1st Quarter 2011 Commentary
The first quarter of 2011 saw the best performance by the S&P 500 Index for the beginning quarter of a year since 1998. This occurred despite a myriad of bad global news—more Middle East strife, a horrific earthquake and tsunami in Japan, and more debt problems surfacing in southern Europe, specifically in Portugal. The only two sectors within the S&P 500 that beat that overall index, however, were Energy and Industrials. Within the Fund's Russell 1000 Growth Index benchmark, Financials and Healthcare could be added to that list, but only barely. Thus, it was a narrow performance and, unfortunately for the Fund, the bulk of the outsized Energy returns came from exploration and production companies, which the portfolio was light in because of the commodity risk.
The Fund lagged the benchmark by a fair amount during the quarter, weighed down by the underperformance in Energy. That sector, which had been huge for returns across the back half of 2010, lagged as service names did not keep pace with the Exxon Mobil’s and Conoco’s of the world. It also didn’t help that top-10 holding Weatherford International had to book a nonrecurring tax charge of $500 million. That stock was down 2.2% for the quarter while the rest of the sector was up 16.5%. We added to the portfolio’s Energy exposure during the period through a couple of coal-mining stocks in the wake of the tragedy in Japan, which will have to bring back those power sources with other alternatives.
Technology had a tepid quarter, and the Fund’s picks lagged the benchmark in that area as well. One name that did stand out was Sina Corp, an online media Chinese portal, whose stock soared during the period. Financials were also weak as holdings in Goldman Sachs and Morgan Stanley were big disappointments. Finally, US Steel lost ground, leading to underperformance in the Materials sector.
Some things that did go well for the Fund were new positions in Healthcare and stock selection in Consumer Discretionary. We had avoided Healthcare for the better part of two years, but that changed during the first quarter as we added Humana and Pfizer to the portfolio, which provided a boost from an area that generated solid returns overall. Although we are still currently underweight Healthcare, we think that may change as this is an area bubbling up in our fundamental work that can also serve as a defensive hedge against potential inflation. Consumer stocks CBS and Wynn International delivered strong returns in what was a weak area for the benchmark. Ad revenue remains solid at CBS and Macau is still coming in well above expectations for Wynn.
We have been quite bullish since Labor Day and the Fund has done extremely well against the benchmark since then. We think it’s going to get a little trickier going into the second quarter and beyond, however, given the price of gasoline. March saw the lowest consumption of gasoline in more than five years, an indication that the price is starting to bite the consumer.
The whole world is complaining about inflation. But forgive us for thinking that that was the whole idea behind the Federal Reserve's policy of quantitative easing (QE). We had better hope it produces some inflation, unlike what happened in Japan during the 1990s. The Fund is now within 5% of recapturing the entire drawdown of 2008. This didn’t happen in Japan when that country instituted its own form of quantitative easing. The trick will come when it is time to take the foot off the liquidity gas. When that is we don’t know, but ultimately we still view stocks as dirt cheap relative to bonds.
While the U.S. has its fair share of problems, we do like the rhetoric coming out of Washington with regards to spending cuts. Additionally, the U.S. needs an energy plan to cut our current account deficit. We have more natural gas than the Saudi’s have oil, so there exists the possibility of some distinct positives that could occur. In the meantime, we are focused on earnings season and trying to identify those names that can execute a business model and drive estimates higher as it seems we may be back to some sense of economic normalcy. We will be monitoring credit spreads closely to see if that is the case.
Charles F. Mercer, Jr. CFA
B. Anthony Weber
Michael E. Johnson, CFA
April 13, 2011
As of March 31, 2011, Exxon Mobil comprised 0.00% of the portfolio's assets, Conoco – 0.00%, Weatherford International – 3.83%, Sina – 3.61%, US Steel – 2.88%, Humana – 2.38%, Pfizer – 3.72%, CBS – 3.26%, and Wynn International – 3.96%.
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.