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, and excellent results for the Fund. 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. A mid-quarter correction of roughly 6% in the small-cap indices and 7% for the S&P 500 didn't slow the Fund down much either. The portfolio performed much better than in previous drawdowns as we have attempted to keep sector exposures linked much closer to what our bottom-up screens are collectively producing as opposed to populating the portfolio with those names that have the greatest variances in estimates. Thus, performance was more in-line with the index during the correction.
The Fund outperformed its Russell 2000 Growth Index benchmark during the quarter in delivering double-digit returns. With the exception of Technology, the portfolio had positive relative results from every sector. Holdings in the Energy were big contributors as the Fund delivered almost double the index’s 18.2% return for the sector. Exposure to predominantly services stocks led the way as drilling activity picked up and the industry focused on oil shale projects. The Consumer Discretionary sector was another bright spot, with several holdings such as Ulta Salon, Timberland, and Shutterfly delivering standout returns.
Top individual contributors came from the Industrials, Healthcare, and Materials sectors. Filtration company Polypore International within Industrials soared as the firm has established a dominant position in developing membranes used in the rapidly growing area of lithium and lead acid batteries. The Fund’s largest Healthcare position, molecular diagnostic company Cepheid, also had a fine quarter, up more than 20%. Finally, chemical company Kronos Worldwide provided more than half of the Fund’s contribution to returns from Materials, as the firm seems to be benefitting from the pricing power it enjoys as a major producer of widely used titanium dioxide.
The portfolio’s Technology stake disappointed mainly from a lack of exposure to the optical equipment space, which soared on chatter about a coming telecom infrastructure boom. This cooled off towards the end of the quarter when AT&T announced its intent to acquire T Mobile, theoretically taking a major player out of those build out plans. The worst performer during the quarter was Monster World Wide, the on-line job site company, which disappointed with less revenue growth than expected during the period as its stock price dropped by nearly a third. MIPS Technologies, a licensee of embedded processor technology used primarily in consumer electronic applications, didn’t bring forward as many deals as expected, causing it to drop sharply as well.
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 has now eclipsed its entire loss from 2008 and is within a few percentage points of getting back the last two months of losses from 2007. 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.
B. Anthony Weber
Charles F. Mercer, Jr. CFA
Michael E. Johnson, CFA
April 13, 2011
As of March 31, 2011, Ulta Salon comprised 1.64% of the portfolio's assets, Timberland– 0.61%, Shutterfly – 1.68%, Polypore International – 2.15%, Cepheid – 2.68%, Kronos Worldwide – 1.24%, Monster Worldwide – 0.00%, and MIPS Technologies – 0.50%.
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.