2nd Quarter 2011 Commentary
The headlines have been quite negative on many global economic and political issues. However, recent discussions with several companies in the portfolio indicate that the outlook from a bottom-up perspective looks better than previously expected. Many of the companies in the Fund have emerged from the recent downturn with stronger balance sheets and streamlined cost structures, which has the potential to improve their profitability regardless of the pace of the recovery.
During the second quarter of 2011, the Fund underperformed its benchmark the S&P MidCap 400 Index. The underperformance was attributable to disappointing first quarter reports by several of the Fund’s holdings. Stocks that were down in April, declined further in May and June, and in some cases became quite undervalued, providing us the opportunity to add to positions.
Winners and Losers
For the quarter, the three best performing stocks were Forest Laboratories, Sigma-Aldrich, and Nuance. U.S.-based pharmaceutical company Forest Laboratories specializes in acquiring, licensing, developing and marketing products across a wide range of therapeutic areas, including central nervous system, cardiovascular, gastrointestinal, anti-infective, respiratory, rheumatology and endocrinology. The stock reacted positively to clarity in pipeline growth, an accelerated share repurchase plan and restructuring efforts, as well as financier Carl Icahn’s recent accumulation of Forest’s stock and the nomination of four directors to their board. Sigma-Aldrich is a specialty chemicals company providing a broad range of essential products and kits used in scientific research, biotechnology, pharmaceutical development, disease diagnosis, and as key components in high technology manufacturing. Sigma reported an increase in revenues along with strong organic growth in their first quarter earnings call. Nuance is the leading provider of speech recognition and PDF imaging technologies. The company has automated speech solutions that are sold into the healthcare, travel, automotive design (navigation systems) and telecommunication industries, including free dictation-to-text capabilities for the iPhone and iPad. Nuance reported strong results across all industries with healthcare leading the way.
The three worst stocks were Technology-related stocks, Akamai Technologies, Lexmark International, and Unisys. Akamai is a leading provider of infrastructure and software, which accelerates high volume website access. The company beat first quarter earnings estimates and reported strong revenue growth. However, the near-term outlook is softer than previously expected, due to a weak pricing environment. We added to the position as we consider this pullback temporary, given the company’s ability to benefit from internet traffic growth through streaming video. Akamai was our top performer in 2010. Lexmark, a manufacturer of printing and imaging products and supplies, reported weak results and lowered guidance due to soft inkjet demand along with secular challenges in the printer industry. Gross margin pressures due to restructuring charges in the March quarter also affected sentiment. Lexmark continues to focus on high-end multi-function printers and they could benefit from an enhanced footprint in Best Buy stores. We feel Lexmark is attractively valued. Unisys, a technology company specializing in outsourcing and information security, reported difficult comparisons and weakness in their U.S. Federal Government business, which represents approximately 20% of the company’s revenue. We believe Unisys is positioned to benefit from a growing focus on “cloud computing” (outsourced, network-based IT solutions) and related data security issues. They also have improved operating margins due to reduced costs and a stronger balance sheet (having reduced debt by half since September 2010). Both Lexmark and Unisys were among our top performers in the prior quarter.
Beckman Coulter was eliminated from the portfolio, after its acquisition by Danaher Corporation in late June. During the quarter, we took advantage of short-term price fluctuations to rebalance positions, trimming stocks with higher valuations and adding to what we feel were more attractively valued stocks.
The Fund’s 2012 price-to-earnings (P/E) ratio is below that of the mid cap indices and significantly below the small cap and large cap indices. Our portfolio’s debt-to-capitalization ratio is also better than the mid and large cap indices. Strong balance sheets present our companies with opportunities to increase shareholder value – via acquisitions, higher research and development (R&D) spending, increased dividend potential and share buybacks. We believe our portfolio is attractively valued and well positioned for a rebound.
Thyra E. Zerhusen, Chief Investment Officer
Marie L. Lorden, Portfolio Manager
Mary L. Pierson, Portfolio Manager
As of June 30, 2011, Forest Laboratories comprised 2.78% of the portfolio’s assets, Sigma-Aldrich – 2.66%, Nuance – 2.85%, Akamai Technologies – 3.58%, Lexmark International – 2.77% and Unisys – 2.58%.
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.