1st Quarter 2011 Commentary - ASTON/Optimum Mid Cap Fund
1st Quarter 2011 Commentary
It was a surprisingly strong quarter for equity markets given the numerous disruptions to the world economy. The ongoing devastation in Japan and the turmoil in Africa and the Middle East are creating widespread dislocations in global supply chains and energy markets. Japan plays a critical role in the production of various components and finished products—including electronics and automobiles. The catastrophe in Japan had an impact as far away as Sweden and North America as production halted in both regions at automobile plants due to component shortages. The full scale of complex supply chain problems are only now beginning to surface. Separately, compromised oil supplies resulting from events in Libya have led to a spike in energy prices. The combination of all of these factors may affect the speed of the economic recovery worldwide by dampening demand, raising raw material costs, and causing inflationary pressures. We have been in contact with several of the companies held in the portfolio regarding their exposure to these events, and continue to assess the evolving implications.
Mid-cap stocks posted solid advances in aggregate during the first quarter, despite a sharp mid-quarter correction. The Fund participated in that advance, though it trailed its S&P 400 Midcap Index benchmark by a fair amount. Nine stocks in the portfolio had negative returns, including three holdings—Akamai Technologies, Molson Coors Brewing, and Boston Scientific—that detracted significantly from relative returns.
Winners and Losers
Internet optimization company Akamai dropped sharply after reporting a weaker than expected outlook, citing seasonal factors. We believe this pullback is temporary given the company’s key position as a firm ready to take advantage of the Internet traffic growth expected from streaming video and mobile devices. Akamai was the Fund’s top performing stock in 2010, and remains up more than 20% for the trailing 12-months through March 31, 2011. Molson Coors declined after reporting fourth quarter results short of expectations and revealing both a weak pricing environment and continued poor consumer trends. The company generates impressive cash flows and has continued to capture synergies from the Miller/Coors merger, and we think should benefit as the economy (and unemployment) improves.
Medical device company Boston Scientific, which specializes in cardiovascular products such as defibrillators and coronary stents, suffered after the company reported lower than expected 2011 guidance. The firm is in the midst of a multi-year transition that will likely reduce near-term earnings, but which we think will provide a platform for future growth. The stock is currently trading well above the Fund’s original purchase price from August 2010, and we believe remains attractively valued at a price-to-sales ratio 40% below that of its five-year historical average.
The best performing stocks during the quarter were H&R Block, Chicago Bridge & Iron, and Unisys. Tax preparation company H&R Block jumped sharply after reporting a strong start to the tax season. The company has made strategic divestitures and acquisitions under new management, restructuring the company to benefit from an improving employment outlook. Chicago Bridge & Iron, a global engineering and construction company specializing in energy infrastructure, rose after reporting better than expected revenue growth, strong margins, and an increasing backlog. The firm is experiencing strong global demand for its highly engineered, steel-plate storage tanks (for oil and natural gas). Tech company Unisys rebounded from last quarter’s weakness after reporting improved operating margins and a stronger balance sheet due to reduced costs and greater cash generation.
Despite the woes on the international front, business and consumer confidence is improving in the U.S. and capital markets are recovering. Merger and acquisition activity has picked up pace and the Fund has benefited from the pending takeover of Beckman Coulter. In February, the Board of Directors of Beckman Coulter agreed to merge with Danaher Corporation. The takeout premium was approximately 45% greater than Beckman’s closing price on December 9, 2010, when acquisition rumors started. During the portfolio's five-year holding period of the stock, it gained more than double that of the benchmark and more than fivefold the returns of the S&P 500 Index. As part of our investment process, we continue to look for companies with characteristics similar to Beckman—a focus on one main business, leading market share, a strong balance sheet, and trading at an attractive valuation.
Regarding buys and sells, the Fund sold its remaining stake in Intuit and initiated a position in Itron during the quarter. We sold Intuit based on valuation. The stock had appreciated substantially in the roughly three and a half years that the Fund had owned it, a time when the overall market declined. Global utility metering company Itron offers smart grid, distribution, and payment solutions and is expected to benefit from increasing requirements to monitor and conserve the use of electricity, gas and water. As always, we took advantage of short-term price fluctuations to rebalance the portfolio during the period, trimming stocks with higher valuations and adding to more attractively valued stocks.
Finally, we have two significant announcements to make to investors in the Fund. We are delighted to share that the Fund received two 2011 Lipper Best Fund Awards. The Fund’s I-Shareclass (ABMIX) was selected best out of 264 Mid-Cap Core Funds for the five-year period classification and its N-Shareclass (CHTTX) was selected best out of 143 Mid-Cap Core Funds for the 10-year period classification, both for the period ending December 31, 2010. The awards are in recognition for demonstrating consistently strong risk-adjusted returns compared with its peers. (Note: Past performance is no guarantee of future results.)
The management team is pleased to announce that we are launching our own firm, Fairpointe Capital LLC, on or about April 30, 2011, and that the Board of Trustees of the Aston Funds has approved the appointment of Fairpointe as subadvisor to the Fund once that transition is complete. This will ensure the Fund remains under the uninterrupted, sole, and exclusive management of the current portfolio management team. The only noticeable change for investors will be to the name of the Fund, which will be renamed the ASTON/Fairpointe Mid Cap Fund. We are thrilled to become owners of our own firm, and look forward to serving the Fund's investors for many more years to come.
Thyra E. Zerhusen, Managing Director and Portfolio Manager
Marie L. Lorden, Co-Portfolio Manager
Mary L. Pierson, Co-Portfolio Manager
As of March 31, 2011, Akamai Technologies comprised 3.57% of the portfolio's assets, Molson Coors Brewing – 2.46%, Boston Scientific – 4.16%, H&R Block – 4.42%, Chicago Bridge & Iron – 3.03%, Unisys – 2.34%, Beckman Coulter – 2.63%, and Itron – 0.76%.
Note: Mid-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.