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 and the broader market (as defined by the S&P 500 Index) 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 Kelly Services, Dice, and Monster Worldwide.
The Fund ended the year heavily involved in cyclical areas of the market such as Consumer Discretionary, Industrials, Materials, and Technology. We added significantly to the portfolio's stake in Energy early in the fourth quarter as well, as the economy began to move into its expansion phase.
Stock selection within the Consumer Discretionary, Industrials, and Materials sectors were the main contributors to performance during the fourth quarter and the full year. Consumer Discretionary was the best performing area as auto parts manufacturers like Gentex and Tenneco delivered big gains, aided by solid performances from Crocs, Lululemon Athletica, and Ulta Salon. Industrials benefitted from the acquisition of electric motor company Baldor Electric for a 40% premium by a large Swiss company during the fourth quarter. Specialty chemicals firm Solutia was the big winner within Materials, another area where we had substantially increased the Fund's exposure during the fourth quarter.
Energy ended the year as a positive contributor to relative returns after a strong fourth quarter. The Fund's larger holdings in the sector did quite well versus the Fund's Russell 2000 Growth Index benchmark's exposure. Two of the notable performers in this area were Patterson-UTI Energy and Lufkin Industries.
Technology was solid on an absolute basis, but trailed the benchmark for the year. Sonic Solutions, the Fund's largest holding dating back to 2009, was the biggest contributor for the year and quarter. Rovi Corporation, a holding in the Aston/Veredus Select Growth Fund (AVSGX), announced its plans to acquire Sonic in late December at a 30% premium. Although we appreciated the recognition of the growth potential that Sonic offered, we wanted the company to remain independent as we felt the opportunity they had in front of them in the new video Over the Top (OTT) world was enormous. Other big gainers in Technology included Entropic Communications, Ceva and Riverbed Technology. The Fund's relative underperformance in the sector came almost entirely from concentrated holdings in semiconductors, which are more closely tied to overall economic growth and suffered more during the summer swoon when the world was worried about a double-dip recession.
Holdings within the Financials and Healthcare sectors detracted from relative performance. The Fund's exposure to Healthcare was negligible, but it did have a bad earnings disappointment in one name. We would suspect that with expectations extremely low in this area we might start to see ideas bubble up in our work, which would lead us to get more involved. We did a poor job picking stocks in Financials, as positions initiated in several regional banks early in the year that we expected to benefit from the steep yield curve did not, as fears of a double-dip recession and a lack of commercial lending hurt returns. We will be looking to put this trade on again this year as we are now just seeing an increase in that lending.
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.
B. Anthony Weber
Charles F. Mercer, Jr. CFA
Michael E. Johnson, CFA
January 10, 2011
As of December 31, 2010, Kelly Services comprised 0.95% of the portfolio's assets, Dice Holdings – 1.30%, Monster Worldwide – 1.09%, Gentex – 2.65%, Tenneco – 1.58%, Crocs – 2.64%, Lululemon Athletica – 1.20%, Ulta Salon – 1.71%, Baldor Electric – 0.00%, Solutia – 1.93%, Sonic Solutions – 6.73%, Entropic Communications – 2.49%, Ceva – 1.17%, Riverbed Technology – 0.00%, Rovi Corporation – 0.00%, Patterson-UTI Energy – 1.20%, and Lufkin Indusries – 1.90%.
Note: Small-cap stocks are considered riskier than large-cap stocks due to greater potential volatility and less liquidity.
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.