3rd Quarter 2010 Commentary
After leading its composite benchmark (35% Russell 3000 Index/35% MSCI World ex-US Index/30% Barclay's Capital Aggregate Bond Index) through the first half of the year, the Fund lagged severely during the third quarter amid a strong rally within equity markets. The Fund's quantitative investment model does not read the news. It does monitor the market, but it bases its decisions only on hard market data. The Fund's managers, on the other hand, are avid readers of the news. Although we feel a duty to constrain what the investment model does if there is a strong opinion that the model may have missed seeing a risk through looking only at price data, rarely do we act on more positive return assumptions. The higher duty is to resist letting optimistic but not fully fact-based views influence investment decisions.
During the third quarter, the model's perception of significant risk was not overridden by the portfolio managers. The Fund held almost 32% of its assets, on average, in cash and short-term Treasuries, mainly via the iShares 1-3 Year Treasury Bond ETF. A reader of the news may have developed the opinion that asset price increases reflected a combination of a pre-election rally and a steady devaluation of the dollar (which can inflate the dollar-denominated prices of assets) and that those trends were likely to continue. Neither the election calendar nor the Federal Reserve Board's rumored additional easing can be directly observed by the investment model. But of course, such trends can change suddenly. Both trends did continue more or less steadily throughout the quarter, however, and help to explain why the Fund's benchmark and the S&P 500 Index rose as much as they did, even while the investment model remained skeptical of the quick market rise and cautious about a possible quick reversal.
A friend reminds us frequently that it is harder to keep money than to make money. In a quarter like the one just ended, the emphasis on keeping money reduced gains but decreased actual volatility (versus the broader market). Of course, the conservative stance also reduced exposure to market dislocations that didn’t occur. That benefit is almost impossible to quantify, although the Fund managers slept a little better at night and we hope our investors did, too. We view the Fund is a marathon runner, not a sprinter. The focus remains producing superior long-term risk-adjusted returns and its third quarter performance was consistent with that objective.
As of September 30, 2010, iShares 1-3 Year Treasury Bond comprised 21.60% of the portfolio's assets.
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 on 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.Use of aggressive ETF investment techniques such as futures contracts, options on futures contracts and forward contracts may expose an underlying fund to potentially dramatic changes (losses) in the value of its portfolio. Credit risk or default risk could negatively affect the Fund’s share price. Inverse or ‘short’ ETFs seek to profit from falling market prices and will lose money if the market benchmark index goes up in value. Leveraged ETFs seek to provide returns that are a multiple of a benchmark and can increase risk exposure relative to the amount invested and can lead to significantly greater losses than a comparable unleveraged portfolio.
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.