1st Quarter 2011 Commentary
The Fund gained just under 2% during the first quarter of 2011. This compares to an increase in value of almost 5% for the portfolio's underlying equity holdings. Thus, the combination of selling calls, that can limit the upside of the underlying equity, and buying put options for protection against a market decline significantly reduced the Fund's returns during the period. Sector allocation didn't help performance much either, despite the Fund outperforming the broader market (defined as the S&P 500 Index) in six of the 10 sectors. A substantial overweight to Utilities and not owning Energy stocks hurt, contributing to the relative underperformance. The healthy performance of the underlying stocks in the portfolio, however, underscores the fact that stock selection was fairly decent despite continued emphasis on low-volatility stocks that we believe have an above market dividend yield.
Given the extent of the advance in equities during the past nine months, and the willingness of investors to embrace higher risk sectors of the equity market, it was clearly a difficult environment for the Fund. Since markets do not go in one direction forever and we do not believe that this recent advance will continue unabated, we remain committed to the strategy and do not plan to waiver from our stated game plan. We will continue to seek out companies that we believe pay above-average dividend yields, generate positive free cash flow, and are selling at price/earnings valuations below that of the S&P 500. In addition, as long as the Option Exchange Market Volatility Index (“VIX”) remains below 20 we expect to maintain a position in put options to protect against a correction in the overall market.
Senior Portfolio Manager
Note: By selling covered call options, the Fund limits its opportunity to profit from an increase in the price of the underlying stock above the exercise price, but continues to bear the risk of a decline in the stock. A liquid market may not exist for options held by the Fund. If the Fund is not able to close out an options transaction, it will not be able to sell the underlying security until the option expires or is exercised. While the Fund receives premiums for writing the call options, the price it realizes from the exercise of an option could be substantially below a stock’s current market price. Premiums from the Fund’s sale of call options typically will result in short-term capital gain taxes, making it ill suited for investors seeking a tax efficient investment.
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.