3rd Quarter 2010 Commentary
The Fund lagged the broader market (as defined by the S&P 500 Index) during the third quarter, though it still leads the index for the year-to-date through the end of September. Virtually all of the underperformance during the quarter came from two sectors—Industrials and Technology—which was somewhat offset by a net gain from option sales. In addition, by sticking to our discipline of not buying put options when the premium is high relative to their degree of downside protection, we avoided a further potential drag to the portfolio.
As we entered the current quarter, overweight positions are concentrated primarily in those sectors that have high dividend-paying companies, particularly telephone and electric utilities. The Fund also has significant exposure to larger Healthcare companies that have substantially higher dividend yields than the S&P 500, and which are selling at unusually low relative price/earnings multiples compared to historical norms.
In terms of options positions, we continue to look for opportunities to sell calls against each position in the portfolio in order to generate additional cash flow. In addition, we are constantly evaluating the cost of purchasing put options as a way to help protect the portfolio against another sizable correction, such as the one experienced this past spring. As noted above, we think the cost benefit of buying put options is currently unattractive, but that could change rather quickly if implied volatility continues to decrease as it has over the last several months.
As always we welcome comments from our shareholders and appreciate your continued support.
Senior Portfolio Manager
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.
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.