1st Quarter 2012
The Fund got off to a solid start to the year in January only to see Apple, which we did not hold in the portfolio, rocket 48% during the quarter. Apple, which grew to comprise 6.6% of the Fund’s Russell 1000 Growth Index benchmark, accounted for almost 20% of the index’s return during the period, most of which came in February and March. We sold Apple from the portfolio in October, after the company disappointed in its third quarter reporting. We didn’t want to face the risk of a miss from the crucial holiday quarter, which in retrospect turned out to be the wrong call as they blew that number out.
Apple now carries the distinction of being the fifth name in history to move above the 4% mark within the S&P 500, as it now comprises 4.4% of that index. The four previous names were Microsoft, GE, Exxon, and Cisco, none of which could stay above that 4% level for more than a year (according to the Leuthold Group). Could Apple be the first to buck this trend? No doubt, but the stock is up six-fold from March of 2009 and 57-fold since April of 2004. It is not exactly undiscovered. Instead, we have chosen to own Qualcomm, a major beneficiary of the success of the iPhone, but more importantly the clear winner of the next generation 4G LTE rollout world-wide. We also chose Microsoft, which will introduce Windows 8 this fall and incorporate a lot of the same touch functionality that Apple has introduced.
The Fund ended the quarter modestly trailing its benchmark. Other than Apple, most other areas of the portfolio performed fairly well. Stock picking within Consumer Discretionary was the main contributor led by Ralph Lauren, which reported a better than expected quarter. Previously mentioned tech firms Qualcomm and Microsoft also contributed positively, both delivering gains of more than 24%. A significant overweight to Financials led by American Express helped returns as well.
Looking ahead, we do not expect macroeconomic worries to fade away anytime soon, and expect some choppiness to surface during the upcoming quarters from a new set of worries—the U.S. presidential election, the Supreme Court decision on the healthcare mandate, and the upcoming fiscal cliff from mounting federal debt and the expiration of the Bush tax cuts in January 2013. We didn’t include gasoline prices as we think they may have run their course already, but if we are wrong they will definitely go into the negative column.
That being said, we believe the U.S. equity market is still the place to be as Europe is teetering on the edge of recession, Emerging Markets are slowing down, and 10-year Treasuries yielding only 2%. The continuing fear is contagion in Europe. Although Spanish and Italian yields have started to blow out again, interbank rates both here and across the Atlantic are doing nothing and are well off their highs. Meanwhile, U.S. corporate profits are at an all-time high.
We believe that we have a solid stable of companies in the portfolio that can continue to report earnings above expectations and drive future estimates ever higher. We have built the portfolio around a variety of themes that include mobile communications and payment systems, multinational consumer brand names, and infrastructure plays that we think will benefit from the vast build out required to get the vast supply of tight oil and natural gas to market. In addition, we think there are enough macro pieces falling into place that could entice the mountain of cash parked on the sidelines or in low-yielding bonds back into equities over the course of the next 12 to 18 months.
Charles F. Mercer, Jr. CFA B. Anthony Weber Michael E. Johnson, CFA
April 11, 2012
As of March 31, 2012, Apple comprised 0.00% of the portfolio's assets, Microsoft – 5.00%, General Electric – 0.00%, Exxon Mobile – 0.00%, Cisco – 2.19%, Qualcomm – 5.56%, Ralph Lauren – 3.90%, and American Express – 3.27%.
Note: Growth stocks are generally more sensitive to market moves and thus may be more volatile than other stocks.
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.