook
Several key trends began to emerge in 2013 that we expect to play an even more important role in 2014. The domestic economy is now clearly in recovery mode. Improvements in housing and employment underpin a return of consumer demand and economic growth. There has been a return of manufacturing to the U.S., as companies position their production closer to demand and take advantage of lower energy costs and a more favorable labor environment. A healthy manufacturing sector can lead to increased capital expenditures and support growth throughout the economy. We also expect merger and acquisition activity to accelerate. Companies with leading market positions and strong balance sheets such as those in the portfolio have been, and we think will continue to be, attractive acquisition targets.
Thyra E. Zerhusen, Chief Investment Officer
Marie L. Lorden, Portfolio Manager
Mary L. Pierson, Portfolio Manager
As of December 31, 2013, New York Times comprised 3.35% of the portfolio’s assets, Xylem – 3.02%, First Solar – 1.72%, Jabil Circuit – 2.38%, Nuance Communications – 2.59%, Akamai Technologies – 3.16%, Alcoa – 2.46%, Edwards Lifesciences – 2.88%, Polypore – 2.15%, and Gannett – 1.96%.
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.