4th Quarter 2011
The Fund outperformed the broad market S&P 500 Index by more than two percentage points during 2011, despite lagging the index sharply during the market's strong fourth quarter rally. All in all, we think results for the year clearly point to the benefit of the Fund’s strategy of selling calls and periodically owning put options in particularly volatile markets.
Covered call and put option positions added more than a percentage point to returns over the course of the full year. We think this performance underscores the positive impact of our option strategy over the long haul, despite the restraint on appreciation that it can produce during short periods of double-digit market increases as seen during the fourth quarter.
The Fund also benefited from its focus on larger, higher-dividend paying companies throughout the year, notably telephone/electric utilities and some healthcare companies. Even in the Technology sector, that dividend focus proved positive as companies like Intel and Microsoft did reasonably well from a total return point of view. In aggregate, the portfolio of underlying holdings aided the Fund's low-volatility profile, helping returns overall.
As we enter 2012, the portfolio remains overweight the same sectors that were dominant for the Fund last year—Utilities, large Healthcare companies, and high-dividend paying Technology companies. Given the ongoing problems in Europe, along with the continued acrimonious rhetoric emanating out of Washington D.C., it is our belief that a shift to a more aggressive investment posture is not warranted at this juncture. The valuation and dividend bias in our process is also keeping us oriented towards individual holdings that we consider higher-quality with lower volatility.
We think a bottom-up approach to selecting stocks, coupled with selling calls on individual holdings, has served investors well since the inception of the Fund. We see no justification in changing our fundamental approach to how we select underlying stock holdings, and until the US equity market embarks on a secular advance like the 1980s and 1990s, we believe this approach will continue to be rewarding for the patient and prudent investor who is also seeking income.
Senior Portfolio Manager
As of December 31, 2011, Intel comprised 0.91% of the portfolio's assets and Microsoft – 3.26%.
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.