2nd Quarter 2011 Commentary - ASTON/Veredus Select Growth Fund
Similar to the summer of 2010, a growth scare struck the market during the second quarter of 2011 fueled by the Greek drama II, the supply chain disruptions within the electronics and auto industries from the Japanese earthquake/tsunami, plus the end of QE2 (the Fed's second quantitative easing ) and the debt ceiling debate in Washington. We tend to compare these scares to aftershocks—with the Fall 2008 financial crisis serving as the primary earthquake and recent events just another among many aftershocks. This most recent aftershock has been smaller, as it should be, but the wall of worry that this market is climbing has been immense and quite frankly very impressive. We have already experienced eight 5% corrections to this bull market which is the most in 73 years, and yet the bull market is but half the age of the typical bull market.
After falling for seven straight weeks, the last four days of the quarter and the first trading day in July saw the market have its best weekly move in more than two years. We feel that the pluses currently far outweigh the negatives as corporate cash has never been so high, gasoline prices have declined by more than 10% (during the height of the driving season), falling food prices are pressuring core inflation, loan demand is picking up and, most importantly, improved earnings. In addition, the credit markets are not even close to signaling any stress in the system as credit spreads are well below last year's levels and historic means, and remain highly stimulative.
The Fund has been positioned for the mid cycle of the economic expansion and that has certainly not worked as defensive areas such as Healthcare, Staples, Utilities, and Telecom have led the market this year. The portfolio coughed up roughly 800 bps relative to its Russell 1000 Growth Index benchmark last year from May to September and we have seen a similar number evaporate this year. Still, we believe that the Fund is positioned in those companies that are primed to take advantage of the mid-cycle phase once the supply chain issues of Japan abate in the auto and technology food chains. There was some evidence of this in the quarterly earnings report of FedEx, a name held in the portfolio, which was 5% above expectations and more importantly drove earnings estimates higher for this year and next.
The portfolio's stake in Energy was hit hard during the quarter despite the fact that it consists primarily of service companies. McDermott International, the construction and engineering firm serving the sector, dropped sharply on what we thought was an overreaction to flooding at its Morgan City fabrication plant. We trimmed the sector back early in May to a slightly overweight position relative to the benchmark, and will look to take it back up again as we think the service industry can continue to do well when the price of oil is above $75 a barrel.
Technology was another problem area, with JDS Uniphase the hardest hit as worries over capital expenditures from the big carriers and a sloppy quarter from Ciena pushed its stock down. Google also tumbled as the firm missed its earnings target as operating expenses have been ramped up in several areas of the company, including the Droid phone segment, in an effort to diversify revenue.
Elsewhere, Consumer and Materials holdings also lagged the index. US Steel, Mosaic, and Freeport McMoran all suffered within Materials. We would look to most likely expand in this area of the portfolio over the back half of the year. Ford and Disney hurt on the consumer side. Disney reported a rare miss to its earnings and Ford gave what we thought was conservative guidance in the aftermath of the Japanese earthquake, thus lowering its forecasted numbers a bit causing the stock to drop. On the positive side, an overweight stake in Healthcare and positive stock selection aided relative returns as Humana and UnitedHealth Group each had a solid quarter.
This was a disappointing quarter despite the fact that the portfolio experienced an upward earnings surprise averaging 9%, which led to upwards earnings revisions of 3.3% for 2011 and 2.3% for 2012. We are very bullish looking out as we feel expectations have been set lower on Wall Street due to macroeconomic concerns much like what happened last year. We anticipate that the earnings season will be solid as the scarcity of growth will be the theme and those companies that can provide the numbers will attract the capital. We are also excited about a lot of companies in expanding markets, such as social media, digital video, and the smartphone supply chain within Technology; fluid management and fracking within the North American Energy markets; and nano-technology equipment—for example, labs on a chip—within the Healthcare industry. We are not having any problem finding new and dynamic ideas. Now we just need the market to agree with us.
Charles F. Mercer, Jr. CFA
B. Anthony Weber
Michael E. Johnson, CFA
July 12, 2011
As of June 30, 2011, FedEx comprised 2.69% of the portfolio's assets, McDermott International – 1.77%, JDS Uniphase – 2.49%, Ciena – 0.00%, Google – 0.00%, US Steel – 0.00%, Mosaic – 0.00%, Freeport McMoran – 0.00%, Ford – 1.80%, Walt Disney Co. – 0.00%, Humana – 3.01%, and UnitedHealth Group – 2.46%.
Note: Growth stocks are generally more sensitive to market moves and thus may be more volatile than other stocks.
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.