4th Quarter 2011
Heightened concerns over the fiscal condition of much of Europe continued during the final calendar quarter of 2011. Thus, volatility within capital markets continued as well, as investors painted with a very broad and emotional brush. The major surprise was the sudden spike to the upside during the first two weeks of October. The S&P 500 Index rose nearly 14% during the month. Remarkably, half that gain occurring in the first five trading days.
The old Wall Street adage, “markets climb a wall of worry” certainly held true. Looking at the news, there was—and is—much to cause investor concern. Since our Dynamic Portfolio Optimization™ (DPO) model is more intermediate term-oriented, it did not capture much of the abrupt October upside reversal in the markets. Having only dropped marginally during the third quarter when the broader U.S. market (represented by the S&P 500 Index) posted double-digit losses, the Fund correspondingly lagged for the fourth quarter following the rally.
The Fund trailed its composite benchmark (35% Russell 3000 Index/35% MSCI ex-US Index/30% Barclays Capital Aggregate Bond Index) significantly in delivering a small loss during the quarter. Performance was especially dampened by a sharp loss in the Market Vectors Russia ETF. Also contributing to the relatively poor returns were iShares Silver Trust and iShares MSCI Singapore Index, though both of those positions had been smaller weights in the portfolio than the Russian ETF. Among the positive contributors to performance were positions in iShares iBoxx $ High Yield Corporate Bond, PowerShares DB U.S. Dollar Index Bullish, and Health Care Select Sector SPDR.
In the terms of positioning, the most noteworthy changes in asset allocation during the quarter were an increase in Domestic Equity from 11% to 30% of assets and decrease in Domestic Fixed Income from 59% to 38% by year end.
For the full year 2011, the Fund slightly outperformed its custom benchmark in posting a small loss. Allocation changes put in place during the second and third quarters allowed the Fund to incur minimal losses during those respective quarters, especially in International Equity. Thus, while missing the abrupt fourth quarter rebound, the avoidance of earlier quarter losses allowed investors to experience less volatility with equal or better performance. Our model continues to warn of high levels of investment risk, so the Fund continues to maintain a relatively conservative stance overall.
As of December 31, 2011, Market Vectors Russia ETF comprised 0.00% of the portfolio's assets, iShares Silver Trust – 0.00%, iShares MSCI Singapore Index – 0.00%, iShares iBoxx $ High Yield Corporate Bond – 6.43%, PowerShares DB U.S. Dollar Index Bullish – 2.06%, and Health Care Select Sector SPDR – 2.13%.
Note: The Fund invests in exchange-traded funds (ETFs) which are securities of other investment companies. An ETF seeks to track the performance of an index by holding all or a sampling of the securities on that index. An ETF may not be able to replicate an index exactly since returns may be reduced by transaction costs, expenses and other factors while the index has none. The Fund invests in many different areas of the market, each of which may involve its own element of risk. Use of aggressive ETF investment techniques such as futures contracts, options on futures contracts and forward contracts may expose an underlying fund to potentially dramatic changes (losses) in the value of its portfolio. Credit risk or default risk could negatively affect the Fund’s share price. Inverse or ‘short’ ETFs seek to profit from falling market prices and will lose money if the market benchmark index goes up in value. Leveraged ETFs seek to provide returns that are a multiple of a benchmark and can increase risk exposure relative to the amount invested and can lead to significantly greater losses than a comparable unleveraged portfolio.
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.