2nd Quarter 2010 Commentary
The second quarter of 2010 was a challenging period for global equity markets, but one weathered well by the Fund. It significantly outperformed its MSCI EAFE & Emerging Markets benchmark, aided by the relative outperformance of Emerging Market stocks despite, in aggregate, their biggest quarterly drop since the fourth quarter of 2008. Evidently, developed markets fared worse still as the scale of the structural problems they face, whether it be from sovereign debt quality problems or vastly overextended fiscal positions, started to unnerve the market. On top of this, the momentum of economic data in the major developed economies slowed, taking market optimism down from its early April highs as concerns of cyclical problems heightened and raised the spectre of the potential for the dreaded double-dip recession.
In this environment, the Fund was rewarded for its lack of cyclical exposure. Instead, we retained our focus on domestic stories within the Emerging Markets, which enjoy a greater degree of insulation from external demand shocks and are geared towards far healthier economic fundamentals— incremental policy tightening measures notwithstanding. Indeed, we view such measures as long-term positives to ensure steady growth without overheating and as votes of confidence in the resilience of the economic recoveries there. Elsewhere in the world, we have maintained our preference for higher quality companies, especially so if they have exposure to either the Emerging Market consumer or other structural growth trends, as highlighted by our global industry sector process.
As noted, strong stock selection was a major contributor to the outperformance, notably within the Technology and Financials sectors. The former area is a prime example of picking companies well positioned for increasing Emerging Market demand. The portfolio is significantly overweight Baidu.com, the Chinese search engine pioneer that has continued to perform exceptionally well, in both revenue generation and user growth. Within Financials, we continue to avoid Western companies that we view as already fairly valued given that structural changes resulting from increased regulation will likely erode stock returns over time. Stock selection here was again aimed mostly towards Emerging Markets. Chinese banks added to performance as, more broadly, did the Fund's continued overweight in China and extreme underweight to Europe.
Question marks over the sustainability and breadth of the developed world's recovery warrant a reasonably cautious stance, whereas such concerns are less vital to the emerging market economic powerhouses at the core of the Fund—namely China and Russia. As such, we think we remain well placed to take advantage of the themes playing out as the world economy continues its rapid realignment after the financial crisis, themes long indentified by our in-house research.
Robin Geffen, Fund Manager and Managing Director
Neptune Investment Management Limited
As of April 30, 2010, Baidu.com comprised 7.45% of the portfolio's assets.
Note: Investing in foreign markets involves the risk of social and political instability, market illiquidity, and currency volatility. Holdings in emerging markets entail the further risk of unstable legal systems, increased volatility, and even less liquidity.
Past performance does not guarantee future results. Investment return and principal value of mutual funds will vary with market conditions, so that shares, when redeemed, may be worth more or less than their original cost.
Before investing, carefully consider the fund’s investment objectives, risks, charges and expenses. Contact 800 992-8151 for a prospectus containing this and other information. Read it carefully. Aston Funds are distributed by BNY Mellon Distributors Inc.