3rd Quarter 2010 Commentary
According to the National Bureau of Economic Research (NBER), the longest recession since World War II (18 months) ended in June 2009. That said, the NBER stated that its committee didn't necessarily conclude that conditions were favorable or that the economy has returned to operating at normal capacity. In our view, however, the U.S. economy appears to be in the midst of a gradual but sustainable recovery.
U.S. economic growth rate decelerated from 3.7% to 1.7% during the second quarter of 2010, as a widening trade gap reduced overall growth by the widest margin on record and the pace of inventory replenishment dropped sharply alongside slowing final demand. Despite these headwinds, consumer spending managed to expand at its fastest pace since 2007, adding to overall growth. Business spending also supported growth as equipment and software investment rose at its fastest pace since 1983.
The Fund outperformed its Barclays Capital Aggregate Bond Index benchmark during the quarter. Performance was driven by an overweight in Corporate bonds that were the best performing sector on an absolute and duration-adjusted basis, outperforming duration matched US Treasuries. Long-term Corporates outperformed Intermediates by more than two percentage points as the impact of declining interest rates was more pronounced on the long end of the curve. Lower-rated BBB securities, also an overweight area of the portfolio, outperformed A-, AA-, and AAA-rated notes. Mortgage-backed securities served as a slight drag on returns as they underperformed duration matched US Treasuries.
The Financials sector was the best performing credit subsector on an absolute and duration-adjusted basis, outperforming its closest challengers—Industrials and Utilities. In the wake of strengthened capital requirements imposed by the Basel Committee on Banking Supervision, Federal Reserve Chairman Ben Bernanke emphasized the Federal Reserve's new responsibilities to develop enhanced standards for large bank holding companies during Congressional testimony in September. In our view, the implementation of the Dodd-Frank Act will lead to enhanced creditworthiness that benefits corporate bondholders over time.
Overall, we think the Federal Reserve has engineered a sharp steepening in the yield curve via monetary policy and credit easing that, in turn, has had a pronounced impact on the structure of the fixed-income market. This steepness has led to a preference to issue short-term debt. As a result, nearly 60% of the securities in the benchmark index mature in the next five years compared with 40% just two years ago.
Taplin, Canida & Habacht (TCH)
Note: Bond funds are subject to interest rate and credit risk similar to individual bonds. As interest rates rise or credit quality suffers, an investor is susceptible to loss of principal.
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.