4th Quarter 2010 Commentary
The market extended its rally right through the end of the year as investors shook off mid-year worries of a double-dip recession to power stocks higher. The Fund had an excellent fourth quarter as stock-picking came back to the forefront after heightened return correlations between individual stocks within the S&P 500 Index and the broader index itself between Memorial Day and Labor Day made it difficult for active managers to distinguish themselves. Indeed, correlations during the summer of 2010 were higher than after the collapse of Lehman Brothers in the fall of 2008, and only eclipsed by the period around the Crash of 1987.
To be sure, the macroeconomic environment is still wrought with potential pitfalls—from sovereign debt issues in Europe to potential municipal and state defaults here in the U.S. Still, the economic backdrop appears to be improving quickly. Weekly jobless claims published by the government are now less than 400,000 for the first time since the middle of 2008. Temporary job placements are heating up and the portfolio has several positions in firms in that industry, such as Robert Half and Manpower.
As for the portfolio, holdings in the Consumer Discretionary sector provided the best performance, far outgaining the Fund's Russell 1000 Growth Index benchmark for the fourth quarter and the full year. Casino-operator Las Vegas Sands, automotive engineering firm BorgWarner, and Ford Motor were the biggest contributors to this performance. The Fund no longer owns Las Vegas Sands, the stake in BorgWarner has been cut in half, but Ford remains one of the largest positions in the portfolio as we think the stock has plenty of room to run.
Industrials was the next best area of performance for the Fund, powered by strong results from large-truck engine manufacturer Cummins and mining equipment company Bucyrus. Cummins climbed steadily throughout the year on the back of solid earnings reports. Bucyrus soared on news that it was being acquired in November by Caterpillar.
The portfolio's holdings in Technology lagged the overall market along with the benchmark weight, despite some notable winners. This sector seemed to be more adversely affected by the possibility of a double dip recession than any other. Problem holdings, mainly from the summer, were Micron Technology, Marvell, and Western Digital. On the plus side, Rovi Corporation, a leading provider of digital entertainment solutions and the Fund's largest current holding posted strong gains. Rovi recently announced that it was going to acquire Sonic Solutions, the largest position in the Aston/Veredus Aggressive Growth Fund (VERDX) small-cap fund. Semiconductor company Broadcom was another big winner as a major player in the wireless, video, and multimedia content markets.
Energy holdings in the Fund proved to be a mixed bag for the year after having a solid fourth quarter. Performance was hurt early in the summer as several natural gas holdings couldn't deliver despite the record heat. Our focus on service names such as Weatherford International during the fourth quarter was a different story, however, as the sector rose strongly adding to the Fund's strong outperformance during the period.
Outlook for 2011
We are very constructive going into 2011, much like we were entering 2010, barring any unforeseen macroeconomic event. The two things we fear the most are the price of gasoline choking off the recovery and a state defaulting on its debt. The latter would be much more short-lived, the former could potentially lead to another bear market. Nevertheless, the first half of the year should see the market move higher as the back half will have to deal with increased uncertainty. This feels and looks a lot like how we exited 2004 and entered 2005. The most important aspect as far as we are concerned is that it appears stock-picking is back and we are once again being rewarded for earnings moving up and to the right as we say internally. We are hopeful and confident this is the beginning of a long cycle in what we do—focus on earnings and finding great companies that can execute their respective business models. Good luck in the upcoming New Year.
Charles F. Mercer, Jr. CFA
B. Anthony Weber
Michael E. Johnson, CFA
January 10, 2011
As of December 31, 2010, Robert Half comprised 3.08% of the portfolio's assets, Manpower – 2.81%, BorgWarner – 2.32%, Ford Motor – 4.20%, Cummins – 1.62%, Bucyrus – 0.00%, Micron Technology – 0.00%, Marvell Technology – 2.12%, Western Digital – 0.00%, Rovi Corporation – 5.51%, Broadcom – 4.25%, and Weatherford International – 4.43%.
Note: Growth stocks are generally more sensitive to market moves and thus may be more volatile than other stocks.
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.