3rd Quarter 2010 Commentary
The Fund slightly outperformed its S&P MidCap 400 Index benchmark in delivering double-digit gains during the third quarter. September provided a major boost to returns, as every holding in the portfolio was in positive territory for the month.
Overall, the biggest contributors to performance during the quarter were BorgWarner, Akamai, and Unisys Corporation. BorgWarner is a leading global producer of highly engineered automotive components and systems, with a focus on improved engine performance, emission control, and fuel efficiency. The company reported a strong backlog of orders, better than expected 2Q10 results, and improved operating margins—its highest since 2002. Top-holding Akamai delivered another quarter of strong execution, while IT provider Unisys rebounded significantly after being the biggest detractor to performance during the second quarter. The latter company continues to win contracts and grow margins.
The biggest detractors to performance were H&R Block, Beckman Coulter, and New York Times Company. Tax service provider H&R Block declined despite reporting a better than expected quarter with reported net losses less than consensus estimates. Although the stock traded higher initially, the resignation of its CEO ultimately negatively affected the firm. New CEO Alan Bennett is very familiar with the company having served as interim CEO from 2007 to 2008, and as a member of the firm's board of directors since 2008. We continue to like the company's reduced long-term debt level, strong cash flow, and 4.6% dividend yield, and think the stock is attractively valued.
Beckman Coulter, a manufacturer of medical instruments and supplies for biomedical laboratories, declined after a significant second quarter earnings miss due to a product recall. Despite these near-term problems, we find the stock very attractively valued. The New York Times Company suffered for the second quarter in a row from still weak advertising revenues, with performance further weakened by increased digital-related spending. We believe the stock remains undervalued relative to the company's superior brand as a worldwide content provider.
During the period, the Fund initiated a position in medical device company Boston Scientific. The majority of company sales derive from its cardiovascular division, with defibrillator and coronary stents making up the primary product offerings. Boston Scientific appears substantially undervalued, trading at a 15-year low after suffering product recalls and a poor integration of 2006 acquisition Guidant. We expect new management to reposition the company for growth.
During the third quarter, more than 80% of the portfolio's holdings met or exceeded earnings expectations. Improving balance sheets at some companies have led to share buybacks, cash infusions into Research & Development, and other growth initiatives. Additionally, the majority of the Fund's companies reported sequential revenue growth, due in part to their international exposure. Approximately 50% of the portfolio holdings have 50% or more of their revenue coming from outside the U.S, which is similar to the foreign exposure of U.S. large-cap companies. The portfolio remains attractively valued, with a forward price/earnings multiple well below that of the benchmark.
As conflicting opinions regarding the economy persist, it is important for us to focus on company fundamentals and invest in companies that we view as inefficiently priced relative to their earnings outlook. We are confident that in the long run, stock price and intrinsic value will converge and our disciplined investment philosophy will reward shareholders accordingly.
Thank you for your continued support and confidence in our portfolio management capabilities.
Thyra E. Zerhusen, Managing Director and Portfolio Manager
Marie L. Lorden, Co-Portfolio Manager
Mary L. Pierson, Co-Portfolio Manager
As of September 30, 2010, BorgWarner comprised 3.30% of the portfolio's assets, Akamai Technologies – 3.78%, Unisys – 2.36%, H&R Block – 3.64%, Beckman Coulter – 2.53%, and New York Times Company – 2.74%.
Note: Mid-cap stocks are considered riskier than large-cap stocks due to greater potential volatility and 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.