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Effective October 1, 2016, the Aston Funds family has been integrated into the AMG Funds family of mutual funds. We are excited about the opportunity to serve you with more than 100 investment options spanning the asset class spectrum.

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Jul 20 2011

2nd Quarter 2011 Commentary - ASTON/Lake Partners LASSO Alternatives

2nd Quarter 2011 Commentary

Amid a period of renewed volatility that saw the broader equity market (as represented by the S&P 500 Index) eke out a 0.1% gain, the Fund slipped 1.1% during the second quarter.  This still easily bested the more than 5% decline in its HFRX Equity Hedge Index benchmark, however. Since the Fund’s inception on April 1, 2009, it has generated a cumulative gain of 27.3%, well above the 11.3% of the benchmark. Year-to-date, the Fund has outperformed both its benchmark and its peer group, the Morningstar Multialternative Category.

Note that Morningstar recently redefined its categories for alternative mutual funds. Previously the peer group for the Fund was the Morningstar Long-Short Category, which Morningstar has divided into three new groups: Managed Futures, Multialternative, and Long-Short Equity, having previously separated out categories for Market Neutral and Currency. The Multialternative Category includes “funds that offer investors exposure to several different alternative asset classes and investment tactics,” according to Morningstar.

As an asset allocation solution for alternative strategies, the Fund has provided returns with less volatility than conventional markets using a liquid format. For example, since the Fund’s inception, its annualized standard deviation (a measure of volatility) has been 6.5%, which is about one-third of the annualized standard deviation of 18.2% for the S&P 500.

Mixed Results

Long-biased and long/short managers exhibited a wide dispersion of results during the quarter, reflecting their divergent exposures. Managers who were more hedged or defensive, or who had an emphasis on eclectic stock picks in their portfolios, were up or flat for the period. In contrast, managers lagged to the extent they were exposed to higher-volatility small-cap growth stocks, Energy, or non-US markets.

Credit-related and strategic fixed-income strategies also had mixed results, but with less dispersion and a greater degree of stability. Some of the portfolio’s global fixed-income managers finished the quarter with solid gains, partly due to Emerging Market exposures. High-yield and opportunistic fixed-income managers with substantial corporate exposure did well early in the quarter but then came under pressure in June as spreads widened in response to concerns about the economy. Sovereign default hedges tended to help portfolios. The Fund’s small hedge on interest rates (short US Treasuries) eroded during the period, though we have maintained the position due to ongoing concerns associated with massive government debt issuance and deficits.

Merger arbitrage-related managers were positive for the quarter, though returns were modest. Increased M&A activity helped improve the opportunity set, but modest spreads continued to limit the upside.

Results for the managed futures and global macro allocations were disappointing. Quantitative models tended to get whipsawed by the erratic reversals in currencies and fixed-income. Furthermore, commodity markets were disrupted by unexpected factors—notably the intervention by the International Energy Agency to release oil reserves.


Throughout the quarter we continued to position the Fund to dampen the risk of traditional asset classes while maintaining the potential for relatively stable returns via less conventional strategies. Equity-oriented strategies continued to represent a core allocation within the portfolio, accounting for nearly 48% of assets at the end of June. It is important to note, however, that this category encompasses a diverse mix of long-biased, hedged, multi-asset and global strategies. The general rationale behind this broad strategy allocation has been that as the economic recovery matures, the equity markets are more clearly differentiating between winners and laggards. The emphasis has been on utilizing managers who tend to be bottom-up stock pickers or who follow a fundamental, thematic investment approach. Value and growth disciplines are represented within this mix. Given the increased volatility of the equity markets, we have emphasized managers that have been more hedged or defensive.

Hedged-credit and strategic fixed-income funds have been another important component of the Fund’s blend of strategies. While the hedged credit funds have been focused on US high-yield and corporate credit, strategic fixed-income funds tend to take a global approach, long and short, to a broad range of opportunities, ranging from US mortgage-backed securities to emerging market debt. Underlying these allocations is a view that 1) while corporate credit in the US continues to benefit from improved balance sheets and low default rates, narrower spreads warrant a certain degree of selectivity and caution, and 2) macro trends continue to create opportunities in fixed-income globally, especially as policy changes unfold in the US, Europe and emerging economies. During June, we reduced exposure to high-yield strategies as spreads widened. Nearly 22% of the portfolio was in hedged-credit and strategic fixed-income by the end of the quarter.

Allocations to hedged futures and commodities provide access to trend following, quantitative, and fundamental trading-oriented strategies, encompassing equity indices, fixed-income, interest-rates, currencies, metals, energy, and industrial and agricultural commodities. Historically, such strategies have tended to be less correlated to other strategies. However, in recent months this has been less apparent, as markets have become increasingly erratic. Consequently, we trimmed this strategy allocation from 10% at the beginning of the quarter to approximately 7% at the end of the period.

Normally cash is a residual reflecting asset flows rather than a strategic allocation. We built a reserve of 15% in the Fund in June, however, as a temporary defensive measure. We intend to put this reserve back to work as opportunities arise.

As indicated above, we have been proactive in adjusting the overall mix of strategies, though using an incremental approach. Changes to the portfolio during the second quarter tended to be defensive in nature, partly due to our assessment of the relative effectiveness of specific strategies, such as high-yield and managed futures, and partly to dampen overall volatility, as with the temporary increase in cash.


In our commentary at the end of the first quarter of 2011, we noted the following: “If investor sentiment has been buoyed by liquidity, then the prospect of the end of the Fed’s quantitative easing program, which is scheduled for the end of June, may lead to a real change in the tide.” Because the picture remained unclear, we took a “cautiously constructive” stance, on the view that earnings would remain strong and that the global economy would continue to recover slowly but steadily, even as serious structural issues remain unresolved. As the quarter unfolded, however, we placed an increasing emphasis on caution. This shift was prompted by the growing risk of policy missteps overshadowing the potential opportunities associated with improving corporate fundamentals.

A spate of weak economic news weighed on the markets throughout much of the quarter, but Federal Reserve Board Chairman Ben Bernanke set the stage for investors to take a dimmer view when he said that the recovery was indeed “continuing,” but at an “uneven” rate that was “frustratingly slow.” With Greece constantly in the headlines, and the Democrats and Republicans playing a game of chicken over the federal debt ceiling, markets became much more sensitive to policy risk.

While our sense is that the recent soft patch in the global economy will be followed by a renewed but slow recovery, markets are likely to remain unsettled near term due to uncertainty about policy decisions in Europe and the US, as well as China’s continued steps towards tightening. We therefore continue to position the Fund to dampen the risk of traditional asset classes while maintaining the potential for relatively stable returns via less conventional strategies. Judicious risk management and strategic allocation, which are integral to the Fund’s process, will continue to be important. 

Lake Partners, Inc.
Greenwich, Connecticut

Note: The Fund is a fund-of-funds, and by investing in the Fund you incur the expenses and risks of the underlying funds it invests in. Potential risks from exposure to the underlying funds includes the use of aggressive investment techniques and instruments such as options and futures, derivatives, commodities, credit-risk, leverage, and short-sales that taken alone are considered riskier than conventional market strategies. Use of aggressive investment techniques including short sales may expose an underlying fund to potentially dramatic changes (losses) in the value of its portfolio. Short sales may involve the risk that an underlying fund will incur a loss by subsequently buying a security at a higher price than the price at which the fund previously sold the security short.

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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