1st Quarter 2012
Financial markets experienced one of the best quarters of the decade as a result of further government and Federal Reserve stimulus. Low interest-rates and renewed optimism were the general themes as unemployment numbers and corporate earnings showed signs of improvement, while the fear of a foreign debt meltdown subsided. Other positive indicators included bullish technical indicators and the fact we are in a Presidential election year, which has typically been good for financial markets as incumbents tend to do what they can to bolster the economy and their image.
Although seemingly optimistic, many of these popular indicators are misleading. For example, unemployment ignores the under-employed—those people who no longer file or no longer qualify for unemployment benefits. More worrisome is the ongoing debt situation in Europe, where even many of the stronger economies continue to assume more debt from domestic banks and the weaker European countries. The debt-to-GDP (Gross Domestic Product) ratio of most European countries is at historical highs with little hope of repayment. In other words, the problem has not gone away, it has only been deferred and is growing in magnitude.
Market crashes occur when the general populace realizes their expectations are wrong. Throughout the 1980s and 1990s the market delivered record returns. In 2000, investor expectations of corporate earnings growth, fueled by the media and over-zealous research analysts, came to a screeching halt. Twelve years later the S&P 500 Index is at nearly the same price level it was back then, while the NASDAQ remains below its high watermark set that year.
The reality is that little has changed since the beginning of the financial crisis in 2008. High levels of personal and government debt remain. Little has changed in the economy or improved in the fundamentals of corporations. Little has changed in politics of our country. What has changed is the bullishness of investor sentiment and technical indicators, but these indicators can change quickly without the backing of a strong economy and corporate earnings.
The Fund substantially lagged its composite benchmark (35% Russell 3000 Index/35% MSCI ex-US Index/30% Barclay’s Capital Aggregate Bond Index) during the first quarter. The portfolio’s defensive posture—more than 50% weighting in cash and short-term Treasury Bills—weighed on performance as equities gained double-digits. Our risk model continues to signal an above normal probability for significant losses. Thus, the portfolio remains at a relatively conservative level. It is our experience that the more that markets rise within a short time period, the more likely that risks have as well.
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, 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.