1st Quarter 2014 Commentary - ASTON/LMCG Small Cap Growth Fund
1st Quarter 2014
U.S. equities entered the New Year on a down note, retracing through January gains from the sustained rally in 2013 that had most market benchmarks at or above all-time highs. Contributing to the downturn were economic signals showing a clear softening, especially across headline U.S. indicators for employment growth, manufacturing, housing, and auto sales in particular. The market’s reset turned out to be short-lived, however, with February bringing a snapback that essentially erased the losses from January. A strong corporate earnings season was a key factor, while global economies showed improvement leading many investors to discount weaker consumer data in the U.S. as the temporary effects of a severe winter. Geopolitics moved to the forefront in March and, with the exception of a sharp turn favoring value stocks over growth, equities were choppy but directionless to close out the quarter.
Despite the volatility for the period, most U.S. equity benchmarks managed modest gains with small-cap and large-cap stocks offering similar returns, and both trailing mid-caps. The growth-to-value reversal in March was strong enough to move value stocks to outperform for the full quarter, and Utilities, Energy, and real estate investment trusts (REITs) were among the best performing areas of the market.
The Fund posted modest gains in slightly outperforming its Russell 2000 Growth Index benchmark during the quarter. The results reflected solid stock selection across a variety of sectors, but was strongest in Industrials and Technology. USG, Continental Building Products, and Kforce were the key names within Industrials. Wallboard and building materials manufacturers USG and Continental benefited from rising demand in the home building industry. USG reported double-digit revenue growth, while Continental just came public with its initial public offering (IPO) in early February. Professional staffing services company Kforce gained on an improving earnings outlook.
Good gains in the networking, Internet, services, and especially software areas boosted Technology during the first quarter. Software firm Fortinet provides security and threat management appliances for networking systems and has been a beneficiary of the increasing focus on data security. Synchronoss Technologies offers cloud- and software-based activation solutions for connected devices. The company has been successfully adding new carriers to its cloud products.
Additional boosts to first quarter performance came from Healthcare firms Parexel International and Intercept Pharmaceutical. Parexel is a contract research organization (CRO), which has been a top performing segment in 2014. Intercept is in biotech name that soared in January when a clinical trial involving its liver disease drug OCA showed such effectiveness that the trial, which was sponsored by the National Institutes of Health, was halted early, potentially putting approval on a fast track.
Holdings in Financials detracted from performance. The portfolio’s positioning was primarily in investment firms, non-traditional finance companies, and real estate, each of which had pockets of weakness during the quarter. Asset manager Wisdomtree Investments, a sponsor and manager of exchange-traded funds (ETFs), retraced from earlier gains. Similarly in REITs, data center operator CyrusOne had been a strong performer late last year but underperformed more recently. The portfolio’s overweight to REITs helped aggregate performance a bit, as the broader REITs sector regained strength along with other bond proxies. For example, the Fund’s largest holding in Financials, GEO Group, is a private prison operator organized as a REIT that managed a modest gain.
Lee Munder Capital Group, LLC
As of March 31, 2014, USG comprised 0.73% of the portfolio's assets, Continental Building Products – 1.29%, Kforce – 3.22%, Fortinet – 0.86%, Synchronoss Technologies – 4.20%, Parexel International – 2.18%, Intercept Pharmaceuticals – 0.59%, WisdomTree Investments – 0.67%, CyrusOne – 0.00%, and Geo Group – 3.54%.
Note: Small-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.