2nd Quarter 2011 Commentary - ASTON/Veredus Aggressive 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.
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.
As for the Fund, it has done a much better job during this drawdown period versus its Russell 2000 Growth Index benchmark (losing 12% versus 10% for the index) compared with its struggles last year from the end of April to the end of August (when the portfolio was down 23% compared with 16% for the benchmark). We attribute this to an enhancement that we put in place at the beginning of the year—paying much closer attention and putting more weight into the sector weightings within the universe that our earnings revision model (ERM) produces as opposed to just investing in those firms with the greatest upward revisions with little regard to sector weightings.
Positions in the Materials, Consumer Discretionary, and Healthcare sectors all aided relative performance during the quarter. The best performing sector was Materials, owing almost entirely to Zagg, a protective shield manufacturer for consumer electronic products such as smartphones and tablets. The firm had a great quarter and made an accretive acquisition that mitigated any concerns about it being a one product company. Consumer Discretionary was led by Crocs and Ulta Salon, as both companies reported stellar quarters that drove their stocks up significantly.
Molecular diagnostic test company Cepheid and robotic orthopedic company Mako Surgical both reported tremendous quarters as well within Healthcare.
Technology continued to give the portfolio problems due to its economic sensitivity and questions arising about the strength of capital spending on some projects, particularly within the Telecom space. The worst performing holding was Finisar, a maker of optical networking components that experienced lingering inventory issues emanating out of Asia. On-demand email marketing firm Constant Contact reported a solid quarter but the stock suffered as Wall Street was focused on net new subscriber growth.
Elsewhere, Industrials lagged as Tutor Perini, a construction and engineering firm, reported a somewhat sloppy quarter even though its order backlog grew more than expected—which to us is what drives future earnings. Energy was down on an absolute basis, though the portfolio's holdings far outperformed the benchmark exposure. Holdings within Financials also suffered, notably Calamos Asset Management which dropped more than 10%.
All in all, we were not disappointed with the quarter, primarily because the Fund made up ground lost during the period during the first three days of trading of the third quarter. Thus, we held our own on the downside given the new investment enhancement of placing more weight on what the sector percentages’ that our ERM model are producing without losing any octane on the upside. We remain bullish looking ahead as we feel expectations have been set lower on Wall Street due to macroeconomic concerns much like what happened in 2010. 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.
B. Anthony Weber
Charles F. Mercer, Jr. CFA
Michael E. Johnson, CFA
July 12, 2011
As of June 30, 2011, Zagg comprised 1.28% of the portfolio's assets, Crocs– 1.34%, Ulta Salon – 1.47%, Cepheid – 1.57%, Mako Surgical – 1.14%, Finisar – 1.14%, Constant Contract – 0.92%, Tutor Perini– 1.41%, and Calamos Asset Managment – 1.62%.
Note: Small-cap stocks are considered riskier than large-cap stocks due to greater potential volatility and less liquidity.
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