4th Quarter 2010 Commentary
The final quarter of calendar 2010 witnessed a strong relative performance by the portfolio. The Fund outperformed its composite benchmark (35% Russell 3000 Index/35% MSCI World ex-US/30% Barclay's Capital Aggregate Bond Index) during the period, though it trailed the benchmark for the full calendar year. Importantly, and true to its objective, volatility of returns for the full year was roughly 30% lower than the aforementioned benchmark.
Sensing increasing risk of loss across the fixed-income maturity spectrum, during the fourth quarter we trimmed and eventually eliminated by year end exposures to short-term US Treasury bonds and the Barclay's Capital Aggregate Bond Index by selling stakes in iShares 1-3 Year Treasury Bond ETF (SHY) and iShares Barclay's Aggregate ETF (AGG). Most of the proceeds from these sales were parked in money market and cash equivalent instruments. "Risk" assets now comprise approximately 85% of the assets in the portfolio.
Several other key changes to allocations were made during the fourth quarter as well. Emerging Markets equity exposure was significantly reduced, while allocations across the U.S. equity market, primarily small to mid-capitalization ETFs, were increased. In addition, allocations to both Energy and Basic Materials holdings were notably increased to a combined 10% of assets.
While Smart Portfolios does not engage in economic forecasting, the portfolio allocations based on our Dynamic Portfolio Optimization (DPO) methodology seem to imply greater U.S. economic strength in the near term, accompanied with both rising inflation expectations and an increasing interest rate environment.
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.
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.