4th Quarter 2011

The Fund outperformed its Barclays Capital U.S. Aggregate Index benchmark during the fourth quarter of 2011. Holdings in investment-grade credit outperformed the market, while the government portion of the Fund performed in-line with the index. Both of these sectors continue to be underweight allocations in the portfolio relative to the benchmark. The Fund’s overweight allocation to Emerging Market fixed-income added to returns as well. Finally, the mortgage-backed securities (MBS) portion of the portfolio continued to outperform that area of the benchmark despite prices on non-Agency MBS remaining stagnant. Holdings in Agency MBS outperformed due to positions in longer duration Agency collateralized mortgage obligations (CMOs).

Global Developed Credit

It was a volatile year for corporate credit markets in 2011. Excess returns for both investment-grade and high-yield Corporate bonds were difficult to come by as corporate credit was unable to rival the returns posted by U.S. Treasury securities. Spreads widened for both areas during the year, and while issuance was active it was primarily at the front-end for high-yield. Volatility in early August shut down the high-yield market almost completely with only a fraction of new high-yield priced during the final five months of the year.

Investors seeking yield had little choice but to increase their risk exposure and, as a result, all-in yields in the high-yield market fell to their lowest level in history in May 2011. As market participants became increasingly focused on Europe, volatility escalated and performance suffered. In addition, default activity picked up during the fourth quarter and ratings migration momentum has decidedly swung downward, strongly suggesting that default rates may soon begin to rise.

We believe another year of global uncertainty awaits investors in 2012, driven not only by concerns in Europe but also by slowing domestic economic growth. During the fourth quarter, European Union (EU) leaders unveiled the fifth plan since May 2010 to address the sovereign debt problems in the region. The implementation of such a plan remains elusive and the immediate problems remain—Europe has approximately €1.1 trillion of EU government debt maturing in 2012, with half of that maturing in the first six months. Slowing European growth may be expected to impair U.S. exports and further cause the U.S. dollar to strengthen, thereby pressuring corporate profitability and corporate bond spreads. Added to that is a recent Bloomberg report highlighting that U.S. corporate profit growth in 2011 was the lowest in two years. Structural domestic economic issues persist, including a stubbornly high unemployment rate, deflating home prices, and huge state and local government budget gaps. Domestic economic concerns coupled with continuing problems in the eurozone will likely foster another year of low interest-rates and heightened volatility in the capital markets.

U.S. Government Securities

Volatility during the fourth quarter was sharply lower compared with the third quarter. The 10-year Treasury yield moved only five basis points during the period, while the 5-year Treasury yield dropped 13 basis points and the 30-year bond moved only 3 basis points. November and December were especially subdued, with only the occasional market-moving announcement from the eurozone and a gradual downtrend in yields. The Federal Reserve’s so-called ‘Operation Twist’ went forward without causing any turmoil in the marketplace.

Opportunities for profitable relative value trades declined during the quarter. Sliding volatility and the Federal Reserve’s buying drove this decline. In response, the portfolio’s government holdings shifted to more closely resemble that of the benchmark. Looking forward to 2012, we expect to favor the 7- to10-year maturity range. We think these issues offer the best risk/return tradeoff and stand to benefit most if the Federal Reserve adopts an inflation-targeted or interest-rate targeted strategy.

Emerging Markets Fixed-Income

Emerging Markets (EM)—external sovereign, corporate debt, and local currency—performed well overall during the fourth quarter, overcoming mixed returns for the month of December and throughout 2011. EM assets remained hostage to the European debt crisis that continued to unfold throughout the year. Securities traded in sympathy with news flowing out of the eurozone, with EM local currency bonds being most affected, while EM sovereign bonds were the most insulated. Uncertainty arising from the global macro backdrop in Europe, Asia, and the U.S. generally led investors to flock to the safe haven of U.S. Treasuries.

Late in December, the European Central Bank (ECB) provided a massive liquidity injection of €489.2 billion in cheap funding to more than 500 eurozone banks through its long-term refinancing program (3-year long-term refinancing operation—LTRO). The market briefly rallied and then traded off as it appeared banks were likely to recycle the liquidity back to the ECB and not put it to work in the economy. Rating downgrades, or the threat of downgrades, uncertainty surrounding the effectiveness of Europe’s most recent plan announced in early December, the magnitude of Europe’s ongoing slowdown and the seasonal “risk-off” trade all contributed to year-end market weakness. Going forward market participants want to know whether favorable sales, consumer sentiment, and improving job data out of the U.S. can be sustained, or if it is just seasonal strength waiting to slip away in the first quarter of 2012.

Mortgage-Backed Securities

There seemed to be four major causes of the “risk-on/risk-off” trade during 2011. First, the European turmoil, which affected all markets, has affected the non-Agency MBS market significantly due to that market’s credit sensitivity. Additionally, there is no good estimate on how much some of these European banks hold in the non-Agency MBS space and how much they could be forced to sell. Even considering some of the more aggressive estimates, we believe the amount could be absorbed going forward if the supply was not released all at once. It is our anticipation that the supply would be released on a more orderly basis.

Second, layer that turmoil with the new Basel 3 accords and the questions continue as to how much additional supply could be force sold into the market by those same banks. Basel 3 will increase the reserves in all these banks, and even though its full implementation does not begin until 2015, most European banks are already starting to implement these changes.

Third, throughout the year, the continuing decline in the value of housing has put pressure on the non-Agency market. Looking at some of the price action, we see a clear indication of this housing price decline. Granted, some of the price decline was the realigning of the underlying bond prices with overstated index prices, yet it isn’t hard to see that the value of most American real estate still hasn’t seen the bottom. This situation shows itself in the high level of delinquency and severity prints which continue to persist, especially in the subprime sector.

And finally, the potential introduction of the “Volker Rule”, a portion of the Dodd-Frank legislation passed by Congress in 2010, has had its potential unintended consequence on Wall Street. Non-Agency MBS positions have been reduced by more than 50% and Wall Street’s risk appetite cut back significantly. The result of this has been to remove a major price support in this space that has allowed prices to seek levels that investors are actually finding more compelling. Of course a reduction in liquidity is not the most sought after condition, but it can provide opportunistic situations to investors.

Although there were lawsuits, congressional investigations, more attorneys general headlines, and even more legislation introduced in 2011, nothing really came to adjudication in terms of Washington significantly affecting the MBS markets. Only the Bank of America settlement with 22 institutional investors actually came to fruition in 2011, and even that settlement has been called into question by the likes of the FDIC and the Federal Home Loan Bank that has sought to intercede in the settlement. This settlement is now in the appeals court to determine which jurisdiction (state or federal) has the final say in the matter, which could extend the outcome for at least six months.

The Agency MBS market underperformed the broader Barclays Capital U.S. Aggregate Bond Index during the fourth quarter and the Barclays Capital MBS Index was the worst performer out of the major sectors of the index in 2011. This underperformance is as expected given the fall in interest-rates during the year, since the Barclays Capital MBS Index has the lowest duration.

One substantial legislative process that found its way into the market, however, was the October FHFA announcement that provided an update to the Home Affordable Refinance Program (HARP) whose final guidelines were formally announced mid-November. Most borrowers have an economic incentive to refinance but cannot afford to make the changes in underwriting standards and/or loan-to-value (LTV) ratios. This dilemma is not lost on the U.S. government and there were multiple rumors throughout 2011 regarding a “Great Refi” plan to offer historic low rates to all mortgagees. What the market received instead was FHFA, which included eliminating the LTV cap of 125%. We think this change will only lead to an increase in Agency MBS prepayments by a 5 to 10 Conditional Prepayment Rate (CPR) per year, spanning the next few years. We expect that if there is further weakening in the national housing market, then the government will intervene. This intervention could lead to higher prepayment speeds, especially in higher coupon securities.

Commercial Mortgage-Backed Securities

The CMBS market experienced quite a tumultuous ride in 2011, a year where prices across the credit spectrum whipsawed alongside with macro markets and ultimately ended December with a fairly strong rally at the top of the capital stack. We continue to see tiering across deals in addition to a steepening credit curve as credit “cuspy” tranches, such as junior AAA CMBS (AJs) and below, continue to lag behind the outperformance in mezzanine AAA super senior CMBS (AMs) and last cash flow (LCF) super seniors. With that said, the market continues to chug along, albeit on a technical basis, as investors appear skittish on broader economic headlines.

On the commercial real estate (CRE) fundamental side, delinquency rates remained flat to slightly down due to a slower pace of deterioration coupled with servicer loan modifications. There continues to be increasing trends of servicer loan modifications which effectively splits a loan into pieces: an A note pays interest and a B note does not pay interest and is effectively a hope note. We view these types of modifications as worrisome due to the fact that the hope notes are effectively a delayed write-down for the trust and in the interim may show lower cumulative losses on a deal level then what is occurring in reality. On the commercial property valuation side, the latest Moody’s Commercial Property Price Index (CPPI) showed a 1.4% decrease in September. This may be skewed 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 in shorter duration assets. Unemployment continues to be a large contributing factor for CRE fundamentals and without any real improvement in the unemployment picture, real recovery in the CRE sector 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. 

4th Quarter 2011

European Uncertainty

Uncertainty surrounding the health of European governments and financial institutions caused substantial volatility and weighed heavily on global financial markets in 2011. The month of December was no exception as investors continued to digest headlines, notably Standard & Poor’s (S&P) placing the long-term sovereign credit ratings of 15 countries within the European Monetary Union (EMU) on CreditWatch due to systematic stresses in the Eurozone.

Following the conclusion of its December meeting, the Federal Reserve stated that recent data suggests the U.S. economy had been expanding moderately though with some apparent slowing in global growth. The Fed did acknowledge that the unemployment rate remained elevated despite improvement in the conditions of the overall labor market. Moreover, it expected strains in financial markets to pose significant downside risk to the U.S. economic outlook, and thus was continuing its program to extend the average maturity of its holdings of securities as announced in September.

Throughout 2011, the Federal Reserve communicated its expectations for the U.S. economy with a fragile tone before finishing the year with a cohesive stance towards current monetary policy. In our view, it is unlikely that the Fed will move from accommodative policy during 2012, absent a significant decline in unemployment or a material change in long-term inflation expectations. Therefore, we do not foresee a change to the exceptionally low Federal Funds rate that the Fed has targeted through the middle of 2013.

Strong Corporates

The Fund outperformed its Barclays Capital US Aggregate Bond Index benchmark during the quarter as sector, credit-quality, and yield-curve selection all added value. The portfolio’s above-market exposure to the outperforming credit sector aided returns, with Corporate bonds besting duration matched Treasuries as spreads tightened modestly. Within credit itself, an overweight to lower-quality investment-grade securities helped as BBB-rated credit securities outperformed A-, AA-, and AAA-rated bonds by healthy margins.

A barbell portfolio structure also boosted returns as rates declined across the yield curve during the fourth quarter. In this environment, longer-dated securities outperformed with long-term US Treasuries outperforming intermediate Treasuries. All told, long Treasuries outperformed intermediate Treasuries by more than 23 percentage points during the full year, the largest margin on record.

Outlook

In 2011, investors dealt with the European uncertainty and persistent bouts of volatility with a flight to quality. In such a “risk-on/risk-off” environment, corporate bond spreads widened regardless of the issuer’s direct exposure to Europe, if any, as investors considered a potential disconnect between the domestic economy and those abroad.  Although the global nature of the European crisis cannot be overlooked, a significant portion of U.S. corporations carry little direct exposure to Europe, and an even greater number have been scaling back investment in Europe since before the crisis emerged. In our view, the outcome for U.S. corporate bonds is more contingent on the domestic economy and the degree to which sound financial discipline has allowed issuers to utilize the low interest-rate environment to improve their balance sheets. On a relative basis, corporate bonds issued by entities that have termed out liabilities, demonstrably reduced their debt burden, and continue to produce strong cash flow throughout the business cycle remain attractive. 

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. 

CHICAGO – January 23, 2012 – Aston Asset Management, LP (Aston) has announced that its mutual fund assets under management exceeded $10 billion, as of the close of business on January 19, 2012.  Aston surpassed the $10 billion mark shortly after celebrating its five-year anniversary.  In 2011, Aston’s net sales ranked in the top fifty of all fund companies.¹ 

“We are pleased with what we have achieved in a relatively short period of time,” said Stuart D. Bilton, Chairman and Chief Executive Officer of Aston. “Our commitment to carefully selecting experienced investment managers with disciplined investment processes, and placing our clients’ interests first, has carried our shareholders and firm through the tough markets of the past five years.   We anticipate that these core values will allow Aston to continue to prosper for many years to come.”

Aston was established in December 2006 with the goal of offering investors high quality institutional managers in a mutual fund format. The history of Aston’s management team extends back to 1993, when Mr. Bilton founded the Chicago Trust Funds and hired Kenneth C. Anderson, now the Company’s President, as the firm’s first employee.  Aston currently employs 37 people, advises 26 funds and partners with 18 subadvisers.

Aston’s growth was fueled by its key strategy of forming partnerships with independent money managers. Aston nurtures these relationships by co-branding funds, working closely with the money managers to achieve strategic goals and distributing funds through extensive national networks of investment consultants, registered investment advisors, broker-dealers, model and retirement platforms, and wealth management teams.

“Aston could not have achieved $10 billion in assets under management without the hard work and strong commitment from every member of the Aston team, as well as the trust we have earned from our clients,” said Mr. Anderson. “While we are very pleased to have reached this milestone, we are not content to simply rest on our laurels. We will continue to diligently execute our strategy, working closely with our subadvisers to help our clients reach their investing goals.”

Aston has added several new mutual funds to its roster in the last year. The ASTON/River Road Long-Short Fund (ARLSX) was opened on May 4, 2011, with subadviser River Road Asset Management.  The ASTON/DoubleLine Core Plus Fixed Income Fund (ADBLX, ADLIX) led by portfolio manager Jeffrey Gundlach of DoubleLine Capital LP (DoubleLine) was launched on July 18, 2011.  DoubleLine considers the fund’s investment strategy to be the highest risk/reward fixed income strategy they employ, and is offered exclusively through Aston Funds. Finally, the ASTON/Silvercrest Small Cap Fund (ASCTX, ACRTX) was opened with subadviser Silvercrest Asset Management Group (Silvercrest) on December 27, 2011. 

In addition to the above, Aston’s full line-up of mutual funds include:

4th Quarter 2011

Heightened concerns over the fiscal condition of much of Europe continued during the final calendar quarter of 2011. Thus, volatility within capital markets continued as well, as investors painted with a very broad and emotional brush. The major surprise was the sudden spike to the upside during the first two weeks of October. The S&P 500 Index rose nearly 14% during the month. Remarkably, half that gain occurring in the first five trading days.

The old Wall Street adage, “markets climb a wall of worry” certainly held true. Looking at the news, there was—and is—much to cause investor concern. Since our Dynamic Portfolio Optimization™ (DPO) model is more intermediate term-oriented, it did not capture much of the abrupt October upside reversal in the markets. Having only dropped marginally during the third quarter when the broader U.S. market (represented by the S&P 500 Index) posted double-digit losses, the Fund correspondingly lagged for the fourth quarter following the rally.

The Fund trailed its composite benchmark (35% Russell 3000 Index/35% MSCI ex-US Index/30% Barclays Capital Aggregate Bond Index) significantly in delivering a small loss during the quarter. Performance was especially dampened by a sharp loss in the Market Vectors Russia ETF. Also contributing to the relatively poor returns were iShares Silver Trust and iShares MSCI Singapore Index, though both of those positions had been smaller weights in the portfolio than the Russian ETF. Among the positive contributors to performance were positions in iShares iBoxx $ High Yield Corporate Bond, PowerShares DB U.S. Dollar Index Bullish, and Health Care Select Sector SPDR.

In the terms of positioning, the most noteworthy changes in asset allocation during the quarter were an increase in Domestic Equity from 11% to 30% of assets and decrease in Domestic Fixed Income from 59% to 38% by year end.

For the full year 2011, the Fund slightly outperformed its custom benchmark in posting a small loss. Allocation changes put in place during the second and third quarters allowed the Fund to incur minimal losses during those respective quarters, especially in International Equity. Thus, while missing the abrupt fourth quarter rebound, the avoidance of earlier quarter losses allowed investors to experience less volatility with equal or better performance. Our model continues to warn of high levels of investment risk, so the Fund continues to maintain a relatively conservative stance overall. 

Smart Portfolios
Seattle, WA

As of December 31, 2011, Market Vectors Russia ETF comprised 0.00% of the portfolio's assets, iShares Silver Trust – 0.00%, iShares MSCI Singapore Index – 0.00%, iShares iBoxx $ High Yield Corporate Bond – 6.43%, PowerShares DB U.S. Dollar Index Bullish – 2.06%, and Health Care Select Sector SPDR – 2.13%.

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.

4th Quarter 2011

Great Quarter, Tough Year

The Fund rebounded strongly during the fourth quarter in posting double-digit gains and outperforming its S&P MidCap 400 Index benchmark by more than four percentage points. The end-of-year surge somewhat eased a tough 2011 overall that saw the Fund underperform the benchmark by a wide margin.

The fourth quarter outperformance was encouraging: 18 stocks rose more than 20% and only four stocks declined. Top contributors included Akamai Technologies, Gannett, and H&R Block.  Long-time holding Akamai reported strong third quarter revenue growth and announced plans to acquire Cotendo, a competitor. We think the acquisition should have a positive impact on the firm’s margins. Broadcasting and publishing company Gannett (USA Today, television stations, regional newspapers, CareerBuilder) continues to generate strong cash flow and has a solid balance sheet, while we think its stock remains attractively valued with a low price/earnings multiple and a healthy dividend yield. H&R Block has refocused on its core business (assisted tax preparation) and divested itself of its non-core mortgage and broker/dealer businesses. The firm has been able to return cash to shareholders through share repurchases and a sizeable dividend.   

The worst performers for the quarter were three Healthcare stocks—Boston Scientific, Charles River Laboratories, and Forest Laboratories—all of which were in negative territory. Medical device company Boston Scientific declined after the company reported continued pricing pressure in its stent business. The firm is in the midst of a multi-year transition, with its stock remaining attractively valued with a current price/sales ratio well below its five-year historical average. Charles River is a provider of products and services that assist pharmaceutical and biotech companies in accelerating research and drug development. With market conditions for big pharmaceutical companies stabilizing, outsourcing to firms like Charles River is expected to pick up. We are encouraged by the company’s focus on key initiatives, which include controlling operating costs, improving free cash flow, and returning cash to shareholders.  In our view, the stock appears substantially undervalued at current levels. Forest Labs, a U.S.-based pharmaceutical company, continues to build out a significant product portfolio. Nine new drugs are in the pipeline to replace products coming off patent in 2012 and 2015. The company has implemented an accelerated share repurchase plan, and remains focused on restructuring efforts.   With the stock trading at only seven times estimated 2012 earnings, we think the risk/reward potential is compelling.

Buys and Sells

The Fund eliminated its remaining positions in FactSet Research Systems and URS Corp. during the quarter. FactSet had nearly doubled from its purchase in March 2008 to when we sold it in December, while the broader market (as defined by the S&P 500 Index) declined 3%. FactSet reached our valuation target and we think that its user base may decline with financial industry layoffs. Engineering firm URS declined during the portfolio’s holding period from April 2008 through November 2011, though less so than the overall market. We made the decision to exit URS due to the lack of federal and municipal funds available for infrastructure related projects.

At the end of October, the Fund initiated a position in global specialty pharmaceutical and medication delivery company Hospira, which had spun off from Abbott Laboratories in 2004. Just prior to the purchase, the firm had highlighted manufacturing issues at two of its facilities that depressed the stock and provided an attractive entry point. We expect the manufacturing issues to be resolved in the intermediate-term and believe the news is well discounted in the stock price. The valuation appears compelling with the stock trading at the low end of the company’s five-year range, at levels similar to 2004. 

Outlook and Perspective

The domestic economy has shown some encouraging signs recently. Employment numbers have improved, while U.S. auto sales grew 10% in 2011. For the first time in two decades GM, Ford, and Chrysler all reported increased market share in the same year. In January, long-term holding BorgWarner, a leading producer of highly engineered automotive products with a focus on improved engine performance and fuel efficiency, increased its 2012 guidance.

At the end of the third quarter, we commented on the historically cheap valuation of the portfolio. Even with the gains made during the fourth quarter, we think it continues to be attractively valued compared with the major mid-cap benchmarks and the S&P 500. The average price/earnings ratio of the portfolio is less than that of the benchmark and its overall price/earnings to growth (PEG) ratio is at the low end of its historical range. In addition, we think the portfolio holds companies with better balance sheets than the broader market, with a lower long-term debt-to-capital ratio than that of the S&P MidCap 400 and Russell MidCap Indexes. Given the stabilizing and improving U.S. economic environment and current fundamental characteristics in absolute and relative terms, we believe the portfolio is well-positioned. 

Fairpointe Capital

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

As of December 31, 2011, Akamai Technologies comprised 4.25% of the portfolio’s assets, Gannett – 3.42%, H&R Block – 4.71%, Boston Scientific – 3.91%, Charles River Laboratories – 2.15%, Forest Laboratories – 2.70%, Hospira – 2.25%, and BorgWarner – 2.13%. 

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.

4th Quarter 2011

U.S. Stocks—Time For a Close Up

Uncertainty about growth in the global economy made 2011 a year of volatility in the stock market. All year, headlines questioned whether there would be a double-dip recession in the U.S.  The fourth quarter saw the upside to that query as markets rallied globally. Small-cap stocks (Russell 2000 Index) led during that period, though large-cap stocks represented by the Fund’s Russell 1000 Index benchmark led for the year. The year-end strength came mostly during October, reflecting encouraging news on corporate earnings. This belied arguments for a double-dip. In addition, a pick-up in Gross Domestic Product growth and less hostile employment results corroborated views on a more constructive market outcome.

Last year we postulated that large-caps could be big in 2011 and that U.S. domestic stocks would be recognized and preferred by investors because of sentiment, valuation, and improving fundamentals. Well, the U.S. stock market (as defined by the large-cap oriented S&P 500 Index) was the best performing equity market for the year, and one of only two markets across the globe to post positive gains. This was the second year in a row where U.S. stocks in general provided superior returns on the global equity stage. It’s time for their close up! We think a trend seems to be developing that warrants further attention from investors.

Overall, though, it was a mixed year for investors. Large-cap stocks, particularly large-growth stocks, registered positive returns for the year, superseding small- and mid-caps among the respective Russell Indexes. But those returns were inconsequential from an absolute return perspective. Still, with an estimated 16% increase in corporate profits in 2011, (based on S&P 500 earnings) and a flat market, we continue to view valuations as compelling, particularly for large-caps. The factors that led us to be sanguine about large-caps heading into 2011 remain in place as we move into 2012. We think sentiment is positive as U.S. large-caps represent an under-owned asset class. Valuations and fundamentals both remain compelling according to our bottom-up analysis, with corporate balance sheets showing U.S. companies flush with cash that can provide necessary liquidity for flexibility.

It was a challenging year for the Fund, which lagged its benchmark substantially in posting a negative return. Poor stock selection in the Technology and Consumer Discretionary sectors was not offset by strength in other sectors. A deceleration in the economy created much of that weakness, but there were also company specific miscues. Specifically, product transitions are never easy and with Research In Motion the only thing in motion was its stock price on a downward path. We believed the company’s superiority in the enterprise space due to its secure network together with its overseas market share lead would provide a cushion. Unfortunately, competition from Google’s Android operating system and Apple’s iPhone and iPad caused the company to lose market share during the year. Yes, it is still part of the portfolio, as profitability and cash flow remain robust along with overall customer growth. A much delayed product transition should begin to take hold later this year and we think the transition should reawaken investor interest as the current valuation is discounting no improvement whatsoever in operating fundamentals. Stock selection in the Utilities and Financials sectors was also weak, but the Fund’s underweight position in Financials muted the impact.

On a positive note, stock selection in the Healthcare, Materials, and Industrials added to relative performance. Stock selection was strong in the Consumer Staples sector, but this benefit was largely offset by an underweight allocation to the sector.

Fourth Quarter Rally

The market rally that began in October led to strong absolute returns, with all sectors of the Russell 1000 and the Fund delivering positive returns. On a relative basis, the Fund was essentially flat in trailing the benchmark by roughly half a percentage point. Stock selection in the Consumer Discretionary, Consumer Staples, and Industrials sectors, as well as an overweight position to Industrials benefitted the portfolio.

Home Depot and Philip Morris International led the way in Consumer Discretionary and Staples, respectively. Home Depot reported solid quarterly results driven by continued strong sales comparisons, a dividend increase, and enhanced share repurchase activity. Favorable pricing and volume led to better than expected results for Philip Morris. Elsewhere, Google beat expectations and showed a reassuring focus on project expenses, boosting its stock. Energy firm EOG Resources was the top individual contributor to relative performance as earnings growth at the firm accelerated as crude oil and natural gas production rose more rapidly than anticipated.

The biggest drag on relative performance was an overweight stake and weak stock selection within Healthcare. Physician services firm Athenahealth issued 2012 guidance below expectations driven by reinvestment in the business. Healthcare IT firm Cerner fell on concerns about future booking trends and a shift toward lower margin businesses. Cerner had been a strong contributor to the portfolio since its initial purchase in 2008, with its forward-looking culture and significant investment in research and development that enabled it to remain at the forefront of automating (and in some cases transforming) healthcare operations for hospitals and other health care providers. We sold the portfolio’s position in November based on valuation.

Positioning

The portfolio remains broadly diversified, with sector allocations resulting from opportunities we identify at the stock level through our bottom-up fundamental analysis and valuation work. The most notable shifts during the quarter were a decline in the Healthcare sector weighting due to sales/profit-taking based on valuation and an increase in Technology. The major trend that has resonated within Technology is the move by corporations toward cloud computing to increase flexibility and efficiency. Those companies that facilitate that shift came into our valuation target range and provided the incremental opportunities. Technology ended the year with the largest sector allocation in the portfolio, followed by Financials and Industrials.

Although the Financial sector was the worst performing sector in the market in 2011, we began increasing the Fund’s exposure during the third quarter having identified what we believe to be clear leaders with compelling valuations. Importantly, while European banks need to raise additional capital, U.S. banks met their requirements a few years ago, thus placing them in a more competitive position. The exposure to Industrials is based on high-quality global leaders where economic uncertainty has depressed valuation.

During the quarter, four stocks reached full-position status either through purchase, appreciation, or a combination of the two. Apple has a unique ability to anticipate users’ wants, meet those wants with simple, easy-to-use functionality, and leverage marketing to create a buzz and level of cache to command a premium price. Now dominant in the mobile landscape, the firm has global trends at its back and a head start against rivals looking to crack the space. We believe that the company’s large cash position should enable premium pricing and high levels of profitability.

Dialysis services provider DaVita provides care to approximately 131,000 kidney failure and end-stage renal disease patients nationwide through nearly 1,700 outpatient centers. In our view, the company possesses competitive advantages given the stability of its business model, predictability of demand for its services, scale within the industry, strong track record of providing quality care, and a payment model that provides the company relative protection from draconian reimbursement pressure. In addition, we see longer-term opportunities for DaVita to gain market share from smaller operators that lack the clinical expertise to effectively operate in a healthcare environment that emphasizes risk management as opposed to fee for service. 

Four full positions, in addition to the previously mentioned Cerner, were sold from the portfolio during the fourth quarter. Amgen, Atwood Oceanics, and Corporate Executive Board were sold to fund purchases in other companies that we view as better relative investment opportunities.  After a steep third quarter decline, we took advantage of a sharp rebound in mining equipment maker Joy Global to sell the position and use the proceeds to add to stocks with greater potential.

2012 Outlook

We believe that U.S. stocks can potentially provide investors good-to-average returns for the upcoming year. We think that large-caps should have an edge over small- and mid-cap stocks due to superior valuation and improving fundamentals. The domestic economy will likely register continued subpar economic growth, and global markets will likely remain subdued due to credit issues in Europe and softness in export markets—a key driver for emerging economies.  As this is an election year, we believe there will continue to be volatility in the U.S. market. We hope to take advantage of any near term downward volatility to add to best-in-class companies at more compelling prices. 

TAMRO Capital Partners
Alexandria, Virginia

As of December 31, 2011, Research In Motion  comprised 1.04% of the portfolio's assets, Google – 3.03%, Apple – 2.12%, Home Depot – 2.17%, Philip Morris International – 2.50%, EOG Resources – 3.20%, Athenahealth – 2.20%, Cerner – 0.00%, and DaVita – 2.33%.

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. 

4th Quarter 2011

Year in Review

Uncertainty about growth in the global economy made 2011 a year of volatility in the stock market. All year, headlines questioned whether there would be a double-dip recession in the U.S.  The fourth quarter saw the upside to that query as markets rallied globally. Small-cap stocks in the Fund’s Russell 2000 Index benchmark led during that period, though large-caps (Russell 1000 Index) led for the year. The year-end strength came mostly during October, reflecting encouraging news on corporate earnings. This belied arguments for a double-dip. In addition, a pick-up in Gross Domestic Product growth and less hostile employment results corroborated views on a more constructive market outcome.

Last year we postulated that large-caps could be big in 2011 and that U.S. domestic stocks would be recognized and preferred by investors because of sentiment, valuation, and improving fundamentals. Well, the U.S. stock market (as defined by the large-cap oriented S&P 500 Index) was the best performing equity market for the year, and one of only two markets across the globe to post positive gains. This was the second year in a row where U.S. stocks in general provided superior returns on the global equity stage.

Small-caps in the benchmark finished the year down about 4%. The Fund was basically flat versus the benchmark for the year. Positive stock selection within Industrials, Healthcare, and Financials was offset by a lack of exposure to Utilities and an overweight position in the struggling Energy sector.

We believe that in a slow growing global economy consolidation is likely to take place, as leading companies grow market share and improve efficiencies by acquiring away competition. Small-caps have historically been the innovators in the domestic economy and we have seen many acquisitions in this universe, particularly in Technology, this past year.

Fourth Quarter Rally

Although markets rebounded during the fourth quarter and absolute returns were strong, the Fund trailed its benchmark for the period. The underperformance came primarily from negative stock selection within the Energy, Healthcare, and Consumer Discretionary sectors. In addition, the Fund’s overweight stake in Energy had a negative impact here as well.

Healthcare IT companies Quality Systems and Athenahealth were among the biggest individual detractors from performance. Concerns that the market for ambulatory electronic health records is more saturated than originally believed weighed on the stock of Quality Systems, while Athena’s management issued 2012 guidance below expectations driven by reinvestment in the business. Telecomm-related firms Acme Packet and Meru Networks were also notable detractors. Delayed orders caused Acme to reduce its quarterly guidance, and Meru missed its earnings target, despite record revenues, owing to expense pressures from sales and marketing.

On the positive side, Financials, Technology, and Industrials were the best performing sectors on both an absolute and relative basis. An overweight in Industrials benefited the portfolio overall, with holdings in Colfax and Westinghouse Airbrake Technologies (Wabtec) as the standouts. Colfax delivered better than expected sales and earnings growth, and further acceleration is expected as a result of a recent acquisition. Solid execution at Wabtec resulted in better than expected earnings and raised guidance.

The Fund benefited from three take-out offers for holdings in Technology: RightNow Technologies, DemandTech, and recently purchased SuccessFactors. All three companies are innovators in cloud computing, which as we have stated over the past several years is one of the strongest trends to hit technology in more than thirty years. Within Financials, top-10 holding Bank of the Ozarks reported better than expected quarterly results. 

Positioning

The portfolio remains broadly diversified, with sector allocations resulting from opportunities we identify at the stock level through our bottom-up fundamental analysis and valuation work. The most notable shifts during the quarter were a decline in the Healthcare sector weighting due to sales/profit-taking based on valuation and an increase in Technology as a result of appreciation from the buy-out offers mentioned above.  

Industrials, Financials, and Technology were the three largest sectors in the portfolio at quarter end. The opportunities we see in Industrials are related to infrastructure build-outs in Emerging Markets for water and energy as those economies continue to grow. Although the Financials sector within the Russell 2000 Index slightly outperformed the full index in 2011, we have identified what we think are high-quality companies within the sector that offer attractive valuations, particularly in the banking industry. We believe the U.S. is still “overbanked” and that consolidation within the industry is likely to continue.

During the quarter, seven stocks reached full-position status either through purchase, appreciation, or a combination of the two. Coinstar is an innovative leader in its eponymous automated coin counting service and the DVD kiosk business through its Redbox subsidiary. Despite impressive growth and market share gains through Redbox, the stock has been weak given a recent executive resignation as well as investor skepticism over management’s outlook and ability to execute a digital strategy. We believe Coinstar’s services offer value and convenience, and think the company is in an excellent position to enhance its competitive position given the demise of traditional brick and mortar video stores. Coinstar generates strong free cash flow and returns on capital.

Two other notable new full positions are in Amerigroup and Red Robin Gourmet Burgers. Amerigroup is the largest pure play Medicaid managed care organization (MCO) serving approximately two million members in 11 states. Although profit margins are being squeezed, we believe this risk is more than fully reflected in the valuation following the stock’s recent correction. In our view, Amerigroup is the best positioned MCO for Medicaid expansion as well as health reform and has competitive advantages relative to its peers given its cost leadership, focused business model, attractive geographic footprint, and strong management. Red Robin has suffered a series of management missteps, including overly aggressive new unit expansion through the economic downturn and poor overall execution. A new CEO and independent board members have recently joined the company to direct an ongoing restructuring effort in response to activist shareholder groups. We believe Red Robin is in the early stages of a turnaround, and are encouraged by the initial success from management’s new focused strategy.

Six full positions were sold from the portfolio during the fourth quarter. Blue Coat Systems, ESCO Technologies, Texas Industries, and Winnebago Industries were sold to fund purchases in other companies that we view as better relative investment opportunities. Cbeyond was sold in light of a shift in the company’s strategy that we believe entails execution risk. Quality Systems was sold due to valuation and better relative opportunities in the sector. Despite the weakness this quarter, the stock had delivered strong gains since its initial 2008 purchase.

2012 Outlook

We believe that U.S. stocks can potentially provide investors good-to-average returns for the upcoming year. We think that large-caps should have an edge over small- and mid-cap stocks due to superior valuation and improving fundamentals, though as noted previously small-caps can continue to benefit from industry consolidation. The domestic economy will likely register continued subpar economic growth, and global markets will likely remain subdued due to credit issues in Europe and softness in export markets—a key driver for emerging economies.  As this is an election year, we believe there will continue to be volatility in the U.S. market. We hope to take advantage of any near term downward volatility to add to best-in-class companies at more compelling prices. 

TAMRO Capital Partners
Alexandria, Virginia

As of December 31, 2011, Quality Systems comprised 0.00% of the portfolio's assets, Athenahealth – 2.23%, Acme Packet – 2.09%, Meru Networks – 0.29%, Colfax  – 2.85%, Westinghouse Airbrake Technologies (Wabtec)  – 2.10%, RightNow Technologies  – 0.67%, DemandTEch – 1.16%, SuccessFactors – 2.98%, Bank of the Ozarks – 2.80%, Coinstar – 2.21%, Amerigroup – 1.75%, and Red Robin Gourmet Burgers – 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.

4th Quarter 2011

After dropping double-digits during the third quarter, U.S. equity markets recovered nicely during the final quarter of the year, with both the broad-market S&P 500 Index and the Fund’s Russell 1000 Growth Index benchmark rallying more than 10%. After a sluggish first half of 2011, economic growth increased at a healthier rate during the second half of the year. A pick-up in consumer spending and ongoing solid gains in business investment contributed to third quarter economic growth, while fourth quarter real Gross Domestic Product (GDP) benefited from improved inventory and trade trends, along with continued gains in consumer spending.

Although the Eurozone debt crisis and the likelihood that Europe has entered a recession increase the risk to economic growth here in the U.S., we believe 2% GDP growth can be achieved in 2012. Job and income growth should be sufficient to support a moderate increase in consumer spending, but no more than that, as consumer debt levels remain high and personal savings rates are low. Business investment should experience another increase in 2012, supported by record levels of corporate profitability and some rebuilding of business inventories from 2011 levels. In addition, both housing starts and unit sales of autos and light trucks could show moderate improvement from depressed levels.

Still, the developed world simply 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 so that historical trend-line growth of closer to 3% can once again be achieved.

Up Year, Lagging Quarter

The Fund modestly underperformed the benchmark during the fourth quarter, but outgained the index for the full year 2011 amid an environment of heightened volatility and unexpected global developments. An overweight allocation to Consumer Staples and underweight position in Energy, which positively contributed to relative results for the year, were among the main causes for lagging the index during the quarter. With the exception of Kraft, stock selection also lagged within the Consumer Staples, further detracting from relative returns during the fourth quarter. 

Underweight positions in the surging Materials and Industrial sectors, an overweight to Healthcare, and cash also detracted from performance during the quarter. The Fund continues to hold a cash reserve, which served as a drag on returns amid a strong market rally, due to weak economic data and the limited availability of additional monetary and fiscal stimulus. 

Notable detractors among individual holdings included Oracle, Monsanto, and Bed Bath & Beyond. Oracle reported disappointing results, with earnings per share uncharacteristically missing consensus estimates by three cents. Results fell short across all products and geographies, leading us to trim the portfolio’s position. Monsanto was relatively weak within Materials even with higher inventories than forecasted, as corn stocks remain at multi-decade lows. With a less aggressive pricing strategy and several product cycles unfolding, we think the company seems poised to deliver strong volume/share gains even with modestly lower corn prices. Thus, we added to the position during the quarter. Bed Bath & Beyond disappointed some analysts’ high expectations for same store sales in its fiscal third quarter earnings report, despite upside in its earnings. We viewed the quarter favorably, with a healthy same-store sales increase on top of a series of strong numbers. We believe the company will be one of the faster growers among large-cap retailers and a long-term market share gain story, leading us to add to the position.

Overall stock selection in the Technology, Consumer Discretionary, and Energy sectors contributed positively to relative results for the quarter. Google, Visa, and Qualcomm within Technology all rose more than the sector. McDonald’s and Omnicom Group shined within Consumer Discretionary, with McDonald’s being reduced as the stock neared its all-time high and approached 5% of Fund assets. Omnicom was also eventually trimmed as about a third of its revenue comes from outside the U.S., which may be negatively affected by the European debt crisis.

Energy was the best performing sector in the index during the quarter. Although the Fund’s underweight position detracted overall from relative performance, stock selection within the sector outperformed. Among other individual stocks of note, pharmacy benefit manager Medco Health Solutions rose strongly. We increased the Fund’s position after the company reported earnings that exceeded expectations. We think the company should benefit from the announced merger with Express Scripts, which is expected to close during the first half of 2012. 

Buys and Sells

Three new positions were added to the portfolio during the quarter—Cisco Systems, General Electric, and Unilever. Networking firm Cisco has become more streamlined and focused, with its restructuring program expected to generate approximately $1 billion in annual cost savings.  We think strong free cash-flow and ample cash on its balance sheet can lead to higher dividends and increased share repurchases. The company is ideally positioned to benefit from continued growth in IP data traffic fueled by mobile, video and cloud technology.

We viewed diversified industrial manufacturer and service company General Electric as attractively valued given its nearly 4% dividend yield and leverage to late-cycle industries. In addition, we think conditions have improved at financial arm GE Capital. Unilever is a leading global consumer products company with a long tenure in Emerging Markets, faster growing regions that are now the source of 55% of the firm’s revenues. We think solid organic growth and a focus on improving operating margins could help the company to generate consistent double-digit earnings growth.

The position in JP Morgan, the Fund’s only Financials holding, was eliminated during the period. Although we had increased the position early in the quarter as the stock approached trough valuation levels from market lows in 1998, 2001 and 2008, we subsequently reduced and ultimately exited the position given its lack of relative earnings momentum.

Other noteworthy portfolio changes included the trimming of some Industrials and Technology names. Emerson Electric was reduced after the company reduced fiscal first quarter earnings guidance due to weaker than expected sales in its Network Power and Climate divisions. Fluor was trimmed after the stock rebounded nicely from recent lows and our concern about slowing economic growth. Within Technology, we eventually cut back on Accenture late in the quarter after having added to it earlier. A shift towards outsourcing versus consulting suggests to us entry into the later stages of the information technology services cycle. Finally, Apple was trimmed following the company’s uncharacteristic earnings miss. We believed upside was limited in the near-term as investors evaluated the competitive environment for the iPhone and iPad. 

Outlook

We expect a challenging and volatile stock market environment into the middle of 2012. With the U.S. economy expected to show very moderate growth, the European economy poised to enter a recession, and Emerging Market economies downshifting to reduced, but still above-average, rates of growth, global growth is slowing. Given this global slowdown and with corporate profitability already at record levels, investors are likely to be disappointed to find that corporate profit expectations for both the intermediate- and longer-term periods are generally too high. In addition to slowing economic and profit growth, investors will also have to contend with significant political uncertainty until U.S. voters determine which candidates can best solve our budget deficit, slower growth, and high unemployment problems. Clarity on these issues is unlikely until the middle of this year.

In our view, we are in the early stages of a rotation to higher-quality growth stocks such as those held in the Fund. In the challenging market environment that we expect in the months ahead, we believe these stocks may do particularly well as their valuations are attractive and their earnings growth is more assured. Longer-term, due to their financial strength and global diversification, we think these companies are positioned to provide sustained growth, and in many cases offer very attractive dividend yields in an environment where both growth and income yield will be scarce.

Montag & Caldwell Investment Counsel

As of December 31, 2011, Kraft Foods comprised 4.46% of the portfolio's assets, Oracle – 1.38%, Monsanto – 2.43%, Bed Bath & Beyond – 2.53%, Google – 4.73%, Visa – 2.94%, Qualcomm – 3.91%, McDonald’s – 4.21%, Omnicom Group – 2.11%, Medco Health Solutions – 2.52%, Cisco Systems – 1.89%, General Electric – 1.63%, Unilever – 1.30%, Emerson Electric – 1.42%, Fluor  – 1.32%, Accenture – 2.45%, and Apple – 4.06%.

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.

4th Quarter 2011

Full of Sound and Fury

The stock market in 2011 will best be remembered as a market “full of sound and fury, signifying nothing.” A year that began with promise retreated mid-year before rebounding sharply during the fourth quarter, with the late surge helping to secure modest returns for the calendar year. Macroeconomic events whipsawed the markets throughout the year as the European debt crisis, Asian natural disasters, and U.S. political wrangling drove investors into seemingly all or nothing mode as the “risk on/risk off” theme dominated the markets. Correlations remained high throughout, with 90% or more of stocks moving in the same direction on 69 trading days (27% of the time) during the year. Daily volatility was also a common factor as investors tried to gauge the extent to which macro events would drive the overall market and economy. The market closed up or down more than 2% 35 times in 2011, nearly 14% of all trading sessions.

The Fund’s Russell 1000 Value Index benchmark gained 13.1% during the fourth quarter, as improved economic reports in the U.S. overshadowed the European debt crisis that has been ongoing for nearly two years. All 10 benchmark sectors were positive, with eight sectors posting double-digit returns. Given the improvement in sentiment and uptick in economic activity, more cyclical areas assumed leadership of the market. Energy led all sectors with an 18.4% return, as better than expected economic growth drove a 25% increase in crude oil prices. The Industrials and Materials sectors followed close behind, boosted by newfound economic optimism despite retreating commodity prices, persistent weakness in developed market demand, and mounting signs of Chinese real estate softness.

More defensive areas of the market trailed as investors flocked to companies poised to take advantage of improved economic conditions. Telecommunication stocks trailed the broader market as AT&T recovered from their failed acquisition of T-Mobile, while Verizon suffered through 4G network outages denting their reputation for reliability. Utilities and Consumer Staples were the next worst performing sectors in the Russell 1000 Value as investors sought faster growing companies with better prospects for expanding earnings in an economic upturn.

Winners and Losers

The Fund underperformed the benchmark during the quarter (though it beat the index handily for the year) as enthusiasm about potential economic improvement drove investors towards more economically sensitive companies and sectors. Stock selection within Technology, Consumer Discretionary, and Materials was the largest reason for the underperformance. Indeed, holdings in Technology were responsible for nearly half of the relative underperformance as Oracle and Flextronics International suffered from a disappointing earnings report and negative forecast, respectively.

Oracle was the biggest detractor as the company reported earnings below guidance on softness across business lines and geographies and numerous deals were pushed into future quarters. Tech equipment manufacturer Flextronics was essentially flat as the company experienced softness in sales as the quarter progressed, largely in semi-cap equipment, but spreading into networking and telecom from client capital expenditures being delayed due to economic uncertainty. The company also took a one-time charge to accelerate its departure from the PC ODM business.

An underweight stake in the Materials sector, along with stock selection, also hurt relative performance as investors rushed to own more economically sensitive positions regardless of valuation. Vale SA, the world’s largest iron ore producer, traded lower as the company continues to deal with project delays and capital expenditure inflation despite a positive cycle for iron ore. Weakness in China, slowing output, and lack of product diversification also continued to weigh on the shares, though we think the attractive valuation and low consumer iron ore inventory make it a compelling story.

Stock selection and an underweight position in Consumer Staples was the largest contributor to relative performance during the quarter, while positioning within the Healthcare sector and a lack of exposure to Utilities also aided returns. Among the top individual contributors were Google, Western Digital, and Royal Dutch Shell.

Google was the best relative performer as the company reported strong third quarter results on the back of strong search growth (especially paid clicks), significant net revenue growth both in the U.S. and abroad, improved operating margins for the first time in a year, notable mobile growth, and impressive product launches including Google+ (40 million members). The strong results and momentum have led to raised guidance for revenues and earnings in 2012.

Western Digital recovered faster than expected after flooding in Thailand interrupted production of its hard drives, which helped raise expectations for revenue, earnings, and market share. Despite weakness in the integrated oil area that was a detractor from performance in the Energy sector for the Fund overall, Royal Dutch Shell was higher as the company reported earnings above expectations. The company benefitted from higher oil prices and strong downstream results, and remains one of the more attractive names in the space with one of the highest yields.

Portfolio Positioning

Despite strong absolute returns during the quarter, valuations remain compelling in our view, both on traditional measures and Cornerstone’s proprietary valuation work. Cornerstone’s Fair Value Model now indicates that 78% of the stocks in our 800-stock universe are undervalued. Using normalized earnings, we calculate the average price for the universe at 70% of fair value.

Aside from normal additions and trims, we added one new position (Parker Hannifin) to the portfolio and exited one (Life Technologies) during the quarter. Parker Hannifin manufactures a full line of diversified motion and control technologies and systems, including fluid power systems, electromechanical controls and related components-hydraulics, pneumatics, and vacuums. This is a cyclical company, but it has a history of pricing power due to the value-add and high tech nature of their products. The firm has been focusing on rationalizing and controlling costs at some of their more expensive manufacturing plants in the EU in addition to a great deal of cost cutting in the past years. These actions should put them in a better position to weather further storms and/or benefit from an economic upturn. The company has historically retained its engineering talent through downturns to maintain their technology base. Although it has a history of acquisitions, most are only in the $50 to $200 million range. The lack of transformative acquisitions and its historical ability to integrate acquisitions alleviates the risk of overpaying for growth or suffering from massive integration issues.

Biotech equipment developer Life Technologies was sold as a lesser idea in the portfolio to be replaced by a higher-quality, more-diversified name that had been punished during the quarter. We see a lot of Industrial stocks “on sale” at this time, so while there wasn’t a tremendous amount of new information at Life Technologies, it no longer was one of our 30 best ideas given the dip in valuation elsewhere.

Concluding Comments

The turning of the calendar has historically been a time for the so-called “experts” to prognosticate about the direction of markets in an attempt to predict an unpredictable future. Cornerstone does not attempt to forecast macroeconomic events. Rather, Cornerstone attempts to identify those successful companies trading at attractive valuations because of low expectations in an effort to protect capital. The past 12 months have seen earnings among benchmark companies rising to record levels, yet opportunities remain compelling throughout our investable universe as investors fret over macro concerns. Recent volatility offers an opportunity to own large, well-known, market-leading companies with strong cash-flow generation and clean balance sheets at valuations rarely seen. Certainly there are concerns surrounding the equity market, but as history has demonstrated these challenges create buying opportunities for patient investors. As these concerns abate over time, we believe discipline and patience are likely to pay off as the prices of these companies revert closer to fair value.

Cornerstone Investment Partners

As of December 31, 2011, AT&T comprised 2.34% of the portfolio’s assets, T-Mobile – 0.00%, Verizon – 0.00%, Oracle – 3.81%, Flextronics International – 2.34%,  Vale SA  – 1.81%, Google  – 4.40%, Western Digital – 3.49%, Royal Dutch Shell – 3.73%, Parker Hannifin – 2.04%, and Life Technologies – 0.00%.

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.

4th Quarter 2011

4th Quarter 2011

Intense Volatility

The volatility that has dominated equity markets in recent years did not abate during the fourth quarter of 2011. The market oscillated between fear and greed, declining each time the perceived liquidity or solvency risk in Europe grew, only to rebound after each intervention by the European Central Bank. By year end, the trailing 100-day volatility of the broad-market S&P 500 Index was at a level only seen three times (1987, 2002, and 2009) since the 1930s. Looking at the Dow Jones Industrial Average, there were 12 downward corrections of at least 5% in 2011, nearly double the long-term average of seven per year.

Despite a double-digit surge during the fourth quarter, there was little to show for all the market volatility in 2011. The Fund’s Russell 3000 Value Index benchmark ended almost at exactly the same point it started in posting a slight loss. For the year, there was a clear preference for stable cash flows as the Utilities and Health Care sectors dominated. The ongoing turmoil in European financial markets played a clear role in the massive underperformance of the Financials sector.

Overall, 2011 marked the first year since 2007 that large-cap stocks (represented by the Russell 1000 Index) outperformed small-caps (Russell 2000 Index). Growth outperformed value in both large-caps and small-caps among the component Russell style indices. The highest yielding stocks in the S&P 500 outperformed the lowest yielding by nearly seven percentage points per Ned Davis Research.

According to BofA/Merrill Lynch, high-quality stocks outperformed low-quality stocks by more than 11 percentage points in 2011, with fundamental-driven strategies the clear winners. Cash return strategies, including dividend yield, return-on-capital, and stock repurchase significantly led the more risky high-beta (volatility), low-price, and high earnings per share estimate dispersion strategies.

Dividend performance for 2011 was supported by a strong fundamental backdrop. During the year, 298 companies in the S&P 500 initiated or raised their dividends at an aggregate rate of more than 19%, the fastest growth rate since 1977. At the same time, rapid earnings growth has driven the estimated payout ratio down to a near-historic low.

Fourth Quarter Rally

Interestingly, results during the fourth quarter were almost the exact opposite of the full year trends. The Russell 3000 Value surged more than 13% as cyclical sectors such as Energy and Industrials significantly outperformed more defensive oriented Telecommunication Services and Utilities sectors. Leadership shifted as small-caps outpaced large-caps. Small-cap value led the way during the quarter, countering the dominance of large-cap growth during the full year. In addition, the lowest yielding companies outperformed the highest yielding by nearly six percentage points. There was no clear pattern in the relative performance of high- or low-quality, while the relative performance of fundamental- and momentum-driven strategies was mixed.

The Fund lagged the benchmark during the fourth quarter, though those results didn’t dent by much its substantial outperformance for the year. Both sector allocation and stock selection had a negative impact on relative performance during the quarter. Stock selection within Energy and Industrials subtracted the most, primarily driven by positions in Ship Finance International and Nordic American Tankers in Energy and Waste Management, Iron Mountain, and United Technologies in Industrials.

Shipping companies Ship Finance and Nordic American were also the two biggest individual detractors to relative performance. Ship Finance charters out 61 marine vessels under long-term contracts that provide stable cash flows outside of the volatile day-rate spot market. We trimmed the position significantly in August due to accumulated unrealized losses and the risk defaults by its charterers posed to the dividend. The shares continued to decline as the downturn in the shipping industry intensified during the quarter. Some classes of ships operated at cash flow negative rates for a significant part of the quarter, triggering the bankruptcies of some highly levered operators. This prompted an additional reduction in the position in November. In December, the firm’s second largest charterer announced a financial restructuring and recapitalization. Our concern that Ship Finance would be forced to reduce charter rates and cut its dividend came to fruition. We immediately exited the small position that remained.

Similar industry challenges pressured Nordic American’s profitability, leaving investors questioning the sustainability of its quarterly dividend. In October, we significantly reduced the position due to accumulated unrealized losses. In November, the company reported a difficult third quarter, as average gross spot rates dropped more than 50% and operating cash flow turned negative. Unlike its shipping industry peers, however, the management of Nordic American has not employed significant amounts of leverage. This allows the company to deploy its balance sheet in a counter-cyclical manner to support the dividend and opportunistically acquire vessels.  The Board of Directors elected to maintain the dividend, using its credit facility to support the payout. Even after acquiring three ships in recent months, net debt per vessel remains relatively low. Although we are confident that the firm will survive the downturn and reward shareholders when industry conditions improve, the October trim prudently reduces the risk if we are wrong.

Strong stock selection and an underweight position in Financials provided the most significant boost to relative performance during the quarter. The portfolio benefited from limited exposure to the largest U.S. financial institutions and strong contributions from third quarter additions BlackRock and PNC Financial Services Group. 

The largest individual contributor was Genuine Parts, distributor of NAPA brand replacement auto parts, industrial parts, office products, and electrical supplies. The firm reported a record third quarter on solid contributions from all four segments. Management also gave strong guidance for the remainder of the year and noted favorable fundamentals for the auto aftermarket, which represents approximately 50% of its sales and operating profits. On the strong results, we increased our Absolute Value target and maintained the Fund’s position.

Other top contributors during the quarter included railroad company Norfolk Southern and offshore drilling company Seadrill.  Norfolk reported solid results for the third quarter, including all-time quarterly highs for both operating income and earnings. In early December, all but one of its outstanding labor contracts was resolved, ending the threat of a major rail strike. We increased our Absolute Value for the stock and maintained the position. Seadrill management offered a positive outlook and announced a dividend increase. The firm’s Board of Directors decided to integrate this year’s quarterly special dividend into the regular payout and increase it, its seventh increase in the past eight quarters. Given Seadrill’s strong fundamentals, growing payout, and favorable outlook, we maintained the position.

2011 Winners

The Fund’s outperformance for the year was broadly distributed. Both sector allocation and stock selection had a positive impact on relative performance, with allocation positive in six sectors and stock selection in seven. Financials had the most significant impact due to both positive stock selection and the underweight position. Although it was the worst performing sector in both the portfolio and the benchmark on an absolute basis, the Fund’s holdings bested the index by more than seven percentage points. This strong relative result was almost entirely attributable to the lack of exposure to four companies—Bank of America, Citigroup, Goldman Sachs, and JPMorgan Chase.

The top individual contributors for the year were Genuine Parts, Duke Energy, and McDonald’s. As the market declined in August 2011, Duke and other utility stocks rose as investors sought the relative safety of regulated utilities. Shareholders approved the proposed merger of Duke with Progress Energy during the third quarter, but the merger did not close in 2011 due to delays in obtaining regulatory approvals. The combination would increase the regulated earnings from under 75% to more than 85% of the total, increasing the predictability of future cash flows and creating the largest utility in the U.S. We trimmed the portfolio’s stake in Duke in December as it traded above our Absolute Value despite the indication that the merger would be delayed.

McDonald’s posted strong mid-single digit same store sales growth every quarter during the year, balancing targeted value promotions (e.g. McNuggets, Sweet Tea) and highly successful menu additions (new smoothie flavors, oatmeal) to drive higher traffic. The company also managed margin pressures well, selectively increasing prices to limit the impact of inflation in the cost of its grocery bill. The company’s Board of Directors authorized a sizeable dividend increase in November and the company continues to execute its share repurchase plan announced in September 2009. We reduced the position during the latter part of the year on multiple occasions as the stock traded at a significant premium to our Absolute Value calculation. 

Only two sectors, Healthcare and Energy, had a negative total effect on the relative results of the portfolio. An underweight position and stock selection in Healthcare both had an adverse impact on performance, with only one of seven holdings in the portfolio outperforming the overall sector. The modest underperformance in the Energy sector was attributable to the previously mentioned holdings in the shipping industry, with Nordic American Tankers and Ship Finance International among the biggest individual detractors for the year as well as the fourth quarter.

In addition, institutional asset manager Federated Investors detracted from performance owing to its significant share in money market funds. The Federal Reserve’s announcement of its intention to hold the federal funds rate at effectively 0% until at least mid-2013 impaired our investment thesis. It became clear that, over 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. Moreover, some of the firm’s money 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 third quarter.

A Bottom-Up Perspective

Our strategy employs a true bottom-up approach to allocations among sectors and market-capitalization groups, letting individual stock selection dictate overall portfolio positioning. Since 2009, a significant shift has occurred in the portfolio. The weighting of small-cap stocks declined as we incrementally found more opportunities among mid- and large-cap companies.  This shift was a significant contributor to relative results in 2011, as the Fund’s large-cap holdings dramatically outgained its small-caps. In addition, attribution highlights the strong outperformance of our large-cap dividend payers in outperforming the benchmark’s large-caps.

The low interest-rate environment in 2011 made it increasingly difficult to find companies with yields in excess of 5% that met our investment criteria and were not already trading at a premium to our calculated Absolute Value, causing exposure to those types of holding to drop well below the Fund’s historical range. In our view, the near frantic demand for alternative sources of income has resulted in MLPs and REITs trading more on a relative value basis, rather than an Absolute Value basis. 

There were only modest changes in the relative positioning of the Fund during the quarter, with turnover relatively low. The portfolio weighting in Energy decreased primarily as a result of the sale of Ship Finance and Spectra Energy, along with the reduction in Nordic American Tanker, more than doubling the relative underweight in the sector. The Fund’s overweight to Industrials increased owing to the introduction of Republic Services to the portfolio and an increase to the position in Lockheed Martin.

A total of five new positions were established during the quarter, the largest being Dr Pepper Snapple Group. Dr Pepper is number three in the North American liquid refreshment beverage business behind Coca-Cola and Pepsi. The Dr Pepper and 7UP brands are iconic leaders in their categories and the company has cobbled together commanding leadership positions in other flavored soda categories, including ginger ales (Canada Dry & Schweppes), orange sodas (Sunkist, Crush, Orangina), and root beers (A&W, IBC, Stewart’s, and Hires). Since being spun out of Cadbury in 2008, management has used the company’s significant cash flow to initiate and increase the dividend, repurchase shares, and pay down debt. Most recently, in May 2011, its Board of Directors announced a sizeable dividend increase. At the time of initial purchase, the stock was trading at a 10% discount to our assessed Absolute Value and had a 3.4% yield. 

Outlook

Our macroeconomic outlook has changed very little in recent months and, unfortunately, there is no reason to expect that the volatility that dominated 2011 will decline in 2012. Solvency issues in Europe remain largely unresolved and austerity efforts are having a negative impact on economic activity in the region. Saber rattling with Iran is intensifying, which threatens to add volatility to oil prices and could ultimately pressure the ongoing recovery in the U.S. In addition, just as we could not have anticipated the Japanese tsunami or Arab Spring, there are likely some surprises in store for the markets in 2012.

Almost unnoticed amid all the focus on Europe, the U.S. economy ended the year with surprisingly strong momentum. Unemployment claims remained below the critical 400k level, consumer sentiment rebounded, inflation declined, railcar loadings and steel production increased, and lastly, inventories reportedly surged providing an unexpected boost. The strength of the recent U.S. economic reports suggests the growth is more robust than in the past. This stands in stark contrast to the emerging recessionary pressures throughout much of Europe. It is unclear if this “decoupling” will continue in the coming year. For now, management teams of the companies we follow noted that visibility has declined but, to date, the actual impact on business has been minor.     

We think the fundamental outlook for dividend-focused strategies remains very strong. As noted at the beginning of this commentary, dividend growth accelerated during the fourth quarter at the fastest growth rate since 1977 and the payout ratio for the S&P 500 remained at historic lows.  We expect dividend growth will continue to be robust in 2012 due to the low payout ratio and increased investor demand for dividends. We continue to see significant press coverage and investor interest in dividend strategies due to strong performance and increasing demand for income in a zero interest rate environment.

That said, a number of articles in the press have begun to urge caution, noting that overly focusing on a stock’s dividend yield may lead to a poor outcome. We agree with this view. An investor whose sole concern is the relative yield of a relatively safe and predictable asset could end up taking on considerable interest-rate risk and may not be prepared for the capital losses that could occur. Buying an overvalued stock for yield is similar to buying a bond at a premium just because it has a higher coupon. The income stream may be attractive but there is a risk of capital loss that must be evaluated. This is why we employ a process that seeks to balance both valuation and yield. We believe demanding a discount at the time of purchase not only reduces downside risk, but also the Fund’s exposure to interest-rate risk and short-term investment fads. 

At the end of the third quarter, we noted that the discount-to-value in the portfolio after the summer pullback was attractive but not as compelling as in our other long-only strategies. Thus, we were not surprised that the Fund underperformed modestly as the market rallied sharply in October. By the end of 2011, the average discount-to-value was back to its second quarter level of 91% of our calculated Absolute Value. This is at the high end of its historical range and has been a good indicator that the portfolio is fairly valued.

In recent quarters we have noted that our focus remains on quality, stock selection, and risk management and this has not changed. Given our expectation that 2012 will be volatile, we see no reason to alter that focus in the near future. We view market pullbacks as opportunities to establish positions in companies previously not trading at steep enough discounts. We remain steadfast in concentrating on stocks with high and growing dividends, healthy balance sheets, and attractive valuations. 

River Road Asset Management

14 January 2012

As of December 31, 2011, Ship Finance International comprised 0.00% of the portfolio's assets, Nordic American Tankers – 0.38%, Waste Management – 1.90%, Iron Mountain  – 0.94%, United Technologies – 1.12%, BlackRock – 1.34%, PNC Financial Services Group – 0.79%, Genuine Parts – 2.29%, Norfolk Southern – 2.32%, Seadrill – 1.72%, Duke Energy – 1.53%, McDonald’s – 1.17%, Federated Investors – 0.00%, Republic Services – 0.96%, Lockheed Martin – 1.55%, and Dr Pepper Snapple Group – 0.98%.

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.

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 December 31, 2011, China Mobile comprised 2.99% 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

International equities, as defined by the Fund’s MSCI EAFE Index benchmark, rose more than 3% during the fourth quarter, helping to recover some of the losses that occurred during a poor third quarter. The global economic recovery is continuing, but at a weak pace and with the main risks that we have highlighted before—a European banking/sovereign default, a China slowdown, or a relapse into recession—still present.

The United Kingdom (UK) was the best performing region of the globe, gaining 9.1%, followed by Pacific ex-Japan region. Japan was the worst performing region in posting a loss of 3.8% during the period. Emerging Markets slightly outperformed the benchmark. On a sector basis, Energy was the best performing area in the benchmark in rising nearly 15%, followed by more modest gains in Consumer Staples and Healthcare. Utilities was the worst performing sector, dropping 4.5%.

Regional Boost

The Fund slightly outperformed its benchmark during the quarter as asset allocation by region and sector were both positive while stock selection was somewhat negative. An underweight position in Japan, an overweight stake in the UK, and an allocation to Emerging Markets marginally aided returns regionally. The positive effects of an overweight to Energy and underweight to Utilities were offset somewhat by an overweight position in the lackluster Technology sector.

Stock selection was negative owing mainly to holdings in the Materials sector and weak stock selection in the UK. Precious metals miners and agricultural commodity stocks suffered during the quarter on the back of weaker commodity prices. Within the UK, auto insurer Admiral Group dropped noticeably following a weak earnings report.

Those disappointments were offset by solid picks in Europe ex-UK and within Industrials and Healthcare. German pharmaceutical company Bayer AG and asset manager Julius Baer were the portfolio’s two best European stocks. Rolls Royce and Keppel performed well within Industrials, while Sanofi, Shire, and Teva Pharmaceutical were the standouts in Healthcare alongside Bayer.

Few changes were made to the portfolio during the quarter. The Fund received cash for its holding in software company Autonomy Corp following its acquisition by Hewlett Packard. The proceeds were then invested into German software company SAP. We believe SAP should continue to see good sales to corporate clients in 2012. 

The Fund sold its holding in Norwegian fertilizer producer Yara International. We still favor agricultural commodity exposure and continue to hold potash producers as well as seed and agricultural chemical companies, however, we felt that urea fertilizer prices looked extended and decided to exit the holding in Yara.

Europe in Trouble

Of the three market risks noted at the beginning—a European banking/sovereign default, a China slowdown, or a relapse into recession—Europe continues to dominate the headlines, and its problems continue to escalate and broaden. We began 2011 worried mostly about Greece and Ireland. Those countries have now been joined by Italy, Spain, Portugal, and Belgium. France is not immune to the crisis given that its banking sector has much exposure to Europe’s problem areas and the country’s AAA credit-rating is in jeopardy as a result.

The potential impact of the European sovereign debt crisis on the global economy is not trivial. History’s largest sovereign default was Argentina’s default on $82 billion of bonds in 2001. By comparison, outstanding Greek sovereign bonds are six times that amount and for Italy it is a staggering 33 times.

Looking at the economic issues for peripheral Europe, Greek unemployment is now at 17%, Spain is at 21%, Ireland is at 14% and Portugal is at 12%. Youth unemployment is approaching 40% for some in the region, and all of these economies are seeing weak growth that will likely lead to a recession in 2012. So the prospect of employment improving in the near term is unlikely.

In general, European policies over the past year have been designed not to bring a resolution to the issues, but to buy time in the hopes that a less painful solution to the crisis might appear—popularly referred to as the “kicking the can” approach. In our view, this cannot continue because peripheral European governments are now struggling to borrow on acceptable terms, because European banks are now struggling to fund themselves, and because unemployment is now leading to rising social unrest. To us, it looks like Europe will have to make some hard choices in 2012.

It is important not to be too negative about European equities, however, because we believe one of the choices that will be made in 2012 will be the European Central Bank (ECB) deciding to increase the amount of debt monetization it undertakes—effectively a victory of French interests over German interests at the ECB. This move would be quite supportive for European equities and has actually already begun. 

In December, the ECB launched a massive liquidity facility in its Long-Term Refinancing Operation (LTRO). The facility provides unlimited repurchase based lending for up to three years on qualifying collateral. It is mainly aimed at supporting the European banking sector, though we expect the resulting expansion of the ECB balance sheet to be broadly positive for equities.

China and the Global Economy

China’s economy continues to slow but its economic problems are not yet as critical as Europe’s. China also has more policy options, such as the Chinese government’s recently announced measures to stimulate domestic spending in 2012. We do not believe that this will include the housing sector where authorities have indicated they want to see prices come down to improve affordability. The resulting stimulus is unlikely to have the multiplier effect that the massive lending boom of 2008-2010 had, but it should still be a positive for the Chinese economy. Against this we expect the Chinese housing sector and related industries to continue to struggle.

For the global economy, the US has been the relative bright spot. A below trend gradual economic recovery continues. Given what is happening in Europe and China this has to be seen as a fragile recovery. Still, housing looks to be near its bottom, exports are recovering, and unemployment looks to be falling.

Growth Prospects

With this as our top-down view, the focus of the portfolio has been on the few areas of growth in an otherwise weak global growth environment and on areas where demand is less sensitive to the economic cycle—much the same as we have been saying for the past two years.

One of these areas is Internet-related companies. Online commerce continues to take market share away from conventional commerce. In international markets this trend has a long way to go. Despite the cycles that we see in overall spending, the market share gains by online commerce has given these companies a better growth rate of sales. We continue to look for new growth ideas in this area.

In Europe we continue to avoid owning banks, many of which are potentially insolvent. The liquidity provided to the banks by the ECB is merely life support, whereas the liquidity that reaches strongly capitalized companies with dominant positions in solid industries can lead to growth. We remain focused on finding more these strong companies that the crisis has left trading at attractive valuations relative to their level of growth, particularly those with exposure to US markets.

One example of this type of European company is German pharmaceutical company Bayer. It manufactures and sells its products globally and has one of the strongest new product pipelines in the pharmaceutical industry. After a strong fourth quarter it still only trades on a forward price/earnings ratio of not much more than 10 times earnings. 

We have also favored companies that are less dependent on bank funding. Companies with strong balance sheets that are self-funded out of their internally generated cash-flow have a funding advantage in the current climate of financial stress. This is particularly true of European firms, which tend to be much more dependent on bank lending for their growth. Many Energy and Healthcare companies fall into this category.

Neither gold miners nor agricultural commodity stocks performed well during the quarter, particularly in December. Still, we continue to like this part of the market. Both areas are driven by demand from factors other than the economic cycle, and both benefit from liquidity and loose monetary policy. Though liquidity had been tightening by the end of last year due to European bank deleveraging, the response by the ECB to expand their balance sheet, plus continued loose monetary policy conditions throughout the western world, will remain supportive for non-economically sensitive commodities. 

Baring Asset Management
London, UK

As of December 31, 2011, Admiral Group comprised 1.21% of the portfolio's assets, Bayer AG – 2.17%, Julius Baer Group – 1.90%, Rolls Royce – 1.57%, Keppel – 1.58%, Sanofi – 2.02%, Shire – 1.54%, Teva Pharmaceutical – 1.93%, and SAP AG – 1.59%.

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.

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.

4th Quarter 2011

In 2011, the market experienced the third year out of the past four where the correlations of stocks within the broad market S&P 500 Index to the overall index spiked above the 80% level. This is unprecedented. Prior to the great recession of 2007 to 2009, this had only happened once since 1974—during the Crash of 1987. Furthermore, according to Jason Goepfort of sentimentrader.com there were 44 days in 2011 in which 90% of the trading volume in the market was either up or down. That was the most since 1946, when there were 46 occurrences. To our surprise, it was worse than 2008, which had only 35 occurrences. To put that into perspective, there were only 29 such days in the entire decade of the 1990s! Such an environment is difficult for our strategy.

In an environment where the instantaneous “risk on/risk off” mindset has taken hold, and Utilities are delivering 20% plus gains as the best performing sector, it’s not going to be a good year for this Fund. In our view, 2011 will be looked back on as an outlier. The mistake we made was to think that the double-dip recession scenario was off the table based on almost every measure of economic data. In retrospect, we were right, but that didn’t matter. Defensive and value-centric factors clearly ruled the day thanks largely to policy uncertainty in Washington and Europe.

The Fund substantially trailed its Russell 1000 Growth Index benchmark  during in the fourth quarter as November saw a resumption of the downward trend after the big move up in October, only to be followed by a flattish to down December both by the portfolio and the market. The biggest loser during the period was Rovi, the fully integrated digital entertainment company, which lowered guidance in November due to the fall off in some legacy business from Sonic Solutions. We had cut this position back in September to reduce risk, but a 43% loss during the quarter still hurt. The Fund still holds this position because we believe the core digital business is still growing at the healthy clip, with robust margins. It is an $800 million revenue company that has more than $1billion in advertising potential as the source of interactive programming guides for TVs across America. Rovi also earned the distinction of being the worst name in the portfolio for the year as well. The biggest contributor to relative performance was Dish Network, a new addition during the quarter that rose sharply after purchase.

Whatever sectors worked in 2009 and 2010 were relegated to the basement in 2011. The market theme was defense, as many feared the potential for a double dip recession that didn’t come. Nevertheless, we did an extremely poor job investing in Technology in the Fund during the year. The portfolio was positioned more for economic expansion with semiconductors as opposed to the more-defensive software-related area that was up modestly. Semiconductor holdings were down 27% for the year, costing the Fund more than nine percentage points in performance versus the benchmark. Energy holdings in the Fund were even worse than Technology, down 35%, owing to our atrocious timing. Several positions were purchased in late July just before the S&P downgrade of U.S. debt, and were the ultimate victims of the macroeconomic trade. Healthcare was one of the few bright spots, up 13% led by Humana, and adding positively to relative returns.

Although 2011 was a disappointing year, it has not tempered our enthusiasm for 2012 and beyond. We feel the Fund is positioned in several fast growing areas with the overall portfolio trading at 14 times next year’s earnings, which are forecasted to grow by more than 15%. The $64,000 question is whether markets will in some sense move back to a state of normality, and what that means for correlations.

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

January 11, 2012

As of December 31, 2011, Rovi comprised 1.64% of the portfolio's assets, Dish Network – 4.80%, and Humana – 2.31%.

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.

4th Quarter 2011

In 2011, the market experienced the third year out of the past four where the correlations of stocks within the broad market S&P 500 Index to the overall index spiked above the 80% level. This is unprecedented. Prior to the great recession of 2007 to 2009, this had only happened once since 1974—during the Crash of 1987. Furthermore, according to Jason Goepfort of sentimentrader.com there were 44 days in 2011 in which 90% of the trading volume in the market was either up or down. That was the most since 1946, when there were 46 occurrences. To our surprise, it was worse than 2008, which had only 35 occurrences. To put that into perspective, there were only 29 such days in the entire decade of the 1990s! Such an environment is difficult for our strategy.

In an environment where the instantaneous “risk on/risk off” mindset has taken hold, and Utilities are delivering 20% plus gains as the best performing sector, it’s not going to be a good year for this Fund. In our view, 2011 will be looked back on as an outlier. The mistake we made was to think that the double-dip recession scenario was off the table based on almost every measure of economic data. In retrospect, we were right, but that didn’t matter.

The Fund substantially trailed its Russell 2000 Growth Index benchmark  during in the fourth quarter as November saw a resumption of the downward trend after the big move up in October, only to be followed by a flattish to down December both by the portfolio and the market. The biggest loser during the period was Rovi, the fully integrated digital entertainment company, which lowered guidance in November due to the fall off in some legacy business from Sonic Solutions. We had cut this position back in September to reduce risk, but a 43% loss during the quarter still hurt. The Fund still holds this position because we believe the core digital business is still growing at the healthy clip, with robust margins. It is an $800 million revenue company that has more than $1billion in advertising potential as the source of interactive programming guides for TVs across America. Rovi also earned the distinction of being the worst name in the portfolio for the year as well.

The biggest contributor to relative performance during the quarter was Akorn, a generic pharmaceuticals company that is the second largest holding in the Fund. It has continued to put up solid quarters and enjoy a deep pipeline of drugs coming to market.

Whatever sectors worked in 2009 and 2010 were relegated to the basement in 2011. The market theme was defense, as many feared the potential for a double dip recession that didn’t come. Nevertheless, we did an extremely poor job investing in Technology in the Fund during the year. The portfolio was positioned more for economic expansion with semiconductors as opposed to the more-defensive software-related area that was up modestly. Semiconductor holdings were down more than 40% for the year, costing the Fund more than 10 percentage points in performance versus the benchmark. Performance within Industrials was also down, as anything the least bit economically sensitive seemed to be out-of-favor. Financials was a mixed bag, with the chief culprit to the downside the portfolio’s exposure to various hotel REITS. One bright spot was Post Properties, a multi-family apartment operator, which enjoyed one of its best years ever.

On the positive side for the full year, the portfolio’s Healthcare positions were up strongly, and holdings in Consumer Staples, Energy, and Materials contributed positively to results. Elizabeth Arden and Hain Celestial are the two Staples holdings that both delivered. Returns within Energy were driven by exposure to the oil fracking phenomenon, with names like Basic Energy and Key Energy the primary drivers. Materials benefited from Zagg, the maker of protective materials for electronic devices, and Kronos, a producer of titanium oxide producer that was in short supply last year.

Although 2011 was a disappointing year, it has not tempered our enthusiasm for 2012 and beyond. We feel the Fund is positioned in several fast growing areas with the overall portfolio trading at 16 times next year’s earnings, which are forecasted to grow significantly. This compares to 20 times for the index and earnings growth at a much slower pace. The $64,000 question is whether markets will in some sense move back to a state of normality, and what that means for correlations. 

B. Anthony Weber                 Charles F. Mercer, Jr. CFA              Michael E. Johnson, CFA
January 11, 2012

As of December 31, 2011, Rovi comprised 0.96% of the portfolio's assets, Akorn – 3.10%, Post Properties – 2.56%, Elizabeth Arden – 3.14%, Hain Celestial – 1.73%, Basic Energy – 1.40%, Key Energy – 1.18%, Zagg – 0.00%, and Kronos – 0.00%.

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.

4th Quarter 2011

One of the Most Volatile Years on Record

Stocks soared during the fourth quarter as investors responded to both improving U.S. economic trends and a series of actions taken by the European Central Bank intended to stabilize that region’s financial markets. Small-cap stocks led the rally, with the Russell 2000 Index gaining more than 15% versus just under 12% for the more large-cap oriented S&P 500 Index. For the full year 2011, however, large-cap stocks outperformed—with the S&P 500 and Russell 1000 indices posting modest gains versus a 4% loss for the Russell 2000. This marks the first year since 2007 that large-caps outperformed small-caps.

It was also a remarkably volatile year, with indices posting some of their best AND worst quarterly returns on record. According to Ned Davis Research, the trailing 100-day volatility of the S&P 500 was at a level only seen three times (1987, 2002, and 2009) since the 1930s. In addition, the 12 downward corrections of at least 5% experienced by the S&P 500 during 2011 was nearly double the long-term average. Among other major asset classes, US Treasury Bonds was the best performing for 2011, followed by Gold—last year’s leading asset class.

From a style perspective, growth outperformed value during 2011 among the component parts of the Russell 2000. This marks the third consecutive year that growth outperformed value. Defense was the best offense with Utilities and Health Care posting the highest total returns, while Telecommunications and Energy posted the lowest. Leadership transitioned to low-beta (volatility) and high-quality stocks—a stark contrast from the prior two years. Within the Fund’s Russell 2000 Value Index benchmark, the lowest beta stocks (first quintile) outgained the highest beta (fifth quintile) by a staggering 26 percentage points. From a quality perspective, stocks in the highest quintile for return-on-equity (ROE) returned 21 percentage points more than stocks in the lowest ROE quintile.

Another leadership theme during 2011 was dividends. According to BofA/Merrill Lynch analyst Savita Subramanian, dividend yield was the top performing quantitative strategy in the S&P 500, while within the Russell 2000 Value, dividend-payers bested non-payers by a healthy margin for the full year.

We noted early on in 2011 that given the market’s robust returns and high-beta/low-quality leadership, an unusually large percentage of small-cap value managers were outperforming the benchmark. From our perspective, that trend reflected not only heightened equity correlations, but also that value managers had jumped on the risk bandwagon. We warned that investors and their advisors should take note of the trend, as managers that were chasing risk were likely to underperform as the market transitioned into the mid-stage of the recovery. By the end of 2011, only 57% of active small-value managers had beaten the benchmark’s return.   

Fourth Quarter Rally

In a reversal of the year’s trend, the fourth quarter equity rally was accompanied by a resurgence in high-beta stocks, which had underperformed the previous two quarters. Value outperformed growth across all market-caps. Within the benchmark, the highest beta stocks (fifth quintile) surged ahead of the lowest beta stocks (first quintile) by 16 percentage points. Lower quality stocks (in terms of ROE) continued to lag, however. All 10 economic sectors within the benchmark posted a positive total return, with Industrials delivering highest the highest total return and Telecomm the lowest. 

The Fund substantially underperformed the benchmark during the quarter due to the portfolio’s cash position and ongoing defensive security selection. The strong recovery in the small-cap market that began in early October drove positive absolute returns.

The largest detractors from performance during the fourth quarter were American Greetings, Bill Barrett, and Federated Investors. Greeting-card company American Greetings declined after announcing disappointing third quarter earnings. Although the business generated higher than expected revenue growth, the cost to obtain this growth weighed heavily on operating margins. Our initial valuation assumed higher revenues and lower margins, but we did not expect the decline in margins to be so abrupt. While encouraged by American Greetings’ ability to grow revenues in a stagnant industry, we have slightly reduced our normalized free cash flow assumption until we can better determine the profitability of new business. We plan to update our valuation quarterly and continue to hold the position as long as the stock trades below that valuation calculation.

Natural gas spot prices declined 19% during the quarter, most likely contributing to exploration and production company Bill Barrett’s poor stock performance. Although Bill Barrett has hedged 50% of its 2012 production, an extended period of low natural gas prices would be concerning. We will continue to monitor this risk closely and expect to update our Bill Barrett valuation in early 2012. Federated’s money market business, which historically generated 50% of revenue, continues to be negatively affected by an extraordinarily low interest-rate environment. Earnings are likely to remain below normalized levels as Federated continues to waive a significant portion of the fees on its money market funds. The uncertainty is putting pressure on Federated’s stock, as is the industry’s widely publicized exposure to European banks. In August 2011, we reduced our normalized free cash flow assumption and corresponding valuation after the Federal Reserve indicated that short-term interest rates would remain depressed longer than we anticipated. We believe our revised valuation appropriately considers the risks noted above and the Fund continues to hold the stock.     

Among the Fund’s winners during the quarter were Brown & Brown, Core-Mark Holdings, and UniFirst. Brown & Brown, the seventh-largest domestic insurance agency, reported positive organic revenue growth in three of its four segments. Although total organic growth remained negative, the firm continued to demonstrate excellent cost controls and reported strong operating profitability. The company also raised its dividend and authorized its first ever stock repurchase program during the period. Core-Mark is a market leading distributor servicing convenience stores.  In November, it reported positive results that included solid sales growth and strong free cash flow generation. It also recently signed a contract with Couche-Tard, a leading convenience store operator based in Montreal, to service 980 convenience stores in the Southeast and Florida. 

Incorporated in 1950, UniFirst is a market leading manufacturer and distributor of workplace uniforms. Although unemployment remains elevated, the company continues to report positive revenue growth in its core laundry business, generating strong organic sales growth during its fiscal fourth quarter of 2011. We believe UniFirst has adapted to a challenging operating environment and continues to win new accounts and gain market share. Management expects sales and earnings growth to continue in 2012.     

Positive Year

Despite the lackluster quarter, the portfolio delivered solid gains for the year in outgaining the Russell 2000 Value by more than 13 percentage points as the benchmark lost ground in absolute terms during the year. The Fund’s results were driven by equity selection.

The top three contributors in the portfolio for the year were Aaron’s, Papa John’s International, and Total Systems Services. Aaron’s, one of the top two rent-to-own retailers, benefited from a stagnant economic environment and tight consumer credit which drove increased customer traffic throughout 2011. Pizza chain Papa John’s experienced strong sales comparisons in its network of stores throughout the year and improved profitability from its international operations. As the leading domestic third-party credit card processor, Total Systems Services posted favorable operating results, growth in same-client transactions, and increasing international market share. 

The bottom three contributors for the year were American Greetings, Federated Investors, and ManTech International. In addition to the specific fourth quarter woes noted earlier, American Greetings suffered from concerns about the future growth of the greeting card industry as well as reduced profitability associated with its increased distribution. ManTech, a leading provider of information technology services to the U.S. military and government agencies, performed poorly due to concerns about contract delays and future reductions in federal government spending.

Portfolio Positioning

Cash levels in the Fund increased from 41% at the beginning of the fourth quarter to 47% by the end of the year. The opportunities that began to appear towards the end of the third quarter were fleeting as small-cap stocks vaulted higher early in fourth, with the Russell 2000 Value increasing more than 14% in October alone. Although we were able to take advantage of the volatility in the third quarter by increasing position sizes and adding new holdings, in hindsight, our gradual approach to investing cash may have been too conservative. As an absolute return portfolio, however, our objective is to avoid being overly aggressive until we can find enough opportunities at prices that offer adequate returns relative to their risk.

Prices in our opportunity set of small-caps clearly improved during the fall, but in our opinion, did not decline to levels that provided the attractive potential returns necessary to validate aggressive positioning. The lack of the required discount-to-value was especially noticeable among the highest quality businesses that we look at. With high-quality small-caps now in favor, it is increasingly difficult to achieve absolute rates of return that we require on potential new positions. Thus, the portfolio remains defensively positioned as we await a more favorable pricing environment.

The largest new position added during the quarter was Steris, a leading provider of infection prevention and sterilization products. As the only domestic provider of a full line of sterilization equipment, Steris benefits from being an ideal partner for large hospital networks and group purchasing organizations. Although the firm’s capital equipment sales are inherently cyclical and driven by hospital capital spending, its new management team has successfully increased its mix of recurring consumable and service revenue while controlling expenses in a strong bid to raise margins. A recent product transition, among other factors, has depressed margins and free cash flow generation the past year. We think that Steris is an established market leader with a strong balance sheet and free cash-flow generation capability that sells at a sufficient discount to our calculated valuation.     

Outlook

The information gathered during the quarter from the 300 small-cap companies we follow continues to indicate a slow growth operating environment. The majority giving guidance for 2012 expect a business climate similar to that in 2011. On average, margins and cash flows remain resilient as companies performed well in what most call a “challenging” environment. Although many raw material prices moderated during the fourth quarter, costs on average remain higher year-over-year. Most of the businesses we follow successfully passed on higher costs to their customers, although some experienced volume declines. Several businesses noted concern regarding a possible slowdown in Europe and China, but have yet to see meaningful declines in business trends. Companies have also communicated an elevated level of uncertainty in their forecasts even though operating results are not expected to change meaningfully in the near future.

As investors search for certainty in an uncertain economic world, we believe investors may be overpaying for quality and, ironically, could be increasing their risk exposure in their attempts to reduce risk. A popular investment acronym used by growth investors is GARP, which stands for “growth at a reasonable price.” To fit our philosophy, we modified this acronym to QARP, or “quality at a reasonable price.” A high-quality business can be a poor investment if the price does not provide the investor with an adequate return relative to risk. Although higher quality small cap businesses often have less risk, they are not risk-free—like all investments, a suitable return potential remains necessary. 

Assuming investors continue to increase the price they are willing to pay for certainty in 2012, we expect to continue selling several of the portfolio’s core holdings that approach or exceed our valuation estimates. We plan to reinvest these proceeds into companies that we believe provide us with adequate potential returns relative to the risk assumed. Although several new positions in the portfolio have short-term operating challenges, such as the Steris product transition highlighted previously, we remain committed to only buying high-quality businesses. The Fund’s recent purchases have long operating histories, established market share positions, strong balance sheets, and a history of consistent free cash-flow generation.

The high degree of volatility in 2011 caused higher than expected turnover in the portfolio as the valuations of many of the small cap businesses we follow fluctuated meaningfully throughout the year. Assuming volatility remains elevated, we could experience above average levels of turnover in the portfolio again in 2012. With high cash levels and a long list of small-cap equity investments that we would like to own at more advantageous prices, we believe the Fund is well positioned to take advantage of future uncertainty and the resulting opportunities stock price volatility can bring.  

River Road Asset Management

6 January 2012

As of December 31, 2011, American Greetings comprised 1.83% of the portfolio's assets, Bill Barrett – 2.62%, Federated Investors – 1.24%, Brown & Brown – 2.53%, Core-Mark Holdings – 3.14%, UniFirst – 2.45%, Aaron Group's – 0.00%, Papa John’s International – 1.25%, Total Systems Services – 3.47%, ManTech International – 1.55%, and Steris – 1.43%.

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. 

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.

4th Quarter 2011

Market Rebound

Stocks rebounded nicely off their early October lows as more encouraging economic data in the U.S. put to rest fears of a double-dip recession. European leaders also successfully bought themselves more time to deal with their systemic debt issues with a program allowing the European Central Bank to supply additional liquidity.

The fourth quarter capped a volatile year for stocks that saw a variety of exogenous events, including the tragic earthquake and tsunami in Japan, the Arab Spring revolts, the Washington debt ceiling stand-off and subsequent U.S. credit downgrade by S&P, an unfolding European sovereign debt crisis, and severe flooding in Thailand. In retrospect, it is quite remarkable that despite all these events that the broader stock market (as represented by the S&P 500 Index) eked out a small gain for the year. Through it all the U.S. economy continued to expand, albeit modestly, and corporate profits registered solid gains in helping to underpin stocks.

The heightened uncertainty these events created, however led investors to seek out safety and quality.  Defensive groups such as Consumer Staples and Utilities typically did well, while more cyclical sectors such as Financials and Materials did not. Fundamental factors such as low beta (volatility), high return-on-equity (ROE), and high dividend yield also tended to lead to superior share gains. According to Bank of America/Merrill Lynch, stocks rate B+ or better outperformed those rated B or worse by more than 11 percentage points in 2011, after lagging significantly the prior two years.

Among the Russell indices, mid-cap stocks outperformed large-caps but lagged small-caps during the quarter. For the year, it was the reverse as mid-caps performed better than small-caps but not large-caps. In terms of style, the Fund’s Russell Midcap Growth Index benchmark slightly lagged its Russell Midcap Value Index counterpart for both the quarter and the year, not altogether surprising given the quality bias in the market. Fortunately, the portfolio was well positioned for the shift to quality this year, resulting in a year of strong outperformance for the Fund relative to the benchmark.

Positive Territory

The portfolio delivered double-digit gains in besting the index during the quarter. For the year, the Fund managed to deliver positive returns while the benchmark lost ground. For both the quarter and full year, strong stock selection superseded sector allocation as the biggest contributor to performance versus the index. In particular, strong selection within Consumer Discretionary, Technology and Industrials led the way. Among the biggest individual contributors to relative performance were Industrial firms Robert Half International and Donaldson, Internet networking specialist F5 Networks in Technology, and Energy companies Oceaneering International and Core Labs.

An overweight stake further added to the outperformance within Industrials during the quarter with Jacobs Engineering and Joy Global contributing. Jacobs reported a solid September quarter that marked a further acceleration in bookings, revenue, and earnings growth, leading us to increase the portfolio’s position in the stock. We think Joy Global can continue to deliver above-average earnings growth, and increased the position amid periods of market weakness during the quarter when there were opportunities to add at an attractive valuation.

Underweight stakes in Energy and Materials—among the best performing areas of the index during the quarter— detracted from relative returns, while the performance of the Fund’s Healthcare holdings were mixed. Varian Medical Systems and Dentsply outpaced its sector peers, but Quality Systems, Waters, and St. Jude Medical lagged. Quality Systems corrected following strong year-to-date gains after the company indicated that market growth had transitioned primarily toward replacement activity versus organic growth. St. Jude announced that a promising new product, CardioMEMS, failed to win FDA Advisory Panel approval, diminishing future growth prospects. We sold the portfolio’s position following the news.

Notable individual detractors from performance included Newfield Exploration, Polycom, and Mead Johnson Nutrition. Oil and gas producer Newfield suffered, and was sold, after an earnings disappointment and significant downward revision to 2012 production forecasts undermined our original investment thesis. An earnings disappointment caused videoconferencing equipment maker Polycom to significantly underperform. We believe the setback to be transitory, presenting an opportunity for us to add to the position at more attractive prices.

Mead Johnson declined sharply late in the quarter as a bacteria scare involving the death of an infant in Missouri led Wal-Mart and other retailers to remove Mead Johnson’s Enfamil infant formula from store shelves while an investigation took place. We immediately trimmed the Fund’s position due to uncertainty regarding the source of the contamination and the length of the investigation. Fortunately, subsequent tests by both Mead Johnson and the FDA exonerated the company, meaning product sales could resume. We expect the financial impact of this incident will prove to be relatively minor and expect the shares to fully recover in time.

Positioning and Outlook

The Fund established one new position during the quarter in leading data warehousing vendor Teradata. We think the company is well positioned to capitalize on rapid growth in data collection and rising corporate adoption of business intelligence analytics.

Conversely, three positions were sold from the portfolio. In addition to Newfield Exploration and St. Jude Medical, asset manager Eaton Vance was eliminated. Eaton Vance reported an earnings disappointment that suggested to us that both cyclical and structural forces were at work against the company. We redeployed the proceeds from the sale into other financial firms such as Intercontinental Exchange and MSCI. We think Intercontinental stands to benefit from the migration of derivative/futures trading to exchanges, and MSCI continues to benefit from the trend towards passive investing and flows to ETF products.

Looking ahead, we expect the challenging and volatile stock market environment to continue until the middle of this year. Although recent data on U.S. employment and housing activity are encouraging, fears about the fallout from a potentially severe European recession, coupled with the possibility of hard landing in China, will likely keep investor risk aversion at elevated levels. By mid-year we are hopeful that investors will start to have a better sense of the likely outcomes of the fall elections and the implications for policy that will lead to necessary deficit and debt reduction, and ultimately, a pathway to healthy sustainable growth. In the meantime, we believe that we are in the early stages of a rotation towards higher-quality growth stocks such as those we seek for the portfolio. The valuations for these stocks remain attractive based on our work, and we think their earnings growth is more assured due to their financial strength, geographic diversification, and unique product cycles. 

M. Scott Thompson, CFA                  Andrew W. Jung, CFA

January 3, 2012

As of December 31, 2011, Robert Half comprised 2.74% of the portfolio’s assets, Donaldson – 2.88%, F5 Networks – 2.42%, Oceaneering International – 2.04%, Core Laboratories – 2.23%, Jacobs Engineering  – 2.37%, Joy Global  – 1.63%, Varian Medical Systems – 1.73%, Dentsply – 2.22%, Quality Systems – 1.75%, Waters – 1.85%, Polycom – 2.22%, Mead Johnson Nutrition – 0.97%, Teradata – 1.36%, Intercontinental Exchange – 1.99, and MSCI – 1.99%.

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.

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 constructio