4th Quarter 2011

The Fund performed strongly during the fourth quarter of 2011 in delivering positive returns and outpacing its MSCI EAFE & Emerging Markets Index benchmark. After an extremely weak and volatile third quarter, positive sentiment returned to global markets in October as hopes regarding a resolution to the Eurozone crisis increased. The Fund performed well thanks to notable performances by holdings in Russia and China. Moreover, overweight stakes in sectors linked to global growth themes—especially those exposed to domestic consumption within Emerging Markets—outperformed, with Energy in particular significantly contributing to the Fund's relative performance.

Volatility returned to the markets in November, however, as macroeconomic events primarily in the Eurozone and China once again dominated global news. Despite this, the Fund continued its strong performance with telecommunications stock China Mobile serving as one of the best performing holdings during the month.

The volatility continued in December, albeit in a more muted form, as the benchmark ended the month relatively flat. The Fund underperformed in December as the portfolio’s high exposure to Russia detracted from performance somewhat due to protests arising from the country’s disputed election.

Overall, we maintained our conviction in the portfolio’s positioning throughout this volatile period, focusing on both developed world companies with exposure to emerging market and global growth themes, as well as high-quality domestic emerging market stories. We made only one portfolio change during the period, selling a Russian metals producer in favor of a UK high street bank as we think the Financials sector has the potential for a short-term relief rally. Looking ahead, the Fund remains fully invested in what our research has identified as the highest quality sector leaders best able to benefit from underappreciated growth. 

Robin Geffen, Fund Manager & CEO
Neptune Investment Management

As of September 30, 2011, China Mobile comprised 3.12% of the portfolio's assets.

Note: Investing in foreign markets involves the risk of social and political instability, market illiquidity, and currency volatility. Holdings in emerging markets entail the further risk of unstable legal systems, increased volatility, and even less liquidity.

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. 

4th Quarter 2011

Although US equity markets posted strong results during the fourth quarter, the investment environment continued to display the same roller-coaster volatility that characterized much of 2011. For example, while the broad market S&P 500 Index rose 11.8% by the end of the quarter, it had quite a ride getting there: The index climbed 13.7% from September 30 through October 27, then plunged 9.6% by November 25, only to jump back up 9.0% over the next eight trading days before moving sideways in a narrow range for the rest of December.

Given the Fund’s hedged approach and modest net equity exposure (approximately 37% at year-end), it performed well in gaining more than 4% while dampening volatility relative to the S&P 500. Furthermore, it outperformed its HFRX Equity Hedge Index benchmark, which posted a small loss for the quarter.

A significant portion of the Fund’s overall gain came from its core Hedged Equity and Long Bias managers, who captured the bulk of the rise in equities. Elsewhere, credit-related strategies delivered solid results as pressure on the high-yield market dissipated and credit spreads improved. Merger Arbitrage managers tended to make relatively steady progress throughout the quarter. Increased merger and acquisition (M&A) activity has helped improve the outlook for the strategy, but modest spreads continue to limit the upside. Strategic Fixed Income managers also were positive, but performance was mixed depending on exposures to emerging markets and other international sovereigns.

On the downside, Global Hedged Equity managers tended to lag, but these were small allocations within the portfolio. Hedged Futures/Commodities allocations were also under pressure for much of the quarter. Although returns were negative, the downside was fairly limited.

Positioning Update

During the fourth quarter, we re-deployed a large portion of the cash raised during the previous quarter in accordance with our risk management guidelines. Although the equity markets remained volatile, several alternative investment strategies began to stabilize and perform better as opportunities improved. This was particularly apparent for several of our underlying managers in the Hedged Equity and Hedged Credit areas, as well as in Merger Arbitrage and, to a lesser degree, Strategic Fixed Income. In contrast, Hedged Futures/Commodities were out of sync. Having entered the quarter with a defensive cash reserve of nearly 24%, the Fund’s cash allocation at year-end was 10.2%.

Equity-oriented funds accounted for 47.9% of the assets in the portfolio at the end of December, slightly more than at September 30. Although this is the largest single strategy allocation in the Fund, it is important to note that this broad category encompasses a diverse mix of Long Bias, Hedged, US Multi-Asset, and Global strategies. Having eliminated several Long Bias managers that had become especially volatile during the third quarter, we continued to focus allocations on core managers with relatively more stable risk/return characteristics.

Hedged Credit and Strategic Fixed Income allocations had been scaled back from nearly 22% at the end of June to slightly less than 10% by the end of September. By the end of December, however, the allocation was back to 25%. We re-built the Fund’s allocation to Hedged Credit during the quarter as valuations improved and fundamentals remained solid. We also increased Strategic Fixed Income, but only at the margin, and we have kept this allocation at a lower level than Hedged Credit. The funds in this area tend to take a global approach, long and short, to a broad range of opportunities, ranging from US mortgage-backed securities to emerging market debt. Although opportunities had been created by the nearly one-sided flight to safety in fixed-income during the third quarter, conditions still tend to be unsettled.

Allocations to Hedged Futures/Commodities provide access to trend following, quantitative, and fundamental trading-oriented strategies in a wide range of financial futures and commodities encompassing equity indices, fixed-income, interest-rates, currencies, metals, energy, and industrial/agricultural commodities. Historically, such strategies have tended to be less correlated to other strategies, especially during market corrections such as the one during the third quarter. Although our target allocation for this area has been 10%, it was actually less than 7% at year-end due to the elimination of one manager owing to a change in the structure of their investment program, which raised concerns about counter-party risk. Our intention is to re-build the Fund’s allocation going forward.

Outlook

The volatile and erratic behavior of markets over the past few quarters has made one thing abundantly clear—investor sentiment remains extremely sensitive to economic policy and political considerations. Markets slid on fears of policy inaction, dysfunction, and missteps, and then popped in reaction to decisive, concrete, and reassuring measures. Although solid corporate fundamentals and improved valuations for U.S. and Emerging Market equities present abundant opportunities for the long term, investors have been fixated on the day-to-day developments in Europe’s struggle to come up with a convincing approach to its sovereign debt situation. In turn, this has amplified the market’s reactions to global economic data, whether positive or negative.

Markets face a “tug of war.” On the one hand, the corporate sector generally remains flush with cash, and despite the exposure of European banks to sovereign risks, the global financial system is on a much sounder footing than it was in 2008. On the other hand, the drama in Europe is far from over, the U.S. lacks consensus on how to address its economic and fiscal problems, and China is still occupied with the very complex task of trying to engineer its own “soft landing.”

Markets therefore remain beholden to political events, which by nature are highly unpredictable. Consequently, an unusual degree of uncertainty continues to cast a shadow over the investment landscape. We therefore continue to maintain a diversified mix of strategies within the Fund, with different degrees of correlation and market sensitivity. We believe that this approach will lead to attractive risk-adjusted returns over time. 

Lake Partners, Inc.
Greenwich, Connecticut

Note: The Fund is a fund-of-funds, and by investing in the Fund you incur the expenses and risks of the underlying funds it invests in. Potential risks from exposure to the underlying funds includes the use of aggressive investment techniques and instruments such as options and futures, derivatives, commodities, credit-risk, leverage, and short-sales that taken alone are considered riskier than conventional market strategies. Use of aggressive investment techniques including short sales may expose an underlying fund to potentially dramatic changes (losses) in the value of its portfolio. Short sales may involve the risk that an underlying fund will incur a loss by subsequently buying a security at a higher price than the price at which the fund previously sold the security short.

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.

By Kerry O'Boyle, Aston Asset Management 

"You don't need to be an Aerospace Engineer to fly airplanes" 
 - Common saying at the U.S. Naval Academy

Becoming a pilot is a serious endeavor involving complex machines, intricate rules, and potentially hazardous situations. In most other professions, years and years of classroom work and testing would precede any attempt to actually perform in the real world. But that's not how we train our pilots.

Training for military pilots, for example, traditionally consists of only a few weeks of ground school learning the basics of the training aircraft, navigation, and air traffic rules. Trainees are then thrown behind the controls of the plane with an instructor in back, typically a practitioner himself serving only a brief tour as an instructor away from frontline duty. After only roughly a dozen flights, trainees are required to solo—fly alone for the first time.

Why does the military take this seemingly risky approach to training pilots? To be sure, flying requires the development of physical skills, which requires hands-on training, but that could be conducted using simulators. Often overlooked is another important factor—the need for experience in a highly dynamic environment. Flying is fast-paced, involving multiple variables and constantly changing situations. Feedback, whether physical or situational, must be assessed and analyzed in the context in which it is happening. Simply put, it's an environment in which experience counts for more than mere descriptive knowledge. You learn by doing.

Buy Low, Sell High

The same might be said for investing. Descriptive knowledge tells investors to buy low and sell high, but it is experience that shows them how to do it. Developing such experience can be time consuming, which is why many investors turn to mutual funds and experienced professionals for the selection of individual securities. Security selection, however, is but one facet of the investment process. Even investors that delegate the selection of individual securities to professional money managers need to develop skills in the construction and management of their entire portfolio. Like security selection, overall portfolio management requires practice and experience derived from being engaged hands-on in the process.

Unfortunately, too many investors take a buy-and-forget approach, put their portfolios on auto-pilot via calendar-based monitoring/re-balancing schemes or employ static quantitative models and then later are left to wonder why results were disappointing. Worse yet are simplistic rules of thumb (i.e. "an equity allocation should equal 100 minus your age") that deceive investors into thinking portfolio management requires little thought at all. Markets are dynamic and investors need to be continually learning from them in order to reinforce the best investment practices. It need not become a full-time job, but it does require some work and attention. Book knowledge and academic theory is not enough absent the ability to practice it in the real world.

Feedback Dilemma

The dilemma for most investors, unlike pilots, is that the feedback is rarely timely, let alone immediate. It may take years to know whether an investment decision made today is ultimately a positive one for a portfolio. In addition, opportunities for mutual fund investors to "practice" and gain experience are limited by these long time horizons involved in determining outcomes. Similarly, the feedback isn't physical, though it can be emotional, often making it difficult to decipher. Mistakes will be made, but the lessons often go unlearned and the experience squandered because the context and the original decision-making rationale have been lost.

To improve outcomes, individual investors need to develop an investment process and method for tracking decision-making in order to create a meaningful feedback loop from which genuine experience can be gained. Such a process would need to instill discipline yet be flexible enough to incorporate new lessons learned and experience gained. The lack of such a disciplined investment process may explain why many investors turn to market prognosticators or academic theories—despite being largely unproven in delivering practical results — as a cheap substitute for a rigorous and experienced investment approach.

Developing such an investment process can seem a daunting task for smaller investors, but it need not be so. Practical ideas on investing can be borrowed from proven investment practitioners with experience in dynamic market environments, provided that investors test that experience out for themselves in the context of their own unique investment situation. Beginners can start at a basic level, borrowing ideas from professionals and practicing on a small scale in a building block approach towards greater understanding and experience. Theories are incorporated only after being verified through practical experience. Many investors may have a hard time experimenting in such ways—fearing mistakes—but developing a process that keeps what works and discards what doesn't based on actual investment situations provides the lasting experience required for long-term success.

An example of a meaningful place to start would be for investors to engage in more frequent re-balancing of their portfolios centered on changes in the market instead of by the calendar. Seeing the results of the regular trimming of high-flyers and additions to stragglers among individual components in a portfolio would provide more data points for feedback. It also has the additional benefit of containing risk more closely around one's designated asset allocation and providing insight as to whether that allocation is appropriate. Although somewhat counter-intuitive, more frequent activity of this kind makes each individual decision less crucial to the overall outcome, dampening potential risk and volatility. Contrast that with a buy-and-forget approach, in which the initial buy decision becomes a dominant factor as the investment is left to be buffeted by the whim of market trends and asset allocations are allowed to drift.

Data Is No Substitute

Although experience can be borrowed to some extent, investors need to be careful not to attempt to manufacture experience through backward-looking data. In the age of fast computer processing and information at our fingertips, many have become over-reliant on simple numerical data as a substitute for actual experience. While cold, hard numbers can often tell a story, whether it tells the right story depends on a full understanding of the context of those numbers and whether all variables have been accounted for or recognized. Too often, people look at data in isolation or allow someone else to interpret the data for them without having a grasp of the full picture available.

Data that is meaningful is data developed and recorded from one's own actions, experience, or interpretation, and fully understood within the context it is provided. A defined investment process should incorporate decisions based on data and other factors, and a system should be developed for recording the context of these decisions and their subsequent investment outcomes in order to build an investor's own feedback loop.

Accountability

Although mutual fund investors delegate security selection to fund managers, they retain responsibility for the performance of their overall portfolios. All too often, the tendency is to blame fund managers for any failure of expectations or results—for "not being consistent" or for "not performing as they have in the past"—despite all the warnings of past performance not being a guarantee of future results. If it were that simple, investors using index mutual funds would be immune from poor results, and practical experience would lead most investors to indexing. But asset allocation, re-balancing, and the timing of buy and sell decisions at the portfolio level play key roles for all investors, making indexing less of a panacea than theory would suggest. In some ways it is akin to blaming a hammer for missing the nail. To be sure, some tools are better than others, but the user is ultimately accountable.

Whether mutual fund investors take on the role of overall portfolio manager or delegate that role to a financial advisor, practical portfolio management skills are required. Such skill doesn't come from buy-and-forget strategies or from one-size fits all academic or market theories. It comes from experience and close attention to detail gained from practice in a dynamic environment.

Pilots don't measure experience in age or years of service, but in hours—flight hours at the controls of an airplane. Only actual flight hours truly measure experience, and experience is what counts. Other professions are beginning to recognize the importance of such hours in their training as well. The trend in medicine is for medical students to see real patients earlier and earlier so as to develop experience in real world situations sooner—in other words, more hours with patients. To achieve their goals, investors need to do the same with their portfolios.

Kerry O'Boyle is an Investment Strategist with Aston Asset Management. Prior to joining Aston he wrote on a variety of investment topics as a mutual fund analyst for Morningstar, Inc. He is a graduate of the U.S. Naval Academy, and holds an M.A. in Liberal Arts from St. John's College, Annapolis, MD.

For more information about Aston Asset Management, LLC and its subadvisors, please call 800-597-9704, or visit www.astonasset.com

4th Quarter 2011

2011 Review

In 1986, legendary R&B singer Luther Vandross won a Grammy Award for the album The Night I Fell in Love in the category of Best R&B Vocal Performance for a Male singer. One of the memorable songs on that album was It’s Over Now. As the market finished 2011, I echoed that sentiment. After a thoroughly lackluster fourth quarter, the Fund ended the year essentially flat   (-0.54%; N shares) on an absolute return basis in underperforming its Russell 1000 Value Index benchmark (+0.39%) by less than a percentage point.

The market clearly maintained a strongly defensive bias for much of the year. Utilities performed like a gem with a 19% return during the year as investors embraced not only the defensive characteristics but also the attractive yields in that area of the market. The Fund had little exposure to Utilities due to the lack of what we consider value creating opportunities due to valuation concerns despite their yields. We are not of the mind that a prudent investor would purchase any of the companies at the levels current valuations suggest. Industrials and Materials were the two other sectors that hurt performance the most owing to economic growth concerns on a global basis related primarily to the European crisis.

The three sectors with the highest contribution for the year were Consumer Discretionary, Financials, and Consumer Staples. Consumer Discretionary holdings were predominantly focused on discount retailers such as TJX Companies and Ross Stores. A large underweight position in struggling Financials aided returns overall, while Consumer Staples held up well due to the defensive orientation of the sector.

Overall stock selection was negative, with Lazard, Federated Investors, and HollyFrontier among the biggest detractors. Financial firm Lazard was penalized for its exposure to Europe, about a third of its business mix, in addition to general exposure to market-related areas. Asset manager Federated has struggled with the low interest-rate impact on money market funds, where the firm is a dominant provider. Energy company HollyFrontier has seen spreads collapse on refining margins with the narrowing of the price differential between Brent and West Texas Intermediate crude. With the exception of Lazard, all remain portfolio holdings as we perceive the issues perplexing the companies as being temporary in nature.

The three top individual stock contributors were TJX Companies, Kinetic Concepts, and Marathon Oil. Previously mentioned TJX benefited from being a discount branded retailer able to offer lower prices to cost-conscious consumers. Medical technology firm Kinetic Concepts rose on a buyout offer, causing us to sell the position as the all-cash deal offered little additional upside. Marathon Oil benefited from a rise in oil prices during the fourth quarter. We continue to view both TJX and Marathon as value creating opportunities, and each remains a portfolio holding.

"You Treated Me So Bad"

Luther Vandross’ It’s Over Now also resonated as the Fund ended a run of five consecutive quarters of benchmark-beating performance in the recently concluded fourth quarter of 2011. During the period, we identified with one of the key parts of the chorus which was “You treated me so bad.” Although the Fund delivered its highest quarterly absolute return for the year, it was clearly behind the benchmark in finishing with the worst relative quarterly performance since inception.

Eight out of 10 sectors in the portfolio underperformed their respective sectors in the Russell 1000 Value, and/or the benchmark overall. The two sectors in the Fund that outperformed were Materials and Consumer Discretionary. Performance for the benchmark was fairly broad, with five sectors—Energy, Industrials, Materials, Consumer Discretionary, and Technology—outperforming. All of these sectors are typically thought of as having a pro-cyclical growth tilt. Eight out of 10 sectors yielded a double-digit absolute return with only Utilities and Telecom, bastions for yield-hungry investors, not hitting that mark as the market rebounded strongly.

Sector allocation for the Fund was positive, but stock selection was decidedly negative. Interestingly, the portfolio had positive sector contributions in all but two sectors—Consumer Staples and Industrials. Thus, for this quarter, the portfolio was in the right places in terms of sectors but at the wrong time in terms of the individual stocks.

The poor or untimely stock selection endemic across the portfolio particularly affected results within Industrials, Financials, and Consumer Staples. The Fund’s holdings were not well correlated to the risk-off, risk-on type of environment that dominated the market, primarily after October. Europe took center stage as the market progressed approximately 1.5% overall from November through December, while the portfolio declined slightly more than 3%. In our view, nothing much changed except market perception.

The biggest individual detractors included Avon Products, Warner Chilcott, and the previously noted Federated Investors. Execution issues plagued Consumer Staples stock Avon and specialty pharmaceutical company Warner Chilcott. Although we view many of these issues as temporary, the period of rectification has been extended. Avon has responded with the removal of its CEO. We have responded with the removal of both stocks from the portfolio, though we will continue to monitor them to see if they are worth revisiting later.

The three top contributing sectors during the fourth quarter were Utilities, Materials, and Telecom. Both Utilities and Telecom were well positioned from a sector standpoint with underweight positions, while an overweight stake in outperforming Materials was the best performing sector for the period. Marathon Oil, TJX, and Exxon Mobil were the top individual contributors, and all three remain portfolio holdings.

Positioning

As we reiterate as often as we can, we cannot predict the timing, duration or magnitude of outperformance. All we can do is try to position ourselves to achieve it. For three out of four quarters in 2011, we did just that. Although the streak of five consecutive quarters of outperformance has ended, we still believe that the portfolio is positioned to outperform over the long haul. Please note that nothing has changed with our process. One quarter of underperformance, regardless of the magnitude, does not justify undoing a process that we have employed professionally for more than a decade.

Stocks not previously mentioned that were eliminated due to sector adjustments and/or valuation or fundamental issues were Pepsico, Abbott Laboratories, Owens-Illinois, Joy Global, and 3M Corporation. These changes were primarily driven by the dynamic interrelationships of the sectors as we seek to position the portfolio to exploit value creating opportunities. As we like to share regarding our investment philosophy, “We have a core process but no core holdings.”

The relatively high number of stocks eliminated allowed for positions to be initiated in Express Scripts, Campbell Soup, Halliburton, and Eli Lilly among others. Each stock was purchased after first being identified as a value creating opportunity followed by our in-depth fundamental analysis of their potential as a portfolio holding.

The result of this and related activity during the quarter was that exposure to Energy, Healthcare, Materials, and Consumer Staples was increased. Exposure to Technology, Industrials, and Consumer Discretionary decreased, while all other sectors essentially remained the same given market appreciation or depreciation.

As a reminder, sector allocation decisions are made on the basis of the value creating opportunities that we find in the market rather than top-down, macroeconomic decisions. Due to this approach, the portfolio may look out of step with conventional thinking. Then again, we are not seeking conventional results. We expect our different approach to yield different, value-added results.

Outlook

Returning to the theme of Luther Vandross’ Grammy Award-winning album, I'm reminded of another song, Wait for Love, which begins with the lyrics:

Knowing love the way I do

I can say for certain that it’s true

There’s a chance for me and you

I surely feel like the time is near

The picture in my mind is very clear

I think love has brought us here

Looking ahead, it is clear that a confluence of issues is coming to a head. The economy, though wildly debated, appears to be headed in an upwardly sloping direction. Funny thing how we often forget that the economy is cyclical, as we become bogged down in believing that it can only move the same way infinitely. The economy appears to have rebounded from its lows with data suggesting that the environment is getting better at an accelerating pace. Thus, despite the negative spin that gives contrary market pundits popularity, I know that it is true that there is a chance for me and you to see the upside of the economic cycle.

Europe, however, has become the issue of the day as all wait to see if the European Union will become the European Dis-Union. Europeans suggest no, but it has become convenient and expedient for commentators to suggest otherwise. Nothing keeps the eyeballs on television than a controversial counterargument.

The presidential election could be one of historic proportions. The economy could be peaking just in time for President Obama to begin his victory lap. Or, if it falters, the Republican Party will have final confirmation for repudiating his tenure and legacy.

What is the constant theme in all of this? Time. Within a matter of months we should have better information to remove the knowledge vacuum that has allowed for a vortex of volatility that makes short-term investment decisions look idiotic or brilliant.

As Luther Vandross poetically sang, “The picture in my mind is very clear”. At Herndon Capital Management, what is clear is that we will continue to look through the noise and short-term issues to seek out value creating opportunities. This last quarter was gut-wrenching from the slow bleeding nature of the underperformance that began in November and ended in December. After being almost even with the Russell 1000 Value in October, it was a painful experience to watch the portfolio lose 10 to 30 basis points daily in a way that we are not accustomed. We persevered because we continue to believe that purchasing companies at a discount to what the fundamentals bear is the only true way investing is supposed to be undertaken. 

The picture clearly in my mind is that the Fund has a portfolio of attractively valued, solid fundamental companies in an economic environment that is improving with interest rates still at historic lows. The confluence of these variables could make 2012 a surprising market to the upside for investors. While love has not brought us here, consistency of process has. After the end of five consecutive quarters of outperformance, what did we learn from the turmoil in the fourth quarter? While we may pursue perfection in terms of outperformance, we will never achieve it. But, pursue it we will.

Randell A. Cain, CFA
Principal and Portfolio Manager
Herndon Capital Management

January 5, 2012

As of December 31, 2011, TJX Companies comprised 4.41% of the portfolio's assets, Ross Stores – 1.30%, Lazard – 0.00%, Federated Investors – 1.42%, HollyFrontier – 0.82%, Kinetic Concepts – 0.00%, Marathon Oil – 2.43%, Avon Products – 0.00%, Warner Chilcott – 0.00%, Exxon Mobil – 3.98%, Express Scripts – 2.23%, Campbell Soup – 2.11%, Halliburton – 1.90%, and Eli Lilly – 1.11%.

Note: Value investing involves buying the stocks of companies that are out of favor or are undervalued. This may adversely affect the Fund's value and return.

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.

1. With the Federal budget problem looming and the potential for tax increases or spending cuts very real, we have a significant risk of a recession in the next couple of years – and the likelihood of significant volatility in security markets throughout that period. The recession that people thought was starting in mid-year is not here yet and I don’t expect it to occur very soon.
   
   
2. On a risk adjusted basis, I deeply believe a well-run bond portfolio should outperform an equity portfolio. The problem with equities is that a 2% dividend yield is going to be overwhelmed by price action.
   
   
3. I don’t believe you should own any Euros. The problem with Europe is that they have a misguided, ill-conceived system based on handshakes and treaties as opposed to a US style constitution. Their central bank has to get buy-in from the various countries whereas the Federal Reserve can act without approval of the individual states. We already see steep recessionary, in fact depression-like activity happening to the peripheral European countries such as Greece. The Euro has hung in remarkably well because it is two Euros – it’s really Germany and everyone else. When you average them together you get eerie stability against a turbulent backdrop. Southern Europe needs to devalue, Germany does not – I don’t know how you solve that problem except by staying away from the currency.
   
   
4. The U.S. has one problem it shares with Europe which is it has borrowed too much money. We are facing huge economic headwinds because of over-indebtedness of the private economy and an unsustainable path of Federal borrowing.
   
   
5. U.S. government debt should not have been downgraded. The idea that the U.S. cannot pay back its debt is just silly. There is no better payback ability in the world than the U.S. or any country that borrows in its own currency – we own a printing press.
   
   
6. I think risk assets are going to get cheaper. For my money, credit is more likely to go down in price than government credit. I will only buy junk bonds when they get much cheaper.
   
   
7. If there is any incremental progress on the federal deficit either through tax increases or spending cuts then low Treasury bond yields are a possibility for years to come because of lower economic growth and a reduced supply of Treasury bonds.
   
   
8. The two year Treasury hit a two year low of 16 basis points back on September 19^th, now it’s back to 23 basis points. However with a weaker economy because of the business cycle or deficit reduction, it is very likely rates will stay low. Bernanke said they want to keep Fed Funds around zero through at least the middle of 2013, so even to get the 2 year Treasury to increase by 50 basis points will be difficult. Similarly, for the five year Treasury which is now yielding 91 basis points, up from a low of 78 basis points on September 22^nd. I don’t see the point of owning either the two or the five year Treasury at less than 1% - put currency in a coffee can instead.
   
   
9. The 30 year Treasury has not taken out the lows of 2008 and is now yielding 3.1%. A lot of people won’t own long Treasury’s because of the low yield and the risk of price decline. I don’t love them at 3%, but I want them to balance out the portfolio against a European disaster or headwinds from the deficit reduction process in the U.S.  I think it’s imprudent to only own credit risk.
   
   
10. The Fed’s Operation Twist program has not really worked, although the economy has lost its downward momentum but monetary velocity remains flat. I think another version of Operation Twist is possible which is why the long bond yield could fall further.
    
    
11. I believe people often misunderstand risk. If you chart 5 year standard deviation, the volatility of Ginnie Mae’s has never been close to the volatility of Treasuries, Municipals or Investment Grade Corporates. That is why we sometimes overweight Ginnie Mae’s.
    
    
12. In my opinion the U.S. must deleverage as must Europe. Certainly inflating the currency would help, but it is going to be difficult to do because of powerful deflationary forces created by the huge pile of debt.
    
    
13. Floating rate notes seem to make no sense when the Fed has told us that they are not going to raise rates.

The information contained in this summary is excerpted from the ASTON/DoubleLine webcast held on November 15, 2011 and presented by Mr. Jeffrey Gundlach of DoubleLine Capital LP (DoubleLine).  The views expressed by Mr. Gundlach do not necessarily reflect those of Aston Asset Management ("Aston").

This material is not intended to be a forecast of future events, does not constitute investment advice, and is not intended as a recommendation to buy or sell any security. Investors should consult their investment professional regarding their individual investment program. Since the date of this report, economic factors, market conditions and Mr. Gundlach’s views of the prospects of any particular investment may have changed.  Investors should consider the investment objectives, risks and associated costs carefully before investing.  Forward-looking information is subject to certain risk, trends and uncertainties that could cause actual results to differ materially from those predicted.  Past performance is no guarantee of future results. For more information about Aston Asset Management LP and its subadvisors, please call 800-597-9704, or visit www.astonfunds.com. 

U.S. Equities Looking Up?

On December 16, 2011 – Philip Tasho, CFA portfolio manager of the ASTON/TAMRO Small Cap Fund was interviewed on CNBC.  The discussion centered on if the potential decoupling between the U.S. and the rest of the world could possibly benefit American equities. 

Click Here To Watch Video on CNBC.com

Aston Funds has no editorial control over the content of video, subject matter, and timing of the video and is independent of CNBC.  Opinions are as of the broadcast date and are subject to change at any time based on market or other conditions. 

ASTON/TAMRO Small Cap Fund

Performance and Disclosure

On December 6, 2011 - The MDE Group CEO Mitchell Eichen was interviewed on Fox Business News Channel on how to try and minimize your risk and potentially profit in a down market.  The ASTON/MD Sass Enhanced Equity Fund was featured in the story.

Click Here To Watch Video on FoxBusiness.com

Aston Funds has no editorial control over the content of video, subject matter, and timing of the video and is independent of FoxNews.  Opinions are as of the broadcast date and are subject to change at any time based on market or other conditions.

ASTON/M.D. Sass Enhanced Equity Fund
Performance and Disclosure

3rd Quarter 2011

REITs Outpace Broader Financials

The third quarter of 2011 was a tough one for U.S. Equity markets, with the broad market S&P 500 Index down nearly 14%. Worse still was the performance of the Financials sector within the S&P 500, which dropped almost 23%. Fortunately, real estate securities held up better than the broader Financials sector, with REIT indices declining roughly 15%.

The good news for Real Estate Investment Trusts (REITs) space during the third quarter was that it was able to outperform both small-cap and financial stocks, two segments with which REITs are often linked in the minds of equity investors and the popular media. For the first two months of the quarter REITs proved to be relatively defensive.  As the flight from risk assets approached a frenzied level late in September, however, REITs suffered disproportionately. This came partly because REITs were the “last man standing” so to speak and partly because their lesser liquidity came home to roost as equity selling accelerated.

Tale of Two Periods

The Fund’s performance during the third quarter was a tale of two periods. During July and August, the portfolio outperformed as REITs in general proved a relative safe haven. Then, during the period of  accelerated risk aversion in September, the portfolio underperformed as many of the smaller-sized, less-liquid positions in the portfolio suffered along with small-caps in general. For the quarter as a whole, the Fund underperformed its FTSE/NAREIT U.S. REIT Index benchmark.

Among the major detractors from relative performance during the quarter were stakes in regional retail REITs and hotels. Large active weightings in class B regional mall companies, including CBL Properties and Penn REIT detracted significantly from returns once the market sell-off got underway in August. Hotels severely underperformed in September as the market seemed to eschew the sector as the most economically sensitive property type. Poor security selection within the Hotel space exacerbated the problem with an out-of-index holding in casino and resort operator Wynn Resorts declining 25% during September alone.

The Multifamily sector proved to be a mixed bag during the quarter, with holdings in the space outperforming in July and August before succumbing to the sell-off in September. All four active positions generated positive results initially, with United Dominion Realty the most additive to relative performance. The catalyst in the multifamily names seemed to be a convergence in operational metrics among the lower-multiple REITs owned in the portfolio with the operating metrics among many of the higher-multiple names not owned in the portfolio. Unfortunately, the group gave back much of that outperformance in September.

Performance in the Office and Industrial sector was generally positive, as seven of the 11 positions in the portfolio outperformed. Among notable individual contributors were large active positions in Health Care Properties and out-of-index holding Crown Castle. Health Care Properties was one of the best performing REITs during August and held on through the rest of the quarter to aid returns. Crown is the largest independent operator of wireless tower communication sites in the U.S. and continues to benefit from the country’s growth in wireless communications.

Outlook

Although the recent market correction has been pronounced, it has not approached the absolute levels seen during the depth of the financial crisis. Nor does it appear likely that it will for four key reasons. First, public real estate companies today carry markedly lower leverage than was the case during 2008 and 2009. Second, REITs are not facing a liquidity squeeze. There is ample debt capital available today at very low rates. Unsecured lines of credit are being made available with rates below 2% in many cases and medium-term debt (5-7 years) can be had below 5% in many cases. Third, REITs are not likely to issue highly dilutive equity to repair strained balance sheets as many did during 2009. Fourth, public real estate companies today are not overextended on development projects which burdened balance sheets during the financial downturn.

We think the correction has left public real estate companies trading at substantial discounts to net asset value (NAV). By the end of September, we calculated the unweighted average discount in North America at 20%. Historically such large discounts to NAV have not been persistent. Although the gap could be closed by falling private real estate values due to higher capitalization-rates, this does not seem the likely outcome. Given the low interest rate environment underscored by Federal Reserve policy statements and the already large risk premium implied by the spread between cap-rates and US Treasury yields (or BBB-rated Corporates), a meaningful increase in cap-rates does not seem to be the near-term mechanism for closing the gap between public and private real estate valuations in the U.S. 

Harrison Street Securities
Chicago, IL

As of September 30, 2011, CBL & Associates Properties comprised 3.19% of the portfolio's assets, Penn REIT – 1.28%, Wynn Resorts – 3.76%, United Dominion Realty – 0.00 %, Health Care Properties – 0.00%, and Crown Castle – 2.47%.

Note: Small- and mid-cap stocks are considered riskier than large-cap stocks due to greater potential volatility and less liquidity.

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.

3rd Quarter 2011

The Fund significantly outperformed its Barclays Capital U.S. Aggregate Index benchmark from its July 18, 2011 inception through the end of the third quarter. Holdings in investment grade credit outperformed the market while the government portion of the portfolio also outperformed. Both of these sectors continue to be underweight positions in the portfolio versus the index. The Fund’s mortgage-backed securities (MBS) component outperformed the MBS in the benchmark despite the price drop in the non-Agency MBS, which the portfolio is also overweight. Agency MBS outperformed as well due to portfolio holdings in longer duration Agency collateralized mortgage obligations (CMOs). The Fund’s allocation to Emerging Market fixed-income detracted from returns during the quarter.

Global Developed Credit

Pressure on risk assets was in evidence throughout the third quarter. Ongoing signs of U.S. economic weakness along with an increasingly dire fiscal situation in Greece and the continuing deterioration in the economies of other eurozone countries battered the credit markets. Amid this backdrop, U.S. investment-grade corporate bonds posted gains in outperforming declining high-yield bonds, though lagged U.S. Treasury securities.

Among investment-grade corporate bonds, the best performing sectors on a relative basis during the third quarter were Lodging, Pharmaceuticals, and Transportation Services, with Life Insurers, Refining, and Metals and Mining the worst performing groups. Performance by rating category was skewed in favor of higher credit-quality with higher-rated (single A-rated or higher) debt outperforming. With respect to the high yield market, higher-beta (volatility) credits were the big underperformers in that space, consistent with the flight to higher-quality credit during the quarter. All high yield sectors generated negative excess returns relative to the benchmark. In-line with the investment-grade market, lower-rated issues generally underperformed their higher-rated counterparts.

Issuance in both the investment grade and high-yield sectors slowed noticeably during the third quarter from the torrid pace registered earlier in the year. High-yield issuance for the year still represents a mildly healthy increase above last year’s tally through the end of September. High-yield default forecasts are beginning to tick up on the back of ongoing equity volatility as U.S. economic growth decelerates and concern mounts that Europe’s debt crisis spill over into credit markets, making it more difficult for weaker companies to obtain capital.

Option-adjusted spreads of investment grade bonds (represented by the Barclays Capital U.S. Credit Index) and high-yield bonds (Barclays Capital U.S. Corporate High Yield Index) widened during the quarter, most noticeably for high-yield which widened 99 basis points in the month of September alone. Although there appears to be value in credit at these levels for those with a 12-month view, the question remains whether the risk-adjusted value is enough to make this an optimal entry point. Investors are well aware that risk assets have little chance of outperforming while fear of systemic risk fallout from the situation in Europe is the dominant factor in the marketplace. The spread widening experienced thus far in 2011 is substantial, though not close to what was seen at the height of the 2008-2009 sell-off during the last systemic shock. If 2008 taught the market anything, it was that too much is not necessarily enough in a systemically unstable world. Thus, we are maintaining a defensive posture in the portfolio in regards to the corporate credit markets as we head into the fourth quarter, and continue to favor investment-grade over high-yield issuers.

U.S. Government Securities

The Treasury market rallied strongly during the third quarter, resulting in the biggest three-month yield decline since late 2008, and reaching all-time low yields on most benchmark issues. The yield on the 10-year note fell from 3.16% on June 30 to 1.92% at quarter-end after reaching an intra-day low of 1.67% on September 23. The two-year note reached an intra-day low yield of 0.14% on September 19. The 30-year bond yield declined the most, falling 146 basis points from 4.37% on June 30 to 2.91% at quarter-end, making it the star performer in the group.

The rally was fueled by the same factors that have driven the Treasury market throughout 2011—the sovereign debt and banking crisis in Europe, disappointing domestic economic growth, and speculation about potential Federal Reserve policy moves. The Fed, following its September 21 Federal Open Market Committee (FOMC) meeting, unveiled a new program to sell $400 billion of short-maturity Treasuries in its portfolio to fund the purchase of longer maturity issues. The program was somewhat larger than the market consensus called for, with a greater emphasis on the purchase of 30-year bonds, thus adding impetus to the yield curve flattening.

Mortgage-Backed Securities

That the U.S. MBS market underperformed other subsectors of the Barclays Capital U.S. Aggregate Bond Index should come as no surprise as the MBS market has a much shorter duration (a measure of interest-rate sensitivity) than the other sectors, and rates declined substantially throughout the quarter.

Two separate incidents during the third quarter caused price movements different from what would be expected due to changes in interest rates. In July, the mortgage market became concerned over a potential downgrade of the U.S. government, though the downgrade actually occurred on August 5. The concern was whether the downgrade would cause investors to shy away from Agency mortgage paper, but within a few days of the announcement it became clear that investors’ interest level in owning Agency mortgages was unchanged.

The second event that occurred in mid-August was an article in the New York Times about a possible “great refi” (re-financing) event in the mortgage market. The mortgage market has been dealing with many issues to help the housing market for the last couple of years. There is no easy solution to this problem. The “great refi” event has been looked into by market participants and deemed unlikely to happen under current conditions. The article brought this topic front and center raising concern among mortgage market participants. It appears that the likely action from Washington DC will be an extension and expansion of the Home Affordability Refinance Program (HARP). This would bring about an increase in mortgage pre-payments, but nothing like what would have happened if the “great refi” had been announced.

Prepayment speeds did increase during the quarter. This was primarily due to the drop in mortgage rates during the past six months. An additional factor was that September was the last month where the conforming jumbo limit was $729,000. This was the last chance for these borrowers to refinance under conforming Government-Sponsored Enterprise (GSE) guidelines. It is important to note that prepayment speeds are still below where they were back in December when rates were 150 basis points higher than they are now.

There are conflicting stories with regards to actual mortgage prepayments. The further the mortgage market’s price varies from par, the greater the variability in the yields for given changes in prepayment speeds. As previously mentioned, the mortgage market is close to an all-time high price, so different prepayment speeds will bring about vastly different yields. Currently, more than 90% of mortgage borrowers have an economic incentive to refinance. Underwriters have tightened their standards over the past couple of years and nationwide real estate valuations are down 35%. As a result, less than one-half of mortgage borrowers have the economic incentive to refinance without having to put more money into the loan. This has, and will, continue to slow prepayment speeds from where they otherwise would be. On the other side of the ledger is the concern of further government involvement in the mortgage process. We believe that HARP will be the immediate focus of governmental policy. Further weakening of the housing market, however, could lead to more action by the government in the future.

The third quarter ended on a lower note in the non-Agency MBS market with several indices falling. Bid list volume increased by a significant amount, almost doubling since August month-end, as the site of liquidations increased significantly. There was a slightly negative tone in non-Agencies with the exception of the most sought-after prime names, where insurance companies and money managers’ demand seemed to increase. Both subprime and alt-B products have suffered the biggest decline, while seasoned product has held up better. At the beginning of 2011, the non-Agency market was approximately $1.3 trillion in current par and this month it appears that the current supply has been reduced to merely $1.13 trillion.

Emerging Markets Fixed-Income

Emerging Markets (EM) returns retreated to negative territory during the third quarter, weighed by a decline across the all three EM sectors—external sovereign, corporate, and local currency bonds—in September. With September’s price action, high-grade bonds in both the sovereign and corporate indices outperformed their high-yield counterparts, and Europe was the worst performer regionally. Local currency bonds were the worst performing sector for the month, driven by large negative currency returns from the Brazilian Real, Hungarian Forint, and South African Rand. The quarterly performance of local currency bonds was also dominated by the negative currency returns out of Europe and Middle East/Africa.

Looking towards the fourth quarter, we expect the European debt and banking crisis to continue to dominate market sentiment. Aside from all the difficulties in Greece itself, the EU still needs a credible plan to insulate Italy and Spain from a Greek default and it needs to recapitalize its banks to cover the credit risk estimated by the IMF. None of this was helped by Moody’s recent three-notch downgrade of Italy to A2 and news that Dexia, Belgium’s largest bank, will need a bailout less than five months after passing the European banks’ stress test. In addition, Moody’s put countries in the entire eurozone on warning that they are not immune from possible downgrades in the future. We expect a lot of noise out of Europe during the next few months.

Despite all of the negative news coming from the developed markets, credit fundamentals remain strong for EM countries and EM companies, which we expect to benefit from rating upgrades during the next 12 months.

Commercial Mortgage-Backed Securities

CMBS sector performance continues to remain volatile amid market expectations of a broader economic slowdown. In addition, without much of a firm resolution plan in the eurozone, broader markets including CMBS continue to trade on a technical basis rather than based on fundamentals. That being said, market performance in the CMBS space has been somewhat lackluster as prices continued to trade down, albeit at a very slow pace, as investors remain on the sidelines. Much of the trading activity in the sector remains at the top of the capital structure as generic last cash-flow super-senior bonds continue to remain liquid with solid two-way flows due to the 30% credit support.

On the commercial real estate (CRE) fundamental side, we have yet to see any meaningful improvement in delinquency rates, though the pace of deterioration has continued to slow. In September, the 30-day plus delinquency rate increased 19 bps to 9.95%, which cancels out August’s delinquency rate improvement. On the commercial property valuation side, the latest Moody’s Commercial Property Price Index (CPPI) showed a rather large improvement reflecting a 5% increase in July. This data point may be a bit skewed, however, as transaction volume continues to remain low such that any large transaction may cause significant change in the Index whether positive or negative.

Our investment focus for this sector remains largely the same, with an emphasis on security selection and focus in shorter-duration assets—including securities with a more “storied” basis as our ability to drill down to collateral/borrower level allows us to adequately assess risk. Looking forward, our outlook for the sector continues to remain cautious despite a slight improvement in the lending environment as a majority of loans that are able to obtain financing in new vintage CMBS are predominantly higher in quality, off-seasoned transactions. Interest-rate risk and unemployment continue to be large contributing factors for CRE fundamentals and without any real improvement in the unemployment picture, real recovery in CRE will be limited. 

DoubleLine Capital LP
Los Angeles, California

Note: Bond funds are subject to interest rate and credit risk similar to individual bonds. As interest rates rise or credit quality suffers, an investor is susceptible to loss of principal.

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. 

3rd Quarter 2011

Operation Twist

After less than 1% real Gross Domestic Product (GDP) growth during the first half of 2011, the economy is not showing much improvement thus far in the second half of the year. The loss of economic momentum combined with only modest gains in employment and reduced consumer and business confidence are reasons for the disappointing improvement that we now forecast for the second half of 2011. Historically, recoveries following a financial crisis, such as we recently experienced, have usually been modest and bumpy. The developed world has too much debt, and it will require time, patience and sound fiscal policies to adequately reduce it in order to establish a solid foundation for future growth. In the meantime, as the private sector continues to deleverage and the public sector reduces its deficits and debt, the trend in real GDP growth is likely to be less than previously expected by economists.

The Federal Reserve achieved its desired result from the announcement of Operation Twist at its September meeting, with yields on longer-term Treasury bonds declining, while short-term Treasury notes increased slightly in yield. Current yield levels suggest investors expect the U.S. economy to enter a recession. Although we anticipate below trend growth for the next several years as debt levels are brought down at the consumer and government levels, we do not see the U.S. reentering recession. Therefore, we continue to be cautious with regard to the bond portfolio’s average duration and maintain a duration that is approximately 20% shorter than the benchmark indices.

With the anticipated second half rebound in U.S. economic activity falling short, equity investors began the process of reducing their growth outlook for both the second half of 2011 and 2012 and markets corrected accordingly. The market suffered a further blow from the festering European sovereign debt and banking crisis, plus political discord in the United States.

Steady Staples

The Fund outperformed its composite benchmark (60% S&P 500 Index/40% Barclays US Government Credit Index) during the quarter, mostly on the back of equity performance over that of the S&P 500. The Fund benefitted from an overweight allocation to more defensive-oriented Consumer Staples stocks, as well as underweight stakes in struggling Financials, Industrials, and Materials. Materials was the worst performing sector in the S&P 500, while more cyclical Industrials names weakened with the disappointing economic news. The Fund also benefited from a meaningful cash reserve built up prior to the stock market correction. The elevated cash position was due to weak economic data, the limited availability of additional monetary and fiscal stimulus, and the fact that equity markets had rallied substantially since their March 2009 lows. 

Within Consumer Staples, Colgate, Coca-Cola, Costco and Procter & Gamble all rose during a period despite the significant declines in the broader equity market. We increased the portfolio’s position in Colgate several times during the quarter as the stock traded at a compelling valuation and in the belief that its relative earnings momentum should start to improve. The company continues to manage well in a difficult environment and has boosted advertising spending back to more-normalized levels along with benefits from restructuring savings and acquisition synergies. Procter & Gamble was increased as market weakness provided an attractive valuation and our view that management may initiate a large, multi-year restructuring to help fund reinvestment and growth. These types of major restructuring programs have often been a catalyst for Consumer Staples stocks in the past. 

Solid stock selection aided returns within the Consumer Discretionary sector, with McDonald’s and TJX also rising in absolute terms. Bed Bath & Beyond and Nike performed well on a relative basis, though both stocks declined modestly. McDonald’s climbed despite the company reporting disappointing same store sales comparisons for August. We trimmed back on the position thinking that its relatively high price/earnings was likely to weigh on the stock in the near-term, though it remained a top holding at quarter-end. We also reduced the position in Nike during the quarter as the stock reached an all-time high despite expected moderate first half fiscal 2012 earnings growth.  

Stock selection in Healthcare positively added to relative performance as Allergan, Abbott Labs, and AmerisourceBergen all outpaced the broader Healthcare sector. Abbott generates 60% of its sales from international markets, half of which come from its increasing penetration of Emerging Markets. We think the stock is attractively valued with a hefty dividend yield, and expect the company to grow earnings in the low double-digits in 2011. AmerisourceBergen has visible earnings growth from its generic drug line and minimal regulatory and macroeconomic risk. The company’s sizeable cash position also increases its ability to return cash to shareholders through potential share buybacks and dividends.

The Fund’s equity holdings in Technology offered a mixed bag during the quarter. An underweight position in the sector detracted from relative returns, but stock selection benefited performance as Apple, Google and Visa outperformed the overall sector. Stock selection within Energy was the biggest detractor from relative performance. In particular, the portfolio did not own Exxon Mobil, one of the largest weightings in the S&P 500, which declined only 10% during the period versus the sector’s overall decline of more than 20%.

New Purchases—Monsanto and Visa

During the quarter, we established a position in Monsanto—a global provider of agricultural products and integrated solutions for farmers. We think the company stands to benefit from the increased use of genetically modified seeds, lean agricultural commodity inventories, robust demand, and the launch of a significant new product in 2012—Refuge in a Bag. We further boosted the portfolio’s position on weakness after a study by Iowa State University showed growing root worm resistance to Monsanto’s rootworm gene. The study focused on a very small sample set of fields where crop rotation and refuge compliance were sub-standard. The study has been ongoing for several years with no widespread reports of rootworm resistance reported.  Monsanto is working on the next generation of its rootworm gene, with refuge and crop rotation important parts of yield improvement in preventing insect resistance to genetic traits. Monsanto is the Fund’s sole position in the Materials sector.

We also initiated a position in global payments technology company Visa. The Federal Reserve published their final rules with respect to debit fees, and the structure was more favorable than expected for the network processors.  The rule should be implemented within the next few months. We think this should remove most of the regulatory uncertainty overhanging the stock. 

Notable additions to current holdings during the quarter included Kraft Foods, Emerson Electric, and Stryker. We believe Kraft’s announced plan to divide the company into a global snacks business and North American grocery business will garner a higher valuation for the stock. We boosted the position in Emerson on market weakness that provided a more attractive valuation. The company continues to be optimistic about the outlook for Emerging Markets next year, which is expected to approach 40% of the firm’s sales. In addition, its Industrial Automation & Process Management division backlog orders are at or near record levels. Finally, we increased medical device-maker Stryker owing to an attractive valuation and our belief that management execution and a diversified business model will allow the firm to continue to deliver double-digit earnings growth in a more challenging profit environment.

Sells

The Fund eliminated five positions during the quarter—Walgreen’s, Apache, General Electric, Walt Disney, and Coach. We sold Walgreen’s due to management’s apparently entrenched negotiating position with pharmacy benefit manager Express Scripts. Although management is convinced it would be able to retain customers even if Express Scripts drops Walgreen’s from its plans, most observers believe Walgreen’s position will weaken over time as consumers may accept and become accustomed to a new pharmacy. Energy firm Apache was cut in favor of adding to Cameron International, which has exposure to both surface shale oil/gas and deep-water/offshore end markets that should garner investor attention in a recovery. Apache may also be hampered by the ongoing political transition in Egypt. 

Despite General Electric’s attractive valuation, we sold the stock as it was not as defensive as we had expected. This likely reflected investor concerns about a new round of credit losses at its GE Capital financial division and/or the likelihood that decelerating economic growth may push out its recovery to the later-cycle industrial businesses. Consumer Discretionary holdings Disney and Coach were eliminated on the expectation of future headwinds—upcoming tough comparisons, slowing economic growth, deleveraging consumers, and heightened capital expenditures for Disney and likely reduced earnings growth from its focus on the high-end consumer for Coach.

The largest reductions to current positions from the previous quarter came from the Fund’s Energy holdings. Occidental Petroleum was trimmed as a source of funds. Oil prices had moved back up toward the higher end of our anticipated price range during the quarter, resulting in the potential for profit-taking in the sector—particularly after a weak June employment report. We further reduced the position, along with a holding in Schlumberger, in order to raise cash in anticipation of stock market weakness following lackluster economic reports.

Elsewhere, Oracle, Qualcomm, and Accenture were all trimmed within the Technology sector. We reduced the portfolio’s stake in Oracle and Qualcomm following a negative pre-announcement from leading microcontroller supplier Microchip. Given Microchip's broad industry, customer, and geographic diversity, its warning is noteworthy and may indicate widespread weakness in the technology sector. We subsequently added back to Qualcomm after its price significantly corrected, however, given that we continue to be optimistic about the company’s long-term earnings growth prospects. Accenture was reduced after the stock moved up nicely following the company’s strong third quarter earnings report and its addition to the S&P 500 Index. Index buying helped push the stock to new highs and the price approached our estimated present value.

Outlook

U.S. Treasury bonds benefited from a flight-to-quality as headlines around the European debt crisis continue to spark fear among investors. We anticipate that volatility will continue in the bond market within a fairly narrow range. Yield levels are not compelling and thus a favorable resolution to the debt crisis would likely cause a reversal in bond market gains. On the other hand, increases in yield are likely to be limited due to continued weak economic growth. With respect to other sectors of the bond market, yields did not fall as much as Treasury bonds, resulting in attractive yields relative to Treasuries. We believe that high-quality corporate bonds will perform better than Treasuries as investors seek incremental yield in a low interest rate environment. Mortgage-backed securities should also perform better than Treasuries following the Fed’s announcement that it will reinvest mortgage maturities from its portfolio back into mortgage securities instead of into Treasuries as has been its practice over the last several months.

Over the next several months we expect a continuation of the challenging stock market environment as well as the ongoing rotation to higher-quality growth stocks such as those held in the Fund. In our opinion, the stock market correction during the third quarter was caused by investors realizing that the developed world had too much debt and that economic and profit growth would be slower than anticipated as these countries de-leverage. In addition, due to the bruising battle over raising the U.S. debt ceiling and subsequent decision by Standard and Poor’s to cut the United States’ AAA credit rating, it became evident that U.S. policymakers had limited stimulus options for dealing with a slower economic growth environment. Although relief rallies are likely to develop along the way, this more challenging and volatile stock market environment may persist into 2012 as investors further reduce their economic growth and valuation assumptions.

We believe the investment trends favoring higher-quality growth stocks that developed during the third quarter are likely to continue in the period ahead. The shares of these companies are attractively valued and their earnings growth rates are more assured due to their financial strength and global diversification. The Fund’s more defensive growth holdings, ones that offer attractive dividend yields and dividend growth prospects, are particularly attractive in this low bond-yield environment that is expected to last for a considerable time.

Montag & Caldwell Investment Counsel

As of September 30, 2011, Colgate-Palmolive comprised 1.81% of the portfolio's assets, Coca-Cola – 3.02%, Costco – 1.47%, Procter & Gamble – 2.65%, McDonald’s – 2.64%, TJX – 1.72%, Bed Bath & Beyond – 1.34%, Nike – 1.49%, Allergan  – 2.51%, Abbott Laboratories  – 2.69%, AmerisourceBergen – 0.95%, Apple – 2.63%, Google – 2.10%, Visa – 1.24%, Exxon Mobil – 0.00%, Monsanto – 0.99%, Kraft Foods – 2.53%, Emerson Electric – 1.13%, Cameron International  – 0.96%, Stryker – 2.36%, Occidental Petroleum – 1.17%, Schlumberger – 1.03%, Oracle – 1.82%, Qualcomm – 2.31%, and Accenture – 1.79%.

Note: The Fund is subject to stock and bond risk, and its value can decline through either market volatility or a rise in interest rates.

There is no guarantee that a company will pay out or continue to increase its dividends.

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.

3rd Quarter 2011

The Fund underperformed its Barclays Capital US Aggregate Bond Index benchmark during the quarter, in what proved to be the index’s strongest performance since the fourth quarter of 2008. Relative returns lagged mainly owing to a sizeable underweight to US Treasury Bonds (and a corresponding overweight to Corporate bonds) as investors generally sought safety given concerns about the financial stability of Europe and the turmoil in equity markets. Despite a new record low yield in the 10-year Treasury, long-term Treasuries outperformed intermediate Treasuries by more than 21 percentage points as long Treasuries posted their best quarterly returns ever. Corporate bonds trailed duration-matched Treasuries by nearly 5 percentage points.

Within Corporate bonds, the portfolio’s overweight to lower-quality investment grade securities also detracted from returns. AAA-rated securities outperformed AA-, A-, and BBB-rated securities by several percentage points in-line with the overall flight-to-quality by investors during the quarter. In addition, a stake in floating-rate notes, which underperformed fixed-rate notes, also detracted from relative performance as rates declined.

The Fund benefitted from its barbell portfolio structure as the yield curve shifted in a bull flattening fashion following the announcement of Operation Twist by the Federal Reserve. Operation Twist is the Fed’s plan to extend the average maturity of securities it holds by purchasing $400 billion of longer-term Treasuries (maturities of six to 30 years) and selling an equal amount of short-term securities (remaining maturities of three years or less). This, along with greater support for mortgage-backed securities, is intended to drive long-term borrowing rates lower, thereby encouraging businesses and households to further term-out their liabilities. This is an unprecedented undertaking, in our view, and will result in a flattening of the historically steep yield curve. Thus, the portfolio remains structured in a barbell fashion in anticipation that yield curves will continue to flatten going forward. 

Heading into the final quarter of 2011, both equity and debt markets remain in a state of flux. Investors saw an increase in volatility throughout financial markets during the third quarter, as renewed concerns surrounding the health of European banking institutions, the solvency of Eurozone countries, and the continued discourse over the U.S. fiscal and monetary policies accelerated. Although U.S. economic growth increased during the second quarter at a clip slightly better than consensus estimates, economic activity remains anemic. Elsewhere, the Fed cited, “strains in the global financial markets” and stubbornly high unemployment as “significant downside risks to the economy.”

As a result of the weakening economic outlook the Fed kept its targeted range for the Fed funds rate at 0.0% to 0.25%, citing economic conditions likely to warrant exceptionally low levels through mid-2013. Although, the Fed expects commodity-price driven inflation to “dissipate further”, the language did express concern that inflationary pressure may prove higher than anticipated. Philadelphia Fed President Charles Plosser, one of three dissenting votes, cited ongoing fiscal and structural economic concerns as challenges inhibiting the effectiveness of new monetary policy actions and warned against “creating an environment of stagflation, reminiscent of the 1970s.” 

Taplin, Canida & Habacht (TCH)
Miami, Florida

Note: Bond funds are subject to interest rate and credit risk similar to individual bonds. As interest rates rise or credit quality suffers, an investor is susceptible to loss of principal.

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.

3rd Quarter 2011

The third quarter was marked with uncertainty from all angles of the macroeconomic landscape.  The US debt ceiling, the US credit downgrade, uncertainty regarding Europe and its financial institutions, and sovereign risk in general all came together during the period to foster an environment of extreme risk aversion. The Fund’s Russell 2000 Growth Index benchmark dropped more than 22%, as the downward pressure on stocks during August and September erased positive gains from earlier in the year. The Fund itself lagged the benchmark by a sizeable margin.

Although painful, we believe such periods of volatility often create greater inefficiency in the small-cap growth market that can lead to medium and long-term opportunities. Many of the holdings in the portfolio reported solid results during the quarter and maintained financial guidance for the year. Our investment team continues to stick to its discipline of identifying companies with strong underlying fundamentals and revenue growth, margin expansion, and surprise potential. Strong balance sheets are especially important during these times. One can never be certain how long these periods of fundamental and market volatility can last, but we remain confident that solid fundamentals will prevail over the medium- and longer-term.

Laggards

Two notable individual detractors from performance during the quarter were Healthsouth and Monster Worldwide. Healthsouth is a leading inpatient- rehab hospital system that was sold from the portfolio during the first quarter of 2011, when it hit our price target. We do continue to monitor stocks even after they are sold and will revisit them if stock price dips back down and the fundamentals remain intact. In early August, many healthcare services stocks, including Healthsouth, sold off sharply in response to headlines regarding budget reform for Medicare and Medicaid. We think the company is in an extremely robust fundamental position, with a dominant market share in its industry and a strong balance sheet, which had improved since it was sold from the portfolio. After conducting several checks with regulatory bodies/company management, we concluded that the sell off was overdone and added the stock back to the portfolio.

Online job site and top-10 holding Monster Worldwide suffered from the steady outpouring of lackluster employment reports and job growth. Despite the dim macroeconomic news, though, Monster continues to report solid revenue and cash-flow growth. We think media hype about social networking sites like Linkedin hampering the online job market is overblown, as the overlap concerns only a portion of its business. The firm is also generating significant growth internationally, which formerly was a detractor to its business, and we believe international business will continue to drive future growth. In another sign of confidence in the fundamentals, there was insider buying from Monster management during the quarter.   

Radiant Buy-Out

Individual contributors that stood out on the positive side relative to the benchmark were Radiant Systems and Jarden. Radiant is a leading provider of software systems and terminals to restaurants. The firm had been growing revenue in the mid-to-high teens and had a cash rich balance sheet from its burgeoning Software as a Services (SAAS) business that helps restaurants better control inventory and link information from several restaurant sites. In early July, the company’s growth potential was realized when NCR, a leader in point-of-service terminals and self-service kiosks, announced they were acquiring Radiant to expand their offerings in the hospitality industry. 

Consumer products conglomerate Jarden continued to deliver solid revenue and cash-flow growth. The firm has demonstrated its ability to hold up well in a recessionary environment with sales relatively flat during the worst periods of 2008. In fact, Jarden acts more like a Consumer Staples than a Consumer Discretionary stock. During the quarter, the company announced a significant share repurchase as its stock continued to trade at a discount to peers. In addition, it was recently highlighted in a Barron’s article, suggesting others may finally be starting to recognize the fundamental strengths of the firm. 

In summary, we remain committed to our discipline of identifying good companies that are growing revenues, expanding margins, and have strong balance sheets in order to weather this storm. The Fund has seen some short periods of relative underperformance amid a volatile market environment as holdings in the portfolio are noticeably different from that of the benchmark. Yet, we think these volatile periods have seeded the portfolio with opportunities as the small-growth market becomes more inefficient, creating a larger pool of companies with the unrecognized growth characteristics we seek trading at what we consider attractive prices. We certainly cannot advise as to how long this period of volatility will last, but we feel confident in the prospects of the portfolio in the medium- and longer-term.  

Andrew Morey
Crosswind Investments, LLC

As of September 30, 2011, Healthsouth comprised 4.57% of the portfolio's assets, Monster Worldwide – 2.75%, Radiant Systems – 0.00%, NCR – 0.00%, and Jarden – 6.53%.

Note: Small-cap stocks are considered riskier than large-cap stocks due to greater potential volatility and less liquidity.

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.

Click here for Silvercrest Red Herring

CHICAGO – October 26, 2011 – Aston Asset Management, LP (Aston) is pleased to announce that it will partner with Silvercrest Asset Management Group LLC (Silvercrest) to offer a new fund in the Aston Fund family.

Aston Funds has filed a post-effective amendment to its registration statement with respect to the ASTON/Silvercrest Small Cap Fund, an open-end mutual fund that will combine Aston’s distribution and administration capabilities with Silvercrest’s portfolio management capabilities in small cap equities.  The Fund is expected to launch in late December 2011.

“Silvercrest has an outstanding reputation in equity portfolio management and client service,” said Stuart D. Bilton, Chairman and Chief Executive Officer of Aston. “We feel confident that the ASTON/Silvercrest Small Cap Fund will be a strong addition to the Aston family.”

The ASTON/Silvercrest Small Cap Fund’s investment objective seeks to provide long-term capital appreciation. By focusing on better quality businesses as gauged by returns on capital, balance sheet strength dominant market shares in niche businesses and other measures, Silvercrest looks to invest in attractively-valued companies that have the potential to grow over time.

The Fund’s portfolio manager is Roger W. Vogel, CFA, Managing Director at Silvercrest.  Mr. Vogel has been the lead portfolio manager for Silvercrest’s equity investment strategies team since he joined Silvercrest in April of 2002. Prior to Silvercrest, Mr. Vogel was a Managing Director at Credit Suisse Asset Management where he co-managed both small-cap and large-cap portfolios. He arrived at Credit Suisse as a result of the merger with Donaldson, Lufkin and Jenrette (DLJ), where he worked since 1993 in a similar capacity. Prior to DLJ, Mr. Vogel was a portfolio manager at Chemical Bank and Manufacturers Hanover Trust.

“We are pleased to partner with Aston through the ASTON/Silvercrest Small Cap Fund,” said Mr. Vogel.  “At Silvercrest, we believe quality and attention to valuation win over time.  Our long-term perspective enables us to evaluate companies that we believe will prove to be profitable investments, even if they are affected by current concerns.”

Aston will act as the investment adviser to the Fund, while Silvercrest will act as subadviser and will be responsible for day-to-day management of the Fund. Silvercrest is a boutique institutional and family office asset management firm based in New York, NY, with a specialty in highly disciplined, quality-oriented, value equity strategies.

To request more information contact Tony Kono at (973) 850-7323 or moc.cnirpcj@onokt

Aston Asset Management, LP

Headquartered in Chicago, Illinois, Aston provides investment management services to the mutual fund and managed accounts markets by carefully selecting, monitoring and marketing experienced boutique investment managers, who seek to achieve consistent investment performance using disciplined investment processes and best in class business standards.  From the initial due diligence on an investment manager to the launching of a new Aston Fund, we take measured steps to ensure congruence between the requirements of Aston, the capabilities of the subadviser and the needs of clients.  As of September 30, 2011, Aston is the adviser to twenty-five mutual funds with total net assets of approximately $8.4 billion.  Our funds are distributed nationally through intermediaries including registered investment advisors, model platforms, broker-dealers, consultants, retirement platforms and wealth management teams.

Note: Small-cap stocks are considered riskier than large-cap stocks due to greater potential volatility and less liquidity. Value investing often involves buying the stocks of companies that are currently out of favor that may decline further.

The information contained in this press release and in the preliminary prospectus is not complete and may be changed.  A post-effective amendment to the registration statement with respect to the securities of the ASTON/Silvercrest Small Cap Fund has been filed with the Securities and Exchange Commission but is not yet effective.   No securities of the Fund may be sold until the post-effecive amendment with respect to the securities is effective.  This press release or the preliminary prospectus is not an offer to sell these securities and is not a solicitation of an offer to buy these securities in any jurisdiction in where the offer or sale is not permitted.

Investors should consider the investment objectives, risks, charges and expenses of the ASTON/Silvercrest Small Cap Fund carefully before investing. Please call 800 597-9704 for a preliminary prospectus which contains this and other information about the Fund. Read it carefully before you invest or send money.

Aston Funds are distributed by BNY Mellon Distributors Inc.

3rd Quarter 2011

You Can Lead a Horse to Water …

What a disappointing quarter for stock investors, particularly in small-caps. Whatever stimulus the Federal Government provides, the follow through of growth into the private economy has been ephemeral. The consumer, who represents at least two-thirds of the economy, is still de-leveraging—which will take years to unwind—despite a lot of liquidity in the financial system.  Corporate balance sheets are bulging with cash and the 30-year US Treasury yield is less than 3%. The catalysts for growth are there—it's just that consumer and business confidence remains subdued. You can lead a horse to water …

So, what’s the problem?  Is it the European sovereign debt issue?  Is it the slowdown in growth in emerging economies? Economic growth globally and domestically has slowed. The latest Federal Reserve initiative to spur growth is Operation Twist, which follows its second round of quantitative easing that began in August 2010 and ended in June. That initiative jump started a rally in stocks and boosted consumer confidence. Will the new Operation Twist have the same impact? Operation Twist is a policy to sell short-dated fixed income securities and buy long-duration bonds. The intent is to lower long-term interest rates and also to steer more investable funds to other sources of long-duration assets like common stocks. Rising stock prices have lifted consumer and business sentiment and led to a stronger economy at times in the past.

Whether or not this is the correct lever for the Government to pull, the important point for long-term investors is that stocks are once again attractively priced. We could cite a lot of statistics to convey the facts, but one significant action to note is that legendary investor Warren Buffett, CEO of Berkshire Hathaway, believes its stock is undervalued and announced that it may begin to buy back some of its shares. This is only the second time in the firm's history that it has made such an announcement. The last time was March 2000.

At TAMRO our mantra has always been to buy the best when they’re depressed. When the entire market swoons, we look for companies that fit our Leader investment category and tend to sell undervalued, lower-confidence holdings and redeploy to equally undervalued, higher-conviction stocks. Our philosophy is to focus on companies that we believe have a sustainable competitive advantage and opportunistically buy them when the valuation is attractive—where we calculate an upside potential to be at least three times greater than the downside risk. In times of uncertainty we stay with what we know best.

Positive Health, Sagging Tech

During the third quarter, the Fund declined sharply with the rest of the equity market and roughly in-line with its Russell 2000 Index benchmark. Positive stock selection overall relative to the benchmark was largely offset by a negative allocation effect. Stock selection was quite strong in the Healthcare, Materials and Consumer Staples sectors, with the picks in the latter category actually able to eke out a positive gain during the period. Healthcare IT firms Athenahealth and Quality Systems both reported solid quarterly earnings results that exceeded expectations. In addition, Athenahealth benefitted from strong cross-selling opportunities as a result of a recent acquisition and Quality Systems' pipeline for new deals remains robust.

Another top individual contributor was Advisory Board, a research firm that provides best-practices analysis to client companies—most of which are in the Healthcare industry. Strong results across all measures and raised guidance drove the stock higher as the firm continues to benefit from upcoming reimbursement changes for hospitals and growth in its analytical tools business. Finally, mining stock Royal Gold within Materials appreciated as the price of gold continued to increase.

An underweight stake in the defensive Utilities sector and an overweight position in the battered Energy sector led to the negative allocation effect. Natural gas commodity prices declined 15% and crude oil 17%, creating uncertainty about energy demand going forward and negatively affecting holdings such as Comstock Resources and Precision Drilling.

In addition, stock selection within Technology, Financials, and Telecommunications detracted from relative performance. Tech stocks Vasco Data Security and NETGEAR were among the largest individual detractors from performance during the quarter, one on company concerns and the other from macroeconomic worries. Vasco suffered a black eye from a security breach at a recently acquired subsidiary while NETGEAR declined on fears an economic slowdown that might negatively affect consumer spending on technology. Another notable detractor was telecomm provider Cbeyond, which reported light net customer additions that prompted fears that small businesses were under more pressure.

Outlook and Positioning

We still believe the economy will avoid re-entering a period of recession. Although we are not top-down investors, we do not ignore the macroeconomic backdrop. The domestic consumer is still deleveraging, a process that has been ongoing for the past three years. As we stated last quarter, corporate balance sheets are flush with cash, interest-rates are at historic lows, domestic Gross Domestic Product (GDP) growth has been positive for four quarters and, outside of housing, there are no other major excesses that have built up in the economy.

At quarter end, the Fund’s largest sector weightings in absolute terms were in Industrials, Financials, and Technology. Relative outperformance also boosted the stake in Healthcare (which would be even greater if you consider Advisory Board as a Healthcare stock, which we do internally, instead of an Industrials name as it is officially classified). Efficient administration continues to be a dominant trend in Healthcare, with the need for cost containment as important as ever as demand for healthcare services continues to grow. In our opinion, that is a long-term trend that resonated with several stocks in the portfolio this quarter. Within Financials we believe that leading companies will consolidate and gain market share, while several companies in the Industrials sector continue to be beneficiaries of global growth as emerging economies invest in water and energy infrastructure.

High-capacity wireless network equipment-maker Ceragon Networks became a full position during the quarter. The company’s Wi-Fi backhaul solutions enable global wireless carriers to offload data traffic onto “secondary” Wi-Fi networks in their efforts to manage the mobile data explosion. Firm growth was pressured by India’s strategic security review of its telecomm network that slowed carrier capital expenditures. With the security review complete, firms have resumed spending on wireless infrastructures in what had been Ceragon’s most important region.  The company’s financial strength enabled the acquisition of Nera, a complementary firm, which provides the strategic heft necessary to capitalize on the emerging mobility trend.

Three full positions were sold from the portfolio during the period—Blackboard, Lumber Liquidators, and NuVasive. Blackboard performed well since its purchase back in early 2009, and was sold as a source of funds as it traded near its takeover price of $45/share from an investor group led by affiliates of Providence Equity Partners. Lumber Liquidators reported earnings in line with reduced guidance, but inventories jumped sizably from the prior year causing us concern. NuVasive was sold due to a patent lawsuit filed against it by Medtronic. Although the company will appeal the loss verdict, we think it is a significant distraction for management. 

TAMRO Capital Partners
Alexandria, Virginia

As of September 30, 2011, Athenahealth comprised 3.35% of the portfolio's assets, Quality Systems – 2.24%, Advisory Board – 3.76%, Royal Gold – 0.99%, Comstock Resources  – 1.78%, Precision Drilling  – 1.48%, Vasco Data Security  – 1.05%, NETGEAR – 1.94%, Cbeyond – 0.99%, and Ceragon Networks – 1.47%.

Note: Small-cap stocks are considered riskier than large-cap stocks due to greater potential volatility and less liquidity.

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.

3rd Quarter 2011

You Can Lead a Horse to Water …

What a disappointing quarter for stock investors, particularly in small-caps. Whatever stimulus the Federal Government provides, the follow through of growth into the private economy has been ephemeral. The consumer, who represents at least two-thirds of the economy, is still de-leveraging—which will take years to unwind—despite a lot of liquidity in the financial system.  Corporate balance sheets are bulging with cash and the 30-year US Treasury yield is less than 3%. The catalysts for growth are there—it's just that consumer and business confidence remains subdued. You can lead a horse to water …

So, what’s the problem?  Is it the European sovereign debt issue?  Is it the slowdown in growth in emerging economies? Economic growth globally and domestically has slowed. The latest Federal Reserve initiative to spur growth is Operation Twist, which follows its second round of quantitative easing that began in August 2010 and ended in June. That initiative jump started a rally in stocks and boosted consumer confidence. Will the new Operation Twist have the same impact? Operation Twist is a policy to sell short-dated fixed income securities and buy long-duration bonds. The intent is to lower long-term interest rates and also to steer more investable funds to other sources of long-duration assets like common stocks. Rising stock prices have lifted consumer and business sentiment and led to a stronger economy at times in the past.

Whether or not this is the correct lever for the Government to pull, the important point for long-term investors is that stocks are once again attractively priced. We could cite a lot of statistics to convey the facts, but one significant action to note is that legendary investor Warren Buffett, CEO of Berkshire Hathaway, believes its stock is undervalued and announced that it may begin to buy back some of its shares. This is only the second time in the firm's history that it has made such an announcement. The last time was March 2000.

At TAMRO our mantra has always been to buy the best when they’re depressed. When the entire market swoons, we look for companies that fit our Leader investment category and tend to sell undervalued, lower-confidence holdings and redeploy to equally undervalued, higher-conviction stocks. Our philosophy is to focus on companies that we believe have a sustainable competitive advantage and opportunistically buy them when the valuation is attractive—where we calculate an upside potential to be at least three times greater than the downside risk. In times of uncertainty we stay with what we know best.  

Positive Health, Sagging Tech

During the third quarter, the Fund declined sharply with the rest of the equity market and underperformed its Russell 1000 Index benchmark. The underperformance relative to the benchmark was primarily due to stock selection in the Technology and Consumer Discretionary sectors. Tech firm Vasco Data Security suffered a black eye from a security breach at a recently acquired subsidiary. The setback at the previously untainted firm, and its depressed stock, eventually led us to sell the position to fund higher conviction names. Auto parts supplier Johnson Controls within Consumer Discretionary underperformed on margin weakness in its non-auto business segments as well as macroeconomic fears of a global recession.

Stock selection within Utilities and Financials, along with underweight positions in the more defensive Utilities and Consumer Staples sectors also hindered performance relative to the benchmark. Life-insurance giant MetLife continued to correct on concerns that a low absolute interest-rate environment would pressure the firm’s profitability.   

Stock selection in Healthcare, Materials, and Energy were strong on a relative basis, with the portfolio’s Healthcare holdings actually posting a positive absolute return for the quarter. Healthcare IT firms Athenahealth and Cerner both reported solid quarterly earnings results and raised guidance. In addition, Athenahealth benefitted from strong cross-selling opportunities as a result of a recent acquisition and Cerner showed robust booking and order backlog growth.

Another top individual contributor was Advisory Board, a research firm that provides best-practices analysis to client companies—most of which are in the Healthcare industry. Strong results across all measures and raised guidance drove the stock higher as the firm continues to benefit from upcoming reimbursement changes for hospitals and growth in its analytical tools business.

Mining stock Royal Gold was another top contributor within Materials as the price of gold continued to increase. Despite a drop in natural gas and oil commodity prices, shares of energy firm Range Resources rose on speculation regarding the company’s attractiveness as a potential acquisition target. Finally, though the overall sector allocation effect for the portfolio was negative during the period, it was more than offset by a positive interaction effect—where the portfolio was overweight outperforming sectors and underweight underperforming sectors. 

Outlook and Positioning

Although our expectations call for a continuation of modest domestic economic growth, TAMRO’s investment process focuses on individual, bottom-up stock selection to identify companies that we believe are best able to execute given their specific competitive advantage.  Our approach to portfolio management is opportunistic and broadly diversified, with sector weights determined by where we see opportunities at the stock level rather than macroeconomic calls.

At quarter end, the Fund’s largest sector weightings in absolute terms were in Healthcare, Financials, and Industrials, with Financials entering the top-three sectors mainly owing to purchases. We decisively added to Financials during the quarter as we identified more high-quality companies that represented attractive opportunities within the sector.  We believe domestic economic growth is only sustainable with a strong financial sector and we think we have identified clear leaders that have executed throughout the financial crisis. We believe there are only a handful of “thrivers”—companies with a competitive advantage that differentiates them from their peers that are attractively priced due to current investor disinterest.

Relative outperformance pulled Healthcare into the top three, pushing Technology out of the top tier. Efficient administration continues to be a dominant trend in Healthcare, with the need for cost containment as important as ever as demand for healthcare services continues to grow. In our opinion, that is a long-term trend that resonated with several stocks in the portfolio this quarter. We have identified Healthcare IT companies that we think are major beneficiaries of this trend and have been able to hold the investments as business execution has continued.

Seven stocks became full positions within the portfolio during the quarter either through direct purchases, market appreciation, or a combination of the two. Notable among them were Berkshire Hathaway, Cisco Systems, and Raymond James Financial. Warren Buffett uses Berkshire’s enormous float, produced by its successful insurance operations, to opportunistically invest in attractively-priced assets. The summer 2011 market selloff drove the company’s share price to a multi-year low on a price-to-book basis. The attractive valuation, improved pricing in the insurance market, and the announced company share buyback program were all catalysts for the re-introduction of Berkshire into the portfolio.

Cisco’s aggressive acquisition campaign over the past decade led to the company overreaching and creating confusion with its customer base. The experienced management team is beginning to undertake the changes needed to refocus on customer needs, however, which we believe should reinvigorate revenue growth and stock performance. We find regional brokerage firm Raymond James attractive because of its management team and strong historical track record. The company gets a majority of its revenues and significant profits from its traditional brokerage/private client operations, but also has an important capital markets operation, asset management group, and bank. Although the firm will likely be affected by overall market conditions and concerns about the outlook for financial services firms in general, we expect management to continue successfully charting the company’s course.

Five full positions were sold during the quarter in addition to the previously mentioned Vasco, including Royal Gold, EMC, and United Technologies. As investors fled to the safety of gold and commodity prices rose, we gradually took profits in Royal Gold and used it as a source of funds for other opportunities. Long-term holdings United Technologies and EMC performed well for the portfolio since their purchase, but operating margins for United Technology are at historic highs and a pending acquisition raises near-term uncertainty about integration. EMC was sold to fund better relative opportunities within the Technology sector. 

TAMRO Capital Partners
Alexandria, Virginia

As of September 30, 2011, Vasco Data Security  comprised 0.00% of the portfolio's assets, Johnson Controls – 1.97%, MetLife – 1.86%, Athenahealth – 3.40%, Cerner – 3.52%, Advisory Board – 3.21%, Royal Gold – 0.00%, Range Resources  – 2.69%, Berkshire Hathaway – 1.84%, Cisco – 1.63%, and Raymond James Financial – 2.14%.

Note: Small- and mid-cap stocks are considered riskier than large-cap stocks due to greater potential volatility and less liquidity.

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.

3rd Quarter 2011

Unnerved Equity Markets

The Fund’s MSCI EAFE Index benchmark fell sharply during the third quarter of 2011, erasing the gains international equities has made during the first half of the year. Developments during the summer unnerved most equity markets. The main issue has been the weakening economic outlook in a number of regions.

Europe has been the main problem area. The issues that have arisen there this year have not only not been resolved they have escalated and expanded. For example, the Greek government funding crisis has led to a Greek banking crisis. It has also led to a crisis for the French banks that are among the largest lenders to the Greek government. Weakness in the French banking sector may need to be stemmed by the French government, undermining that country’s AAA credit-rating. This is a concern for the French as they can see from Italy’s situation how quickly borrowing costs can rise once the confidence of the bond market is lost. This dynamic is also very apparent to the Germans, who have remained reluctant to lend their national balance sheet to the aid of the Euro zone.

The result is a very messy impasse. A coordinated response is required, yet none of the key central Euro zone countries are motivated to act. With no action forthcoming, the Euro crisis agenda is slowly being overtaken by political rather than economic considerations.

We do not know how this will end. There are many possibilities, including a Euro zone fiscal transfer union (possibly a Euro zone political union), a Greek default and exit from the Euro zone, a German exit from the Euro zone, and many others. We think the one certainty that exists is that the Euro zone will look much different in the future however this situation is resolved.

No sectors or regions in the benchmark rose in absolute terms during the quarter. Japan was the best performing region in falling only 6% followed by the UK which fell 15%. Europe ex-UK was the poorest performer down 26%, while Emerging Markets fell by 22% in underperforming the index. Consumer Staples and Healthcare were the best performing sectors in limiting losses to single digits. Materials and Financials were the worst performing areas, with Materials falling by nearly 28% during the period.

Materials and the UK

The Fund solidly outperformed the index overall during the quarter, mostly due to stock selection. Positive asset allocation by region was mostly offset by slightly negative sector allocation. The strong stock selection was largely driven by picks in the UK region and the Materials sector.

In the UK, the main factor was the acquisition of software company Autonomy Group by Hewlett Packard. The purchase price was a very attractive 79% premium to the closing price prior to the bid. The bid has gone unconditional and we look forward to reinvesting the proceeds in the coming quarter. Outperformance within Materials came on the strength of precious metals miners. Gold mining stocks continued to benefit from the negative real interest rate environment, though they struggled towards the end of the quarter possibly due to the disappointment that the US Federal Reserve did not announce a more substantial round of monetary stimulus at their September meeting.

Other contributing factors to the Fund’s relative outperformance came from stock selection in the Europe ex-UK region and the Technology, Consumer Discretionary, and Financials sectors. Returns in the tech arena were boosted by the previously mentioned Autonomy acquisition, while the strong performance of Japanese online retailer Rakuten boosted results within Consumer Discretionary. The avoidance of sagging European commercial banks led to the outperformance in Financials.

Stock selection in the Pacific ex-Japan region and the Energy sector was weak, primarily due to the poor performance of Australian uranium miner Paladin Energy. In addition, an overweight position in the battered Materials sector and an underweight stake in the more defensive-oriented Consumer Staples area detracted from relative returns.

Portfolio Positioning

The Fund has benefitted from its underweight position in Europe, and especially to European commercial banks, as our Strategic Policy Group remains negative on the region and the Financial sector overall. That said, many high-quality growth stocks in Europe that are less directly affected by European events have shown attractive growth at what we consider to be reasonable prices. We have been selectively adding to these ideas when we find them. One example is German pharmaceutical company Bayer. Bayer manufactures and sells its products globally and has one of the strongest new product pipelines in the pharmaceutical industry, a strong balance sheet, and now trades at a forward price/earnings ratio of not much more than seven times earnings.

The decision to selectively buy Japanese equities earlier in the year benefitted the portfolio this quarter, and our only regret was that we did not own more. Although neutral on Japan from a top-down perspective, this has not been an impediment to finding good bottom up driven growth ideas and this is likely to continue.

Overall, there were few changes made to the Fund during the quarter, with only three notable sales from the portfolio. We took profits in Spanish healthcare company Grifols and Macau gaming company SJM Holdings. SJM did not appear to be overvalued, but we had increasing doubts about the sustainability of its extremely rapid rate of growth. In addition, the tightening of credit conditions in China was the catalyst for exiting this position. Heineken was sold following a disappointing set of results that highlighted growth problems in parts of its business, most notably its African business.

We used the proceeds of the Heineken sale to purchase brewer SABMiller. SABMiller has recently acquired Australian brewer Foster’s Group. We think the deal looks sensible and should benefit from the cost savings that we believe SABMiller will extract from the combined groups. Another new purchase was Randgold Resources, which follows our belief that gold miners continue to offer an attractive investment opportunity.

Outlook

In the US, economic data over the summer has been weak leading a number of economists to predict that a relapse into recession is underway. More recent economic data out of the US has been moderately better than expected though still weak. The biggest surprise in recent weeks has been the market’s sudden concern about the Chinese economy. We have commented in the past about rising inflation in China and the efforts the People’s Bank of China (PBOC) has made to keep this under control.

The recent concern has centered on the shadow banking system. A good deal of recent loan growth in China has been outside of the banking system. This has been an outgrowth of the low deposit rates offered to savers. Savers, rather than putting money in the bank, have instead made their funds available to lend to companies—primarily small- and medium-sized enterprises and small property developers. Several recent failures of smaller companies who had borrowed via the shadow banking system has led to fears of a property market collapse and other knock on effects caused by declining credit availability. If the collapse of the Chinese shadow banking system leads to less credit availability in the economy, then our investment theme related to high-end consumer spending in China is at risk.

But the weakness in the global economy and the recent renewed weakness in global equities suggest to us that more monetary stimulus will be coming, and probably soon. Fiscal stimulus measures no longer look possible. The European debt crisis and this summer’s acrimonious debt ceiling debate in the US show this to be true. Gold mining stocks look attractively valued relative to the gold price and are likely to respond well to any further monetary stimulus.

The same can be said for equities in general and especially for growth stocks. We continue to look to find companies that can grow their earnings even in a weak economic growth environment. Recent equity market weakness is disappointing but it has left more growth stocks trading at reasonable prices than we have seen in a while. 

Baring Asset Management
London, UK

As of September 30, 2011, Autonomy Group comprised 2.09% of the portfolio's assets, Rakuten – 1.38%, Paladin Energy – 0.64%, Bayer AG – 1.98%, Grifols – 0.40%, SJM Holdings – 0.00%, Heineken – 0.19%, SABMiller – 1.53%, Foster’s Group – 1.43%, and Rangold Resources – 1.74%. 

Note: Investing in foreign markets involves the risk of social and political instability, market illiquidity, and currency volatility.

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.

3rd Quarter 2011

After less than 1% real Gross Domestic Product (GDP) growth during the first half of 2011, the economy is not showing much improvement thus far in the second half of the year. The loss of economic momentum combined with only modest gains in employment and reduced consumer and business confidence are reasons for the disappointing improvement that we now forecast for the second half of 2011. Historically, recoveries following a financial crisis, such as we recently experienced, have usually been modest and bumpy. The developed world has too much debt, and it will require time, patience and sound fiscal policies to adequately reduce it in order to establish a solid foundation for future growth. In the meantime, as the private sector continues to deleverage and the public sector reduces its deficits and debt, the trend in real GDP growth is likely to be less than previously expected by economists.

With the anticipated second half rebound in U.S. economic activity falling short, investors began the process of reducing their growth outlook for both the second half of 2011 and 2012 and equity markets corrected accordingly. The market suffered a further blow from the festering European sovereign debt and banking crisis, plus political discord in the United States.

Steady Staples

The Fund outperformed both its Russell 1000 Growth Index benchmark and the broader market S&P 500 Index by a healthy margin during the quarter. On a sector level, the Fund benefitted from its sizeable overweight allocation to more defensive-oriented Consumer Staples stocks, as well as underweight stakes in struggling Financials, Industrials, and Materials. Materials was the worst performing sector in the benchmark, while more cyclical Industrials names weakened with the disappointing economic news. The Fund also benefited from a meaningful cash reserve built up prior to the market correction. The elevated cash position was due to weak economic data, the limited availability of additional monetary and fiscal stimulus, and the fact that the markets had rallied substantially since their March 2009 lows. 

Within Consumer Staples, Colgate, Coca-Cola, Costco and Procter & Gamble all rose during a period despite the significant declines in the broader equity market. We increased the portfolio’s position in Colgate several times during the quarter as the stock traded at a compelling valuation and in the belief that its relative earnings momentum should start to improve. The company continues to manage well in a difficult environment and has boosted advertising spending back to more-normalized levels along with benefits from restructuring savings and acquisition synergies. Procter & Gamble was increased as market weakness provided an attractive valuation and our view that management may initiate a large, multi-year restructuring to help fund reinvestment and growth. These types of major restructuring programs have often been a catalyst for Consumer Staples stocks in the past. 

Solid stock selection aided returns within the Consumer Discretionary sector, with McDonald’s and TJX also rising in absolute terms. Bed Bath & Beyond and Nike performed well on a relative basis, though both stocks declined modestly. McDonald’s climbed despite the company reporting disappointing same store sales comparisons for August. We trimmed back on the position thinking that its relatively high price/earnings was likely to weigh on the stock in the near-term, though it remained a top holding at quarter-end. We also reduced the position in Nike during the quarter as the stock reached an all-time high despite expected moderate first half fiscal 2012 earnings growth.  

Stock selection in Healthcare positively added to relative performance as Allergan, Abbott Labs, and AmerisourceBergen all outpaced the broader Healthcare sector. Abbott generates 60% of its sales from international markets, half of which come from its increasing penetration of Emerging Markets. We think the stock is attractively valued with a hefty dividend yield, and expect the company to grow earnings in the low double-digits in 2011. AmerisourceBergen has visible earnings growth from its generic drug line and minimal regulatory and macroeconomic risk. The company’s sizeable cash position also increases its ability to return cash to shareholders through potential share buybacks and dividends.

The Fund’s holdings in Technology offered a mixed bag during the quarter. An underweight position in the sector detracted from relative returns, but stock selection benefited performance as Apple, Google and Visa outperformed the overall sector. Stock selection within Energy was the biggest detractor from relative performance. In particular, the portfolio did not own Exxon Mobil, one of the largest weightings in the benchmark, which declined only 10% during the period versus the sector’s overall decline of more than 20%.

New Purchases—Monsanto and Visa

During the quarter, we established a position in Monsanto—a global provider of agricultural products and integrated solutions for farmers. We think the company stands to benefit from the increased use of genetically modified seeds, lean agricultural commodity inventories, robust demand, and the launch of a significant new product in 2012—Refuge in a Bag. We further boosted the portfolio’s position on weakness after a study by Iowa State University showed growing root worm resistance to Monsanto’s rootworm gene. The study focused on a very small sample set of fields where crop rotation and refuge compliance were sub-standard. The study has been ongoing for several years with no widespread reports of rootworm resistance reported.  Monsanto is working on the next generation of its rootworm gene, with refuge and crop rotation important parts of yield improvement in preventing insect resistance to genetic traits. Monsanto is the Fund’s sole position in the Materials sector.

We also initiated a position in global payments technology company Visa. The Federal Reserve published their final rules with respect to debit fees, and the structure was more favorable than expected for the network processors.  The rule should be implemented within the next few months. We think this should remove most of the regulatory uncertainty overhanging the stock. 

Notable additions to current holdings during the quarter included Kraft Foods, Emerson Electric, and Stryker. We believe Kraft’s announced plan to divide the company into a global snacks business and North American grocery business will garner a higher valuation for the stock. We boosted the position in Emerson on market weakness that provided a more attractive valuation. The company continues to be optimistic about the outlook for Emerging Markets next year, which is expected to approach 40% of the firm’s sales. In addition, its Industrial Automation & Process Management division backlog orders are at or near record levels. Finally, we increased medical device-maker Stryker owing to an attractive valuation and our belief that management execution and a diversified business model will allow the firm to continue to deliver double-digit earnings growth in a more challenging profit environment.

Sells

The Fund eliminated five positions during the quarter—Walgreen’s, Apache, General Electric, Walt Disney, and Coach. We sold Walgreen’s due to management’s apparently entrenched negotiating position with pharmacy benefit manager Express Scripts. Although management is convinced it would be able to retain customers even if Express Scripts drops Walgreen’s from its plans, most observers believe Walgreen’s position will weaken over time as consumers may accept and become accustomed to a new pharmacy. Energy firm Apache was cut in favor of adding to Cameron International, which has exposure to both surface shale oil/gas and deep-water/offshore end markets that should garner investor attention in a recovery. Apache may also be hampered by the ongoing political transition in Egypt. 

Despite General Electric’s attractive valuation, we sold the stock as it was not as defensive as we had expected. This likely reflected investor concerns about a new round of credit losses at its GE Capital financial division and/or the likelihood that decelerating economic growth may push out its recovery to the later-cycle industrial businesses. Consumer Discretionary holdings Disney and Coach were eliminated on the expectation of future headwinds—upcoming tough comparisons, slowing economic growth, deleveraging consumers, and heightened capital expenditures for Disney and likely reduced earnings growth from its focus on the high-end consumer for Coach.

The largest reductions to current positions from the previous quarter came from the Fund’s Energy holdings. Occidental Petroleum was trimmed as a source of funds. Oil prices had moved back up toward the higher end of our anticipated price range during the quarter, resulting in the potential for profit-taking in the sector—particularly after a weak June employment report. We further reduced the position, along with a holding in Schlumberger, in order to raise cash in anticipation of stock market weakness following lackluster economic reports.

Elsewhere, Oracle, Qualcomm, and Accenture were all trimmed within the Technology sector. We reduced the portfolio’s stake in Oracle and Qualcomm following a negative pre-announcement from leading microcontroller supplier Microchip. Given Microchip's broad industry, customer, and geographic diversity, its warning is noteworthy and may indicate widespread weakness in the technology sector. We subsequently added back to Qualcomm after its price significantly corrected, however, given that we continue to be optimistic about the company’s long-term earnings growth prospects. Accenture was reduced after the stock moved up nicely following the company’s strong third quarter earnings report and its addition to the S&P 500 Index. Index buying helped push the stock to new highs and the price approached our estimated present value.

Outlook

Over the next several months we expect a continuation of the challenging stock market environment as well as the ongoing rotation to higher-quality growth stocks such as those held in the Fund. In our opinion, the stock market correction during the third quarter was caused by investors realizing that the developed world had too much debt and that economic and profit growth would be slower than anticipated as these countries de-leverage. In addition, due to the bruising battle over raising the U.S. debt ceiling and subsequent decision by Standard and Poor’s to cut the United States’ AAA credit rating, it became evident that U.S. policymakers had limited stimulus options for dealing with a slower economic growth environment. Although relief rallies are likely to develop along the way, this more challenging and volatile stock market environment may persist into 2012 as investors further reduce their economic growth and valuation assumptions.

We believe the investment trends favoring higher-quality growth stocks that developed during the third quarter are likely to continue in the period ahead. The shares of these companies are attractively valued and their earnings growth rates are more assured due to their financial strength and global diversification. The Fund’s more defensive growth holdings, ones that offer attractive dividend yields and dividend growth prospects, are particularly attractive in this low bond-yield environment that is expected to last for a considerable time.

Montag & Caldwell Investment Counsel

As of September 30, 2011, Colgate-Palmolive comprised 3.17% of the portfolio's assets, Coca-Cola – 5.01%, Costco – 2.44%, Procter & Gamble – 4.88%, McDonald’s – 4.43%, TJX – 2.80%, Bed Bath & Beyond – 2.19%, Nike – 2.57%, Allergan  – 3.93%, Abbott Laboratories  – 4.52%, AmerisourceBergen – 1.67%, Apple – 4.42%, Google – 3.56%, Visa – 2.14%, Exxon Mobil – 0.00%, Monsanto – 1.67%, Kraft Foods – 4.28%, Emerson Electric – 1.87%, Cameron International  – 1.61%, Stryker – 4.10%, Occidental Petroleum – 1.96%, Schlumberger – 1.72%, Oracle – 2.95%, Qualcomm – 3.78%, and Accenture – 3.19%.

Note: Growth stocks are generally more sensitive to market moves and thus may be more volatile than other stocks.

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.

3rd Quarter 2011

International equity markets were extremely weak during the third quarter. A U.S. sovereign debt downgrade, continued concerns over the unresolved Eurozone debt crisis, China growth slowdown fears, and the apparent paralysis of policymakers were just a few of the factors to undermine investor confidence. Although corporate news remained resilient for the majority of companies reporting during the period, equity markets remained very much focused on the weakening macroeconomic outlook. Consequently, equity valuations moved lower in anticipation of tougher times ahead.

The Fund slightly underperformed its MSCI EAFE & Emerging Markets Index benchmark overall during the quarter. It was a tale of two periods for the portfolio, as sector selection drove outperformance in July. With growing concerns over macroeconomic and systemic issues weighing heavily on the global Financials sector, the portfolio’s underweight stake in this sector proved highly beneficial. July also saw strong relative performance from Emerging Markets as investors grew more concerned with the macroeconomic developments in developed markets, the heart of which is the U.S. and Europe. Overweight positions in Russia and China also proved particularly beneficial to relative performance during the month.

August and September were challenging months for global equities in aggregate, however, and the Fund was not spared. Its underperformance during those two months can be broadly attributed to both the Fund’s Emerging Market holdings and exposure to more economically influenced cyclical names amid a period of distinct developed market and defensive sector relative outperformance. We believe this is a short-term flight-to-safety, though, in reaction to diminished confidence in economic data and political action.

The Fund’s underweight position in Financials remained a positive contributor to performance even in the latter part of the quarter as ultimately Financials fell by more than 20% for the three months ending in September. Underweight stakes in traditionally defensive sectors such as Healthcare and Utilities detracted from performance, as did an overweight position in Energy—where a declining price for oil negatively affected holdings.

Despite the many near-term challenges, we remain positive on global growth in the long-term, particularly once macroeconomic fears ease. Despite the economies in developed markets having only just returned to their pre-crisis real Gross Domestic Product (GDP) levels, emerging economies are now more than 14% above that level. Combined with relatively low debt in the Emerging Markets and continued de-leveraging in the developed world, we believe nations such as Russia and China will continue to be the driving forces behind global growth. 

Robin Geffen, Fund Manager & CEO
Neptune Investment Management

Note: Investing in foreign markets involves the risk of social and political instability, market illiquidity, and currency volatility. Holdings in emerging markets entail the further risk of unstable legal systems, increased volatility, and even less liquidity.

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. 

3rd Quarter 2011

Equities declined sharply during the third quarter on heightened fear of a global economic slowdown resulting from the ongoing European debt crisis and a gridlocked Washington’s inability to respond with meaningful domestic policy. The decline was broad based with most sectors losing more than 20% of their value, with the stocks of economically sensitive businesses being most affected as is typical with macroeconomic related corrections. The traditionally resilient and defensive-oriented Healthcare sector performed poorly during the quarter as the overhang of potential reductions in Medicare spending starting in 2013 muted investor interest. Within the Russell Midcap Index, value slightly outperformed growth primarily as a result of its higher weighting in the better performing utility stocks.

Corporate earnings remained strong and balance sheets healthy, but visibility diminished. The housing market remained moribund as regulators and mortgage servicers failed to agree on settlement terms leaving the foreclosure backlog overhanging the market. With the significant decline in stock prices, insiders and corporations have become aggressive buyers, reinforcing our view that equity valuations remain quite attractive. While merger & acquisition activity has slowed with the decline in business confidence, we expect activity to pick up when visibility improves.

Solid Stock Selection

The Fund fared better than its Russell Midcap Value Index benchmark during the third quarter. Relative performance was driven by stock selection across most economic sectors. Picks within Financials were the largest contributor due to holdings in Capital Source, Cash America International, and agency mortgage REIT Hatteras Financial. Silgan Holdings and World Fuel Services within Materials and Energy, respectively, also aided relative returns. Packaging manufacturer Silgan declined less than the sector due to its low exposure to falling commodity prices while fuel logistics company World Fuel outperformed as it tends to benefit from volatility in energy prices.

Elsewhere, holdings in the Consumer Discretionary sector performed relatively well led by IAC/InterActive and American Eagle. Wireless systems firm InterDigital announced that it was exploring strategic alternatives as a result of the high valuation paid for Nortel’s patents, driving its stock into positive territory during the quarter. The Fund's Healthcare investments also proved more resilient than those of the benchmark as a result of less regulatory and managed care exposure. The primary detractor from relative performance was the absence of Utilities in the portfolio, which was offset by the benefit of holding residual cash in a falling market.

Portfolio Highlights

We focus on finding companies with solid fundamentals at opportunistic valuations, and both highlights during the quarter come from the Financials arena. Bank holding company Capital Source is transitioning its business focus to commercial lending for small and midsized companies. During the past three years management has sold non-core assets and written down and liquidated legacy loans. As a result, company debt is down more than 80% in two years and unrestricted cash is near $1 billion. Going forward, we expect legacy loans to keep declining and excess capital to grow. The bank has a growing pool of new, higher-quality and higher-margin loans funded internally by low cost deposits. The bank also originates, underwrites, manages and retains all of its loans. In the next two years, we expect that the holding company and the bank will be consolidated, achieving cost savings and increased efficiencies. The excess capital at the parent holding company is planned to be used for share repurchases and dividends. With earnings and returns on capital rising as the bank puts excess liquidity to work and as its share count declines, we believe that Capital Source’s stock price should rise meaningfully above tangible book value where it currently trades.

Cash America International is the largest pawnshop chain in the U.S. With the 2006 acquisition of CashnetUSA.com, the company also became one of the largest providers of payday loans. Conceptually, pawn loans are an attractive business as growth in locations and price levels are limited by state law. Cash profit margins of mature pawn shops near 20% and loan balances have grown steadily in the past as the low-to-middle income segment of the population

has grown. About 40% of the collateral for pawn loans is gold with the balance broadly diversified by asset type. The payday lending business is more controversial, as consumer advocates have sought to eliminate the product offering, but it represents a faster growing third of the firm's corporate profits with similar margins to pawn. Last month, Cash America announced that it was selling a controlling interest in the payday lending business through a public offering. If successful, this would significantly reduce Cash America’s payday lending exposure and should cause investors to refocus on its attractive pawn business.

Outlook

Our investment outlook for the remainder of 2011 is cautious as monetary policy remains accommodative but fiscal policy and credit conditions are now headwinds, while the economy is uneven and sluggish. Equity valuations are attractive but market sentiment is poor. Investors are wary of the political process and what that will mean for tax and regulatory policy. In coming months, investors will focus on employment and growth trends to assess whether the third quarter represented simply a slowdown or something more severe. The financial forecasts driving our valuations reflect this cautious outlook. The company management teams in the portfolio remain active in redeploying their cash flow in accretive ways including acquisitions and share repurchases. We think these actions will benefit 2011 results, and also bode well for the future.

The Cardinal Capital Team

As of September 30, 2011, Capital Source comprised 2.27% of the portfolio's assets, Cash America International – 2.42%, Hatteras Financial – 1.39%, Silgan Holdings – 4.49%, World Fuel Services – 1.56%, IAC/Interactive – 4.15%, American Eagle – 1.73%, and InterDigital – 2.25%.

Note: Small- and mid-cap stocks are considered riskier than large-cap stocks due to greater potential volatility and less liquidity.

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.

3rd Quarter 2011

The daily news seemed to drive market instability during the third quarter of 2011, which saw a continuing trend of increasing volatility. Central to this was Greece, with its rescue negotiations and potential default dominating the news. Swirling speculation as to which European sovereign may be next to slide into the debt abyss added to the frenzy. We believe these types of extreme events tend to cluster and to take on a momentum of their own, which our Dynamic Portfolio Optimization model attempts to anticipate. It is possible that some of this building disruption is what our model was sensing earlier in the year when it signaled for us to take a more defensive stake in the portfolio, and as it continues to signal for cautious, conservative allocations. The Fund's performance during the quarter reflects these relatively defensive allocations as it dropped only marginally compared with double-digit losses for the broader US market (as measured by the S&P 500 Index) and the its composite benchmark (35% Russell 3000 Index/35% MSCI ex-US Index/30% Barclays Capital Aggregate Bond Index).

Toward the end of the third quarter the model indicated that some small and well-diversified equity exposures were appropriate, resulting in 1% to 4% allocations to ETFs with exposure to Australia, Singapore, Brazil, broader Latin America, and the US Healthcare sector being initiated. Overall, though, conservatism was the watchword as 56% of assets remained in high-quality, short-maturity fixed-income securities and 18% in cash at quarter-end.

Many investors remain cautiously optimistic, hoping for a year-end market rally from admittedly oversold conditions or a positive European debt resolution. We remain more rooted in events and data taking place in the marketplace. Although our model is seeing modest signs of improvement, our outlook remains cautious. 

Smart Portfolios
Seattle, WA

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.

3rd Quarter 2011

The third quarter proved to be a very challenging period as markets experienced sharp dislocations and elevated levels of volatility, resulting in exaggerated moves to the downside. In particular, the broader market (as measured by the S&P 500 Index) dropped more than 13%, while the Fund declined significantly less as it outperformed its HFRX Equity Hedge Index benchmark. As an asset allocation solution for alternative strategies in a liquid format, the Fund aims to provide diversified returns with less volatility than conventional markets. It was able to do just that during the third quarter.

The Fund’s core long/short and long-biased managers outperformed the S&P 500 during the quarter, but returns varied widely depending on their exposures. Not surprisingly, managers who were more hedged or defensive, or who had an emphasis on eclectic stock picking in their portfolios, tended to fare relatively better. Nevertheless, any net long equity exposure meant that returns were still negative.

Credit-related and strategic fixed-income strategies also had mixed but negative results. Some holdings in global fixed-income managers were adversely affected by Emerging Market exposures, while high-yield oriented managers and opportunistic fixed-income managers with substantial corporate exposure were hurt by yield spread widening. A move to reduce exposures in these areas during the quarter helped to limit the impact on the overall portfolio, however.

Returns for merger arbitrage related managers were negative for the quarter due to residual equity exposure, though much less negative than for the broader market. Increased merger & acquisition (M&A) activity has helped improve the outlook for the strategy, but modest spreads continue to limit the upside. As a group, managed futures and global macro allocation strategies provided positive and relatively less correlated returns.

August Revisited

In accordance with our risk management guidelines, we adjusted the portfolio's exposure to various alternative strategies during the third quarter in order to limit downside results. Much of this activity occurred during August, which was a particularly gut-wrenching ride for equity markets. A review of the events during that month is instructive:

The market plunged during the first six trading days of August as investors reacted with dismay to Washington’s budget and debt ceiling deal, Standard and Poor’s downgrade of the US from AAA to AA+, worsening economic data, and signs of credit contagion among many of Europe’s weakest economies. High frequency trading also appeared to exacerbate the downside volatility. Stocks then managed a brief but sharp rally before those gains quickly gave way to a retreat that sent the equities back down near their lows of the month.

As soon as the pervasive feeling of panic reached a peak, however, the market began to rise steadily, climbing the proverbial “wall of worry” with strong gains during the last 10 days of the month. Nevertheless, the S&P 500 finished the month down more than 5%. Global equity markets followed similar patterns, but with even greater losses, as the MSCI EAFE Index dropped 9%. So-called “safe haven” assets continued to benefit from investor risk aversion, continuing a trend that started in May. The Barclays Capital Aggregate Bond Index rose in August as the yield on the 10-year Treasury set a new low for the year, while gold spiked briefly above $1,900 for the first time on August 22 (before retreating to a range around $1,640 in late September).

With this as a backdrop, a number of the underlying funds in which the Fund invests were able to avoid much of the downside, while others were affected to one degree or another even if they were relatively hedged. In order to limit the Fund’s month-to-date drawdown in August, we substantially reduced exposures in several steps during the first two weeks of the month. These steps involved eliminating or reducing positions that were especially volatile or vulnerable (as detailed below). We cautiously re-deployed some of the cash towards the end of the month. Having entered the quarter with a defensive reserve of 15%, we finished August with a cash balance of nearly 23%. By the end of the quarter cash comprised nearly 24% of assets.

Portfolio Positioning

Equity-oriented funds accounted for 46% of portfolio assets by the end of the quarter. It is important to note, however that this broad category encompasses a diverse mix of long-biased, hedged, multi-asset and global strategies. Several allocation changes were made, including the elimination of several long-biased managers that had become especially volatile and increasing allocations to core managers with more stable risk/return characteristics.

Hedged credit and strategic fixed-income allocations were scaled back from nearly 22% at the end of June to less than 10% by the end of September. In fact, this reduction began prior to the quarter, when we became concerned that yield spreads would reverse course and continue to widen. Consequently, allocations to funds with a focus on US high-yield and corporate credit were cut in half in June and then eliminated in early August. We also reduced allocations to strategic fixed-income funds, but to a lesser degree—from slightly less than 10% on June 30 to a bit more than 7% by September 30. The funds in this area tend to take a global approach, long and short, to a broad range of opportunities, ranging from US mortgage-backed securities to Emerging Market debt. While some of the underlying funds came under pressure during the quarter, opportunities have been created by the nearly one-sided flight to safety in fixed-income.

Allocations to Hedged Futures and Commodities strategies provided access to trend following, quantitative, and fundamental trading-oriented strategies in a wide range of financial futures and commodities encompassing equity indices, fixed-income, interest-rates, currencies, metals, energy, and industrial and agricultural commodities. Historically, such strategies have tended to be less correlated to other strategies. This became less apparent during the second quarter of 2011, when markets turned more erratic. Consequently, we trimmed this allocation from 10% at the beginning of April to 7% by the end of June. We then re-built the allocation to 10% by the end of August as managers were able to capitalize on new trends, especially in currencies and interest rates. One underperforming holding was also eliminated.

Outlook

We have placed an increasing emphasis on caution, partly in response to the erratic behavior of markets, and partly in response to the elevated risks associated with policy missteps. These risks became ever more apparent throughout August and September. Investor confidence was seriously undermined by a combination of factors, including Washington’s inability to come up with a comprehensive budget or debt plan, and Europe’s lack of political consensus on how to effectively address the fiscal plight of Greece and other peripheral countries and preventing credit contagion in Spain and Italy. Worries have been compounded by continued deterioration in economic data. Nevertheless, the corporate sector generally remains flush with cash, equity valuations have improved, and despite the exposure of European banks to sovereign risks, the financial system is on a much sounder footing than it was in 2008

Given that judicious risk management is always our top priority our current target is to keep a cash cushion of approximately 20% in the portfolio, and to keep net long equity exposure less than 35% for the foreseeable future. As opportunities improve, though, we will be prepared to get the Fund more invested. 

Lake Partners, Inc.
Greenwich, Connecticut

Note: The Fund is a fund-of-funds, and by investing in the Fund you incur the expenses and risks of the underlying funds it invests in. Potential risks from exposure to the underlying funds includes the use of aggressive investment techniques and instruments such as options and futures, derivatives, commodities, credit-risk, leverage, and short-sales that taken alone are considered riskier than conventional market strategies. Use of aggressive investment techniques including short sales may expose an underlying fund to potentially dramatic changes (losses) in the value of its portfolio. Short sales may involve the risk that an underlying fund will incur a loss by subsequently buying a security at a higher price than the price at which the fund previously sold the security short.

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.

3rd Quarter Commentary

It was a tough third quarter of 2011 for the Fund, which lagged its S&P Midcap 400 Index benchmark by more than three percentage points in delivering double-digit losses. U.S. equity markets were extremely volatile during the period, making it a difficult environment for fundamental stock pickers. The bulk of the negative absolute returns in the market, and the portfolio, occurred during a 30-day period from July 8 to August 8. 

Winners and Losers

Three stocks dropped more than 30% during the quarter, hurting both relative and absolute returns. The outlook at leading Internet infrastructure and software provider Akamai Technologies remained softer than previously expected due to a weak pricing environment, sparking a sell-off in the stock. We added to the position on the weakness as we consider this a temporary pullback given the company’s ability to benefit from Internet traffic growth through streaming video. The company is debt-free and trading at a price/earnings ratio half that of its five-year average. The stock was the Fund’s top performer in 2010.

Itron is a global utility metering company that offers smart grid, distribution, and payment solutions to gas, water, and electric utilities, and was a recent addition to the portfolio. The firm is expected to benefit from increasing requirements to monitor and conserve the use of electricity, gas, and water. After losing ground to its competition, however, the Board of Directors replaced its CEO with the prior CEO and architect of the company’s products. Lastly, New York Times Company declined on continued weakness in advertising spending. We believe the stock remains undervalued given the company’s superior brand as a worldwide content provider.

Top individual contributors to performance during the quarter included Scholastic Corporation, Northern Trust, and Nuance Communications. The first two holdings actually delivered positive absolute returns amid the broad market sell-off. Scholastic is a global publishing, education, and media company that announced better-than-expected earnings. Higher sales of educational products and services to schools as well as higher sales of children's books in its retail channels contributed to the strong results.

We added new holding Northern Trust, a leading provider of custodial and advisory financial services, to the portfolio following the market decline in late July and early August. It benefitted from the timing of the purchase as the market and the stock was relatively flat, albeit choppy, through the end of the quarter. Leading provider of speech recognition and imaging technologies Nuance reported solid results in August, beating estimates and raising its guidance.

Portfolio Changes

We took advantage of short-term price fluctuations during the quarter to rebalance positions— trimming stocks with higher valuations and adding to more attractively-valued stocks—and to purchase two new positions in CA, Inc. and the previously mentioned Northern Trust.

CA is an enterprise-level IT management software and solutions company providing products and services—from mainframe computers to virtualization to cloud-based services. The stock currently trades near the low end of its historical price/earnings to long-term growth rate (PEG ratio) and has an attractive dividend yield. We believe Northern Trust is a conservative franchise with a strong management team, an attractive business mix (37% foreign revenue), and the highest operating margins among its trust bank peers. Its stock is trading near the five-year low of its historical price/earnings ratio, with a low PEG ratio and solid dividend yield.

Outlook

Much of the recent day-to-day market volatility has been driven by various global macroeconomic concerns: fears of a global recession, European sovereign debt issues, the economic policy stalemate in Washington D.C., and Standard & Poor’s downgrade of the creditworthiness of the United States. Despite all of this, the economic data for September was actually positive.

We believe that many of the macro issues have already been discounted by the U.S. stock market. Most U.S. companies are in better financial health today than they were in 2008. During the second quarter earnings season, two-thirds of the portfolio’s holdings met or beat consensus earnings expectations and another two-thirds of the holdings have recently announced significant share repurchase programs. These actions signal that these companies consider their shares undervalued, a view we share.

All told, the portfolio is trading at an average multiple based on 2012 consensus earnings estimates that is below the Fund’s benchmark and that of the broader market (as measured by the S&P 500 Index). Moreover, the portfolio’s PEG ratio proxy of valuation to growth has been this low only twice before during the 12 years we have managed the Fund—October 2002 and October 2008. 

Fairpointe Capital
Thyra E. Zerhusen, Chief Investment Officer
Marie L. Lorden, Portfolio Manager
Mary L. Pierson, Portfolio Manager

As of September 30, 2011, Akamai Technologies comprised 3.18% of the portfolio’s assets, Itron – 2.56%, New York Times Company – 3.06%, Scholastic – 1.71%, Northern Trust – 1.54%, Nuance – 3.34%, and CA – 1.71%. 

Note: Mid-cap stocks are considered riskier than large-cap stocks due to greater potential volatility and less liquidity.

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.

3rd Quarter Commentary

TGIF!

For many people, this phrase means Thank God It’s Friday. For this quarter, it means Thank God It’s Finished. The third quarter of 2011 was quite challenging, with the Fund's Russell 1000 Value Index benchmark posting its fourth worst quarter since Herndon Capital Management began running its large-cap strategy in July 2002. We have persevered since that time by being steadfast in our approach, though it was, as previously stated, quite challenging.

Performance for the benchmark was fairly broad with five sectors—Utilities, Consumer Staples, Telecom, Health Care, and Technology—outperforming the overall index. The defensive posturing of the market continued, as cyclical, more-economically sensitive parts of the market lagged the benchmark from almost three percentage points (Consumer Discretionary) to nearly nine percentage points (Materials). Concern over worldwide growth has become eerily similar to the mindset the market adopted in the 2008 to early 2009 time frame. We do not think the situation is the same but recent results in terms of stock market performance are quite similar.

The Fund bested the index by nearly a percentage point during the quarter, with holdings in eight out of 10 sectors outperforming their respective sector and/or the overall benchmark. The two sectors that lagged were Materials and Energy. Stock selection contributed 100% of the outperformance as sector allocation was slightly negative.

Solid Consumer Picks

The three sectors with the highest contribution during the quarter were Consumer Discretionary, Financials, and Consumer Staples. All of the portfolio’s holdings in the Consumer Discretionary sector outperformed the benchmark sector average. An underweight position in Financials along with stock selection that benefitted from less emphasis on market and credit-sensitive companies aided returns. Consumer Staples added value primarily as an overweight position in the sector with the second highest contribution to the benchmark’s performance.

Top individual contributors were Kinetic Concepts, TJX Companies, and Apple. Medical device and equipment maker Kinetic Concepts received a buyout offer that boosted the stock significantly, leading us to sell the position from the portfolio on the basis of it being an all-cash offer with limited upside. TJX benefited from being a discount branded retailer offering shopping solutions for cost-conscious consumers in a tough economy. New addition Apple’s value rose as the market shook off concerns about Steve Jobs stepping down as CEO, as the company appears capable of continuing to generate popular products. We continue to view both TJX and Apple as value creating opportunities, and each remains a holding in the portfolio.

The sectors with the lowest contribution to returns overall were Utilities, Materials, and Healthcare. Utilities was the best performing area of the benchmark during the quarter and the Fund lacked exposure as we have not identified any value creating opportunities in the sector. An overweight position and lackluster stock selection in Materials, the worst performing sector, also detracted from returns. Holdings in more cyclical areas were dependent on continued positive global Gross Domestic Product (GDP) growth. The lack of near-term confidence in this growth resulted in the underperformance of some of these holdings. Although the portfolio’s picks in Healthcare sector outperformed the broader benchmark, they underperformed the sector itself. An emphasis on predominantly specialty pharmaceutical companies faltered as the market sought refuge in larger-cap pharmaceuticals during a difficult quarter.

Stocks that were the greatest negative contributors to performance were Lazard, Cliffs Natural Resources, and Endo Pharmaceuticals. Finanical firm Lazard was penalized for exposure to Europe that encompasses about a third of its business mix, as well as overall exposure to market-related areas. Iron ore producer Cliffs Natural Resources suffered as concerns about global growth have lowered investors’ expectations of a continuation of the company’s growth prospects. Finally, Endo Pharmaceuticals continues to have to defend itself from concerns regarding the efficacy of its product pipeline. All three stocks remain portfolio holdings as we perceive the issues facing these companies as being temporary in nature.

Portfolio Positioning

Eleven stocks were eliminated during the quarter due to sector adjustments and/or valuation or fundamental issues, including American Express, Coca-Cola Enterprises, and Forest Laboratories. These changes were primarily driven by the dynamic interrelationships of the sectors as we seek to position the portfolio to exploit value creating opportunities. As we have noted before in regards to our investment philosophy, “We have a core process but no core holdings.” As a result, if stocks no longer appear to be value creating opportunities, we sell.

With the higher level of positions eliminated, we initiated a number of new purchases to the portfolio to compensate, notably Accenture, Abbott Laboratories, and Marathon Oil. Each stock was purchased after first being identified as a value creating opportunity followed up by fundamental analysis to vet out its potential as a portfolio holding.

The result of this and related activity during the quarter was that exposure to Energy, Technology, and Industrials increased, while stakes in Consumer Staples, Consumer Discretionary, and Materials decreased. As of the end of the third quarter, the portfolio was overweight Consumer Staples, Technology, Energy, Materials, and Consumer Discretionary, while significantly underweight Utilities, Financials, Telecom, and Healthcare.

Outlook

“He was extremely tempted. Tempted to do what, he didn’t know. But he did know that, somewhere inside him, the familiar itch of anxiousness was beginning to fester. ‘What to do, what to do,’ he murmured…”

- Mad Hatter from Alice in Wonderland by Lewis Carroll (1865)

Like the Mad Hatter, we all have a temptation to look at current macroeconomic events and try to change our perception of reality, one that is heavily influenced by our emotions. We too feel the twinges of anxiousness when the market rises or falls by 3%, 4%, or 5% in a given market session. To not feel the real anxiety of the moment would make us less than human. But, how we react as investment professionals is the key. You, as investors, do not pay us for our fear. You pay us to overcome that fear and make sound, rational, and pragmatic investment decisions.

In our attempt to fulfill our responsibility, we look to our process. Our process has recently caused us to start selling down some of the areas that have been performing best in this challenging market and to begin embracing those areas that have been leading the way down. Market pundits abound to show the obvious error of our ways. But, to beat the market, by definition, you have to do something different than the market.

In making investments, we do not invest on Monday and expect to realize all of the opportunities on Tuesday, in terms of a literal tomorrow. Tomorrow for us has a long time frame associated with it. Within that time frame, we are much like farmers. We see the seasons of stocks played out in the holdings of the portfolio. There is a planting season, a weeding season, and a harvesting season.

During planting season we seek out value creating opportunities to populate the portfolio at the individual and sector level. During weeding season, we adjust sectors and holdings by underweighting or removing some to make room for those that might be more appropriate and timely. Next, during harvesting season, the stocks and/or sectors that realize the vision we determined during the planting season are reaped. Finally, we begin the process anew with the next planting season.

In reality and application, the dynamic process of portfolio management reveals a congruent and parallel expression of these seasons rather than following in a linear progression. Depending on the stock and the sector, it is always planting, weeding, and harvesting season. Coupled with this vision, we recognize that we are in a tumultuous period in the market. We know that we have no control over the absolute direction of the market. Thus, our objective is to continue to position the portfolio to best realize value regardless of the environment.

To answer the question posed by the Mad Hatter, “What to do, What to do …?”  Right now, we are seeing opportunities in areas that the market is ignoring or abhorring and we are lowering exposure to areas the market is embracing or finding safety and security. Why? Because we are constantly looking for the value creating opportunities that are present today. 

Randell A. Cain, CFA
Principal and Portfolio Manager
Herndon Capital Management
October 1, 2011

As of September 30, 2011, Kinetic Concepts comprised 0.00% of the portfolio's assets, TJX Companies – 3.99%, Apple – 2.67%, Lazard – 1.52%, Cliff Natural Resources – 1.15%, Endo Pharmaceuticals – 2.17%, Accenture – 2.04%, Abbott Laboratories – 1.18%, and Marathon Oil – 1.89%.

Note: Value investing involves buying the stocks of companies that are out of favor or are undervalued. This may adversely affect the Fund's value and return.

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.

3rd Quarter 2011 

The U.S. equity market declined sharply over the course of the third quarter. In July, fears that deadlock in Washington D.C. would result in a debt default or credit downgrade pressured the market. Despite the last minute deal that averted a technical default, Standard & Poor’s downgraded the rating on U.S. sovereign debt. For the remainder of the quarter, concerns about the health of European banks and economic weakness in the U.S. led to further risk aversion.  The Federal Reserve tried to stem the tide by initiating “Operation Twist,” an effort to extend the average maturity of its security holdings, but the plan did not include an expansion of the Fed’s balance sheet and the market reacted negatively.

Defensive Strategies Dominate

The broad market S&P 500 Index declined nearly 14% during the quarter, its biggest drop since the fourth quarter of 2008 and the second worst calendar third quarter since 1928. As would be expected in any market correction, defensive, high-quality strategies held up better than most.  Defensive sectors such as Utilities and Consumer Staples dramatically outpaced the more cyclical Materials and Financials sectors as investors sought out a relatively safe source of income in a low-yield environment.

High-quality stocks maintained their leadership position, significantly outperforming low-quality stocks during the quarter. According to BofA/Merrill Lynch, fundamental-driven strategies like dividend yield and return-on-capital (ROE) substantially outperformed more-risky high-beta (volatility) and low-price strategies. Despite the poor relative performance during the first quarter, the dividend yield strategy was the top performer by a wide margin for the year-to-date through the end of September. As concerns of another financial crisis and global recession grew, investors also fled to the relative safety of large, growing firms. The Russell Top 200 Index substantially outpaced the smaller-sized Russell Midcap and Russell 2000 indices. Among the largest companies, growth outshined value in the Russell Top 200 as growth benefited from minimal exposure to Financials and a heavy emphasis on Technology.

Similarly, the highest yielding companies in the S&P 500 outperformed the lowest yielding during the third quarter (per Ned Davis Research).  High-yield stocks lagged as markets advanced following the mid-2010 announcement of the second round of the Fed’s quantitative easing (QE2) program, but have remained resilient as markets have declined. The price performance continues to be supported by a strong fundamental backdrop for dividends. During the past year, 287 companies in the S&P 500 initiated or raised their dividend, while rapid earnings growth has driven the payout ratio down to 28.6%—the lowest rate since measurement began in 1926—indicating that there's plenty of room for dividend expansion if earnings hold.

Strong Staples Picks

The Fund substantially outperformed its Russell 3000 Value Index benchmark during the quarter, outperforming in each of the market-capitalization tiers with the performance of large-cap stocks particularly strong. Although the Fund’s small-cap holdings lagged the rest of the portfolio, it bested its respective area of the index by a wide margin.

The Utilities sector was the only area to post a positive absolute return in either the Fund or the benchmark. Both sector allocation and stock selection had a positive impact on relative returns, with the largest contributors being stock selection in Financials and a large overweight to the Consumer Staples sector. Financials was among the worst performing sectors in the benchmark, but the portfolio holdings in the sector nearly beat the broader benchmark return.

Among Consumer Staples holdings, Kimberly-Clark and Clorox were top contributors during the quarter. Kimberly-Clark reported second quarter results that topped analysts’ estimates and included a gain in organic sales. Management also raised sales guidance and increased cost reduction estimates for the year. Commodity inflation has been a significant headwind for the firm, but its strong brands and ongoing product innovation supported price increases. As this headwind abates, the firm is positioned for further margin expansion. Clorox has grown beyond the bleach business and now owns a portfolio of consumer products including Burt’s Bees, Brita, Glad, S.O.S., Formula 409, and Kingsford. In July, activist investor Carl Icahn made an unsolicited offer to buy the remaining shares in the company, boosting the stock. We sold the Fund’s position on the day of the announcement.

Other top individual performers included two utility companies, Duke Energy and Southern.

Duke Energy and Progress Energy shareholders approved the proposed merger between the two companies during the quarter. Duke is still waiting on final approvals from FERC, the North and South Carolina utility commissions, and the NRC, but the merger is still expected to close by the end of the year. The transaction will increase Duke’s regulated earnings to more than 85% of total earnings and create the largest utility in the U.S. Southern reported a better than expected second quarter, with weather-normalized sales increasing year-over-year driven by an increase in sales to industrial customers. The economic recovery in the Southeast, combined with Southern’s favorable regulatory relationships, has allowed the company to continue earning industry leading returns.

Tough Transport

Only two out of 10 economic sectors had a negative total effect on relative results, with an underweight stake in Healthcare offsetting marginally positive stock selection. Unlike with Healthcare, strong stock selection in poor performing Industrials mostly offset the negative effects of an overweight position in the sector.

Among the biggest individual detractors from performance during the quarter were transporation-related holdings Norfolk Southern and Nordic American Tankers. Railroad stocks plummeted on fears of an economic slowdown or possible recession, sending Norfolk Southern lower despite reporting strong second quarter operating results. During the quarter, the firm repurchased its own shares and raised its dividend for the second time in 2011. Crude oil shipping company Nordic American traded down as the tanker industry continued to deteriorate.  Day-rates have been weak since the middle of 2010 driven by an oversupply of new ships that were ordered when rates were peaking in 2007-2008. Unlike much of the rest of the industry, Nordic American has a conservative balance sheet, and we believe this financial strength gives them the ability to survive the downturn while making opportunistic acquisitions. Despite our optimism, we reduced the position in accordance with our sell discipline due to accumulated unrealized losses and the increased risk of slowing global economic growth.

Another notable detractor was asset manager Federated Investors, a major player in the money market funds space. The Federal Reserve’s announced intention to hold the federal funds rate at effectively 0% until at least mid-2013 impaired our investment thesis on the stock. It became clear that given our investment horizon the firm would have to maintain the fee waivers offered to its investors in order to keep money market fund yields at zero or slightly positive.  In addition, some of Federated’s funds were invested in the certificates of deposit of troubled European banks. This increased our concerns about the credit quality of the funds as they stretched for yield. Given these factors, plus the accumulated unrealized losses, we eliminated the position from the portfolio during the quarter.

Portfolio Positioning

Turnover picked up during the quarter as the market decline created opportunities to establish new positions at attractive discounts. In addition, the market decline resulted in the portfolio exceeding our unrealized loss threshold, requiring the management team to reduce losing positions. In terms of sector positioning, the portfolio’s stake in Healthcare and Consumer Discretionary increased, while the position in Financials decreased. Four stocks were sold during the quarter, one of which was sold as it traded at a premium to our assessed Absolute Value.

A total of six new positions were established, including Healthcare stocks Landauer and Medtronic and Consumer Discretionary name National CineMedia. The largest of the new positions was in global investment manager BlackRock. The firm’s five-year annualized dividend growth rate through June 30, 2011 has been significant. Considering senior management’s large stake in the firm, the company’s dividend policy represents a significant, stable, and rapidly growing income to them. We were able to take advantage of the August market correction to establish a position in this market leader, which we calculated was trading at a 20% discount to our assessed Absolute Value.

Outlook

Since the beginning of 2011, much of our outlook has been focused on how we believed the market would react to the expiration of QE2. From our perspective, the extraordinary liquidity provided by QE2 effectively extended the risk trade from April 2010 through February 2011.  Since QE2 did little to stimulate actual demand for anything other than financial assets and commodities, equity markets became increasingly disconnected to the underlying economy. Such gaps eventually close. This is why we communicated our belief at the beginning of 2011 that the following two events would occur as the Federal Reserve began to wind down QE2: 1) investors would begin to de-risk their portfolios and low-beta/high-quality stocks would begin to outperform; and, 2) given stretched valuations, the small-cap market would experience at least a modest correction. We anticipated the correction would signal the market’s entry into the mid-stage of the recovery, where earnings (and investor expectations) begin to moderate, and that the Fund’s relative performance would improve substantially as these events unfolded.

We did not foresee the Arab Spring, the natural disasters in Japan, the European financial crisis, or the debt ceiling debate in Washington. Thus, although our outlook for 2011 was bearish relative to most of Wall Street, we did not anticipate the severe contraction in economic growth or the depth of the correction in equity markets. We simply knew speculative froth was high and the Fed had few remaining effective options. It was a time for caution.

We believe the persistent global financial problems we face, including the sovereign debt issues in Europe, are residual effects of a multi-decade global debt explosion that will require many years to unwind. Historically, hangovers from financial events are long and painful, accompanied by slow economic growth, plenty of market volatility, social upheaval (e.g., Occupy Wall Street, Tea Party, Arab Spring), and policy mistakes. From our perspective, however, earnings have held up reasonably well. Many companies never unwound their austerity measures from the 2008 recession as they recognized, and subsequently learned how to manage in, a slow-growth world. Unlike 2008, corporate balance sheets are also in excellent condition.

We continue to think macroeconomic risks remain elevated. Since the end of June, the likelihood of a recession in Europe and the U.S. has increased substantially. The odds of a financial crisis (and associated contagion) emanating from Europe have also increased. Large U.S. banks remain weak, growth in key markets like China has slowed appreciably, and the political environment in Washington remains unstable and unpredictable. Still, we believe that many of these risks have already been discounted in equity prices.

As expectations have downshifted dividends are finally getting the attention they deserve. Dividend growth has rebounded to historic highs, payout ratios are at historic lows, interest-rates on bonds are low, cash is accumulating on corporate balance sheets, performance has been relatively strong, new funds are being launched, and there has been an explosion in both media and investor interest. Every day we hear or read commentators and professionals extolling the virtues of investing in large-cap dividend stocks. While everything appears to be primed for the long-term secular shift that we have long expected, we think it proper to diligently watch for signs of investor euphoria. What gives us confidence that this renewed focus on dividends is more than just another investment fad is the recent growth in interest from large institutional investors and consultants. In the past 12 months we have seen investors with large pools of capital readdress their allocation models and open up to dividend-focused strategies. This indicates that a second, much larger, wave of investors could be building which would fuel a secular shift toward a more balanced focus on both income and capital gains.

We wanted to take a moment to note that dividend-focused investment strategies do not all share the same risk/reward profile. As many investors learned to their detriment in 2008 and 2009, buying or holding onto a position just because the yield is attractive can be a recipe for disaster.  We believe a successful investment outcome requires a process that balances the need for a high and growing income stream with the strong underlying business fundamentals that are necessary to support it. We think that River Road’s core Absolute Value philosophy and investment process, coupled with a dividend focus, strikes this balance effectively. 

River Road Asset Management
14 October 2011

As of September 30, 2011, Kimberly-Clark Group comprised 2.28% of the portfolio's assets, Clorox – 0.00%, Duke Energy – 1.93%, Southern  – 1.34%, Norfolk Southern – 2.13%, Nordic American Tankers – 0.77%, Federated Investors – 0.00%, Landauer – 0.81%, Medtronic – 0.83%, National CineMedia – 0.56%, and BlackRock – 0.95%.

Note: Funds that invest in small- and mid-cap stocks are considered riskier than large-cap stocks due to greater potential volatility and less liquidity. The Fund seeks to invest in income-producing equity securities and there is no guarantee that the underlying companies will continue to pay or grow dividends.

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.

3rd Quarter 2011

The best thing we can say about the third quarter is that it is over. In our second quarter letter we warned that a downshifting in economic growth, the ongoing European sovereign debt crisis, the conclusion of the Federal Reserve’s second round of quantitative easing bond purchases (QE2) and uncertainty about the outcome of this summer’s political showdown regarding the U.S. debt ceiling could result in choppier markets in the period ahead. Unfortunately, we were right. The third quarter rout in stocks marked the worst quarterly performance by the broader US market (as measure by the S&P 500 Index) since the 2008-2009 bear market and the worst September quarter for mid-cap stocks (Russell Midcap Index) since the third quarter of 1990. Fortunately, our prediction that high-quality, mid-cap growth stocks would perform better in such an environment was also correct. 

Consumer Picks Hang Tough

The Fund declined sharply during the third quarter in this harsh environment for stocks, but did manage to best its Russell Mid Cap Growth Index benchmark by a healthy margin. Relative returns benefitted from both sector allocation and stock selection, with stock selection in Consumer Discretionary, an underweight position in Materials, and stock selection in Energy the most positive influences. Off-price retailer TJX and auto parts/services provider O’Reilly Automotive were among the top contributors within Consumer Discretionary. Both businesses tend to do well during more challenging economic periods given their strong value proposition. The Materials and Energy sectors were among the worst performing areas of the benchmark, and the Fund’s holdings in each held up better than the broader sector—significantly so in Energy.

Stock selection in the Consumer Staples and Healthcare sectors also provided modest boosts.

Despite the broad downdraft in share prices, the Fund did have a few stocks produce positive absolute returns. Consumer Staples companies Church & Dwight and Mead Johnson Nutrition both posted gains as investors sought out businesses believed to be relatively immune to the weakening macroeconomic trends. Within Healthcare, Quality Systems was up strongly during the quarter.  The company is seen as a beneficiary of growth both in electronic medical records as well as revenue cycle management products. Finally, the Fund’s moderately higher than normal cash position buffered returns somewhat. 

Stock selection within the Financials and Technology sectors negatively affected relative performance the most. The hardest hit stocks were, not surprisingly, those companies that investors perceived to be most vulnerable to weak growth. Merger & Acquisition boutique Lazard fell sharply during the quarter, significantly underperforming the broader Financials sector. Underperforming tech stocks included F5 Networks, Polycom, FLIR Systems, and Sapient, all noticeably lagged the broader sector. We actually increased the Fund’s stake in F5 Networks given what we viewed as an attractive valuation and recent reports from sell-side firms that meetings with company management affirm strong near-term business trends and a promising new product cycle for 2012. Polycom had been one of the Fund’s top performing stocks over the last year, and thus was likely subject to some profit taking. Sapient was weak due to a lack of upside in second quarter results and third quarter guidance. We added to the position based on still strong earnings momentum and a compelling valuation. 

Juniper Redux

Trading activity during the quarter was moderate. We added just one new position to the portfolio, re-establishing a position in network equipment producer Juniper Networks. We previously owned Juniper until January of this year when the stock reached 120% of our intrinsic value calculation, and sold it in accordance with our sell discipline that require us to take action to eliminate or reduce positions when they achieve such valuation levels. We like Juniper’s intermediate-term growth opportunities driven by a new product cycle beginning in 2012, and saw the significant share price correction as a chance to re-enter the position at a bigger discount.

Two positions were sold during the quarter—semiconductor manufacturer Microchip and infrared equipment maker FLIR. Microchip was eliminated after the company negatively preannounced for the June quarter. Although part of the miss was related to a significant drop-off in orders to auto manufacturers following parts hoarding in the immediate aftermath of the Japan earthquake that, in hindsight, appears to have resulted in a pull-forward of demand into March and April. The company also cited broad-based weakness across its entire customer base—which is one of the broadest in the industry, covering autos, industrial, aerospace, consumer and computing. Microchip guided cautiously for the September quarter and warned that it expects similar downward revisions from others in the industry over the next quarter or two. We exited FLIR because roughly 50% of its revenues come from the federal government, and the U.S. fiscal condition dictates a weaker outlook. In addition, the outlook for its commercial business, which has been strong, now has to be called into question due to the deteriorating economic environment.   

Outlook

We see a number of cross currents that could affect market performance the remainder of the year. First and foremost, investor, consumer and business confidence, and therefore the pace of global economic growth, remains highly dependent upon the path policy makers in Europe take in dealing with the continent’s debt situation. Here in the U.S., our policy makers also face difficult decisions as the deficit “Super-Committee” convenes in November to make additional headway on our budget deficits.

On the positive side, the Federal Reserve continues to reinforce the notion they stand ready to provide ample liquidity to jittery markets. The decline in share prices in recent months has resulted in more compelling valuations, while investor sentiment is similar to levels last seen when Bear Stearns failed in 2008. Liquidity, valuation and negative investor sentiment have historically served as important market backstops and/or pre-conditions for stock market rallies. Regardless of the near-term outcomes, however, we continue to believe that a major rotation toward higher-quality issues is underway. We think the companies that comprise the portfolio offer superior growth, a higher degree of earnings predictability, higher return potential, and healthier balance sheets than those of the broader mid-cap universe. We believe these characteristics make the portfolio better prepared for the more uncertain environment we expect to prevail in the months and quarters ahead. 

M. Scott Thompson, CFA                  Andrew W. Jung, CFA
October 13, 2011

As of September 30, 2011, TJX Companies comprised 1.89% of the portfolio’s assets, O’Reilly Automotive – 2.76%, Church & Dwight – 2.45%, Mead Johnson Nutrition – 2.18%, Quality Systems – 2.59%, Lazard – 0.76%, F5 Networks – 1.82%, Polycom – 2.23%, FLIR Systems – 0.00%, Sapient – 1.66%, and Juniper Networks – 1.11%.

Note: Small- and mid-cap stocks are considered riskier than large-cap stocks due to greater potential volatility and less liquidity.

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.

3rd Quarter 2011 

The Fund's strategy of focusing on dividend-paying companies and using call and index put options to hedge the portfolio aided in dampening downside volatility amid a volatile market environment during the third quarter. The Fund declined significantly less than the overall market (as measured by the S&P 500 Index), besting it by more than 10 percentage points.

The majority of the Fund's relative outperformance came from the benefits derived from owning index put options and selling individual out-of-the-money call options on underlying holdings in the portfolio. In addition, stock and sector selection aided returns to the tune of roughly two percentage points over the S&P 500. The bulk of that outperformance came from concentrating the portfolio's Energy exposure in the electric utilities area and not having any representation in the balance of the sector. Further benefit came from concentrating the Fund's stock holdings in low-volatility, higher-yielding equities such as electric utilities and larger Healthcare companies.

Given expectations of a subpar economic environment over the next 12 months, we expect the Fund to continue to maintain a risk adverse posture in the portfolio. With high levels of economic uncertainty we continue to allocate a portion of call option proceeds towards investment in protective put options, and the concentration in equities remains focused on traditionally conservative areas of the market such as those mentioned above. For investors that purchased shares in the Fund to help hedge against extreme swings in the market, we continue to strive to dampen volatility while maintaining exposure to the equity market.

Looking ahead, there are concerns about the economic and profit outlook for the next year as outlined in a recent position paper I penned entitled Storm Clouds Ahead. It is my opinion that the global deleveraging which is taking place across the entire developed world will lead to subpar growth for an extended period of time. Thus, I believe that an income-centric investment approach that also incorporates hedging techniques, such as those used to manage this Fund, is the proper position going forward in this volatile environment. 

Ron Altman                                                   
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, 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.

3rd Quarter 2011 

Market: Worst Quarter Since 2008
Equity markets entered the third quarter of 2011 positive for the year and on pace for an above average annualized equity return. The period closed with the worst three-month performance since the end of 2008 and the “Great Recession”, as the market’s sell-off approached bear-market territory. The reasons were varied but carried a similar theme of global economic malaise and debt, beginning with the U.S. economy slowing and Congress taking the country to the brink of default over the debt ceiling. Concerns about the economic slowdown were not just limited to the U.S., however, as global data showed a slowdown across the board—including in the previously bulletproof emerging economies. European indices were down more than 20%, led by the French and German bourses. Debt concerns were also not just the province of the U.S., as the Euro zone continued to play chicken with Greece’s debt restructuring as possible default looms in the coming months.

Volatility was a common factor throughout the quarter as investors tried to guess which way the economic and bailout winds would blow. The Chicago Board Options Exchange Market Volatility Index (“VIX”) doubled during the period to twice its historical average, the biggest quarterly jump on record. In August and September alone the market moved 1% or more on 29 days and 2% or more on 15 days. Nearly 1-in-4 stocks in the Fund’s Russell 1000 Value Index benchmark declined more than 30%, while the yield on the 10-year US Treasury bond bottomed at levels not seen since the 1940s.

With this as a backdrop, U.S. large-cap equities fared significantly better than their small-cap peers. The Russell 1000 Index dropped 14.7% during the third quarter compared with a loss of nearly 22% for the small-cap Russell 2000 Index. More defensive areas of the market took leadership positions given the slowdown in economic activity. Utilities was the only area of the market in positive territory during the quarter, as investors gravitated toward regulated cash flows and higher yields in the face of plunging Treasury yields. The sector still faces headwinds though, as it is the only sector expected to see a drop in earnings for the full year and with what we consider to be valuations at a slight premium to the market. Consumer Staple and Telecommunications also outperformed the broad market, the former as investors rotated out of economically sensitive sectors and into more defensive, consistent earning sectors and the latter as industry dominant companies with strong cash flows fared better than their smaller, less-entrenched peers.

Three sectors during the quarter were down more than 20%—Materials, Financials, and Energy. Materials lagged significantly as commodity prices tumbled on news of a global economic slowdown, including fast growing emerging markets. Financials were lower as financial institutions struggled to calm the fears of investors worried about exposure to the European debt crisis through derivatives and counterparty risk. Energy sold off as leading indicators and economic reports cautioned of a global economic slowdown, hampering those stocks dependent on economic growth.

Strong Consumer Picks
The Fund outperformed the Russell 1000 Value by a considerable margin during the third quarter largely due to stock selection. Holdings within Consumer Discretionary, such as VF Corp and GameStop, led the way in delivering strong relative outperformance. Technology enjoyed relative strength on the back of solid performances out of industry-leading, strong cash-flow generating companies such as IBM, Microsoft, Apple and Oracle. Strong stock selection within integrated oil firms and the avoidance of oilfield services led to outperformance in Energy.

VF Corp continued to deliver strong relative returns since its announced acquisition of Timberland in June. Analysts raised price targets and upgraded the stock, as immediate and meaningful earnings per share accretion from the deal became incorporated into estimates for the company. A shift towards Outdoor and Action Sports (up to 50% of revenues) should allow for faster, more-stable growth. Furthermore, future growth could be fueled by expanding internationally with VF’s international exposure low relative to its domestic share.

Bristol-Myers Squibb was another top individual performer in the portfolio during the quarter. Investors overly focused on the upcoming patent expiration of the company’s largest drug, Plavix, have been forced to re-examine their thesis as the firm’s previously underappreciated pipeline came to the forefront of attention amid a slew of positive data points and approvals. Questions about second quarter results were dominated by the recently approved cancer drug, Yervoy, which has posted impressive sales since its launch. In addition, Bristol-Myers reported impressive results in efficacy and side effects for blood thinner Apixaban against not only existing drugs, but also other competitor drugs recently brought to market or in development. 

Hard Hit Financials
Underweight stakes in both the Consumer Staples and Utilities sectors were the biggest drags on Fund performance as investors flocked to more defensive areas of the market despite what we consider more expensive valuations and lower growth prospects. Several stocks within Financials also hurt relative returns on concerns about exposure to the Eurozone debt crisis noted earlier as well as regulatory and capital concerns.

Morgan Stanley dropped sharply as investors worried about the more traditional business model of trading and brokerage, fears related to Europe, the slowing global economy, and a trading downturn. Despite the fears, we calculate that the company is trading at roughly half of its tangible book value and is in better financial shape than it was during the 2008 financial crisis. Citigroup also lagged severely owing to regulatory issues (Dodd-Frank) and Moody’s downgrade of short-term credit. Light information and spotty disclosure has left investors somewhat uncomfortable with Citi’s exposure to Europe, and the stock has traded down in response.

Portfolio Activity
Despite the extreme volatility (or perhaps because of it), we think valuations have become even more compelling—both by traditional measures and Cornerstone’s proprietary valuation work. Our Fair Value Model now indicates that 84% of the stocks in the Fund’s 800-stock universe are undervalued relative to normalized earnings, with the universe overall priced at 54% of fair value. On an absolute basis, stocks are trading at 10.2 times 2012 earnings estimates, even as the growth of those earnings estimates is slowing. Other positive factors for stocks include an accommodative and creative Federal Reserve, record low interest rates, and solid, growing corporate earnings.

Aside from normal additions and trims to current holdings, we took advantage of the volatility during the quarter to purchase four new positions—Hess Corporation, Life Technologies, Lockheed Martin, and Mattel. Hess extracts oil and gas through drilling and processes it into a variety of products, including gasoline, lubricants and heating oil. We think the company is currently one of the cheapest integrated oil companies due to its poor track record within exploration (although recent data suggests otherwise) and one money losing refinery. Global life sciences company Life Technologies is diversified in clients, product offerings, and geographic dispersion of its highly recurring revenues. The company possesses a rich pipeline and has more than 3,900 patents. The stock has been weak thus far year-to-date, which offered an attractive buying opportunity for the Fund.

Defense contractor Lockheed Martin’s share price has been hindered recently as budgetary pressures surrounding defense spending are likely to result in significant reductions to its revenue. Despite questions about the health of its F-35 fighter plane program and its underfunded pension plan, which is likely to force the firm to earmark more free cash to funding requirements, the company is in strong financial shape. It has earned an average of nearly $3 billion in free cash during the past five years, has stable margins, and a huge backlog of new business. We think the valuation looks attractive, with the stock trading at a meaningful discount to our fair value.

Mattel, the world’s largest toymaker, features a broad portfolio of products that includes Barbie, Hot Wheels, Matchbox, Fisher Price and American Girl brands. We think it is an attractively valued industry leader with good growth prospects globally, a financially sound balance sheet with strong cash flows, and a solid dividend yield.

The Fund exited four positions during the period—Advance Auto Parts, ConocoPhillips, McGraw Hill, and St. Jude Medical. Advance Auto Parts reported better-than-expected earnings in large part due to more aggressive cost cutting and stronger do-it-yourself sales. The stock responded accordingly, but after such a strong performance no longer represents one of our best ideas. ConocoPhillips was sold on strength after the company announced it was splitting into two separate divisions, which will also see the resignation of the CEO directly after the separation is complete. This corporate action calls into question the relevance of the firm’s past history and, hence, our ability to assess valuation. McGraw Hill was sold during the month as the stock had performed well and our investment thesis had played itself out.

St Jude Medical was sold as the stock had performed relatively well on the back of a new product, Quadra. The valuation of the stock became no longer compelling enough for the Fund to warrant holding, however. Our past valuation work was also based on a high growth rate that looks difficult to maintain given the company’s exposure to the slow growing ICD market, a US Department of Justice investigation into excessive ICD use, and a medical device tax.

Outlook
Given all of the concerns surrounding the global economy, any short-term moves in the markets are largely unpredictable. Cornerstone does not attempt to forecast macroeconomic directions, interest rates, Gross Domestic Product (GDP), or any other unforecastable event. Rather we attempt to identify successful companies trading at attractive valuations with low expectations in an effort to protect capital. The recent sell-off in equity markets has allowed us to focus on highly successful franchises trading at attractive valuations, and we think the recent volatility has allowed for an upgrade in the quality of the companies in the portfolio. As macroeconomic concerns abate over time, we believe the discipline and patience shown now is likely to pay off as the prices of stocks revert closer to fair value.

Cornerstone Investment Partners

As of September 30, 2011, VF Corporation comprised 3.28% on the portfolio’s assets, GameStop – 4.51%,  IBM  – 3.52%, Microsoft  – 3.27%, Apple – 3.70%, Oracle – 4.15%, Bristol-Myers Squibb– 3.32%, Morgan Stanley – 2.72%, Citigroup – 2.47%, Hess – 2.34%, Life Technologies – 2.31%, Lockheed Martin – 1.05%, and Mattel  – 2.55%.

Note: Value investing often involves buying the stocks of companies that are currently out of favor that may decline further.

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.

3rd Quarter 2011

The third quarter delivered the worst market returns (as measured by the broad market S&P 500 Index) since the first quarter of 2009, and the Fund’s worst returns since the fourth quarter of 2008. Volatility and correlations spiked as the European debt crisis was front and center, but Washington’s inability to come to a final compromise regarding the debt ceiling—leading to the downgrade of the U.S. debt rating—also didn’t help. In this type of environment it is difficult to keep one’s head above water, and stock picking goes out the window. It then becomes every man for himself and macroeconomic issues, along with market technicals, take over in a shoot first ask questions later mentality.

Correlations between stocks within the S&P 500 and the overall index itself have spiked above 80% three times since the fall of 2008. No one, especially us, would have guessed that we would experience this kind of anomaly. To make matters worse, this latest spike in correlations hit an all-time high even though the S&P 500 is up 65% from its 2009 low.

In our opinion, the macroeconomic data concerning the U.S. economy is just not that bad. It's not good, but it’s not that bad! The U.S is in far better shape today than it was in September of 2008. Back then, the economy was already contracting and the housing market was in free fall. The banking system became woefully undercapitalized once it started writing down bad loans. Major counterparty risks emerged as the system froze up and credit became unavailable. This is not the situation today, at least not in the U.S.

We feel this was an old fashioned financial panic driven by sovereign debt worries that spilled into the currency markets. If the policy makers address this problem, if only in the short run, with all of the short interest and cash on the sidelines we could see a very large rally into the end of the year much like what we witnessed in 1998.

Miserable Quarter

As for the Fund, it was a miserable quarter. Anything that was tied to an economic recovery was punched in the face. As hinted above, the portfolio was not positioned for an economic slowdown.

Holdings in the Energy, Technology, and Consumer Discretionary sectors severely underperformed their Russell 1000 Growth Index benchmark sector equivalents. The index exposure to Energy is highly concentrated in big integrated oil companies such as Exxon Mobil, while we have been focused more on oil service, drillers, and exploration and production (E & P) firms. Higher volatility (beta) names such as CBS and Wynn Resorts dragged down returns within Consumer Discretionary. Finally, the Technology holdings in the Fund lost nearly 21% versus 7.7% for the index. Again, exposure was skewed towards higher-volatility networking names like F5 Networks and Riverbed Technology as opposed to the IBM’s of the world. The portfolio did hold Apple, which was positive during the quarter, and was the largest position in the Fund at quarter-end.

Positive areas for the portfolio relative to the benchmark included Consumer Staples and Industrials. Specialty beverage company Hansen’s Natural within Consumer Staples increased by double-digits during the quarter, compared with a loss overall for that segment of the index. And industrial and chemical company Goodrich was acquired by United Technologies at a healthy premium that boosted its stock.

In summary, we feel this market has discounted a fairly solid recession and a huge hit to S&P 500 Index earnings. Since 1974, U.S. equity markets have declined more than 20% seven times, five of which correctly forecasted a recession and two that did not—1987 and 1998. We just don’t buy into it this time. Yes, problems remain—housing hasn't rebounded and the lack of new jobs is disturbing. The banking system is over-capitalized now that it has written down the bulk of its bad loans, as evidenced by the huge hit to earnings in 2009. Our point is we don't think the ball has that far to fall anymore. Thus, we think if the country does slip back into recession, it should be a mild one. What if we do get some action out of the super committee, however, and Europe is successful at kicking the can down the road? On a relative basis, we think stocks are as cheap as they have been in our lifetimes and U.S. assets will attract a mountain of money from around the world. The only caveat is if the Germans decide to bail on Europe, but the credit markets are not saying that right now. This sure looks a lot like 1998. 

Charles F. Mercer, Jr. CFA               B. Anthony Weber                 Michael E. Johnson, CFA
October 12, 2011

As of September  30, 2011, Exxon Mobil comprised 0.00% of the portfolio's assets, CBS – 1.49%, Wynn Resorts – 2.89%, F5 Networks – 0.00%, Riverbed Technology – 0.00%, IBM  – 0.00%, Apple – 5.09%, Hanson’s Natural – 2.54%, Goodrich – 2.52%, and United Technologies – 0.00%.

Note: Growth stocks are generally more sensitive to market moves and thus may be more volatile than other stocks.

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.

3rd Quarter 2011

The third quarter delivered the worst market returns (as measured by the broad market S&P 500 Index) since the first quarter of 2009, and the Fund’s worst quarterly returns since its inception, eclipsing even the third quarter of 1998. Volatility and correlations spiked as the European debt crisis was front and center, but Washington’s inability to come to a final compromise regarding the debt ceiling—leading to the downgrade of the U.S. debt rating—also didn’t help. In this type of environment it is difficult to keep one’s head above water, and stock picking goes out the window. It then becomes every man for himself and macroeconomic issues, along with market technicals, take over in a shoot first ask questions later mentality.

Correlations between stocks within the S&P 500 and the overall index itself have spiked above 80% three times since the fall of 2008. No one, especially us, would have guessed that we would experience this kind of anomaly. To make matters worse, this latest spike in correlations hit an all-time high even though the S&P 500 is up 65% from its 2009 low.

In our opinion, the macroeconomic data concerning the U.S. economy is just not that bad. It's not good, but it’s not that bad! The U.S is in far better shape today than it was in September of 2008. Back then, the economy was already contracting and the housing market was in free fall. The banking system became woefully undercapitalized once it started writing down bad loans. Major counterparty risks emerged as the system froze up and credit became unavailable. This is not the situation today, at least not in the U.S.

We feel this was an old fashioned financial panic driven by sovereign debt worries that spilled into the currency markets. If the policy makers address this problem, if only in the short run, with all of the short interest and cash on the sidelines we could see a very large rally into the end of the year much like what we witnessed in 1998.

Miserable Quarter

As for the Fund, it was a miserable quarter. Anything that was tied to an economic recovery was punched in the face. The portfolio didn’t have any outsized sector bets relative to its Russell 2000 Growth Index benchmark, by design. Holdings within Technology, where we had a couple of earnings snafus, Consumer Discretionary, Energy, and Industrials proved to be a serious drag on performance during the period.

Vocus, an on demand software provider for public relations management, announced its intention of moving into the Social Media Business, which is going to require a much larger incremental investment—clouding the visibility for the company and sparking to a major sell-off in the stock. Mobile game designer Glu Mobile dropped more than 60% during the quarter after rising more than 100% going into August, despite no fundamental issues with the company that we could discern. Fortunately, we had cut this position in half for no other reason in that it was breaking down. Valuevision Media also dropped more than 60% as it missed top line revenue targets and, more disturbingly, the number of new customers fell—a complete reversal from the first part of the year—leading us to sell the stock from the portfolio.

The lone bright spot was Healthcare, an area where the Fund dropped less than the benchmark. The four greatest individual contributors to performance all came from that sector. Caliper Life Sciences was acquired by Perkin Elmer. Molecular diagnostic testing company Cepheid, orthopedic robotics device company Mako Surgical, and generic pharmaceutical company Akorn all reported great quarters.

In summary, we feel this market has discounted a fairly solid recession and a huge hit to S&P 500 Index earnings. Since 1974, U.S. equity markets have declined more than 20% seven times, five of which correctly forecasted a recession and two that did not—1987 and 1998. We just don’t buy into it this time. Yes, problems remain—housing hasn't rebounded and the lack of new jobs is disturbing. The banking system is over-capitalized now that it has written down the bulk of its bad loans, as evidenced by the huge hit to earnings in 2009. Our point is we don't think the ball has that far to fall anymore. Thus, we think if the country does slip back into recession, it should be a mild one. What if we do get some action out of the super committee, however, and Europe is successful at kicking the can down the road? On a relative basis, we think stocks are as cheap as they have been in our lifetimes and U.S. assets will attract a mountain of money from around the world. The only caveat is if the Germans decide to bail on Europe, but the credit markets are not saying that right now. This sure looks a lot like 1998. 

B. Anthony Weber                 Charles F. Mercer, Jr. CFA              Michael E. Johnson, CFA
October 12, 2011

As of September 30, 2011, Vocus comprised 0.00% of the portfolio's assets, Glu Mobile – 0.39%, Valuevision Media  – 0.00%, Caliper Life Sciences – 1.12%, Perkin Elmer – 0.00%, Cepheid – 2.82%, Mako Surgical – 1.26%, and Akorn – 2.38%.

Note: Small-cap stocks are considered riskier than large-cap stocks due to greater potential volatility and less liquidity.

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.

From his perch in the Ivory Tower, the Yale University Chief Investment Officer's perspective on mutual funds misses the mark.

By Kerry O'Boyle, Aston Asset Management

David Swensen has a bone to pick with investors who use mutual funds. In a scathing editorial in the New York Times (The Mutual Fund Merry-Go-Round – August 13, 2011), the highly regarded manager of the Yale University endowment and creator of the "Yale Model" of investing took the "mutual fund industry" to task for what he sees as its many failings. To summarize, he believes that for decades, mutual fund managers, brokers and financial advisers, and even independent rating firm Morningstar have all conspired to dupe naïve individual investors into making poor investment choices by luring them into inferior funds in an effort to line their own pockets. As diabolical as this all sounds, Swensen's credibility on the subject diminishes with each passing paragraph as he smears with a broad brush of generalities and innuendoes not only all mutual funds, but financial advisers and individual investors. Capping it all off is a plea for more government regulation of investing that would "encourage" investors to embrace low-cost index funds.

The Industry 

Swensen appears to have a poor grasp as to what constitutes the "mutual fund industry." He uses terms such as mutual fund company, brokers, advisers, and fund managers interchangeably with "the industry" as if each were synonyms for the others. In fact, few mutual fund companies have their own brokerage arms—legions of brokers and advisers to peddle their proprietary wares. Most need to convince financial advisers of the worth of their funds just as they would any individual investor. Most fund managers, those actually responsible for managing a fund's assets on a daily basis, are seldom directly involved in how their funds are sold or marketed. Brokers and financial advisers have no say in how individual mutual funds are managed, just as mutual fund companies have no control over the advice that the advisers provide their clients. In short, the monolithic "industry" that Swensen has lumped together, and upon which he rails, doesn't exist. More accurately, the investment community is a collection of businesses offering services that frequently complement each other, but also compete directly and indirectly for the attention of the end investor.   

Yet, even when writing specifically about mutual fund companies, Swensen provides little support for his assertions. He states that, " … for-profit mutual funds face a fundamental conflict between producing profits for their owners and generating superior returns for their investors" without explaining why those two outcomes must be mutually exclusive. He merely declares that, "In general, these companies spend lavishly on marketing campaigns, gather copious amounts of assets—and invest poorly." While there may be instances of firms for which such criticism applies, it's quite a leap to proclaim all such traits as nearly universal across all fund providers. Indeed, it appears that Swensen's main criticism is with a capitalist structure where businesses compete and profit. All private companies have to balance producing profits for their owners with producing superior goods and services for their customers.

Perverse Investor Behavior 

Swensen is also seemingly unwilling to find fault with anyone but the "mutual fund industry" for the poor investment results that he believes that individual investors have suffered. Although he begins his editorial by noting that, "As stock prices have gyrated wildly, many investors have behaved in a perverse fashion, selling low after having bought high" the blame for all of this, in his view, lies entirely with the fund industry. Aided and abetted by the Morningstar star-rating system, the industry "aggressively market[s]" highly-rated funds and "encourage[s] performance-chasing." Gullible investors "respond to industry come-ons" and pay fees to the "parasitic mutual fund industry," resulting in decades of "below-market returns." Swensen writes as if convincing investors to make poor investment decisions is somehow a desirable goal for advisors and mutual fund companies. To the contrary, fund providers and advisers have a long-term vested interest in doing well by investors, as investment success builds and maintains relationships and increases assets and profits for both investors and those serving them. It's up to investors to decide if their needs are being met.

Ultimately, what becomes clear is Swensen's condescending belief that individual investors using mutual funds don't, and can't, achieve adequate investment returns (such as he generates, one assumes, at his Yale endowment)—and are foolish to try. Citing studies by Morningstar on so-called Investor Returns, he derides the performance of individual investors. (Interestingly, Swensen is more of a fan of Morningstar methodologies when they suit his view.) Unfortunately, Investor Returns are based on aggregate monthly fund flow information, not the actual performance of any individual investor. The data cannot pinpoint when assets that left a fund came in or when assets that came in, left. At best, Investor Returns can be used as a rough guide as to whether investors, in aggregate, tend to time the purchases and sales of a particular fund effectively, not as a measure the overall success of individual investors.

Nanny-State Investing

Armed with his Yale endowment bias and little perspective on the needs of smaller investors, Swensen offers a solution—low-cost index mutual funds and heightened US Securities and Exchange Commission (SEC) regulatory and enforcement power to "encourage", some might say force, their use by investors. He states that the burden of proof must be on the vendor in selling "a high-cost product" (re: actively managed funds). No such burden of proof appears necessary, however, for the academically sanctioned indexing approach, despite it being based on increasingly challenged statistical methods and theoretical assumptions. Index funds have proved to be no panacea for investors concerned about the absolute returns and volatility of their portfolios during the market shocks of the past few years.

Swensen, who has criticized the construction methodologies of certain indexes in the past, offers no specific recommendations. Indeed, he offers little specific advice to individual investors at all other than to "educate themselves" and "invest in a well-diversified portfolio of low-cost index funds" while failing to give any insight as to how an investor should go about this. It's surprising that Swensen decides that government and the SEC should be the savior of individual investors given an earlier charge that "regulators do not provide effective oversight." The current restrictive regulatory environment placed on mutual funds can't guarantee investors favorable results, but it hasn't yielded any Ponzi schemes or Bernie Madoffs yet either.

Swensen ends his editorial by writing that, "This is serious business. The financial security of millions of Americans hangs in the balance." Yes, it is serious. Too serious to let government do to investing what it has done to home owners (via Fannie Mae and Freddie Mac), small businesses (oppressive regulation), and the fiscal stability of this country. Too serious to turn a vast and multi-layered industry attempting to serve millions of investors into a straw man to be torn down by gross generalizations from a man perched in an ivory tower disconnected from the goals and fears of individual investors. Too serious to promote a simplistic, one-size-fits-all nanny state solution for investors needing more.

Simple, But Not Easy

David Swensen is a pioneer in institutional investing who deserves much credit for sharing his expertise and management philosophy with the investment community, but he can't micromanage success for millions of individual investors. In one area, however, Swensen is right—financial education is the key. Investors need to become better informed about how markets work, fund selection, diversification, and the monitoring of their portfolios. As Warren Buffett famously noted, investing is "simple, but not easy." It takes practice, and a constant desire to learn and stay informed.

But many individual investors do not have the time or interest to fully commit to becoming savvy investors. They rely on the expertise of mutual fund families and financial advisers to bridge the gap by understanding their needs and goals and knowing how to build a portfolio to match them. Swensen's approach of skewering all of those that don't fit his narrow paradigm of investing doesn't help individuals to identify quality fund families or find informed and trustworthy advisers. Sound investment practices and advice are out there, but it is investors' ultimate responsibility to seek it out and heed it.

Kerry O'Boyle is an Investment Strategist with Aston Asset Management. Prior to joining Aston he wrote on a variety of investment topics as a mutual fund analyst for Morningstar, Inc. He is a graduate of the U.S. Naval Academy, and holds an M.A. in Liberal Arts from St. John's College, Annapolis, MD.

For more information about Aston Asset Management, LP and its subadvisors, please call 800-597-9704, or visit www.astonasset.com

3rd Quarter 2011

Stocks Plunge as Macro Risks Intensify

Equity markets plunged during the third quarter as investors reacted to a string of negative macroeconomic events beginning with the debt ceiling fiasco in Washington and the subsequent U.S. debt downgrade by Standard & Poor’s, followed by the deepening financial crisis in Europe and a general slowing of economic growth around the globe.

The broad market S&P 500 Index declined nearly 14% during the quarter, its biggest drop since the fourth quarter of 2008 and the second worst calendar third quarter since 1928. Small-cap stocks suffered even worse, with the Russell 2000 Index plummeting almost 22%—its second worst third quarter on record. We had warned investors about the overvaluation of small-cap stocks relative to large-caps for several quarters. That valuation gap collapsed amid the decline as small-caps underperformed large caps by more than seven percentage points (as measured by the Russell 2000 vs. Russell 1000 Index)—the widest spread since the first quarter of 1999.

Investors dumped both low-quality and high beta (volatility) stocks as the risk trade collapsed during the third quarter. Within the Fund’s Russell 2000 Value Index benchmark, the lowest beta stocks (first quintile) lost only 9% during the quarter versus a stunning decline of 36% for those with the highest beta (fifth quintile). In terms of quality, stocks in the top quintile for return-on-equity (ROE) outperformed the lowest ROE quintile by more than 13 percentage points.

From a style perspective, performance was mixed across market caps. Value modestly outperformed growth among small-caps during the quarter driven largely by greater weightings in the more defensive Utilities and Healthcare sectors. Growth still leads value by nearly three percentage points for the year-to-date through September 30, however, as the overall trend favoring growth has been broad-based. On a sector basis, all 10 economic sectors in the benchmark posted negative returns during the period. Utilities posted the least negative return, while Energy and Telecommunications delivered the worst returns.

Avoiding the Risk Bandwagon

The Fund significantly outperformed its benchmark during the third quarter, boosting its returns ahead of the index for the year-to-date through the end of September. To put that into perspective, only 40% of active small-cap value managers outperformed the index during the quarter (according to Lipper Analytical Services and BofA/Merrill Lynch). Based on our historical observations, such weak performance is unusual in sharply declining markets.  Conservative, value-oriented managers typically shine in environments of heightened risk and volatility. As mentioned in prior commentaries, however, we observed an unusually large percentage of small-value managers outperforming when the market was advancing sharply higher in the months following the announcement of the second round of quantitative easing (QE2). To us, this trend not only reflected heightened equity correlations, but also that value managers, as a group, were jumping on the risk bandwagon. 

We believe investors and their advisors should take note of this trend. Not only is strategy consistency critically important in the context of an investor’s broader investment portfolio, but low-volatility stocks can help investors weather volatile periods without sacrificing long-term growth. Stocks that go down less require less upside to return to even, an advantage that can become especially valuable in a whipsaw, low-growth market.

We believe the key driver behind the Fund’s improvement during the third quarter was the market trend favoring lower-beta, higher-quality securities. The sectors with the highest contribution to relative performance were Consumer Discretionary and Industrials, highly cyclical sectors where our stock selection was distinctly less-cyclical, higher-quality, and somewhat more defensive. In addition, merger & acquisition (M&A) activity that carried over from the second quarter boosted a couple of individual names. As noted in our last commentary, the portfolio experienced five transactions during a roughly 50-day period ending July 7. We were excited about the developing M&A theme, but when the market rolled over into the third quarter M&A slowed and no further deals occurred in the portfolio.

The top two contributors to performance during the quarter were acquisition targets Immucor and APAC Customer Services. Healthcare technology company Immucor announced an agreement to be acquired by private equity firm TPG Capital for $27 a share—a 30% premium to the previous day’s closing price, and above that of our assessed Absolute Value. The potential for acquisition was part of our initial investment thesis due to the board-level involvement of ValueAct, an activist investment firm with a history of helping companies secure buy-out deals. Call center outsourcing provider APAC was purchased in an all-cash deal at a huge premium to its prior closing price. Both stocks were sold soon after their buy-out announcements.

Another top contributor was Rex Energy, a small independent energy company engaged in the exploration, development, and production of natural gas and oil. Rex reported strong second quarter results in July, with production up significantly from last year as the company raised its 2011 production guidance. In addition, Rex released an operational update in mid-September showing that its new wells in the Marcellus Shale were producing at a higher rate than expected. The Fund continues to hold a position in the stock.

Underweight Stakes Lag

The primary detractor from relative performance during the quarter came from significant underweight positions in the Utilities and Financials sectors. Both sectors outperformed the overall index, Utilities by an especially wide margin. Among the biggest individual detractors from returns were Brink’s, Miller Energy Resources, and WMS Industries.

Security company Brink’s was the biggest individual detractor after it reported mixed second quarter results as its North American segment continues to suffer from pricing and volume pressures driven by aggressive competition. Weak organic growth and sovereign debt fears in Europe also pressured the stock. Industry consolidation fortunately eliminated a low-price competitor in March, which should help alleviate pressure in North America. A continuing bright spot for the company was in the Emerging Markets of Latin America and Asia-Pacific, both of which posted sizeable organic revenue growth. We maintained the Fund’s position in the stock on expectations of an improving outlook.

Shares of micro-cap exploration & production company Miller Energy fell sharply after a blogger questioned the value of its oil and gas assets in Alaska. The stock fell further after the company, in conjunction with newly appointed auditor, KPMG, was forced to restate its cash flow statement in its latest annual filing. Although the change did not impact our assessed Absolute Value, investor confidence was damaged once again. Prior to these negative developments, River Road sent a team to perform on-site due diligence on the company’s primary oil and gas operations in Alaska and believe they support the fundamental long-term value of the company. Given the large loss, however, we trimmed the position.

Gaming equipment manufacturer WMS traded down sharply after management lowered the top end of its 2012 revenue growth range and withdrew its margin guidance. Although overall quarterly results and guidance were in-line with our estimates, Wall Street was disappointed.  The replacement cycle for slot machines has not occurred as quickly as anticipated and, in response, the company announced a 10% reduction in its workforce. Several sell-side analysts issued downgrades on the company as a result. We were encouraged that the firm repurchased stock during the quarter and Chairman and CEO Brian Gamache personally purchased a significant amount of the stock in the open market after the earnings disappointment. Despite WMS being a relatively new position, we trimmed the size of the holding due to its significant loss in the portfolio. 

Positioning and Outlook

During the quarter, nine new holdings were purchased and 11 companies were sold from the portfolio. The new positions added were diversified across a broad range of industry groups, with two-thirds having a market-cap of less than $1 billion and only one, DreamWorks Animation SKG, having a market-cap greater than $2 billion. Among the companies sold, five achieved their Absolute Value price targets and six were sold due to either accumulated losses and/or a negative change in our fundamental outlook for the firm. Three of the six losers sold during the quarter were in the capital markets industry, including Federated Investors, Knight Capital Group, and Artio Global Investors.

Since the beginning of 2011, much of our outlook has been focused on how we believed the market would react to the expiration of QE2. From our perspective, the extraordinary liquidity provided by QE2 effectively extended the risk trade from April 2010 through February 2011.  The average “early stage” recovery, when high-beta, low-quality and more-cyclical stocks tend to dominate, is about 14 months (excluding the tech bubble period). With QE2, the most recent high-beta recovery lasted 24 months. Since QE2 did little to stimulate actual demand for anything other than financial assets and commodities, equity markets became increasingly disconnected to the underlying economy. Prior to the recent correction, for example, small-cap stocks were experiencing the strongest post-war recovery on record, while U.S. Gross Domestic Product (GDP) growth was experiencing the weakest. Such gaps eventually close.

This is why we communicated our belief at the beginning of 2011 that the following two events would occur as the Federal Reserve began to wind down QE2: 1) investors would begin to de-risk their portfolios and low-beta/high-quality stocks would begin to outperform; and, 2) given stretched valuations, the small-cap market would experience at least a modest correction.  We anticipated the correction would signal the market’s entry into the mid-stage of the recovery, where earnings (and investor expectations) begin to moderate, and that the Fund’s relative performance would improve substantially as these events unfolded.

We did not foresee the Arab Spring, the natural disasters in Japan, the European financial crisis, or the debt ceiling debate in Washington. Thus, although our outlook for 2011 was bearish relative to most of Wall Street, we did not anticipate the severe contraction in economic growth or the depth of the correction in equity markets.  We simply knew speculative froth was high and the Fed had few remaining effective options. It was a time for caution.

Although investors still face many of the same challenges now as in early 2011, we believe the risk/reward proposition is greatly improved. Risk assets around the world have plunged in price, yet small-cap earnings have held up reasonably well. Many companies never unwound their austerity measures from the 2008 recession as they recognized, and subsequently learned how to manage in, a slow-growth world. Unlike 2008, corporate balance sheets are also in excellent condition.

Still, we think macroeconomic risks remain elevated. Since the end of June, the likelihood of a recession in Europe and the U.S. has increased substantially. The odds of a financial crisis (and associated contagion) emanating from Europe have also increased. Large U.S. banks remain weak, growth in key markets like China has slowed appreciably, and the political environment in Washington remains unstable and unpredictable.  We believe that many of these risks have already been discounted in equity prices, however.

We are not suggesting that investors return to what has worked during the past two years—a high-beta, high-risk investment strategy—just the opposite. We think this is a mid-stage, cyclical transition in a low-growth environment. It is not the beginning of a new bull market. Thus, it is a time for investors to seek high-quality companies which, in many cases, were left behind during the earlier recovery. Investors should not rush to reinvest. Current volatility is likely to continue and we believe the market may remain trading in a broad range through the 2012 presidential election or beyond. For most, averaging-in over a period of months during pullbacks is better than rushing in only to question your decision if the market sets new lows. This certainly proved to be the case in 2008-2009.

Finally, the Fed remains both a blessing and a curse. Its actions are at least temporarily supporting the price of commodities and financial assets, but there appears to be limited benefits to the real economy. We believe that, ultimately, the Fed is making it more difficult for the financial system to purge its excesses and rebuild. If there is a QE3 and high-beta stocks have a temporary resurgence, we urge investors not to get caught up in the euphoria. We believe stocks could respond negatively to further quantitative easing, as they did following the announcement of “Operation Twist.”  Thus, we urge investors to stay focused on high-quality portfolios of companies that can survive, and perhaps thrive, in a period of low economic growth. 

River Road Asset Management
10 October 2011

As of September 30, 2011, Immucor comprised 0.00% of the portfolio’s assets, APAC Customer Services – 0.00%, Rex Energy – 0.67%, Brink's Co. – 2.97%, Miller Energy Resources – 0.53%, WMS Industries – 1.00%, and DreamWorks Animation – 0.82%.

Note: Small-cap stocks are considered riskier than large-cap stocks due to greater potential volatility and less liquidity. Value investing often involves buying the stocks of companies that are currently out of favor that may decline further.

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.

3rd Quarter 2011

Stocks Plunge as Macro Risks Intensify

Equity markets plunged during the third quarter as investors reacted to a string of negative macroeconomic events beginning with the debt ceiling fiasco in Washington and the subsequent U.S. debt downgrade by Standard & Poor’s, followed by the deepening financial crisis in Europe and a general slowing of economic growth around the globe.

The broad market S&P 500 Index declined nearly 14% during the quarter, its biggest drop since the fourth quarter of 2008 and the second worst calendar third quarter since 1928. Small-cap stocks suffered even worse, with the Russell 2000 Index plummeting almost 22%—its second worst third quarter on record. We had warned investors about the overvaluation of small-cap stocks relative to large-caps for several quarters. That valuation gap collapsed amid the decline as small-caps underperformed large caps by more than seven percentage points (as measured by the Russell 2000 vs. Russell 1000 Index)—the widest spread since the first quarter of 1999.

Investors dumped both low-quality and high beta (volatility) stocks as the risk trade collapsed during the third quarter. Within the Fund’s Russell 2500 Value Index benchmark, the lowest beta stocks (first quintile) lost only 9% during the quarter versus a stunning decline of 36% for those with the highest beta (fifth quintile). In terms of quality, stocks in the top quintile for return-on-equity (ROE) outperformed the lowest ROE quintile by more than 7 percentage points.

Avoiding the Risk Bandwagon

The Fund significantly outperformed its benchmark during the third quarter, boosting its returns well ahead of the index for the year-to-date through the end of September. To put that into perspective, only 40% of active small-cap value managers outperformed the index during the quarter (according to Lipper Analytical Services and BofA/Merrill Lynch). Based on our historical observations, such weak performance is unusual in sharply declining markets.  Conservative, value-oriented managers typically shine in environments of heightened risk and volatility. As mentioned in prior commentaries, however, we observed an unusually large percentage of small-value managers outperforming when the market was advancing sharply higher in the months following the announcement of the second round of quantitative easing (QE2). To us, this trend not only reflected heightened equity correlations, but also that value managers, as a group, were jumping on the risk bandwagon. 

We believe investors and their advisors should take note of this trend. Not only is strategy consistency critically important in the context of an investor’s broader investment portfolio, but low-volatility stocks can help investors weather volatile periods without sacrificing long-term growth. Stocks that go down less require less upside to return to even, an advantage that can become especially valuable in a whipsaw, low-growth market.

We believe the key driver behind the Fund’s improvement during the third quarter was the market trend favoring lower-beta, higher-quality securities. The sectors with the highest contribution to relative performance were Consumer Discretionary and Industrials, highly cyclical sectors where our stock selection was distinctly less-cyclical, higher-quality, and somewhat more defensive. In addition, merger & acquisition (M&A) activity that carried over from the second quarter boosted returns. As noted in our last commentary, the portfolio experienced three transactions during a roughly 50-day period ending July 7. We were excited about the developing M&A theme, but when the market rolled over into the third quarter M&A slowed and no further deals occurred in the portfolio.

The top contributor to performance during the quarter was an acquisition target—Immucor. Healthcare technology company Immucor announced an agreement to be acquired by private equity firm TPG Capital for $27 a share—a 30% premium to the previous day’s closing price, and above that of our assessed Absolute Value. The potential for acquisition was part of our initial investment thesis due to the board-level involvement of ValueAct, an activist investment firm with a history of helping companies in its portfolio secure buy-out deals. We sold the stock upon the announcement near the $27 offering price.

Other notable contributors included closeout retailer Big Lots and footwear-maker Skechers USA. New store growth led to increased revenue at Big Lots during the second quarter despite a decline in same store sales. The management team also reacted quickly and decisively when speculation ended that Big Lots was an acquisition target of private equity. After its shares fell sharply, the company used its strong balance sheet to aggressively repurchase its own shares at a significant discount to our assessed Absolute Value. The stock remains one of our highest conviction holdings.

Skechers popularized toning shoes last year when they introduced their Shape-ups line. Its first generation of toning shoes sold quickly and the company restocked its inventory. The firm and its competitors then introduced sleeker, more-attractive toning shoes which led to excess inventory of the first generation of toning shoes. This temporary inventory overhang led to a sharp decline in the price of the stock, and the Fund subsequently purchased a small position. The stock continued to fall on negative investor sentiment. The company later announced it had successfully liquidated roughly half of its first generation toning inventory when it reported its second quarter results. The market reacted positively to the news and we took the opportunity to exit this lower-conviction name at a small loss to reduce the Portfolio’s overall consumer exposure.   

What Didn't Work

The sectors with the lowest contribution to relative performance during the quarter came from Utilities and Energy. Results in Utilities suffered from a significant underweight position relative to the benchmark in an area that by far delivered the least negative returns. Energy was one of the worst performing sectors in absolute terms, but the negative relative effect was minimal and equally divided between stock selection and allocation. Among the biggest individual detractors from returns were Brink’s, WMS Industries, and Geo Group.

Security company Brink’s was the biggest individual detractor after it reported mixed second quarter results as its North American segment continues to suffer from pricing and volume pressures driven by aggressive competition. Weak organic growth and sovereign debt fears in Europe also pressured the stock. Industry consolidation fortunately eliminated a low-price competitor in March, which should help alleviate pressure in North America. A continuing bright spot for the company was in the Emerging Markets of Latin America and Asia-Pacific, both of which posted sizeable organic revenue growth. We maintained the Fund’s position in the stock on expectations of an improving outlook.

Gaming equipment manufacturer WMS traded down sharply after management lowered the top end of its 2012 revenue growth range and withdrew its margin guidance. Although overall quarterly results and guidance were in-line with our estimates, Wall Street was disappointed.  The replacement cycle for slot machines has not occurred as quickly as anticipated and, in response, the company announced a 10% reduction in its workforce. Several sell-side analysts issued downgrades on the company as a result. We were encouraged that the firm repurchased stock during the quarter and Chairman and CEO Brian Gamache personally purchased a significant amount of the stock in the open market after the earnings disappointment. Despite WMS being a relatively new position, we trimmed the size of the holding due to its significant loss in the portfolio. 

Private prison operator GEO Group reported strong second quarter results with higher revenue growth from two acquisitions and an increase in average inmate per-diems. On the new business front, the Florida legislature is seeking to privatize 29 state facilities in one ‘winner take-all’ contract that would be the largest state award in the industry’s history. On September 30, a Florida circuit judge declared the legislature’s privatization proposal unconstitutional.  The state is expected to appeal the decision. If they request a Stay it would allow the state to move forward with the procurement pending the outcome of the appeals process. On the conference call, Chairman & CEO George Zoley noted the current environment is the “most active business development market we’ve ever seen.” We continue to view GEO as a high conviction position. 

Positioning and Outlook

During the quarter, eight new holdings were purchased and 10 companies were sold from the portfolio. The new positions added were diversified across a broad range of industry groups, with two-thirds having a market-cap of less than $1 billion and only one, DreamWorks Animation SKG, having a market-cap greater than $2 billion. Among the companies sold, five achieved their Absolute Value price targets and six were sold due to either accumulated losses and/or a negative change in our fundamental outlook for the firm. Three of the six losers sold during the quarter were in the capital markets industry, including Federated Investors, Knight Capital Group, and Artio Global Investors.

Since the beginning of 2011, much of our outlook has been focused on how we believed the market would react to the expiration of QE2. From our perspective, the extraordinary liquidity provided by QE2 effectively extended the risk trade from April 2010 through February 2011.  The average “early stage” recovery, when high-beta, low-quality and more-cyclical stocks tend to dominate, is about 14 months (excluding the tech bubble period). With QE2, the most recent high-beta recovery lasted 24 months. Since QE2 did little to stimulate actual demand for anything other than financial assets and commodities, equity markets became increasingly disconnected to the underlying economy. Prior to the recent correction, for example, small-cap stocks were experiencing the strongest post-war recovery on record, while U.S. Gross Domestic Product (GDP) growth was experiencing the weakest. Such gaps eventually close.

This is why we communicated our belief at the beginning of 2011 that the following two events would occur as the Federal Reserve began to wind down QE2: 1) investors would begin to de-risk their portfolios and low-beta/high-quality stocks would begin to outperform; and, 2) given stretched valuations, the small-cap market would experience at least a modest correction.  We anticipated the correction would signal the market’s entry into the mid-stage of the recovery, where earnings (and investor expectations) begin to moderate, and that the Fund’s relative performance would improve substantially as these events unfolded.

We did not foresee the Arab Spring, the natural disasters in Japan, the European financial crisis, or the debt ceiling debate in Washington. Thus, although our outlook for 2011 was bearish relative to most of Wall Street, we did not anticipate the severe contraction in economic growth or the depth of the correction in equity markets.  We simply knew speculative froth was high and the Fed had few remaining effective options. It was a time for caution.

Although investors still face many of the same challenges now as in early 2011, we believe the risk/reward proposition is greatly improved. Risk assets around the world have plunged in price, yet small-cap earnings have held up reasonably well. Many companies never unwound their austerity measures from the 2008 recession as they recognized, and subsequently learned how to manage in, a slow-growth world. Unlike 2008, corporate balance sheets are also in excellent condition.

Still, we think macroeconomic risks remain elevated. Since the end of June, the likelihood of a recession in Europe and the U.S. has increased substantially. The odds of a financial crisis (and associated contagion) emanating from Europe have also increased. Large U.S. banks remain weak, growth in key markets like China has slowed appreciably, and the political environment in Washington remains unstable and unpredictable.  We believe that many of these risks have already been discounted in equity prices, however.

We are not suggesting that investors return to what has worked during the past two years—a high-beta, high-risk investment strategy—just the opposite. We think this is a mid-stage, cyclical transition in a low-growth environment. It is not the beginning of a new bull market. Thus, it is a time for investors to seek high-quality companies which, in many cases, were left behind during the earlier recovery. Investors should not rush to reinvest. Current volatility is likely to continue and we believe the market may remain trading in a broad range through the 2012 presidential election or beyond. For most, averaging-in over a period of months during pullbacks is better than rushing in only to question your decision if the market sets new lows. This certainly proved to be the case in 2008-2009.

Finally, the Fed remains both a blessing and a curse. Its actions are at least temporarily supporting the price of commodities and financial assets, but there appears to be limited benefits to the real economy. We believe that, ultimately, the Fed is making it more difficult for the financial system to purge its excesses and rebuild. If there is a QE3 and high-beta stocks have a temporary resurgence, we urge investors not to get caught up in the euphoria. We believe stocks could respond negatively to further quantitative easing, as they did following the announcement of “Operation Twist.”  Thus, we urge investors to stay focused on high-quality portfolios of companies that can survive, and perhaps thrive, in a period of low economic growth.

River Road Asset Management
10 October 2011 

As of September 30, 2011, Immucor comprised 0.00% of the portfolio’s assets, Big Lots – 4.59%, Skechers – 0.00%, Brink's Co. – 3.05%, WMS Industries – 1.03%, Geo Group – 2.83%, and DreamWorks Animation – 0.83%.

Note: Small-cap stocks are considered riskier than large-cap stocks due to greater potential volatility and less liquidity. Value investing often involves buying the stocks of companies that are currently out of favor that may decline further. 

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. 

3rd Quarter 2011

Stocks Plunge as Macro Risks Intensify

Equity markets plunged during the third quarter as investors reacted to a string of negative macroeconomic events, beginning with the debt ceiling fiasco in Washington and the subsequent U.S. debt downgrade by Standard & Poor’s, followed by the deepening financial crisis in Europe and a general slowing of economic growth around the globe.

The broad market S&P 500 Index declined nearly 14% during the quarter, its biggest drop since the fourth quarter of 2008 and the second worst calendar third quarter since 1928. The market’s macroeconomic focus also led to a dramatic increase in volatility. The Russell 3000 Total Return Index moved more than 2% on 19 of the 64 trading days during the quarter. By comparison, the index had just 22 such trading days during all of 2010.

Across all market capitalizations, stocks with the lowest beta (volatility) dramatically outperformed high-beta stocks. Within the S&P 500, the difference in returns between the lowest and highest quintiles was more than 23 percentage points!  Higher quality stocks, as measured by higher return-on-equity (ROE), marginally outperformed lower quality stocks during the quarter as well. In addition, correlations among stocks increased significantly, again as a result of the market’s macroeconomic focus, with correlation within the S&P 500 are at a 25-year high according to BofA/Merrill Lynch research.

Drawdown Plan

As would be expected in such a market correction, the Fund declined less than its long-only Russell 3000 Index benchmark during the quarter. The magnitude of the outperformance was substantial, however. Since the portfolio typically is long low-beta stocks and short high-beta stocks in accordance with our Absolute Value approach, a market that favors low-beta stocks was ideal. Fundamental long-short strategies, such as the one we employ in running the Fund, seek to be long the best performing stocks and short the worst. Although high correlations tend to minimize outperformance opportunities, the Fund managed to outperform in both the long and short sleeves of the portfolio.

Average net long equity exposure during the period was 31% as our Drawdown Plan went into effect in early August. The Drawdown Plan is a critical risk management tool we designed to help minimize portfolio losses in a declining market environment. If the portfolio falls 4% from its high-water mark (the highest peak in the Fund’s value), the Drawdown Plan calls for a reduction in net long equity exposure to no more than 50%, 30% (second level) if it falls 6%, and 10% (third level) if it falls more than 8%. The Drawdown Plan went into effect on August 3 and quickly progressed through its second and third thresholds on August 5 and August 9, respectively.

By quickly reducing the net market exposure in early August, the Drawdown Plan helped the portfolio limit the damage of the declining market. In addition to limiting losses, the Drawdown Plan significantly lowered volatility during the period. Compared to the 19 days of more than 2% moves for the Russell 3000 Total Return, the Fund experienced just one during the quarter.

Long Portfolio

The long portfolio dropped more than 13% during the quarter with an average exposure of 79%.  Although the Drawdown Plan dramatically reduced net long equity exposure, it did not prevent us from increasing our long exposure when stocks began trading at compelling values. Long exposure stood at 71% when the portfolio reached the third threshold of the Drawdown Plan on August 9, but increased to 85% by quarter-end. We maintained the portfolio’s net equity exposure by offsetting increases in the long positions with equal increases in short positions.

The three largest individual contributors to performance on the long side were Rent-A-Center, Big Lots, and Medtronic. Rent-A-Center is the largest rent-to-own company in the U.S. In 2010, it began locating kiosks within furniture and electronics retailers to offer rent-to-own contracts to customers who could not qualify for in-store credit. These RAC Acceptance kiosks fill a need for consumers and retailers making them an exciting growth opportunity for the firm. Investors bid up the stock after it was reported that Best Buy began testing the kiosks in Chicago-area stores.

New store growth led to increased revenue at Big Lots during the second quarter despite a decline in same store sales. The management team also reacted quickly and decisively when speculation ended that Big Lots was an acquisition target of private equity. After its shares fell sharply, the company used its strong balance sheet to aggressively repurchase its own shares at a significant discount to our assessed Absolute Value. Medtronic is an example of a high-quality company that hit our discount target. It was added opportunistically after the portfolio reached the third stage of the Drawdown Plan. With high correlations among stocks, both high-quality and low-quality companies saw stock prices decline sharply in early August. Medtronic received a boost when the firm’s new CEO affirmed earnings guidance in his first quarterly conference call.

WMS Industries, Brink’s, and ManTech International were the biggest detractors from the long portfolio. Gaming equipment manufacturer WMS traded down sharply after management lowered the top end of its 2012 revenue growth range and withdrew its margin guidance, though overall quarterly results and guidance were in-line with our estimates. Security company Brink’s reported mixed second quarter results as its North American segment continues to suffer from pricing and volume pressures driven by aggressive competition. Weak organic growth and sovereign debt fears in Europe also pressured the stock. Industry consolidation fortunately eliminated a low-price competitor in North America in March and the Emerging Markets of Latin America and Asia-Pacific continue to be a bright spot for the company.

ManTech, a provider of information technology services to the Department of Defense and federal government agencies, was in part a victim of the U.S. debt ceiling debate. We believed when we established the position that defense contractors specializing in technology would be spared from the deepest cuts. When Congress and the White House agreed to raise the debt ceiling and continue debating the budget, they established defense cuts as the default if the budget Super Committee could not reach their target. Our conviction in the position weakened as the outlook for defense spending grew increasingly pessimistic. ManTech had also developed into one of the Fund’s largest losing positions so we eliminated the stake.

Short Portfolio

The stocks shorted by the portfolio declined an average of more than 18% with an average exposure of -48%, resulting in a net gain for the Fund. The short portfolio changed dramatically from the second quarter 2011 as we covered 17 of the portfolio’s 28 positions held on June 30 at their Absolute Value. Even though the Drawdown Plan called for a sharp reduction in net long equity exposure, we were not forced to sell long positions when covering shorts. A significant short position in the SPDR S&P 500 ETF replaced the covered positions and helped maintain the net long equity exposure dictated by the Drawdown Plan.

The ETF short was selected solely as a market proxy to achieve the desired net equity exposure.  We do not have an opinion on the valuation of the S&P 500 Index. The SPDR S&P 500 ETF was chosen for its superior liquidity and lower borrowing costs versus ETF options for the Russell 3000. The short ETF position will be replaced by individual short positions as they present themselves and can be quickly covered to increase net long equity exposure when the Drawdown Plan ends.

The short position with the greatest contribution to short portfolio return was the SPDR S&P 500 ETF. Among other individual short positions, AMR and Texas Industries were notable positive contributors. Unlike most other legacy carriers, AMR (parent company of American Airlines) avoided bankruptcy and consolidation during the Great Recession. Its reward for weathering the storm is that its competitors emerged with stronger balance sheets and reduced pension liabilities.  Furthermore, American Airlines operates one of the oldest and least fuel efficient fleets among legacy airlines. AMR has lost money in 12 of the last 16 quarters and experienced unusually high pilot retirements during August and September, fueling speculation that the company was planning to seek bankruptcy protection.  The stock fell sharply, allowing us to cover the short position at our assessed Absolute Value.

We have maintained a short position in cement supplier Texas Industries since the inception of the Fund. The slowdown in residential and commercial construction and infrastructure projects has left the highly leveraged company in a predicament. Operating earnings have not covered interest expense in any of the last eight quarters, and to sustain itself the company has issued debt, drawn down cash balances, and suspended its dividend. When pressed by analysts for details of their liquidity plan during the quarterly earnings conference call, management could only offer that they needed the business environment to improve. We maintained the short position through quarter-end.

The short positions with the lowest contribution to short portfolio return were Bebe Stores, Frontier Communications, and CONMED. Only Bebe had a negative contribution to return, and the short position in Frontier was only established on September 28. Bebe held up relatively well during the third quarter as the market declined precipitously. A solid balance sheet that has no debt and its first positive same-store sales comparable in 17 quarters prevented the stock from participating in the market meltdown. Given the firm’s Chief Merchandiser left in early January 2011 and the retailer benefited from very easy comparables, we remain confident that this is a turnaround story that does not ultimately turn and we maintained the portfolio’s position.

When we established the short position in CONMED, we believed that management had put the medical technology company’s business at risk due to an underinvestment in research and development. We also noted the appearance of nepotism, overly generous pay packages, and a poison pill provision as evidence of poor alignment between management and shareholder interests. The firm reported low single-digit sales growth and margin expansion for 2010 and the first quarter of 2011, prompting two increases in our assessed Absolute Value and decreasing conviction in the short position. We covered the position prior to the firm’s second quarter earnings announcement.

Outlook and Positioning

Global economies are faced with macroeconomic problems that defy easy solutions. Sovereign debt and government obligations are a growing burden in the U.S. and much of Europe at a time when many economies are stalling. With this backdrop, we expect very modest growth from the U.S. economy in 2012. Markets moved a long way during the third quarter toward pricing in this economic malaise, however, and it is possible the market could rally even if economic growth is stagnant. If current estimates for 2012 earnings hold, we believe stocks are priced attractively. Even at reduced estimates, equities seem to offer a reasonable return opportunity.

Still, with volatility high and a tepid outlook we are comfortable beginning the fourth quarter with a net long equity exposure of only 11% (85% long and -74% short) in the portfolio. Our Drawdown Plan ends when the market begins to exhibit a positive trend, which we define as a positive change in the 50-day moving average of the Russell 3000. Once that happens we will increase net long equity exposure to at least 30% and may choose to increase exposure further if long opportunities are sufficiently compelling. Per the Drawdown Plan, we must return to a normal net long equity range of 50% to 70% once the 50-day moving average of the Russell 3000 has increased for 10 consecutive days.

We believe the sell-off has allowed us to build a solid long portfolio of high-quality stocks that rarely meet our discount-to-value criteria. When we begin to cover the short position in the SPDR S&P 500 ETF, we think we will be able to build exposure to a long portfolio with an attractive return potential even in a low growth economic environment. In addition, our short portfolio watchlist will help us rebuild the short portfolio once the equity markets begin to trend positively. 

River Road Asset Management
10 October 2011

As of September 30, 2011, Rent-A-Center comprised 2.40% of the portfolio's assets, Big Lots – 3.91%, Medtronic – 3.56%, WMS Industries – 2.43%, Brink’s Co. – 2.72%, ManTech International – 0.00%, SPDR S&P500 ETF – (70.54%), AMR – (0.16%), Texas Industries – (0.36%), Bebe Stores – (0.52%), Frontier Communication – (0.14%), and CONMED – (0.00%).

Note: Short sales may involve the risk that the Fund will incur a loss by subsequently buying a security at a higher price than which it was previously sold short. A loss incurred on a short sale results from increases in the value of the security, thus losses on a short sale are theoretically unlimited. Value investing often involves buying the stocks of companies that are currently out-of-favor that may decline further. Investing in exchange traded and closed end funds are subject to additional risk that shares of the underlying fund may trade at a premium or discount to their net asset value.

Parameters set by the Subadviser are not a fundamental policy of the Fund and are subject to change at any time.

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.

CHICAGO – October 6, 2011 – Aston Asset Management, LP (Aston) is pleased to announce that effective September 30, 2011, a voluntary waiver of management fees and/or reimbursement of ordinary operating expenses of an additional 0.15% went into effect for the ASTON/Montag & Caldwell Mid Cap Growth Fund (Ticker: AMCMX) (the “Fund”). 

Currently, Aston is contractually obligated to waive management fees and/or reimburse ordinary operating expenses of the Fund so that the total ordinary operating expenses, including management fees, do not exceed 1.40% of the Fund’s average net assets in any fiscal year, excluding acquired fund fees and expenses.  Aston is voluntarily reducing that contractual expense cap from 1.40% to 1.25%.  Based on the Fund’s most recent fiscal year, the Fund’s gross expense ratio per its current prospectus is 3.56%, including 0.01% of acquired fund fees and expenses. 

The Fund invests in high-quality mid-cap growth companies that are growing near-term earnings faster than the market and trading at a discount to their intrinsic value.  The ASTON/Montag & Caldwell Mid Cap Growth Fund is managed by Scott Thompson, CFA and Andrew W. Jung, CFA.  The Fund leverages Montag & Caldwell's time-tested, fundamentally driven growth investment philosophy and process. 

“Aston has enjoyed a long, beneficial relationship with Montag & Caldwell”, said Stuart D. Bilton, Chairman and Chief Executive Officer of Aston.  “We are pleased to be establishing this voluntary waiver of management fees in the interests of our shareholders.”

To request more information please contact Tony Kono at 973-732-3521 or moc.cnirpcj@ynot

Aston Asset Management, LP

Headquartered in Chicago, Illinois, Aston provides investment management services to the mutual fund and managed accounts markets by carefully selecting, monitoring and marketing experienced boutique investment managers, who seek to achieve consistent investment performance using disciplined investment processes and best in class business standards.  From the initial due diligence on an investment manager to the launching of a new Aston Fund, we take measured steps to ensure congruence between the requirements of Aston, the capabilities of the subadviser and the needs of clients.  As of September 30, 2011, Aston is the adviser to twenty-five mutual funds with total net assets of approximately $8.4 billion.  Our funds are distributed nationally through intermediaries including registered investment advisors, model platforms, broker-dealers, consultants, retirement platforms and wealth management teams.   For more information on the funds managed by Aston please call 800-597-9704.

Note: Small- and mid-cap stocks are considered riskier than large-cap stocks due to greater potential volatility and less liquidity.

The voluntary waiver of management fees and/or reimbursement of ordinary operating expenses may be subject to cancellation at any time.

Investors should consider the investment objectives, risks, charges and expenses of the Fund carefully before investing. Please call 800 597-9704 for a prospectus which contains this and other information about the Fund. Read it carefully before you invest or send money. Aston Funds are distributed by BNY Mellon Distributors Inc.

3rd Quarter 2011

Stocks Plunge as Macro Risks Intensify

Equity markets plunged during the third quarter as investors reacted to a string of negative macroeconomic events beginning with the debt ceiling fiasco in Washington and the subsequent U.S. debt downgrade by Standard & Poor’s, followed by the deepening financial crisis in Europe and a general slowing of economic growth around the globe.

The broad market S&P 500 Index declined nearly 14% during the quarter, its biggest drop since the fourth quarter of 2008 and the second worst calendar third quarter since 1928. Small-cap stocks suffered even worse, with the Russell 2000 Index plummeting almost 22%—its second worst third quarter on record. We had warned investors about the overvaluation of small-cap stocks relative to large-caps for several quarters. That valuation gap collapsed amid the decline as small-caps underperformed large caps by more than seven percentage points (as measured by the Russell 2000 vs. Russell 1000 Index)—the widest spread since the first quarter of 1999.

Investors dumped both low-quality and high beta (volatility) stocks as the risk trade collapsed during the third quarter. Within the Fund’s Russell 2000 Value Index benchmark, the lowest beta stocks (first quintile) lost only 9% during the quarter versus a stunning decline of 36% for those with the highest beta (fifth quintile). In terms of quality, stocks in the top quintile for return-on-equity (ROE) outperformed the lowest ROE quintile by more than 13 percentage points.

From a style perspective, performance was mixed across market caps. Value modestly outperformed growth among small-caps during the quarter driven largely by greater weightings in the more defensive Utilities and Healthcare sectors. Growth still leads value by nearly three percentage points for the year-to-date through September 30, however, as the overall trend favoring growth has been broad-based. On a sector basis, all 10 economic sectors in the benchmark posted negative returns during the period. Utilities posted the least negative return, while Energy and Telecommunications delivered the worst returns.

Cash Cushion

Although a less favorable business operating environment and sharply declining market resulted in negative absolute returns during the quarter, the Fund substantially outperformed its benchmark aided by the portfolio’s cash position as well as security selection. Security selection has also been an important contributor to the Fund’s positive year-to-date performance through the end of September, which compares favorably with the index’s 18% decline.

Top contributor’s included Scholastic, Aaron’s, and Big Lots, all of which delivered positive returns during the quarter. Scholastic is the world’s largest publisher and distributor of children’s books, and despite a difficult financial period for both school districts and consumers it has reported several consecutive quarters of strong educational technology sales and solid book fair results. Management used its free cash flow to pay down debt, increase its dividend, repurchase stock, and reinvest in the business.

Aaron’s is a market leading rent-to-own retailer with growing customer traffic and positive same-store sales amid the challenging economic environment. Management also maintained its strong operating outlook and repurchased shares during the first six months of 2011. With consumer credit remaining tight, we are optimistic Aaron’s will continue to generate meaningful free cash flow and maintain its strong balance sheet.

Closeout retailer Big Lots reported a disappointing decrease in same-store sales, but management noted improving consumables and strong seasonal category sales. Since authorizing a share repurchase plan last quarter, the firm has reduced shares outstanding by 13%. Although the acquisition of an unprofitable Canadian closeout retailer negatively affected quarterly results, Big Lots reported year-over-year earnings per share growth due to its aggressive share repurchase program and tightened cost controls. Management believes same-store sales comparisons in the second half of 2011 will improve and continues to implement its store growth strategy.

Laggards

ManTech International, CSG Systems International, and American Greetings were the three largest negative contributors to performance during the quarter. ManTech is a leading provider of information technology services to the U.S. military and federal government agencies. Although it reported a strong second quarter and reaffirmed its expectations for the year, contract awards during the quarter were weak. Management blamed the slowdown on delays in the U.S. federal government appropriation process. Given the uncertainty surrounding future government spending and a lower than expected book-to-bill ratio, we reduced our growth rate assumption and valuation calculation. On a positive note, ManTech’s balance sheet continues to improve and now has more cash than debt outstanding. Given its strong balance sheet, the government’s strategic need for a secure technology infrastructure, and the growing importance of cyber security, we are confident ManTech will survive the current downturn in government spending, thus the Fund continues to hold a reduced position.

Billing software firm CSG Systems has seen operating results negatively affected by a recent acquisition that has failed to meet expectations. The company also continues to suffer from price concessions on a recently renegotiated contract with DISH Network and further uncertainty stemming from the 2012 expiration of a contract with its largest client, Comcast. We believe we have accounted for these risks by using an above-average discount rate in our valuation model. We remain attracted to the firm’s high revenue visibility and strong free cash flow attributes.

Although American Greetings generated favorable operating results during the first two quarters of its fiscal year, management recently reduced its annual revenue growth forecast due to a more cautious economic outlook and a broad-based slowdown at retailers. Despite slower growth expectations, the greeting card company continues to generate strong free cash flow that it has used to reduce net debt, repurchase stock, and pay an attractive dividend. Because we originally used a lower growth-rate estimate in our valuation model than management’s lowered short-term guidance, our outlook and valuation assumptions remain unchanged.

Portfolio Positioning

Cash in the Portfolio declined from 48% at the beginning of the quarter to roughly 39% by the end of September. The increase in volatility in the small-cap market allowed us to take advantage of lower equity prices. Although we added several new stocks to the portfolio, the majority of purchases consisted of additions to existing holdings. We often increase the position size of holdings in the portfolio if their prices decline and their discount-to-valuations widen, assuming our valuation assumptions remain intact. Conversely, as the price of a holding appreciates and the discount-to-valuation declines, we will typically reduce the position size. 

While the Fund remains defensively positioned, lower cash levels may increase the volatility of the portfolio in the future. If the small-cap market continues to weaken and valuations become more attractive, the portfolio may begin to increase its allocation to businesses with higher risk profiles. In essence, as the opportunity to earn adequate returns relative to risk improves, the assumption of risk in the portfolio may increase.

The largest new position added during the quarter was insurance firm Brown & Brown. The firm’s commissions are a product of exposure units and insurance rates. Unfortunately, both have declined significantly during the last several years due to price competition among insurers and, more recently, the struggling domestic economy. The deflationary pressure on insurance premiums has caused the firm to experience negative organic growth since 2007. Despite these well-known challenges, Brown & Brown continues to generate strong margins and cash flow thanks to management’s focus on expense control. Consequently, Brown & Brown’s balance sheet has improved in recent years and now has more cash than debt. Management’s patience has better positioned the company to make acquisitions to enhance growth, as it has done in the past, as valuations become more attractive.  

Outlook

Based on the commentaries from the approximately 300 small-cap businesses that we follow, we believe the economy has transitioned from a period of slow growth to slow-to-no-growth. The operating environment remains uncertain and management teams continue to experience difficulty planning and forecasting their businesses. Rising costs have reduced the margins of businesses we follow and higher prices have caused some demand destruction. In general, capital expenditures remain focused on short-term paybacks and increased productivity. The focus on productivity has enabled many businesses to maintain attractive margins, but it also has contributed to the stubbornly high unemployment rate. Several companies have also noted a slowdown in government spending, putting further pressure on end demand. Year-over-year earnings growth became more challenging during the second quarter and we expect earnings comparisons to remain increasingly difficult as companies report third quarter results. Although the business environment is uncertain for the companies we follow, we have not noticed a sharp decline in demand that would resemble the 2008-2009 recessionary period.

Given this environment, it remains extremely important that the portfolio follows its risk management discipline of only taking risk when appropriately compensated. When studying an individual business, we categorize the major forms of risk as operating and financial. Our definition of operating risk is the degree of volatility of a business’s future free cash flows.  The more volatile or uncertain the future free cash flows, the higher the operating risk. We measure financial risk by the degree of leverage on a firm’s balance sheet relative to free cash flow.

When small-cap valuations appear high and we believe investors are not adequately compensated to assume risk, we attempt to avoid both operating and financial risk. When small-cap valuations are attractive and risk is being priced appropriately, as an opportunistic strategy we are comfortable taking measured risk. In an attempt to limit large mistakes that could jeopardize absolute return, however, when assuming risk on a small-cap investment we will take only operating OR financial risk—never both.

Earlier this year, we did not believe risk was being priced properly in the small-cap market and positioned the Fund accordingly. In our opinion, the portfolio’s equity holdings possessed below average levels of operating and financial risk. We believe this positioning benefited the performance of the equities held year-to-date. The pricing of risk changed considerably during the third quarter and is now more favorable for the purchaser of risk. Although we have not significantly altered the risk profile of the portfolio, we are considering several small-cap businesses that may have either volatility in their cash flows (operating risk) OR higher leverage on their balance sheet (financial risk). We do not believe that current prices for the universe of small-cap equities will cause us to become aggressively positioned at this time, but assuming volatility increases and the pricing of risk becomes even more favorable, we may increase the amount of holdings with higher risk profiles.

We manage this Fund in a manner that is flexible and opportunistic and will only assume risk when we believe we are being adequately compensated. The time to increase risk in the portfolio could be approaching, and we believe we are well positioned to take advantage of further increases in volatility in the small-cap market. 

River Road Asset Management
5 October 2011

As of September 30, 2011, Scholastic comprised 0.26% of the portfolio's assets, Aaron Group's – 0.14%, Big Lots – 1.30%, ManTech International – 1.97%, CSG Systems International – 1.90%, American Greetings – 2.11%, and Brown & Brown – 3.19%.

Note: Small-cap stocks are considered riskier than large-cap stocks due to greater potential volatility and less liquidity. Value investing often involves buying the stocks of companies that are currently out of favor that may decline further.

Parameters set by the Subadviser are not a fundamental policy of the Fund and are subject to change at any time.

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. 

3rd Quarter 2011 SMA Diversified Equity Managed Accounts Quarterly Commentary

You Can Lead a Horse to Water …

What a disappointing quarter for stock investors, particularly in small-caps. Whatever stimulus the Federal Government provides, the follow through of growth into the private economy has been ephemeral. The consumer, who represents at least two-thirds of the economy, is still de-leveraging—which will take years to unwind—despite a lot of liquidity in the financial system.  Corporate balance sheets are bulging with cash and the 30-year US Treasury yield is less than 3%. The catalysts for growth are there—it's just that consumer and business confidence remains subdued. You can lead a horse to water …

So, what’s the problem?  Is it the European sovereign debt issue?  Is it the slowdown in growth in emerging economies? Economic growth globally and domestically has slowed. The latest Federal Reserve initiative to spur growth is Operation Twist, which follows its second round of quantitative easing that began in August 2010 and ended in June. That initiative jump started a rally in stocks and boosted consumer confidence. Will the new Operation Twist have the same impact? Operation Twist is a policy to sell short-dated fixed income securities and buy long-duration bonds. The intent is to lower long-term interest rates and also to steer more investable funds to other sources of long-duration assets like common stocks. Rising stock prices have lifted consumer and business sentiment and led to a stronger economy at times in the past.

Whether or not this is the correct lever for the Government to pull, the important point for long-term investors is that stocks are once again attractively priced. We could cite a lot of statistics to convey the facts, but one significant action to note is that legendary investor Warren Buffett, CEO of Berkshire Hathaway, believes its stock is undervalued and announced that it may begin to buy back some of its shares. This is only the second time in the firm's history that it has made such an announcement. The last time was March 2000.

Our mantra has always been to buy the best when they’re depressed. When the entire market swoons, we look for companies that fit our Leader investment category and tend to sell undervalued, lower-confidence holdings and redeploy to equally undervalued, higher-conviction stocks. Our philosophy is to focus on companies that we believe have a sustainable competitive advantage and opportunistically buy them when the valuation is attractive—where we calculate an upside potential to be at least three times greater than the downside risk. In times of uncertainty we stay with what we know best.  

Positive Health, Sagging Tech

During the third quarter, the strategy declined sharply with the rest of the equity market and underperformed its Russell 1000 Index benchmark. The underperformance relative to the benchmark was primarily due to stock selection in the Technology and Consumer Discretionary sectors. One tech security firm suffered a black eye from a security breach at a recently acquired subsidiary. The setback at the previously untainted firm, and its depressed stock, eventually led us to sell the position to fund higher conviction names. An auto parts supplier within Consumer Discretionary underperformed on margin weakness in its non-auto business segments as well as macroeconomic fears of a global recession.

Stock selection within Utilities and Financials, along with underweight positions in the more defensive Utilities and Consumer Staples sectors also hindered performance relative to the benchmark. One life-insurance giant continued to correct on concerns that a low absolute interest-rate environment would pressure the firm’s profitability.   

Stock selection in Healthcare, Materials, and Energy were strong on a relative basis, with the portfolio’s Healthcare holdings actually posting a positive absolute return for the quarter. Two healthcare IT holdings both reported solid quarterly earnings results and raised guidance. In addition, one benefitted from strong cross-selling opportunities as a result of a recent acquisition and the other showed robust booking and order backlog growth. Another top individual contributor was a research firm that provides best-practices analysis to client companies—most of which are in the Healthcare industry. Strong results across all measures and raised guidance drove the stock higher as the firm continues to benefit from upcoming reimbursement changes for hospitals and growth in its analytical tools business.

A gold-mining stock was another top contributor within Materials as the price of gold continued to increase. Despite a drop in natural gas and oil commodity prices, shares of an energy holding rose on speculation regarding the company’s attractiveness as a potential acquisition target. Finally, though the overall sector allocation effect for the portfolio was negative during the period, it was more than offset by a positive interaction effect—where the portfolio was overweight outperforming sectors and underweight underperforming sectors. 

Outlook and Positioning

Although our expectations call for a continuation of modest domestic economic growth, TAMRO’s investment process focuses on individual, bottom-up stock selection to identify companies that we believe are best able to execute given their specific competitive advantage.  Our approach to portfolio management is opportunistic and broadly diversified, with sector weights determined by where we see opportunities at the stock level rather than macroeconomic calls.

At quarter end, the portfolio’s largest sector weightings in absolute terms were in Healthcare, Financials, and Industrials, with Financials entering the top-three sectors mainly owing to purchases. We decisively added to Financials during the quarter as we identified more high-quality companies that represented attractive opportunities within the sector.  We believe domestic economic growth is only sustainable with a strong financial sector and we think we have identified clear leaders that have executed throughout the financial crisis. We believe there are only a handful of “thrivers”—companies with a competitive advantage that differentiates them from their peers that are attractively priced due to current investor disinterest.

Relative outperformance pulled Healthcare into the top three, pushing Technology out of the top tier. Efficient administration continues to be a dominant trend in Healthcare, with the need for cost containment as important as ever as demand for healthcare services continues to grow. In our opinion, that is a long-term trend that resonated with several stocks in the portfolio this quarter. We have identified Healthcare IT companies that we think are major beneficiaries of this trend and have been able to hold the investments as business execution has continued.

Seven stocks became full positions within the portfolio during the quarter either through direct purchases, market appreciation, or a combination of the two. An aggressive acquisition campaign by one tech company over the past decade caused it to overreach, creating confusion with its customer base. The experienced management team is beginning to undertake the changes needed to refocus on customer needs, however, which we believe should reinvigorate revenue growth and stock performance. We found one regional brokerage firm attractive because of its management team and strong historical track record. The company gets a majority of its revenues and significant profits from its traditional brokerage/private client operations, but also has an important capital markets operation, asset management group, and bank. Although the firm will likely be affected by overall market conditions and concerns about the outlook for financial services firms in general, we expect management to continue successfully charting the company’s course.

Five full positions were sold during the quarter in addition to the previously mentioned tech security firm, including the gold-mining stock. As investors fled to the safety of gold and commodity prices rose, we gradually took profits and used them as a source of funds for other opportunities.

TAMRO Capital Partners

Alexandria, Virginia

3rd Quarter 2011 SMA Dynamic Allocation Quarterly Commentary

The daily news seemed to drive market instability during the third quarter of 2011, which saw a continuing trend of increasing volatility. Central to this was Greece, with its rescue negotiations and potential default dominating the news. Swirling speculation as to which European sovereign may be next to slide into the debt abyss added to the frenzy. We believe these types of extreme events tend to cluster and to take on a momentum of their own, which our Dynamic Portfolio Optimization model attempts to anticipate. It is possible that some of this building disruption is what our model was sensing earlier in the year when it signaled for us to take a more defensive stake in the portfolio, and as it continues to signal for cautious, conservative allocations. The strategy's performance during the quarter reflects these relatively defensive allocations as it dropped only marginally compared with double-digit losses for the broader US market (as measured by the S&P 500 Index) and the its composite benchmark (35% Russell 3000 Index/35% MSCI ex-US Index/30% Barclays Capital Aggregate Bond Index).

Toward the end of the third quarter the model indicated that some small and well-diversified equity exposures were appropriate, resulting in 1% to 4% allocations to ETFs with exposure to Australia, Singapore, Brazil, broader Latin America, and the US Healthcare sector being initiated. Overall, though, conservatism was the watchword as 56% of assets remained in high-quality, short-maturity fixed-income securities and 18% in cash at quarter-end.

Many investors remain cautiously optimistic, hoping for a year-end market rally from admittedly oversold conditions or a positive European debt resolution. We remain more rooted in events and data taking place in the marketplace. Although our model is seeing modest signs of improvement, our outlook remains cautious. 

Smart Portfolios
Seattle, WA

3rd Quarter 2011 SMA Large Cap Value Managed Accounts Commentary 

TGIF!

For many people, this phrase means Thank God It’s Friday. For this quarter, it means Thank God It’s Finished. The third quarter of 2011 was quite challenging, with the strategy's Russell 1000 Value Index benchmark posting its fourth worst quarter since we began began running our large-cap strategy in July 2002. We have persevered since that time by being steadfast in our approach, though it was, as previously stated, quite challenging.

Performance for the benchmark was fairly broad with five sectors—Utilities, Consumer Staples, Telecom, Health Care, and Technology—outperforming the overall index. The defensive posturing of the market continued, as cyclical, more-economically sensitive parts of the market lagged the benchmark from almost three percentage points (Consumer Discretionary) to nearly nine percentage points (Materials). Concern over worldwide growth has become eerily similar to the mindset the market adopted in the 2008 to early 2009 time frame. We do not think the situation is the same but recent results in terms of stock market performance are quite similar.

The strategy bested the index by nearly a percentage point during the quarter, with holdings in eight out of 10 sectors outperforming their respective sector and/or the overall benchmark. The two sectors that lagged were Materials and Energy. Stock selection contributed 100% of the outperformance as sector allocation was slightly negative.

Solid Consumer Picks

The three sectors with the highest contribution during the quarter were Consumer Discretionary, Financials, and Consumer Staples. All of the portfolio’s holdings in the Consumer Discretionary sector outperformed the benchmark sector average. An underweight position in Financials along with stock selection that benefitted from less emphasis on market and credit-sensitive companies aided returns. Consumer Staples added value primarily as an overweight position in the sector with the second highest contribution to the benchmark’s performance.

Top individual contributors included a medical device and equipment maker that received a buyout offer that boosted the stock significantly, leading us to sell the position from the portfolio on the basis of it being an all-cash offer with limited upside. A discount-retailer benefited from offering shopping solutions for cost-conscious consumers in a tough economy. A new addition in the Technology sector rose as the market shook off concerns about its CEO stepping down, as the company appears capable of continuing to generate popular products.

The sectors with the lowest contribution to returns overall were Utilities, Materials, and Healthcare. Utilities was the best performing area of the benchmark during the quarter and the portfolio lacked exposure as we have not identified any value creating opportunities in the sector. An overweight position and lackluster stock selection in Materials, the worst performing sector, also detracted from returns. Holdings in more cyclical areas were dependent on continued positive global Gross Domestic Product (GDP) growth. The lack of near-term confidence in this growth resulted in the underperformance of some of these holdings. Although the portfolio’s picks in Healthcare sector outperformed the broader benchmark, they underperformed the sector itself. An emphasis on predominantly specialty pharmaceutical companies faltered as the market sought refuge in larger-cap pharmaceuticals during a difficult quarter.

Among the greatest negative contributors to performance was a Finanicals firm that was penalized for its exposure to Europe, which encompasses about a third of its business mix, as well as overall exposure to market-related areas. An iron ore producer suffered as concerns about global growth have lowered investors’ expectations of a continuation of the company’s growth prospects. Finally, a pharmaceutical company continues to have to defend itself from concerns regarding the efficacy of its product pipeline. All three stocks remain portfolio holdings as we perceive the issues facing these companies as being temporary in nature.

Portfolio Positioning

Eleven stocks were eliminated during the quarter due to sector adjustments and/or valuation or fundamental issues. These changes were primarily driven by the dynamic interrelationships of the sectors as we seek to position the portfolio to exploit value creating opportunities. As we have noted before in regards to our investment philosophy, “We have a core process but no core holdings.” As a result, if stocks no longer appear to be value creating opportunities, we sell. With the higher level of positions eliminated, we initiated a number of new purchases to the portfolio to compensate. Each stock was purchased after first being identified as a value creating opportunity followed up by fundamental analysis to vet out its potential as a portfolio holding.

The result of this and related activity during the quarter was that exposure to Energy, Technology, and Industrials increased, while stakes in Consumer Staples, Consumer Discretionary, and Materials decreased. As of the end of the third quarter, the portfolio was overweight Consumer Staples, Technology, Energy, Materials, and Consumer Discretionary, while significantly underweight Utilities, Financials, Telecom, and Healthcare.

Outlook

“He was extremely tempted. Tempted to do what, he didn’t know. But he did know that, somewhere inside him, the familiar itch of anxiousness was beginning to fester. ‘What to do, what to do,’ he murmured…”

- Mad Hatter from Alice in Wonderland by Lewis Carroll (1865)

Like the Mad Hatter, we all have a temptation to look at current macroeconomic events and try to change our perception of reality, one that is heavily influenced by our emotions. We too feel the twinges of anxiousness when the market rises or falls by 3%, 4%, or 5% in a given market session. To not feel the real anxiety of the moment would make us less than human. But, how we react as investment professionals is the key. You, as investors, do not pay us for our fear. You pay us to overcome that fear and make sound, rational, and pragmatic investment decisions.

In our attempt to fulfill our responsibility, we look to our process. Our process has recently caused us to start selling down some of the areas that have been performing best in this challenging market and to begin embracing those areas that have been leading the way down. Market pundits abound to show the obvious error of our ways. But, to beat the market, by definition, you have to do something different than the market.

In making investments, we do not invest on Monday and expect to realize all of the opportunities on Tuesday, in terms of a literal tomorrow. Tomorrow for us has a long time frame associated with it. Within that time frame, we are much like farmers. We see the seasons of stocks played out in the holdings of the portfolio. There is a planting season, a weeding season, and a harvesting season.

During planting season we seek out value creating opportunities to populate the portfolio at the individual and sector level. During weeding season, we adjust sectors and holdings by underweighting or removing some to make room for those that might be more appropriate and timely. Next, during harvesting season, the stocks and/or sectors that realize the vision we determined during the planting season are reaped. Finally, we begin the process anew with the next planting season.

In reality and application, the dynamic process of portfolio management reveals a congruent and parallel expression of these seasons rather than following in a linear progression. Depending on the stock and the sector, it is always planting, weeding, and harvesting season. Coupled with this vision, we recognize that we are in a tumultuous period in the market. We know that we have no control over the absolute direction of the market. Thus, our objective is to continue to position the portfolio to best realize value regardless of the environment. 

To answer the question posed by the Mad Hatter, “What to do, What to do …?”  Right now, we are seeing opportunities in areas that the market is ignoring or abhorring and we are lowering exposure to areas the market is embracing or finding safety and security. Why? Because we are constantly looking for the value creating opportunities that are present today.

Randell A. Cain, CFA
Portfolio Manager
April 4, 2011

3rd Quarter 2011 SMA Mid Cap Core Managed Accounts Quarterly Commentary 

It was a tough third quarter for the strategy, which lagged its S&P Midcap 400 Index benchmark by more than three percentage points in delivering double-digit losses. U.S. equity markets were extremely volatile during the period, making it a difficult environment for fundamental stock pickers. The bulk of the negative absolute returns in the market, and the portfolio, occurred during a 30-day period from July 8 to August 8.

Winners and Losers

Three stocks dropped more than 30% during the period, hurting both relative and absolute returns. The outlook of a leading Internet infrastructure and software provider remained softer than previously expected due to a weak pricing environment, sparking a sell-off in the stock. We added to the position on the weakness as we consider this a temporary pullback given the company’s ability to benefit from Internet traffic growth through streaming video. The company is debt-free and trading at a price/earnings ratio half that of its five-year average, and was the portfolio’s top performer in 2010.

Another detractor is a global utility metering company that offers smart grid, distribution, and payment solutions to gas, water, and electric utilities added recently to the portfolio. The firm is expected to benefit from increasing requirements to monitor and conserve the use of electricity, gas, and water. After losing ground to its competition, however, the Board of Directors replaced its CEO with the prior CEO and architect of the company’s products. Lastly, a media holding declined on continued weakness in advertising spending. We believe the stock remains undervalued given the company’s superior brand as a worldwide content provider.

Among the top individual contributors to performance were an education company, a bank, and a technology firm. The first two holdings actually delivered positive absolute returns amid the broad market sell-off. The global publishing, education, and media company announced better-than-expected earnings. Higher sales of educational products and services to schools as well as higher sales of children's books in its retail channels contributed to the strong results.

The bank is a leading provider of custodial and advisory financial services added to the portfolio following the market decline in late July and early August. It benefitted from the timing of the purchase as the market and the stock were relatively flat, albeit choppy, through the end of the quarter. The tech company is a leading provider of speech recognition and imaging technologies that reported solid results in August, beating estimates and raising its guidance.

Outlook

Much of the recent day-to-day market volatility has been driven by various global macroeconomic concerns: fears of a global recession, European sovereign debt issues, the economic policy stalemate in Washington D.C., and Standard & Poor’s downgrade of the creditworthiness of the United States. Despite all of this, the economic data for September was actually positive.

We believe that many of the macro issues have already been discounted by the U.S. stock market. Most U.S. companies are in better financial health today than they were in 2008. During the second quarter earnings season, two-thirds of the portfolio’s holdings met or beat consensus earnings expectations and another two-thirds of the holdings have recently announced significant share repurchase programs. These actions signal that these companies consider their shares undervalued, a view we share.

All told, the portfolio is trading at an average multiple based on 2012 consensus earnings estimates that is below the strategy’s benchmark and that of the broader market (as measured by the S&P 500 Index). Moreover, the portfolio’s PEG ratio proxy of valuation to growth has been this low only twice before during the past 12 years. 

Thyra E. Zerhusen, Managing Director and Portfolio Manager
Marie L. Lorden, Co-Portfolio Manager
Mary L. Pierson, Co-Portfolio Manager

3rd Quarter 2011 SMA Dividend All Cap Value Quarterly Commentary

The U.S. equity market declined sharply over the course of the third quarter. In July, fears that deadlock in Washington D.C. would result in a debt default or credit downgrade pressured the market. Despite the last minute deal that averted a technical default, Standard & Poor’s downgraded the rating on U.S. sovereign debt. For the remainder of the quarter, concerns about the health of European banks and economic weakness in the U.S. led to further risk aversion.  The Federal Reserve tried to stem the tide by initiating “Operation Twist,” an effort to extend the average maturity of its security holdings, but the plan did not include an expansion of the Fed’s balance sheet and the market reacted negatively.

Defensive Strategies Dominate

The broad market S&P 500 Index declined nearly 14% during the quarter, its biggest drop since the fourth quarter of 2008 and the second worst calendar third quarter since 1928. As would be expected in any market correction, defensive, high-quality strategies held up better than most.  Defensive sectors such as Utilities and Consumer Staples dramatically outpaced the more cyclical Materials and Financials sectors as investors sought out a relatively safe source of income in a low-yield environment.

High-quality stocks maintained their leadership position, significantly outperforming low-quality stocks during the quarter. According to BofA/Merrill Lynch, fundamental-driven strategies like dividend yield and return-on-capital (ROE) substantially outperformed more-risky high-beta (volatility) and low-price strategies. Despite the poor relative performance during the first quarter, the dividend yield strategy was the top performer by a wide margin for the year-to-date through the end of September. As concerns of another financial crisis and global recession grew, investors also fled to the relative safety of large, growing firms. The Russell Top 200 Index substantially outpaced the smaller-sized Russell Midcap and Russell 2000 indices. Among the largest companies, growth outshined value in the Russell Top 200 as growth benefited from minimal exposure to Financials and a heavy emphasis on Technology.

Similarly, the highest yielding companies in the S&P 500 outperformed the lowest yielding during the third quarter (per Ned Davis Research).  High-yield stocks lagged as markets advanced following the mid-2010 announcement of the second round of the Fed’s quantitative easing (QE2) program, but have remained resilient as markets have declined. The price performance continues to be supported by a strong fundamental backdrop for dividends. During the past year, 287 companies in the S&P 500 initiated or raised their dividend, while rapid earnings growth has driven the payout ratio down to 28.6%—the lowest rate since measurement began in 1926—indicating that there's plenty of room for dividend expansion if earnings hold.

Strong Staples Picks

The strategy substantially outperformed its Russell 3000 Value Index benchmark during the quarter, outperforming in each of the market-capitalization tiers with the performance of large-cap stocks particularly strong. Although small-cap holdings lagged the rest of the portfolio, they bested their respective area of the index by a wide margin.

The Utilities sector was the only area to post a positive absolute return in either the strategy or the benchmark. Both sector allocation and stock selection had a positive impact on relative returns, with the largest contributors being stock selection in Financials and a large overweight to the Consumer Staples sector. Financials was among the worst performing sectors in the benchmark, but the portfolio holdings in the sector nearly beat the broader benchmark return.

Two Consumer Staples holdings were among the top contributors during the quarter. One firm reported second quarter results that topped analysts’ estimates and included a gain in organic sales. Management also raised sales guidance and increased cost reduction estimates for the year. Commodity inflation has been a significant headwind for the company, but its strong brands and ongoing product innovation supported price increases. As this headwind abates, the firm is positioned for further margin expansion. The second Staples winner has grown beyond its core business into a portfolio of well-known consumer products. In July, an activist investor made an unsolicited offer to buy the remaining shares in the company, boosting the stock. We sold the position on the day of the announcement.

Other top individual performers included two utility companies, one of which reported a better than expected second quarter with weather-normalized sales increasing year-over-year driven by an increase in sales to industrial customers. The economic recovery in the Southeast, combined with the firm’s favorable regulatory relationships, has allowed the company to continue earning industry leading returns.

Tough Transport

Only two out of 10 economic sectors had a negative total effect on relative results, with an underweight stake in Healthcare offsetting marginally positive stock selection. Unlike with Healthcare, strong stock selection in poor performing Industrials mostly offset the negative effects of an overweight position in the sector.

Among the biggest individual detractors from performance during the quarter were two transporation-related holdings—a railroad and a shipping firm. Railroad stocks plummeted on fears of an economic slowdown or possible recession, sending the shares of one holding lower despite reporting strong second quarter operating results. During the quarter, the firm repurchased its own shares and raised its dividend for the second time in 2011. The crude oil shipping company traded down as the tanker industry continued to deteriorate.  Day-rates have been weak since the middle of 2010 driven by an oversupply of new ships that were ordered when rates were peaking in 2007-2008. Unlike much of the rest of the industry, the firm has a conservative balance sheet and we believe this financial strength gives them the ability to survive the downturn while making opportunistic acquisitions. Despite our optimism, we reduced the position in accordance with our sell discipline due to accumulated unrealized losses and the increased risk of slowing global economic growth.

Another notable detractor was an asset manager that is a major player in the money market funds space. The Federal Reserve’s announced intention to hold the federal funds rate at effectively 0% until at least mid-2013 impaired our investment thesis on the stock. It became clear that given our investment horizon the firm would have to maintain the fee waivers offered to its investors in order to keep money market fund yields at zero or slightly positive.  In addition, some funds were invested in the certificates of deposit of troubled European banks. This increased our concerns about the credit quality of the funds as they stretched for yield. Given these factors, plus the accumulated unrealized losses, we eliminated the position from the portfolio during the quarter.

Outlook

Since the beginning of 2011, much of our outlook has been focused on how we believed the market would react to the expiration of QE2. From our perspective, the extraordinary liquidity provided by QE2 effectively extended the risk trade from April 2010 through February 2011.  Since QE2 did little to stimulate actual demand for anything other than financial assets and commodities, equity markets became increasingly disconnected to the underlying economy. Such gaps eventually close. This is why we communicated our belief at the beginning of 2011 that the following two events would occur as the Federal Reserve began to wind down QE2: 1) investors would begin to de-risk their portfolios and low-beta/high-quality stocks would begin to outperform; and, 2) given stretched valuations, the small-cap market would experience at least a modest correction. We anticipated the correction would signal the market’s entry into the mid-stage of the recovery, where earnings (and investor expectations) begin to moderate, and that the strategy’s relative performance would improve substantially as these events unfolded.

We did not foresee the Arab Spring, the natural disasters in Japan, the European financial crisis, or the debt ceiling debate in Washington. Thus, although our outlook for 2011 was bearish relative to most of Wall Street, we did not anticipate the severe contraction in economic growth or the depth of the correction in equity markets. We simply knew speculative froth was high and the Fed had few remaining effective options. It was a time for caution.

We believe the persistent global financial problems we face, including the sovereign debt issues in Europe, are residual effects of a multi-decade global debt explosion that will require many years to unwind. Historically, hangovers from financial events are long and painful, accompanied by slow economic growth, plenty of market volatility, social upheaval (e.g., Occupy Wall Street, Tea Party, Arab Spring), and policy mistakes. From our perspective, however, earnings have held up reasonably well. Many companies never unwound their austerity measures from the 2008 recession as they recognized, and subsequently learned how to manage in, a slow-growth world. Unlike 2008, corporate balance sheets are also in excellent condition.

We continue to think macroeconomic risks remain elevated. Since the end of June, the likelihood of a recession in Europe and the U.S. has increased substantially. The odds of a financial crisis (and associated contagion) emanating from Europe have also increased. Large U.S. banks remain weak, growth in key markets like China has slowed appreciably, and the political environment in Washington remains unstable and unpredictable. Still, we believe that many of these risks have already been discounted in equity prices.

As expectations have downshifted dividends are finally getting the attention they deserve. Dividend growth has rebounded to historic highs, payout ratios are at historic lows, interest-rates on bonds are low, cash is accumulating on corporate balance sheets, performance has been relatively strong, new funds are being launched, and there has been an explosion in both media and investor interest. Every day we hear or read commentators and professionals extolling the virtues of investing in large-cap dividend stocks. While everything appears to be primed for the long-term secular shift that we have long expected, we think it proper to diligently watch for signs of investor euphoria. What gives us confidence that this renewed focus on dividends is more than just another investment fad is the recent growth in interest from large institutional investors and consultants. In the past 12 months we have seen investors with large pools of capital readdress their allocation models and open up to dividend-focused strategies. This indicates that a second, much larger, wave of investors could be building which would fuel a secular shift toward a more balanced focus on both income and capital gains.

We wanted to take a moment to note that dividend-focused investment strategies do not all share the same risk/reward profile. As many investors learned to their detriment in 2008 and 2009, buying or holding onto a position just because the yield is attractive can be a recipe for disaster.  We believe a successful investment outcome requires a process that balances the need for a high and growing income stream with the strong underlying business fundamentals that are necessary to support it. We think that River Road’s core Absolute Value philosophy and investment process, coupled with a dividend focus, strikes this balance effectively. 

River Road Asset Management
14 October 2011

3rd Quarter 2011 SMA Mid Cap Value Quarterly Commentary

Equities declined sharply during the third quarter on heightened fear of a global economic slowdown resulting from the ongoing European debt crisis and a gridlocked Washington’s inability to respond with meaningful domestic policy. The decline was broad based with most sectors losing more than 20% of their value, with the stocks of economically sensitive businesses being most affected as is typical with macroeconomic related corrections. The traditionally resilient and defensive-oriented Healthcare sector performed poorly during the quarter as the overhang of potential reductions in Medicare spending starting in 2013 muted investor interest. Within the Russell Midcap Index, value slightly outperformed growth primarily as a result of its higher weighting in the better performing utility stocks.

Corporate earnings remained strong and balance sheets healthy, but visibility diminished. The housing market remained moribund as regulators and mortgage servicers failed to agree on settlement terms leaving the foreclosure backlog overhanging the market. With the significant decline in stock prices, insiders and corporations have become aggressive buyers, reinforcing our view that equity valuations remain quite attractive. While merger & acquisition activity has slowed with the decline in business confidence, we expect activity to pick up when visibility improves.

Portfolio Highlights

The strategy fared better than its Russell Midcap Value Index benchmark during the third quarter. Relative performance was driven by stock selection across most economic sectors. Picks within Financials were the largest contributors to performance, including one agency mortgage REIT. Holdings within Materials and Energy also aided relative returns as a packaging manufacturer declined less than the sector due to its low exposure to falling commodity prices while one fuel logistics company outperformed as it tends to benefit from volatility in energy prices.

Elsewhere, the portfolio's Healthcare investments also proved more resilient than those of the benchmark as a result of less regulatory and managed care exposure. The primary detractor from relative performance was the absence of Utilities in the portfolio, which was offset by the benefit of holding residual cash in a falling market.

At Cardinal, we seek to find companies with solid fundamentals at opportunistic valuations, and two examples from Financials stood out during the quarter. One bank holding company is transitioning its business focus to commercial lending for small- and mid-sized companies. During the past three years management has sold non-core assets and written down and liquidated legacy loans. As a result, company debt is down more than 80% in two years and unrestricted cash is near $1 billion. Going forward, we expect legacy loans to keep declining and excess capital to grow. The excess capital at the parent holding company is planned to be used for share repurchases and dividends. With earnings and returns on capital rising as the bank puts excess liquidity to work and as its share count declines, we believe that the stock price should rise meaningfully above tangible book value where it currently trades.

The other example is the largest pawnshop chain in the U.S. With a 2006 acquisition the company also became one of the largest providers of payday loans. Conceptually, pawn loans are an attractive business as growth in locations and price levels are limited by state law. Cash profit margins of mature pawn shops near 20% and loan balances have grown steadily in the past as the low-to-middle income segment of the population has grown. About 40% of the collateral for pawn loans is gold with the balance broadly diversified by asset type. The payday lending business is more controversial, as consumer advocates have sought to eliminate the product offering, but it represents a faster growing third of the firm's corporate profits with similar margins to pawn. Last month, the company announced that it was selling a controlling interest in its payday lending business through a public offering. If successful, this would significantly reduce its payday lending exposure and should cause investors to refocus on its attractive pawn business.

Outlook

Our investment outlook for the remainder of 2011 is cautious as monetary policy remains accommodative but fiscal policy and credit conditions are now headwinds, while the economy is uneven and sluggish. Equity valuations are attractive but market sentiment is poor. Investors are wary of the political process and what that will mean for tax and regulatory policy. In coming months, investors will focus on employment and growth trends to assess whether the third quarter represented simply a slowdown or something more severe. The financial forecasts driving our valuations reflect this cautious outlook. The company management teams in the portfolio remain active in redeploying their cash flow in accretive ways including acquisitions and share repurchases. We think these actions will benefit 2011 results, and also bode well for the future

The Cardinal Capital Team

3rd Quarter 2011 SMA  Select Growth Managed Accounts Quarterly Commentary 

The third quarter delivered the worst market returns (as measured by the broad market S&P 500 Index) since the first quarter of 2009, and the strategy’s worst returns since the fourth quarter of 2008. Volatility and correlations spiked as the European debt crisis was front and center, but Washington’s inability to come to a final compromise regarding the debt ceiling—leading to the downgrade of the U.S. debt rating—also didn’t help. In this type of environment it is difficult to keep one’s head above water, and stock picking goes out the window. It then becomes every man for himself and macroeconomic issues, along with market technicals, take over in a shoot first ask questions later mentality.

Correlations between stocks within the S&P 500 and the overall index itself have spiked above 80% three times since the fall of 2008. No one, especially us, would have guessed that we would experience this kind of anomaly. To make matters worse, this latest spike in correlations hit an all-time high even though the S&P 500 is up 65% from its 2009 low.

In our opinion, the macroeconomic data concerning the U.S. economy is just not that bad. It's not good, but it’s not that bad! The U.S is in far better shape today than it was in September of 2008. Back then, the economy was already contracting and the housing market was in free fall. The banking system became woefully undercapitalized once it started writing down bad loans. Major counterparty risks emerged as the system froze up and credit became unavailable. This is not the situation today, at least not in the U.S.

We feel this was an old fashioned financial panic driven by sovereign debt worries that spilled into the currency markets. If the policy makers address this problem, if only in the short run, with all of the short interest and cash on the sidelines we could see a very large rally into the end of the year much like what we witnessed in 1998.

Miserable Quarter

As for the strategy, it was a miserable quarter. Anything that was tied to an economic recovery was punched in the face. As hinted above, the portfolio was not positioned for an economic slowdown. Holdings in the Energy, Technology, and Consumer Discretionary sectors severely underperformed their Russell 1000 Growth Index benchmark sector equivalents. The index exposure to Energy is highly concentrated in big integrated oil companies, while we have been focused more on oil service, drillers, and exploration and production (E & P) firms. Higher volatility (beta) names dragged down returns within Consumer Discretionary. Finally, the Technology holdings in the portfolio lost significantly more than their index peers. Again, exposure was skewed towards higher-volatility networking names as opposed to the tech blue-chips. The portfolio did hold one well-known name, which was positive during the quarter, and was the largest position in the portfolio at quarter-end.

Positive areas for the portfolio relative to the benchmark included Consumer Staples and Industrials. A specialty beverage company within Consumer Staples increased by double-digits during the quarter, compared with a loss overall for that segment of the index. And an industrial and chemical company was acquired by a big conglomerate at a healthy premium that boosted its stock.

In summary, we feel this market has discounted a fairly solid recession and a huge hit to S&P 500 Index earnings. Since 1974, U.S. equity markets have declined more than 20% seven times, five of which correctly forecasted a recession and two that did not—1987 and 1998. We just don’t buy into it this time. Yes, problems remain—housing hasn't rebounded and the lack of new jobs is disturbing. The banking system is over-capitalized now that it has written down the bulk of its bad loans, as evidenced by the huge hit to earnings in 2009. Our point is we don't think the ball has that far to fall anymore. Thus, we think if the country does slip back into recession, it should be a mild one. What if we do get some action out of the super committee, however, and Europe is successful at kicking the can down the road? On a relative basis, we think stocks are as cheap as they have been in our lifetimes and U.S. assets will attract a mountain of money from around the world. The only caveat is if the Germans decide to bail on Europe, but the credit markets are not saying that right now. This sure looks a lot like 1998. 

Charles F. Mercer, Jr. CFA               B. Anthony Weber                 Michael E. Johnson, CFA

October 12, 2011

By Ronald L. Altman, M.D.Sass Investor Services, Subadviser to the Aston Funds

Given the return of turmoil to equity markets recently, investors may be grappling with whether to become more aggressive or defensive at this juncture. For many, it is tempting to opt for the former based on the perceived low valuation levels of the broad market S&P 500 Index using consensus earnings estimates for 2012. Taking an aggressive posture based on a price/earnings basis, however, assumes that the earnings estimates for the market, or companies in the index, are generally accurate. The global economic deceleration witnessed lately suggests that those earnings estimates could very well be significantly off the mark, particularly if it leads to a recession in either Europe or the U.S. in 2012. In our opinion, it is quite probable that S&P 500 earnings would decline substantially in a recession, causing the valuation argument to lose its validity.

U.S. Economic Outlook: Cloudy

We believe that it is more appropriate to focus on the economic issues facing the developed world over the next few years rather than valuations. The overriding issue is the impact of de-leveraging in the U.S., and Europe, and how it might affect final demand.  Considering the degree of leverage that has been layered on consumer and government balance sheets during the past few decades, it is unlikely that excess leverage will be redressed in the short term. A substantial amount of the debt that governments owe is opaque, with entitlements such as Social Security and Medicare /Medicaid serving as only the tip of the iceberg. Underfunded pension plans at the state and local levels likely amount to trillions of dollars, and retirement medical benefits that municipal workers have been promised contractually are typically paid out of current cash flow and not counted as debt. The unwinding of excess debt and government obligations will take time and will ultimately dampen cash flows to consumers.

Consumer debt in the U.S. has not been reduced sufficiently during the past few years. After rising dramatically from 2000 to 2008 on the back of the housing boom and credit bubble, consumer debt still has a long way to go before returning to reasonable levels. Until housing prices begin to recover and debt levels decline considerably, the willingness of consumers to increase spending at past rates will fail to materialize.

As Washington continues to argue with itself about how to fix the federal government debt and budget problems, and fails to act decisively, we believe consumer confidence will remain low. There is no easy fix to spur economic growth as the country goes through a cycle of de-leveraging. Saving rates have to go up, the tax system needs to be overhauled, and government spending must be reduced.

The good news in our view is that the outlook is much less dire than during 2008 to 2009. Still, the situation is not altogether attractive from a domestic point of view. The U.S. banking system has raised a substantial amount of capital through equity offerings, asset sales, and retained earnings. Therefore, a repeat of the last financial crisis in terms of severity in this country is unlikely. On the other hand, fixing the government debt problems will likely cause final demand to decline domestically, dampening efforts to keep the economy out of another recession. In addition, Europe is a major trading partner for American companies, and multinationals that have a considerable presence in Europe are likely to be affected by the negative economic situation in that region.

Multi-national companies derive a substantial degree of revenue and profit from their subsidiaries that are domiciled in Europe. A decline in final demand in Europe will result in a decline in sales and profits for those companies. In addition, any resulting decline in the Euro against the US dollar would hurt the translation of sales and profits over the next one to two years depending on how much each individual company has hedged its currency risk.

The bigger risk is the interconnection of the U.S. financial sector with that of Europe. As we learned in the last financial crisis, linked risks of this type are seldom fully reserved for, or appreciated, beforehand. While we are quite confident that no major U.S. financial institutions are exposed to a major extent, there is likely to be some fallout.

European Outlook: Stormy

We think the Euro zone is facing the same issues as the U.S., but without the ability to monetize its debt. An economic union and a common currency without a political union limits the ability of government to manage fiscal problems. As the stronger Northern European countries demand austerity from the southern euro zone as the price for financial aid, the ability of the recipients to pay back that aid, which is in the form of debt, is clearly suspect. For Europe as a whole, the real problem is that the major banks own much of the sovereign debt of the weaker countries. We question whether they can deal with a default of that debt.

This situation is similar to the U.S. banking crisis of 2008 - 2009, when the subprime mortgage market melted down. The question then was how big a "haircut" banks would be required to take to reflect the real market value of bad loans, and how much additional capital needed to be raised in order to cover the markdowns. We wonder if the European banking system is prepared to take the markdowns, and whether they can raise sufficient capital to stay viable. Without a political union, Europe can not engage in a TARP-like program similar to the U.S. in 2008, complicating any short-term solution.

The Euro zone risks could become the epicenter of another financial crisis that could create a global recession within developed economies. Add in a languishing Japanese economy, and our outlook for emerging countries becomes decidedly negative. Growth in China and India is likely to decelerate more than most models predict due to the decline in the end markets for their products. Although neither is likely to experience a recession in terms of negative Gross Domestic Product (GDP), both could experience a decline to mid-single digit rates of growth. Therefore, we believe that the world economy as a whole is at risk of slipping into a recession in 2012.

Corporate Confidence

Having gone through the ringer only three years ago—when even the strongest companies were finding access to the credit markets challenging at best—corporations built up as much liquidity as possible as the economy recovered. Remembering the experience of a shutdown in credit in 2008 and 2009, few companies felt confident hiring or undertaking significant plant expansion amid an uncertain environment. A perceived lack of cohesiveness in Washington in terms of addressing fiscal issues will likely continue to retard hiring and domestic capital spending. 

The lack of corporate confidence, coupled with a need by all levels of government to shrink employment, is contributing to a negative feedback loop that in all probability will discourage consumer confidence and exacerbate problems in the housing sector. De-leveraging is not going to end anytime soon. Decades of debt accumulation on the part of governments and consumers will take years to unwind. Thus, we are currently in something other than a normal business cycle where the Federal Reserve can lower interest rates and corporations and consumers will increase their level of spending.

What This Means For Equities

In terms of the equity markets, we believe the operative word is caution. Equity investors as a whole are unlikely to become aggressive buyers in an uncertain environment. Uncertainty is one thing that typically causes investors to retreat to the sidelines. Until the various governments in the U.S. and Europe face the realism of global de-leveraging, we are likely to remain mired in the negative economic feedback loop.

Equity markets in the U.S. are in a phase that can be best described as a protracted sideways period characterized by a succession of bull and bear markets. Historically, every substantial advance in real stock prices has been followed by a prolonged phase of very low returns relative to inflation. Given the economic storm clouds brought on by the global de-leveraging process, we doubt the next five or 10 years will bear witness to a resumption of the advance that occurred between 1982 and 2000.

Low current stock yields relative to history also suggest that total returns going forward are likely to be somewhat lackluster. The yield on stocks averaged 5% per year from the 1870s until the mid-1980s before dropping off sharply during the past few decades. We do not believe that stock prices have to decline to raise the yield on the S&P 500 back to its historic median. A more likely scenario is that companies are going to increase their payout ratio over the next decade. A combination of flat share prices and rising dividends is the way we believe the adjustment will occur. This suggests that the total return on equity investments is going to be a function more of dividends than stock appreciation. If this takes place in a low inflationary environment, then we think the real return on equities will be positive. With the low return on government and high-grade corporate bonds versus historical norms, equities appear to be the more attractive asset class on a long-term basis.

The World Is Not Coming to an End

Yes, we may have a potential financial crisis in Europe and a debt problem to fix in this country, but in the end these problems typically get resolved even though the solutions are not apparent today. The U.S. has always come through crises in the past and this one will pass as well. The only question is how long it will take before we right the ship, and how much pain will it take before we put partisan politics aside. Although no one knows exactly when these problems will be resolved, the fact that they are now being debated in every arena, and every day, suggests that the problems will be resolved sooner rather than later.

Most observers seem to fear default on sovereign debt in Europe and U.S. municipal debt, but these are not unique in terms of history. The important thing is to recognize is that there will be defaults—and that the world will not end when it happens. When the subprime issues affected the U.S. several years ago, causing a number of major financial institutions to fail, the result was that the survivors came out stronger and were better able to cope going forward. 

Next year could easily be a recession year for the developed countries and as a result profit estimates will prove to be too high, but we believe that equity markets will price this event in long before it happens. By the time everyone acknowledges the recession, we believe equity markets will be recovering similar to how they have reacted in the past. Now is not the time to panic. We believe a risk-averse investment strategy is the correct approach given the difficulty in correctly timing any recovery in stock prices. And that owning the stocks of strong companies able to return capital to shareholders in the form of dividends, and that have the financial strength to sustain those dividends, should be rewarding for investors. 

The information contained in this article is provided by Mr. Ronald L. Altman ("Mr. Altman") and his views do not necessarily reflect those of Aston Asset Management ("Aston").

This material is not intended to be a forecast of future events, does not constitute investment advice, and is not intended as a recommendation to buy or sell any security. Investors should consult their investment professional regarding their individual investment program. Since the date of this report, economic factors, market conditions and Mr. Altman's views of the prospects of any particular investment may have changed.  Investors should consider the investment objectives, risks and associated costs carefully before investing.  Forward-looking information is subject to certain risk, trends and uncertainties that could cause actual results to differ materially from those predicted.  Past performance is no guarantee of future results. For more information about Aston Asset Management LP and its subadvisors, please call 800-597-9704, or visit www.astonfunds.com. 

Note: There is no guarantee that the underlying companies of income-producing equity securities will continue to pay or grow their dividends. Stock prices can lose value in response to changes in overall economic and stock market conditions. 

2nd Quarter 2011 Commentary 

The U.S. economy continues to move ahead at a sustained but moderate pace. It is evident that even with unprecedented federal fiscal and monetary stimulus, real Gross Domestic Product (GDP) growth much above 3% has been difficult to achieve during this recovery. Unfortunately, second quarter real GDP may have increased only 1.5% due to weaker than expected consumer spending. In addition, while inflation remains generally well contained, higher energy and food prices have caused us to increase our inflation forecast for a second time this year. We now expect the Consumer Price Index (CPI) to increase 3%, versus our previous revised forecast of 2%, up from a 1% forecast at the beginning of the year.

Several factors cause us to think it is possible for economic growth to at least temporarily bounce back during the second half of this year. With a recovering Japanese economy, there should be fewer supply chain disruptions. Ongoing job and income growth, coupled with lower energy prices, should support some pickup in consumer spending, and business investment trends should be firm due to the high level of corporate profits and business tax incentives that are set to expire at year end.

This recovery continues to be frustratingly slow in view of the sharp decline in economic activity during the Great Recession, reinforcing the notion that recoveries following a financial crisis are usually modest and bumpy. The developed world simply has too much debt, and it will require time, patience, and sound fiscal policies to reduce it adequately so that a solid foundation can be established for future growth. In the meantime, as the private sector continues to deleverage and the public sector reduces its deficits and debt, trend-line real GDP growth could remain tepid.

Winners and Losers

Despite resurfaced apprehension about sovereign debt problems and continued underwhelming job growth in the U.S., bond and equity markets managed to end the quarter on a positive note. The Fund posted a marginal gain during the period, slightly trailing its composite benchmark (60% S&P 500 Index/40% Barclays US Government Credit Bond Index). The portfolio benefited from stock selection and an overweight allocation to the relatively strong Consumer Staples sector as Kraft Foods, Costco, and PepsiCo, in particular, gained more than the market. Strong performances from Nike, McDonalds, and TJX within Consumer Discretionary also aided returns. Allergan and Abbott Laboratories outperformed the overall Healthcare sector, positively affecting performance. 

Technology was a mixed bag for the Fund as strong gains from Accenture and Qualcomm plus an underweight position that aided relative performance were offset by disappointing performances from Google and Broadcom. Although Google's long-term fundamentals remain attractive, we think the company's near-to-intermediate term issues warranted reduced exposure in the portfolio. Specific issues of concern include: 1) rising costs in a slowing revenue environment; 2) changes in the management structure; and 3) current antitrust investigations. The Fund sold Broadcom due to a lack of near-term catalysts and a reduction in our confidence in the company’s secular growth outlook.

Energy was the worst performing sector in the market during the period, and thus the Fund’s overweight position detracted from performance. This was mitigated somewhat by our decision early in the quarter to trim Halliburton, Occidental, Cameron International, and Schlumberger following strong absolute and relative performance over the previous six-to-eight months and our concerns that the spike in oil prices would increasingly lead to fears over demand destruction. We subsequently added back to Halliburton and Occidental, for the former on raised rig count expectations in North America related to the sustained strength in oil-related activity. We think Occidental should benefit from accelerated shale oil drilling in California and the Permian basin.

Stock selection within Industrials detracted from relative performance despite the Fund’s underweight allocation to the declining sector. One of the culprits was Fluor. Although fundamentals at the company remain sound and an energy backlog has been building, the spike in oil prices early in the quarter caused some investor anxiety regarding demand destruction. We see this development as limiting the stock's potential in the short run, warranting a reduced position. 

Finally, the Fund’s sole position in the Financials sector, JP Morgan Chase, fell more than its peers during the quarter, detracting from relative and absolute returns. We reduced the position twice during the quarter as the stock has been dragged down by sector concerns (regulatory, revenue growth, etc) as well as general investor apathy towards banks and financials. Despite those results, the Fund’s underweight stake in Financials helped overall.

New Additions

We established five new positions in the portfolio during the quarter. We think leading U.S. drugstore operator Walgreen stands to benefit from an aging population and a significant amount of branded drugs going off-patent over the next few years, as pharmacies make much higher gross profit dollars on generics relative to branded drugs. In addition, the company has what we believe to be superior freestanding real estate locations, and has refocused toward improving the existing store base through its Customer Centric Retailing initiative.

The Fund’s Healthcare stake increased as we added pharmaceutical and specialty care products distributor AmerisourceBergen, and pharmacy benefit manager Medco Health Solutions to the portfolio. Both companies are attractively priced according to our valuation work, and their earnings could potentially benefit from a significant number of generic drugs coming to market over the next several quarters.

In addition to the previously mentioned sale of Broadcom, the Fund trimmed several positions during the quarter. Disney was reduced significantly following an earnings report that missed expectations. Earnings for the company are likely to be uneven over the next couple of quarters related to some unusual items such as the Tokyo Disney shut-down and ESPN affiliate fee recognition, difficult advertising comparisons, and the uncertain economic environment.

Other trims in position size within the portfolio included Costco, UPS, and Apache. Costco traded at our estimated present value and was pared back as a source of funds for other ideas. We trimmed UPS based on concerns that the global economic slowdown is likely to result in softer than expected volume. Apache was reduced as fall elections in Egypt and renewed tensions in the Middle East (Syria, most recently) may hamper the stock in the very near term.

Outlook

We believe the stock market could be challenging in the months ahead. The economy is showing less than expected growth, and earnings momentum is fading as annual comparisons become more difficult and cost containment and productivity benefits begin to subside. Earnings expectations for the second half of 2011 are probably too high given the downshift in economic growth that has developed during the first half of the year. It is unclear what impact the end of the Fed’s second quantitative easing program (QE2) on June 30 will have on the market, but many investors believe QE2 has boosted the price of commodities and more risky stocks. These assets could come under selling pressure and contribute to greater stock market volatility.

We also think the fixed-income market will be volatile within a narrow range over the coming months. Yields will be pressured higher by elevated commodity costs, continued economic growth and the end of QE2, which will deprive bonds of a strong source of demand that it has enjoyed over the last several months. This will be offset to some degree by continued deleveraging by consumers and governmental entities, which implies weaker economic growth and periodic bouts of flight-to-quality caused by adverse developments with the European debt crisis. Given the low absolute level of yields, we continue to maintain a short duration position in the portfolio. We favor high-quality, intermediate-maturity Corporate bonds as we believe that strong company fundamentals and the search for incremental yield should continue to benefit this sector of the bond market.

With QE2 ending and earnings momentum fading, we believe there will be a change in the nature of the market from one that is momentum driven and led by riskier cyclical stocks, to one that is supported by sustained but moderate economic growth and led by higher-quality cyclical and secular growth issues such as those held in the portfolio. We believe the shares of these companies are attractively valued and their earnings growth rates are more assured due to their financial strength and global diversification. We think that the Fund’s multinational holdings with strong global franchises are particularly well positioned for the sustained but moderate growth period ahead.

Montag & Caldwell Investment Counsel

As of June 30, 2011, Kraft  comprised 1.95% of the portfolio's assets, Costco – 1.37%, PepsiCo – 2.74%, Nike – 1.84 %, McDonald’s – 2.80%, TJX – 1.54%, Allergan  – 2.39%, Abbott Laboratories  – 2.04%, Accenture – 2.31%, Qualcomm – 3.00%, Google – 2.18%, Halliburton – 1.86%, Occidental Petroleum – 2.24%, Cameron International  – 0.81%, Schlumberger – 2.13%, Fluor – 1.82%, JPMorgan Chase – 1.17%, Walgreen – 1.48%, AmerisourceBergen – 0.64%, Medco Health Solutions – 0.91%,Walt Disney Co. – 1.31%, UPS – 2.14%, and Apache – 1.39%.

Note: The Fund is subject to stock and bond risk, and its value can decline through either market volatility or a rise in interest rates.

There is no guarantee that a company will pay out or continue to increase its dividends.

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.

2nd Quarter 2011 Commentary - ASTON/Crosswind Small Cap Growth Fund

The Fund outperformed its Russell 2000 Growth Index benchmark by more than three percentage points during the second quarter as the index posted a slight loss. Small-growth stocks continued their advance from the first quarter into April, but quickly cooled down in May and June as economic news soured. The Fund gained most of its ground over the index in April, and then was able to maintain its outperformance , even adding to it slightly, during the subsequent pullback.

Several times during the quarter significant pull backs in many strong growth companies that have been high flyers and large weights in the benchmark came through our screens. Many of these companies passed our fundamental due diligence, but did not pass the valuation step of our investment process. When this happens, we typically move them to a watch list and set a price alert to see if a stock reaches a price that makes sense to us. We eventually took advantage of the volatility and declines in some of these names and established positions in those that we believe have solid fundamental growth stories. 

Unrecognized Growth

One of the ways in which we identify these potential growth stories is by focusing on growth that is seemingly unrecognized by the market. Fiber optic network operator Global Crossing caught our eye by increasing revenues in the high single-digits and expanding margins at a rate in the mid-teens. Although those figures don't appeal to most small-growth investors who typically seek revenue growth north of 15% to 20%, especially in the Telecom sector which only comprises less than 2% of the benchmark, we viewed the firm as a stable business with a track record of generating significant free cash flow. This April, it was announced that Level 3 Communications planned to acquire Global Crossing at a 60% premium, driven by the desire for Global’s proprietary network in Latin America, Europe and Asia.

Another way in which we root out growth opportunities is to focus on key drivers. Software company Blackboard provides learning management solutions to K-12 schools and universities. After a strong early growth run after its initial public offering, it seemed that many investors saw the finite number of schools as potential customers as a limiting factor to the firm’s long-term growth rate. We think that this view underestimated Blackboard’s ability to grow through selling additional software applications to its existing customer base and overestimated the potential for customers to go elsewhere to open source software, which is seldom as “free” as it seems once the necessary consulting and support costs are considered. Disregarding this market “noise”, we made the stock a top position in the Fund on weakness during the first quarter of 2011. The stock subsequently shot up during the second quarter as a number of universities announced that they would renew their contracts with Blackboard, validating our thesis, and as the company announced that it had hired Barclays to advise them on several unsolicited takeover offers. We then trimmed the position significantly in line with our price target discipline given the uncertainty as to the identity of the potential buyer.

Disciplined Process

To be most effective, we think this discipline should be followed at both ends of the spectrum. Tenet Healthcare drew attention from the public towards the end of 2010 (as discussed in our fourth quarter commentary) when another hospital system, Community Health, offered to acquire them. There has been much public discussion regarding the takeover and the tactics used on both sides, and the topic has stayed in the news on into 2011. We viewed all the hype as noise. We felt strongly about the fundamental growth story behind the company, and believed that if there were to be a potential buyer it would not be Community Health. As it became clear during the second quarter that the takeover was not likely, the stock dropped. We continue to evaluate Tenet based on its fundamentals and believe there is significant potential upside in the stock given its growth profile. Thus, we added to the portfolio’s position during the period on the dip, and it remains a top position in the Fund.

The Fund had a strong quarter that has put it ahead of its benchmark for the year-to-date through June 30. We continue to stay focused on our investment process that seeks unrecognized growth by rooting out the key drivers of each stock and maintaining discipline with price targets. We believe that these three aspects enable the team to take advantage of inefficiencies in the small-cap growth market. We remain optimistic the current environment will continue to provide quality ideas for the portfolio. 

Andrew Morey
Crosswind Investments, LLC

As of June 30, 2011, Global Crossing comprised 0.00% of the portfolio's assets, Blackboard – 2.38%, and Tenet Healthcare – 4.75%.

Note: Small-cap stocks are considered riskier than large-cap stocks due to greater potential volatility and less liquidity.

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.

2nd Quarter 2011 Commentary - ASTON/TAMRO Diversified Equity Fund

Ever Hopeful

Stock market volatility colored the second quarter landscape with the end result being a slight decline in small-cap stocks and a neutral to positive swing for large-caps.  Defensive sectors of the market rose, while cyclical areas experienced profit taking. Much of the economic news during the past three months reflected weakening conditions for growth. This can be summarized by U.S. Gross Domestic Product (GDP) growth of just 1.8% during the first quarter (announced April 28th), down from 3.1% growth in the fourth quarter of 2010. Anticipated results for the second quarter of 2011 are not expected to be much better than the first.

Fiscal policy in Washington is currently focused on moving toward reducing the Federal deficit, while monetary policy is focused on maintaining liquidity and low interest-rates. With the end of quantitative easing part two, it is not evident what the next steps will be from the Federal Reserve. Historically, Federal policy has been instrumental in moving the U.S. economy from recession to recovery and there is no difference this time. As a nation, we have always been successful in addressing the major issues confronting the country, and for that reason, we are ever hopeful we will resolve them once again. We believe the levers will continue to be pulled to maintain a forward course. We are not anticipating a double dip recession due to excess liquidity and we continue to expect faster economic growth overseas. Stock market valuations are attractive based on forward earnings, and corporate balance sheets are flush with cash. Small-cap companies are often the innovators of the U.S. economy, whereas large-cap companies serve an expanding global marketplace. We remain optimistic about the long-term prospects for U.S. stocks.

Weakness in Technology

The Fund declined during the second quarter in trailing the roughly flat returns of its Russell 1000 Index benchmark. The underformance relative to the benchmark can be attributed to stock selection in Technology, with company-specific issues affecting three stocks that detracted the most from performance during the period. Stock selection within the Utilities and Consumer Discretionary sectors also hurt relative performance. The overall sector allocation effect was slightly negative due to an underweight position in Consumer Staples during a time when investors sought relative safety in the defensive-oriented sector.

The three tech holdings that disappointed were Research in Motion, Smith Micro Software, and Ixia. Softened demand for Research in Motion’s high end offerings combined with a delay in the launch of new products led to a reduction in guidance by the company that has weakened the stock considerably. Smith Micro Software lowered revenue and earnings guidance owing to a product transition by a major customer, and is no longer in the portfolio. Tech equipment supplier Ixia reported strong growth for their testing equipment, but uncertainty about their exposure to Japan led to profit-taking in the stock. In addition, Google declined during the period as uncertainty rose in regards to its capital allocation plans as founder Larry Page assumed the position of CEO. We see the change by the company as a move to refocus on innovation.

Stock selection in the Financials and Healthcare benefitted performance during the quarter, with health-related firms Allergan, Cerner, and Advisory Board among the top contributors. Allergan received 12 approvals from the FDA for new products even as revenue growth at the company continues to be robust. Cerner continues to benefit from the strong spending trend in health care IT as the industry becomes more digitized. Finally, research firm Advisory Board saw improved demand from its hospital client base that resulted in strong contract growth.

Buys and Sells

Six stocks became full positions during the second quarter, notably American Express, Fluor, and Teva Pharmaceutical. We think American Express is well positioned to benefit from the transition to a “cashless” society and the ongoing rebound in discretionary spending by its affluent customer base. Additionally, the company’s iconic brand should support further expansion into key Emerging Markets. Global engineering firm Fluor is rebounding quickly along with the boom-bust energy and raw materials industry that it supports. If historical patterns hold, the growth in the firm’s order backlog will presage revenue and earnings growth while also boosting profitability, thereby, we think, boosting its stock price.

Teva is the leading manufacturer and marketer of generic drugs worldwide. The company also operates a branded specialty pharmaceutical business primarily focused on central nervous system therapies led by Copaxone, the number one treatment for multiple sclerosis.  Despite its dominant position, international market share expansion, and industry catalysts that should favor Teva near-term, investor concerns over potential Copaxone deterioration from new oral drugs entering the market and potential generic competition combined with a shift in strategy have led to skepticism over management’s long-term outlook, causing its stock to underperform. In our view, Teva continues to possess a competitive advantage in generics, has diversified the Copaxone risk, and enhanced its branded portfolio and innovation capabilities with its recent acquisition of Cephalon. We think it generates sufficient cash flow to successfully execute future acquisitions and return cash to shareholders via dividends and share repurchases. We believe the risks are largely priced into the stock and view current price levels as an opportunity to own an excellent business at a near-trough valuation.

Seven full positions were sold during the period, including Goldman Sachs, Microsoft, NVIDIA, and Washington Post Company. Goldman offered an attractive valuation, but the wildcard remains its potential level of profitability in a post-financial crisis world of heightened regulation. We sold Microsoft to fund other tech opportunities in which we have greater conviction. We trimmed the portfolio’s stake in NVIDIA when it spiked earlier this year, and took the remaining profits during the second quarter to fund ideas we think have better upside/downside ratios. Washington Post, with its Kaplan Education Division, was sold to fund a more pure play in the education space.

Positioning and Outlook

Although we expect a continuation of modest domestic growth, TAMRO’s investment process focuses on individual, bottom-up stock selection to identify companies that we believe are best able to execute given their specific competitive advantage. Our approach to portfolio management is opportunistic and broadly diversified, with sector weights determined by where we see opportunities at the stock level rather than macroeconomic calls. At quarter-end, Industrials, Healthcare, and Technology were the top-three sectors in the portfolio by percentage of assets, with Technology the only one that was underweight relative to the Russell 1000. We have added to the Fund’s stake in Healthcare since the end of the first quarter, propelling it into the top-three, and took profits in Energy, which dropped from the top-three. We also decreased exposure to Financials due to reduced expectations within the banking industry.

Within certain sectors we have identified trends that have helped to focus our stock-picking efforts. Within Industrials, the major trend is rising global demand from Emerging Markets for capital equipment. Efficient administration is a dominant trend in Healthcare, with the need for cost containment a priority as the demand for healthcare services continues to grow. We have also recognized that growing demand for a better diet in emerging countries has affected grain and protein pricing. We think this situation bodes well for both seed and agricultural nutrients companies.

TAMRO Capital Partners

Alexandria, Virginia

As of June 30, 2011, Research in Motion comprised 1.44% of the portfolio's assets, Smith Micro Software – 0.00%, Ixia – 1.85%, Google – 2.13%, Allergan – 2.35%, Cerner – 2.99%, Advisory Board Company – 2.38%, American Express – 1.68%, Fluor – 2.18%, and Teva Pharmaceutical – 1.94%.

Note: Small- and mid-cap stocks are considered riskier than large-cap stocks due to greater potential volatility and less liquidity.

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. 

2nd Quarter 2011 Commentary - ASTON/River Road Dividend All Cap Value Fund

Stocks Flat as Economy Weakens

It was a volatile quarter for equity markets with stocks gyrating on robust earnings early in the period followed by weak economic data. Although management comments provided advance warning of a contraction in growth, the pivot point occurred on April 29 when the slowdown officially appeared in the U.S. Gross Domestic Product (GDP) numbers. A stream of disappointing economic news continued through May, particularly in housing and labor, which weighed on equities. In June, the fiscal crisis in Greece added to the turbulence, with investors initially fearing a broader debt contagion and later celebrating the passage of austerity measures. Toss into the mix the end of the second round of quantitative easing (QE2), more economic braking in China, and the deficit stalemate in Congress and investors were given considerable reason to reduce risk exposure during the period.

Despite the macroeconomic uncertainty, equity markets delivered solid results. Both the S&P 500 and Russell 1000 Indices ended the quarter with positive performance. The performance of small-cap stocks, however, reflected the market’s heightened volatility and investor risk aversion. After rallying to an all-time high in late April, the Russell 2000 Index plunged 10% through mid-June before rebounding in the final week of trading to end the quarter with a 1.61% loss. Mid-cap stocks were the best performing market-cap group overall. Among style categories, growth led value across all market-caps as growth-oriented indices benefitted from their larger relative weighting in the Consumer Discretionary sector and smaller relative weighting in the lagging Financials sector.

The performance of high-dividend stocks was strong. According to Ned Davis Research, the highest yielding companies in the S&P 500 outperformed the lowest yielding by more than four percentage points during the quarter. Although high-dividend stocks lagged following the initiation of a second round of quantitative easing in 2010, they outperformed as the program approached completion and uncertainty increased. This coincided with the fading of the high-beta (volatility) theme which had dominated equity performance since the start of the recovery.

Rising macroeconomic concerns led high-quality stocks to regain a leadership position as well, significantly outperforming low-quality stocks. According to BofA/Merrill Lynch, fundamental-driven approaches substantially outperformed as the dividend yield and return-on-equity (ROE) strategies led the more risky high-beta and low-price strategies. Interestingly, the dividend-yield strategy continues to be a swing factor, turning in the best results during the second quarter after having been the worst performer in the first quarter.

Consumer Staples Stands Out

The Fund outperformed its Russell 3000 Value Index benchmark during the quarter, posting positive returns versus a decline in the index. The portfolio outperformed in each of the market-capitalization tiers, with the returns of large-cap stocks particularly strong. The greatest contribution to absolute returns came from the Consumer Staples and Healthcare sectors, while relative performance benefited from stock selection in Financials and an overweight position in Consumer Staples. Financials was the worst performing sector in the benchmark, but the portfolio’s lack of exposure to the largest money center banks—which underperformed significantly during the period—noticeably boosted results over that of the index. 

The top contributing holding during the second quarter was Telecomunicacoes de Sao Paulo.  Commonly referred to as Telesp, the firm is Brazil’s largest telecommunications company following a merger with Vivo Participacoes S/A. Fears that the parent company of both firms, Telefonica, might force an unattractive share exchange ratio were unfounded, and the shares continued to rise following orderly and equitable merger negotiations. As the merger was completed and our conviction increased, we added to the Fund’s position.

Other notable performers included Sysco, PepsiCo, and Johnson & Johnson. Food distributor Sysco traded down in March following storms and freezes that devastated crops in the U.S. and Mexico, leaving the company with limited supplies of produce to sell to their customers. We increased the portfolio’s position as the discount became attractive. The company managed through the challenges extremely well, reporting results in-line with our expectations and that exceeded Wall Street projections. Pepsi reported strong first quarter results as volume growth in North America surpassed expectations, reflecting the benefits of its continued investment in brand building and innovation. In May, the company announced a sizeable boost to its dividend, marking its 39th consecutive annual dividend increase. 

Investors had become increasingly critical of Johnson & Johnson due to a string of recalls resulting from quality issues at three production facilities in North America. News turned more positive during the second quarter as the firm and Merck announced a settlement of their dispute over two large drugs, Remicade and Simponi. Merck ceded sales territories, adjusted the profit split in favor of Johnson & Johnson, and made a one-time payment to the firm. The stock continued to rally when the company announced an agreement to acquire Swiss orthopedics device-maker Synthes—creating a dominant player in the global orthopedics market. Although the manufacturing issues led us to conclude that the stock’s multiple should be reduced in calculating our valuation to reflect the increased risk, the Fund has maintained its position owing to the company’s strong financial position, limited patent expiration risk, and long history of dividend increases.

Insurance Struggles

The sectors with the lowest contribution to total return were Energy and Financials. Healthcare was the best performing area in both the portfolio and the benchmark in absolute terms, but a significant underweight position and lackluster overall stock-picking in the sector hurt relative performance despite the boost from Johnson & Johnson. Outside of Healthcare, the largest negative impact on relative performance was from stock selection in Materials. Steel manufacturer Nucor, the only holding in the sector for much of the quarter, dramatically underperformed the sector, though it modestly outperformed its peers in the Metals & Mining industry.

The weakest performer during the quarter was Bermuda-based reinsurer PartnerRe. Results from the company were negatively affected by losses primarily resulting from the Tohoku earthquake and tsunami in Japan. Subsequent loss estimates reduced the firm’s tangible book value significantly. Looking forward, the surge in catastrophic events should result in improved reinsurance pricing as the industry looks to rebuild capital levels. Our calculated Absolute Value declined as a result of the losses, but we maintained the position as the stock now trades below our new estimate of tangible book value. 

Two other underperforming Financials stocks detracted from performance as well. Property & casualty insurer Cincinnati Financial deliberately expanded outside of the Midwest region in part to diversify against catastrophe risk. Unfortunately, they were still exposed to the unusual level of tornado and flooding damage that occurred during the second quarter.  The extent of the underwriting losses has yet to be determined but they likely will reduce the insurer's book value and impact our assessed Absolute Value, which is currently under review. Money manager Federated Investors, with a large presence in the money market space, continued to tread water in a sub-optimal operating environment. A near zero federal funds rate requires that the company continue to subsidize its money market funds, offering fee waivers to maintain a positive, or zero, net yield. Management’s credibility with investors also took a hit when they offered an outlook for a rate hike by year-end. As economic data suggested U.S. growth was slowing and the probability of an interest rate hike decreased, the stock price declined. 

Finally, BreitBurn Energy Partners, an oil & gas exploration and production Master Limited Partnership declined along with oil prices during the quarter. We think the fundamentals remain strong as the partnership raised its quarterly distribution for the fourth consecutive time. There was no change to our assessed Absolute Value during the period.

Russell Rebalancing

Three new holdings were purchased and one was sold from the Portfolio during the quarter.   Turnover remained below the Fund’s historic average and changes in the relative positioning of the portfolio were driven by both trading and the June 24 reconstitution of the Russell benchmark. Notable shifts occurred within the Technology, Telecomm, and Consumer Staples sectors.

A number of changes boosted the benchmark weight in Technology from 5.7% to 8.9%. Thus, despite adding to the Fund’s position in Intel and the stock’s strong performance, the portfolio moved from a slight overweight versus the benchmark at the beginning of the quarter to a more than two percentage point underweight by the end of the period. Additions to current positions within Telecomm and a reduction in the benchmark weight contributed to an increase in the Fund’s overweight stake in that sector.

Reductions to several positions, including McCormick & Co. and Sara Lee Corp, at prices above our calculated Absolute Values led to a decrease in the weighting within Consumer Staples in the portfolio. Still, an even more substantial reduction to the benchmark that removed PepsiCo, Coca-Cola, and other constituents from the value index caused the Fund’s relative weighting to increase overall, and it remains the portfolio’s most significant overweight position.

The largest new position added during the quarter was global packaging manufacturer Bemis Company. Unlike packaged food companies, the firm is not affected by consumer trade-downs as both branded and private-label products use their packaging and pricing is the same. Together these factors have allowed the firm to deliver consistent free cash flow. Management has a history of strong shareholder orientation and that free cash flow is devoted to growing the dividend, share repurchases, strategic acquisitions, and debt reduction. The company has paid a dividend since 1922 and the latest dividend increase in February 2011 marked the company’s 28th consecutive annual increase.

Although contracts provide for regular price adjustments, rapidly rising prices for resin and other raw materials remains the greatest risk. Longer pass-throughs resulting from a recent acquisition was the focus in first quarter results as resin prices surged more than 15%. The firm is working to shorten the contract adjustment time frame on inherited contracts as they come up for renewal. At the time of purchase the stock was trading at a 16% discount to our calculated Absolute Value.

Outlook

Since the beginning of 2011, we anticipated that as the end of QE2 approached the following two events would occur:  1) investors would begin to de-risk their portfolios and, thus, low beta/high quality stocks would begin to outperform; and 2) given stretched valuations, the small-cap market would experience at least a modest correction. We further believed the correction would signal the market’s entry into the mid-stage of the recovery, where earnings (and stock price gains) moderate. Finally, we stated that a sustained rise in oil prices would pose the greatest threat to what we continue to believe is a very fragile recovery.

Looking back at the first half of 2011, investors have been de-risking their portfolios since late February and the market did experience a modest correction between late April and mid-June. Earnings began to moderate and higher oil prices contributed to a slowdown. The end of QE2, however, appears to have been more coincident than a major catalyst to these events.   

The market appears to be entering the mid-cycle stage of the recovery. As organic growth has become more challenging, merger & acquisition activity is picking up, especially among small-cap stocks, and is beginning to have a positive impact on the portfolio. So called “Tail risk” remains high, but even if economic growth continues to slow and we do re-enter a recession, we believe the portfolio is well positioned.

We believe the fundamental outlook for dividend-focused strategies remains very strong.  Dividend growth continued to accelerate during the period and the aggregate dividend payment for the S&P 500 Index is significantly higher than last year. Despite their rapid growth, dividends are lagging earnings, which should support further dividend increases even if earnings growth slows in the coming year.

Looking out over the next two or three years, we are also modestly positive on equities. The economy appears poised to continue growing (albeit at a sluggish pace) and should continue to look favorable relative to most other developed nations. The Federal Reserve indicated it will remain supportive, broad inflation appears subdued, and companies are well capitalized. Corporate margins will likely compress, but thanks to low wage inflation they should remain reasonably attractive. The White House is likely to do whatever it can to keep oil prices low and boost employment prior to the 2012 election.  If the Republicans win, we can expect a favorable reaction from Wall Street on the assumption of greater tax relief. While austerity measures will ultimately need to be adopted in the U.S. public sector, the really tough choices are likely to be addressed well after the 2012 election.

In summary, we believe that while there are clear structural issues that will weigh on U.S. equities longer-term and a sustained rise in oil prices remains a huge risk, in the intermediate-term the U.S. is one of the more attractive equity markets in the developed world.

River Road Asset Management

15 July 2011

As of June 30, 2011, Telecomunicacoes de Sao Paulo comprised 1.69% of the portfolio's assets, Sysco – 2.15%, PepsiCo – 2.15%, Johnson & Johnson  – 1.58%, Merck – 0.00%, Nucor – 1.45%, PartnerRe – 1.51%, Cincinnati Financial – 1.70%, Federated Investors – 1.52%, BreitBurn Energy Partners – 2.07%, Intel – 2.18%, McCormick & Co. – 1.05%, Sara Lee – 1.56%, Coca-Cola  – 0.00%, and Bemis Company – 0.75%.

Note: Funds that invest in small- and mid-cap stocks are considered riskier than large-cap stocks due to greater potential volatility and less liquidity. The Fund seeks to invest in income-producing equity securities and there is no guarantee that the underlying companies will continue to pay or grow dividends.

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.

2nd Quarter 2011 Commentary - ASTON/Neptune International Fund

The Fund significantly underperformed its MSCI EAFE & Emerging Markets Index benchmark during the second quarter. The major contributor to that underperformance was Fund’s overweight stake in the Energy sector, where companies suffered against the backdrop of falling oil prices and broad growth concerns. Similar concerns also saw the Industrials and Consumer Discretionary sectors underperform. As during the first quarter, however, stronger markets towards the end of the period saw the Fund regain some relative performance and finish with strong momentum in late June.

Our investment views have not changed significantly since the end of the first quarter. We see global growth over the next few years as impressively broad-based—with approximately equal contributions coming from the "BRIC" countries (Brazil, Russia, India, and China) and other Emerging Markets. This means that the global economy will no longer be reliant on one specific economy. Thus, we remain positioned to take advantage of global growth directly through Emerging Market exposure, as well as through world class companies in developed markets that have good access to these sources of growth. Furthermore, we remain impressed by corporate strength in the major economies and have positioned the portfolio to take advantage of this potential strength as it translates into late economic cycle capital expenditures, especially through high-quality industrial companies.

Overall, we remain confident that our high conviction portfolio positioning, based on in-house economics and sector research, has the potential to generate strong returns over the long-term. 

Robin Geffen, Fund Manager & CEO
Neptune Investment Management

Note: Investing in foreign markets involves the risk of social and political instability, market illiquidity, and currency volatility. Holdings in emerging markets entail the further risk of unstable legal systems, increased volatility, and even less liquidity.

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. 

2nd Quarter 2011 Commentary - ASTON/Cardinal Mid-Cap Value Fund

The optimism prevalent in the equity market earlier in the year waned during the second quarter. Concern that the economy would slip back into recession was exacerbated by credit market fears raised by the European sovereign debt crisis and politics being played with the U.S. government debt ceiling. Economic data showed a marked deceleration with employment growth in particular much lower than forecast and housing data weak as flawed foreclosure processes at loan servicers and regulatory delays have created a shadow inventory that overhangs the market. Although economic growth estimates for the second quarter were positive, they have been falling due to the impact of severe storms and floods in the U.S., lower consumer spending as a result of much higher gasoline prices, and business disruption caused by the events in Japan.

Most economists do expect a stronger second half to the year, however, as gas prices have come off their highs and the Japanese economy is bouncing back rapidly. As expected, monetary policy remained supportive as the Federal Reserve reiterated their intention to keep interest rates low for an extended period even as  the second round of quantitative easing ended. Despite heightened economic uncertainty, merger and acquisition activity remained robust as valuations are attractive and credit is available at low rates for most publicly traded companies. With the markets already assuming that Congress will raise the U.S. debt ceiling prior to a default, equity markets rallied in relief at quarter end after the passage of Greece’s $41 billion austerity program.

Value Lags Growth

The value component of the Russell Midcap Index trailed its growth counterpart by more than two percentage points during the quarter. The value index lagged as a result of its lower weighting in better performing Consumer Discretionary stocks and its higher weighting in poorer performing names in the Financials and Energy sectors. Overall, more defensive Healthcare, Consumer Staples, and Utility stocks led the market while more cyclical Energy, Industrials and Technology shares lagged.

The Fund outperformed its Russell Midcap Value Index benchmark in posting a slight loss for the period. Relative performance was driven primarily by stock selection within the Financials, Materials, Industrials, and Consumer Discretionary sectors. Among Financials, shares of Cash America rose sharply after the threat of adverse payday lending legislation in Texas ended. Silgan Holdings, a processor of metal cans, plastic containers and closures outperformed its peers due to its negligible exposure to falling commodity prices. Gains in KAR Auction Services (strong used car prices) and R.R. Donnelley (significant share repurchase) within Industrials more than offset declines in Equifax (weaker than expected mortgage-related activity) and Atlas Air Worldwide (concerns that international freight trends may weaken). IAC/Interactive was the best performer in the Consumer Discretionary sector due to strong results in its Internet search and match.com businesses as well as the successful renegotiation of its relationship with Google. In addition, Virgin Media rose on continued strong operating results. The primary detractors from performance were an overweight stake in poorly performing Technology stocks and the absence of better performing Utility stocks.

Portfolio Highlights

Among the companies with solid fundamentals trading at opportunistic valuations in which we seek to invest, we highlight Six Flags and InterDigital this quarter. Six Flags is the largest regional theme park operator in the U.S., attracting 25 million visitors to 19 parks annually. Laden with billions in debt following a failed effort to diversify, Six Flags filed for bankruptcy in 2009. Emerging last year with substantially less debt and significant tax assets, the company hired new management to focus on improving park operations. A key change is that management will spread capital spending across all parks to keep them fresh instead of building a few blockbuster attractions each year which leaves most parks with nothing new to attract visitors. Management also has plans to reduce costs, boost sales, and monetize non-core assets. With a proven management team, we believe that Six Flags will successfully execute its operating plans and redeploy its free cash flow wisely to enhance shareholder value.

Founded during the 1960s, InterDigital designs and develops advanced digital wireless technologies and has more than 18,000 patents essential to virtually every wireless device. The firm is second only to Qualcomm in terms of non-carrier based intellectual property used in wireless cellular devices, and we expect that its IP network will eventually be licensed by everyone. The mobile phone market is growing rapidly and about half of the InterDigital’s licensees, including Apple, pay fixed fees based on far fewer units than they are selling today. The firm is focusing its efforts on expanding capacity for wireless data as existing infrastructure and technology are inadequate to meet the demand for high speed and quality data. Despite the quality and value of its assets, InterDigital has no real research coverage, and we expect that Google and other vendors who missed out on previously available Nortel patents to take a hard look at possibly acquiring the company to remain relevant and cost competitive in the wireless market.

Outlook

We are cautiously optimistic on the remainder of the year as fiscal and monetary policy remain accommodative and credit conditions improve despite the sluggish economy. Equity valuations continue to be attractive despite poor market sentiment. Investors expect the U.S. debt limit to be raised but remain skeptical that government spending can be brought under control. In coming months, investors will focus on employment and growth trends to assess whether the first half’s soft patch was temporary. Mergers and acquisition activity has remained strong and is important to our positive stance on equities.

We think Cardinal’s approach of opportunistically buying sound, free cash-flow producing businesses at inexpensive valuations has served investors well. One key reason is that the investment opportunities that we seek arise from systemic structural inefficiencies which are not dependent on market conditions. The company management teams of holdings in the portfolio have continued to be active in redeploying their cash flow in accretive ways, including acquisitions and share repurchases. For example, Stanley Black & Decker completed the acquisition of Niscayah, a Swedish security services firm and R.R.Donnelley bought back $1 billion of outstanding stock. These actions have benefited results thus far, and we think also bode well for the future.

The Cardinal Capital Team

As of June 30, 2011, Cash America comprised 3.25% of the portfolio's assets, Silgan Holdings – 4.14%, KAR Auction Services – 2.74%, R.R. Donnelley & Sons -3.35 %, Equifax – 1.88%, Atlas Air Worldwide – 3.35%, IAC/Interactive – 3.31%, Google – 0.00%, Virgin Media – 1.82%, Six Flags Entertainment – 2.14%, InterDigital – 1.86%, and Stanley Black & Decker – 3.44%.

Note: Small- and mid-cap stocks are considered riskier than large-cap stocks due to greater potential volatility and less liquidity.

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.

2nd Quarter 2011 Commentary

Equity markets gyrated back and forth within a large trading range during the second quarter of 2011, with the S&P 500 Index moving up and down in covering 100 points. What was surprising, and frustrating for us, was the narrow range of the Options Exchange Market Volatility Index (“VIX”) during the past several months. We would have expected that index to increase much more than it did on each decline in the market. It remained at a low level, in aggregate, however. We believe this persistently low reading on the VIX suggested an underlying optimism on the part of the investors, who as a whole shied away from buying put option protection. This equanimity resulted in a drag on the Fund's performance from the portfolio's defensive put positions, which we view as the defensive aspect of our strategy. As a result, the Fund's performance ended the quarter slightly down, marginally behind the S&P 500.

We remain committed to what we consider to be a low volatility portfolio in part because the equities that we view as undervalued are currently the higher-yielding, larger-capitalization companies that historically and statistically have also been considered lower-volatility stocks. The portfolio is heavily weighted toward traditionally defensive non-cyclical companies, such as Healthcare and Utilities, and underweight commodity oriented companies. In addition, we continue to sell out-of-the-money call options to generate incremental cash.

In our opinion, this is not the time to switch gears and become more aggressive for a variety of reasons. Our fundamental and valuation disciplines strongly suggest that we remain committed to the lower volatility segments of the market with the exception of a few technology companies. Even there, holdings such as Intel and Microsoft had higher than market dividend yields and were selling at a below market price/earnings ratios at the end of the quarter.

Although, we do not manage the portfolio from a top down point of view the current environment is such that we feel compelled to offer our opinion on the major domestic and global events that could shape the investment picture over the foreseeable future. In that regard, we are of the belief that staying the course and being risk adverse will prove to be correct. Given all the uncertainties that are present here, in Europe, and elsewhere we are as convinced as ever that a commitment to a risk mitigation approach will prove most beneficial.

Macroeconomic Outlook

Trees do not grow to the sky and the stock market is unlikely to keep going up at the rate it has for the past two-plus years unless the economy grows at a rate fast enough to sustain double-digit profit increases. We believe the period of earnings growth in excess of 10% per year is unsustainable given the myriad of problems faced by the U.S., Europe, and Japan—problems, by the way, that will likely impact China and India. Financial strains are expected to eventually impact final demand in the mature economies which will affect the rapidly developing regions that rely on those mature regions as consumers of their goods.

Despite the turmoil of the past several years there are still major problems in this country that could result in a prolonged period of low growth. Extremely high levels of debt on the part of every segment of government—Federal, State, and Local—represent a potential drag on economic growth for many years. Every solution that has been enacted and those that are proposed represent financial restraint. If we lower our deficit by reducing expenses it means firing workers. Raising taxes will not work at this juncture as it will undermine business confidence. We are, it appears, between the proverbial rock and a hard place.

Europe is also in a Catch-22 situation in that those countries that lived beyond their means are so far in debt that any austerity program is unlikely to work. Social obligations are not easy to fix if it means benefits must be reduced. Taxes going up only exacerbate the pain of the average citizen, leading to potential social unrest, while debt forgiveness could result in a significant capital shortfall for the banks that hold the debt of the countries that cannot pay. Credit markets are already signaling a likely default based upon the spread and the price of the credit default swaps. In the end, European growth is likely to be extremely low for a protracted period of time.

Furthermore, high oil prices act like a tax to the average consumer, which inevitably causes retail sales of other goods to slow. This problem is often compounded by the desire to maintain profits on the part of the integrated oil companies, as they hold refined product prices high in order to maintain profit margins.

Back in the U.S., the current debt ceiling negotiations are clearly underscoring the difficult situation the federal government finds itself in. The more this plays out in the media, the more it may be viewed as a negative by the average consumer in this country.  None of this encourages companies to invest in people or equipment. The senior management teams of major companies seem to acting as one of the most risk adverse groups today.

Given all of these storm clouds, this is not the time in our opinion to disregard the macroeconomic environment. It is difficult to generate a great deal of confidence in earnings beyond this year, and we possibly face the prospect of a reduction in estimates as the balance of this year unfolds. If profits begin to slow, we believe equity valuations would come under serious downward pressure. 

Thus, we remain committed to a strategy focused on dampening potential volatility through the use of options and dividend-paying stocks. 

Ron Altman                                                   
Senior Portfolio Manager                            

As of June 30, 2011, long-only positions in Intel comprised 3.46% of the portfolio's assets and Microsoft – 3.72%.

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, 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.

2nd Quarter 2011 Commentary

The U.S. economy continues to move ahead at a sustained but moderate pace. It is evident that even with unprecedented federal fiscal and monetary stimulus, real Gross Domestic Product (GDP) growth much above 3% has been difficult to achieve during this recovery. Unfortunately, second quarter real GDP may have increased only 1.5% due to weaker than expected consumer spending. In addition, while inflation remains generally well contained, higher energy and food prices have caused us to increase our inflation forecast for a second time this year. We now expect the Consumer Price Index (CPI) to increase 3%, versus our previous revised forecast of 2%, up from a 1% forecast at the beginning of the year.

Several factors cause us to think it is possible for economic growth to at least temporarily bounce back during the second half of this year. With a recovering Japanese economy, there should be fewer supply chain disruptions. Ongoing job and income growth, coupled with lower energy prices, should support some pickup in consumer spending, and business investment trends should be firm due to the high level of corporate profits and business tax incentives that are set to expire at year end.

This recovery continues to be frustratingly slow in view of the sharp decline in economic activity during the Great Recession, reinforcing the notion that recoveries following a financial crisis are usually modest and bumpy. The developed world simply has too much debt, and it will require time, patience, and sound fiscal policies to reduce it adequately so that a solid foundation can be established for future growth. In the meantime, as the private sector continues to deleverage and the public sector reduces its deficits and debt, trend-line real GDP growth could remain tepid.

Winners and Losers

Despite resurfaced apprehension about sovereign debt problems and continued underwhelming job growth in the U.S., equity markets managed to end the quarter on a positive note. The Fund posted a marginal gain during the period, in line with its Russell 1000 Growth Index benchmark and ahead of the S&P 500 Index. The portfolio benefited from stock selection and an overweight allocation to the relatively strong Consumer Staples sector as Kraft Foods, Costco, and PepsiCo, in particular, gained more than the market. Strong performances from Nike, McDonalds, and TJX within Consumer Discretionary also aided returns. Allergan and Abbott Laboratories outperformed the overall Healthcare sector, positively affecting performance. 

Technology was a mixed bag for the Fund as strong gains from Accenture and Qualcomm plus an underweight position that aided relative performance were offset by disappointing performances from Google and Broadcom. Although Google's long-term fundamentals remain attractive, we think the company's near-to-intermediate term issues warranted reduced exposure in the portfolio. Specific issues of concern include: 1) rising costs in a slowing revenue environment; 2) changes in the management structure; and 3) current antitrust investigations. The Fund sold Broadcom due to a lack of near-term catalysts and a reduction in our confidence in the company’s secular growth outlook.

Energy was the worst performing sector in the market during the period, and thus the Fund’s overweight position detracted from performance. This was mitigated somewhat by our decision early in the quarter to trim Halliburton, Occidental, Cameron International, and Schlumberger following strong absolute and relative performance over the previous six-to-eight months and our concerns that the spike in oil prices would increasingly lead to fears over demand destruction. We subsequently added back to Halliburton and Occidental, for the former on raised rig count expectations in North America related to the sustained strength in oil-related activity. We think Occidental should benefit from accelerated shale oil drilling in California and the Permian basin.

Stock selection within Industrials detracted from relative performance despite the Fund’s underweight allocation to the declining sector. One of the culprits was Fluor. Although fundamentals at the company remain sound and an energy backlog has been building, the spike in oil prices early in the quarter caused some investor anxiety regarding demand destruction. We see this development as limiting the stock's potential in the short run, warranting a reduced position. 

Finally, the Fund’s sole position in the Financials sector, JP Morgan Chase, fell more than its peers during the quarter, detracting from relative and absolute returns. We reduced the position twice during the quarter as the stock has been dragged down by se