3rd Quarter 2011
International equity markets were extremely weak during the third quarter. A U.S. sovereign debt downgrade, continued concerns over the unresolved Eurozone debt crisis, China growth slowdown fears, and the apparent paralysis of policymakers were just a few of the factors to undermine investor confidence. Although corporate news remained resilient for the majority of companies reporting during the period, equity markets remained very much focused on the weakening macroeconomic outlook. Consequently, equity valuations moved lower in anticipation of tougher times ahead.
The Fund slightly underperformed its MSCI EAFE & Emerging Markets Index benchmark overall during the quarter. It was a tale of two periods for the portfolio, as sector selection drove outperformance in July. With growing concerns over macroeconomic and systemic issues weighing heavily on the global Financials sector, the portfolio’s underweight stake in this sector proved highly beneficial. July also saw strong relative performance from Emerging Markets as investors grew more concerned with the macroeconomic developments in developed markets, the heart of which is the U.S. and Europe. Overweight positions in Russia and China also proved particularly beneficial to relative performance during the month.
August and September were challenging months for global equities in aggregate, however, and the Fund was not spared. Its underperformance during those two months can be broadly attributed to both the Fund’s Emerging Market holdings and exposure to more economically influenced cyclical names amid a period of distinct developed market and defensive sector relative outperformance. We believe this is a short-term flight-to-safety, though, in reaction to diminished confidence in economic data and political action.
The Fund’s underweight position in Financials remained a positive contributor to performance even in the latter part of the quarter as ultimately Financials fell by more than 20% for the three months ending in September. Underweight stakes in traditionally defensive sectors such as Healthcare and Utilities detracted from performance, as did an overweight position in Energy—where a declining price for oil negatively affected holdings.
Despite the many near-term challenges, we remain positive on global growth in the long-term, particularly once macroeconomic fears ease. Despite the economies in developed markets having only just returned to their pre-crisis real Gross Domestic Product (GDP) levels, emerging economies are now more than 14% above that level. Combined with relatively low debt in the Emerging Markets and continued de-leveraging in the developed world, we believe nations such as Russia and China will continue to be the driving forces behind global growth.
Robin Geffen, Fund Manager & CEO
Neptune Investment Management
Note: Investing in foreign markets involves the risk of social and political instability, market illiquidity, and currency volatility. Holdings in emerging markets entail the further risk of unstable legal systems, increased volatility, and even less liquidity.
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.