1st Quarter 2012
The Fund lagged the broader equity market (as represented by the S&P 500 Index) amid a strong double-digit rally during the first quarter of 2012. The rally is a continuation of the upward swing in stocks from the fourth quarter of last year which began after a summer of severe volatility and losses in 2011. The portfolio’s focus on higher-yielding stocks such as utilities and large healthcare companies that cushioned some of the blow from last summer have acted as a drag on returns during the market surge. The Fund’s secondary strategy of owning put options as a hedge against sudden downswings in the market also hurt relative performance in the generally rising market.
As expected, and as we have seen in the past, the Fund tends to lag during market rallies due to our primary strategy of writing individual, out-of-the-money call options on the portfolio’s underlying holdings. As stocks rise, the option strike price effectively caps the return on those individual positions, limiting some of the upside potential of the portfolio. We are willing to make that sacrifice in exchange for the premiums garnered and the lessening of volatility over the longer market cycle. Although the upside potential is reduced somewhat, when option positions are called we have the opportunity to re-invest the proceeds in holdings and/or sell additional call options to continue to participate in an appreciating market.
At this time, we think it is inappropriate to increase the risk profile of the underlying portfolio after a substantial rally. We remain focused on income from both the dividends of the Fund’s underlying equity holdings and the premiums from the call options we write as a means of staying firmly in the “risk-off” (i.e. relatively defensive) portion of the equity market. Given the opportunity to change holdings as they are called away, one of the things we have focused on is to increase the current dividend yield of the portfolio through newer purchases.
Although results can lag over short time periods, such as during the past quarter, we think the long-term benefits of our risk management focus using call and put options are evident. The Fund has delivered less volatility than the S&P 500 (as measured by standard deviation) its January 2008 inception, which has contributed to its outperformance over the broader index during the time.
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, consider the Fund’s investment objectives, risks, charges, and expenses. Contact 800 992-8151 for a prospectus or summary prospectus containing this and other information. Please, read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC.