2nd Quarter 2010 Commentary
This was the quarter of the "Flash Crash," the worst afternoon in stock market history. There is no agreement as to its immediate cause. That disagreement in itself, however, tells us that the market was so on-edge that any number of things could have tipped it over. The Fund's investment model also was, and still is, on edge. At the time of this writing the portfolio holds a higher fraction of its assets in cash and short-term US Treasury investments than at any time since the beginning of last October. This defensiveness has helped to improve its relative return and decrease its volatility given the late quarter selloff in the stock market. Overall, the Fund outperformed its composite benchmark (35% MSCI World ex-US Index/35% Russell 3000 Index/30% Barclay's Capital Aggregate Bond Index) for the quarter, and now slightly leads it for the year-to-date through June 30, 2010.
The portfolio's average defensive position comprised about 31% of assets, counting both cash and the iShares Barclays 1-3 Year Treasury Bond (SHY), during the quarter. US equities on aggregate made up roughly 37% of the portfolio. ETFs such as the iShares Russell Midcap Value Index (IWS) were featured alongside sector ETFs like the Energy Select SPDR (XLE) and iShares Dow Jones US Basic Materials (IYM) focused on materials and energy companies. International equities made up about 19% of assets, including ETFs representing Latin America, Asia, Canada, and Russia. Commodities and Real Estate rounded out the rest of the portfolio, representing 7% and 5% of assets respectively. These holdings included ETFs with exposure to silver, coal, and natural gas, along with REIT holdings mostly through iShares Cohen & Steers Realty Majors (ICF).
The Fund invested in 28 different ETFs at varying times during the quarter, with the mix changing with projected risk and opportunity. Twenty-eight is a relatively high number of individual investments for the Fund, highlighting that our process values diversification more when volatility is high. The dilemma is that in broad-based declines, as was the drop during the second quarter (only five of the 28 ETFs delivered positive returns during the period), the benefit of diversity comes at the cost of being less able to avoid the widespread decline. Still, the Fund's returns for the quarter compare well with an unweighted average of the 28 ETFs. Both the Fund and the unweighted average substantially outperformed the S&P 500 Index's 11.9% decline. We think this is an indication of the ability of the Fund's investment process to seek out investments with less than average risk.
The market continues to suffer from high anxiety. We see nothing on the horizon that has the capacity to change this condition anytime soon. The solace we can offer is an investment strategy that is laser-focused on risk analysis using 21st century analytical tools. We appreciate your continued trust in this process, which we try to earn every day.
As of June 30, 2010, iShares 1-3 Year Treasury Bond comprised 19.37% of the portfolio's assets, iShares Russell Midcap Value Index – 4.90%, Energy Sector SPDR – 3.83%, iShares Dow Jones US Basic Materials – 2.91%,and iShares Cohen & Steers Realty Majors – 4.85%.
Note: The Fund invests in exchange-traded funds (ETFs) which are securities of other investment companies. An ETF seeks to track the performance of an index by holding all, or a sampling, of the securities of that index. An ETF may not be able to replicate an index exactly since returns may be reduced by transaction costs, expenses and other factors while the index has none. The Fund invests in many different areas of the market, each of which may involve its own element of risk.
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.