1st Quarter 2011 Commentary
The first quarter of 2011 was characterized by increasing concerns about U.S. fiscal and monetary policy, especially the effect of the pending conclusion of the Federal Reserve’s second quantitative easing program (QE2) and a declining US Dollar. Hence, anything related to a declining dollar “hedge” performed relatively well. This held true for oil, precious metals, basic materials, and agricultural commodities, as well as those countries which are heavily commodity-oriented like Canada and Russia.
The Fund underperformed its composite benchmark (35% Russell 3000 Index/35% MSCI World ex-US Index/30% the Barclays Capital Aggregate Bond Index) during the period despite significant weights in the above mentioned areas of the market through a variety of ETFs. Overall performance was dampened as our risk model sought to lower exposure to “dollar hedge” investments as they surged as the quarter progressed. The proceeds from those investments were used to increase the Fund’s weighting to government-backed, lower volatility ETFs. As a result, approximately 25% of the portfolio was in short-term, high credit-quality bonds and cash instruments by the end of the period, versus roughly 15% at the beginning of the quarter. This had the effect of detracting from performance, but it also controlled and reduced the Fund’s risk profile. In addition, some individual holdings were a relative impediment to performance, such as REIT-related ETFs, and a risk hedge through the volatility index exchange traded note iPath S&P 500 VIX Short-Term Futures ETN (VXX).
Global markets have generally ratcheted irregularly higher, assisted by massive central bank liquidity efforts. Markets have been behaving in an anxious, “twitchy” fashion. This market behavior is reflective of continued concerns about uneven economic growth, weak job growth, excessive debt, currency devaluations, latent inflation, and sovereign debt defaults. As both Warren Buffet and Ben Bernanke have commented, “We are in uncharted waters.” These concerns continue to be reflected in our risk model, resulting in what we consider to be a relatively risk averse investment posture for the portfolio.
As of March 31, 2011, the iPath S&P 500 VIX Short-Term Futures ETN comprised 2.34% of the portfolio's assets.
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.