3rd Quarter 2012
Global equities turned in a strong third quarter, as investors embraced the resolve shown by central bankers in supporting the eurozone and holding interest-rates near all-time lows in the U.S. The announcement of an additional round of quantitative easing (QE3) by the U.S. Federal Reserve spurred stocks through late September, lifting most indices to mid-single digits gains for the quarter. On the flip side, the economic slowdown in China deepened through late summer, holding markets somewhat in check, while third-quarter economic releases in manufacturing, employment, and capital spending continued to trend lower. Corporate earnings growth has slowed as well.
Whereas defensive sectors and income producing names led the domestic market during the prior quarter, the Fed’s vigilance encouraged buyers in the retail, building/housing, and commodity-related industries during the third quarter. At the sector level, Consumer Discretionary, Materials, and Healthcare led the market. Large-cap stocks generally outpaced mid- and small-caps, and value performed better than growth.
The Fund substantially outperformed its Russell 2000 Growth Index benchmark in gaining nearly 9% during the quarter. Strong stock selection in the Technology, Consumer Discretionary, and Healthcare sectors was the primary driver of the relative outperformance. Human resource software company Kenexa was a top-10 holding when IBM announced that it was acquiring the company in late August. IBM paid a meaningful premium for the firm’s leading software and deep client base, pushing the stock up more than 58% jump by quarter end. A new position in data security firm Imperva also rose sharply since the Fund’s initial purchase in early August.
Camping equipment maker Jarden, office supply chain Officemax, and specialty retailer Genesco contributed to returns within Consumer Discretionary. Jarden logged a double-digit gain as the company continues to report strong revenue and earnings growth. Reports of consolidation across the office supply segment led to a strong advance in Officemax, which also announced earnings that came in well above consensus estimates. Among the portfolio’s Healthcare holdings, much of the outperformance was attributable to acute care hospital operators Vanguard Health System and Tenet Healthcare. Elsewhere, a significant position in for-profit prison operator GEO Group performed well as its stock continued to advance throughout the quarter.
Shortfalls for the quarter were more stock-by-stock than sector specific, though the portfolio did underperform overall within Financials and Telecomm. The key individual detractor was DFC Global, a financial services firm that lends to “under-banked” individuals and small businesses. The stock traded lower partly due to concerns about stricter collection requirements in the UK. The notable underperformer in Telecom was tw telecom.
As intervention by central banks helped economically sensitive industries such as metals & mining, performance was also hurt by a sizeable underweight to the Materials sector. In addition, precious metals outperformed industrial metals within the sector as commodities rallied late in the quarter. The Fund’s position in titanium producer Allegheny Technologies lagged as a result. Industrial holdings ACCO Brands and Hexcel both underperformed as well.
Lee Munder Capital Group, LLC
As of September 30, 2012, Kenexa comprised 4.67% of the portfolio's assets, Imperva – 1.09%, Jarden – 0.00%, Officemax – 1.29%, Genesco – 0.69%, Vanguard Health System – 3.35%, Tenet Healthcare – 2.43%, The GEO Group – 4.44%, DFC Global – 1.32%, tw telecom – 2.29%, Allegheny Technologies – 1.03%, ACCO Brands – 0.00%, and Hexcel – 2.55%.
Note: Small-cap stocks are considered riskier than large-cap stocks due to greater potential volatility and less liquidity.
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.