3rd Quarter 2011
The Fund's strategy of focusing on dividend-paying companies and using call and index put options to hedge the portfolio aided in dampening downside volatility amid a volatile market environment during the third quarter. The Fund declined significantly less than the overall market (as measured by the S&P 500 Index), besting it by more than 10 percentage points.
The majority of the Fund's relative outperformance came from the benefits derived from owning index put options and selling individual out-of-the-money call options on underlying holdings in the portfolio. In addition, stock and sector selection aided returns to the tune of roughly two percentage points over the S&P 500. The bulk of that outperformance came from concentrating the portfolio's Energy exposure in the electric utilities area and not having any representation in the balance of the sector. Further benefit came from concentrating the Fund's stock holdings in low-volatility, higher-yielding equities such as electric utilities and larger Healthcare companies.
Given expectations of a subpar economic environment over the next 12 months, we expect the Fund to continue to maintain a risk adverse posture in the portfolio. With high levels of economic uncertainty we continue to allocate a portion of call option proceeds towards investment in protective put options, and the concentration in equities remains focused on traditionally conservative areas of the market such as those mentioned above. For investors that purchased shares in the Fund to help hedge against extreme swings in the market, we continue to strive to dampen volatility while maintaining exposure to the equity market.
Looking ahead, there are concerns about the economic and profit outlook for the next year as outlined in a recent position paper I penned entitled Storm Clouds Ahead. It is my opinion that the global deleveraging which is taking place across the entire developed world will lead to subpar growth for an extended period of time. Thus, I believe that an income-centric investment approach that also incorporates hedging techniques, such as those used to manage this Fund, is the proper position going forward in this volatile environment.
Senior Portfolio Manager
Note: By selling covered call options, the Fund limits its opportunity to profit from an increase in the price of the underlying stock above the exercise price, but continues to bear the risk of a decline in the stock. A liquid market may not exist for options held by the Fund. If the Fund is not able to close out an options transaction, it will not be able to sell the underlying security until the option expires or is exercised. While the Fund receives premiums for writing the call options, the price it realizes from the exercise of an option could be substantially below a stock’s current market price. Premiums from the Fund’s sale of call options typically will result in short-term capital gain taxes, making it ill suited for investors seeking a tax efficient investment. The use of derivatives by the Fund to hedge risk may reduce the opportunity for gain by offsetting the positive effect of favorable price movements. There is no guarantee that derivatives, to the extent employed, will have the intended effect, and their use could cause lower returns or even losses to the Fund.
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.