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Jul 20 2011

2nd Quarter 2011 Commentary - ASTON/Barings International Fund

2nd Quarter 2011 Commentary

Steady as She Goes

International equity markets had another positive quarter, as the Fund’s MSCI EAFE Index benchmark rose by 1.6%.  This was, again, another good result for international equities in the face of headwinds. The Health Care sector was the best performing sector for the second quarter of 2011, rising by 8.9% in the quarter. This was followed by Consumer Staples which rose by 7.6% and the consumer discretionary sector which rose by 6.8%.  The best performing region was Europe ex UK which rose by 3.4%.  This was followed by the UK up by 1.7%.

The Energy sector was the worst performing sector in the quarter falling by 2.9%.  This was followed by Information Technology which fell by 0.9%.  Emerging markets also declined, falling by 1.0% in the quarter and underperforming the MSCI EAFE index.  The Pacific ex Japan region was also down in the quarter falling by 0.2%.  

Stock Selection

The Fund outperformed the benchmark during the quarter mostly due to good stock selection in Japan and Europe ex UK. The strong performance in Japan was broad based with personal products company Uni-Charm leading the way. In Europe our holding in car manufacturer BMW was a good performer.  Offsetting this was somewhat weak stock selection in the UK. Gold miner Petropavlosk was the Fund’s weakest performer in this region, despite good performance from the underlying price of gold.  Allocation by region was negative for the Fund. This was mostly due to weak performance from a number of our emerging markets stocks. Niko Resources had another weak quarter of performance as investors were disappointed about production growth from its Indian assets. 

Stock selection by sector was slightly positive in the second quarter.  Leading the way was stock selection in the Consumer Discretionary and Information Technology sectors.  Macau gaming stock SJM Holdings was our biggest positive contributor in Consumer Discretionary.

We also saw a positive contribution from our overweight in Health Care. This was offset to some extent by weak stock selection in Energy and Consumer Staples. In Consumer Staples our holding in salmon farmer Marine Harvest underperformed following a decline in salmon prices.


There were a number of changes made to the portfolio in the second quarter.  After a disappointing meeting with Hypermarcas, that suggested we might see margin pressure for the rest of 2011, we decided to sell this investment. We also sold our position in Chinese internet stock Tencent. Tencent has been a good investment for the Fund, but it was felt that  there was more return potential from Chinese internet stock, Baidu, that had underperformed Tencent in recent months. Baidu was a recent addition to our best ideas list. The company is the leading search engine in China with greater than 80% market share. We see potential for growth from rising search activity and growth in online advertising.

We added to our Japanese holdings in the quarter. Chugai Pharmaceutical has a reasonably strong product pipeline in the oncology area and benefits from having the distribution rights to Roche products in the Japanese market. The stock was a recent addition to our best ideas list.  We also purchased Japanese insurance company Tokio Marine Holdings. Tokio Marine is a well-capitalized insurance company that has a strong position in the domestic Japanese market where we feel pricing trends are likely to be strong.

Finally, we purchased Latin American telecommunications company America Movil. The stock is on our best ideas list and recent weakness in the share price gave us an attractive entry point. America Movil has a number of interesting growth businesses spanning much of Latin America, but is largely focused on Mexico and Brazil.


This quarter we saw an escalation of the European debt problem with a crisis in Greece only just averted at the end of the quarter. But, in our view, this was a problem postponed, not resolved, because while the proposed solution provides Greece the liquidity to rollover maturing debt, it does little to improve Greece’s solvency other than to impose greater austerity on an already weak economy.  Middle Eastern and North African political tensions continued in the quarter. Not surprisingly we remain negative on the Financial sector and we remain comfortable with our zero weighting to European commercial banks in our portfolios. 

In the quarter, we also saw a string of weaker economic data coming out of a number of areas, including the US, China, parts of Europe and Japan. For now, it is difficult to say how much of this is underlying economic weakness and how much is merely the after effects of the supply chain disruptions caused by the disastrous earthquake/tsunami in Japan. Our view is that the underlying global economy is stronger than recent data has suggested, and that an economic recovery is continuing but that it is continuing at a weak pace.

The weak pace of the economic recovery is a problem for policy makers because it has been accompanied by inflation in several important areas such as food and energy. This inflation threatens the economic recovery because it acts as a tax on consumer spending. Extra dollars spent on food and energy are dollars not spent on other consumer goods.  Where the economic recovery is stronger, like in China and India, this inflation is being tackled with tighter monetary policy. But in the West, where the economic recovery is fragile, tighter monetary policy is not an option and the authorities have opted for unconventional measures.

Despite these interventions we continue to find investments in the Energy, Agriculture and Precious Metals areas attractive and we remain overweight to these areas. The reason is that the supply-demand picture in these areas remains fundamentally attractive; demand has been steady and supply has only been able to respond slowly to higher prices.

Finally, we remain cautious on equities in the short term. The two main reasons are a concern that now that the US Federal Reserve's second round of quantitative easing (QE2) has ended we might see renewed weakness in equity markets, and that we have event risk from the ongoing European debt crisis. It is why our focus remains on finding growth stocks for our portfolios. When economic growth is scarce, growth stocks tend to rise to a premium to the market.

Baring Asset Management
London, UK 

As of June 30,  2011, Uni-Charm comprised 1.52% of the portfolio's assets, BM W – 1.73%, Petropavlosk - , Niko Resources – 1.06%,  SJM Holdings – 0.97%, Marine Harvest – 0.93%, Baidu – 1.04%, Chugai Pharmaceutical – 1.49%, Tokio Marine Holdings – 1.54%,  America Movil – 1.55%. 

Note: Investing in foreign markets involves the risk of social and political instability, market illiquidity, and currency volatility.

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.


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