Stuart Bilton, Chairman and CEO of Aston Asset Management, spoke with Tommy Fernandez of MutualFundWire.com about Aston’s process and criteria for selecting new investment managers.

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Note:  Small- and mid-cap stocks are considered riskier than large-cap stocks due to greater potential volatility and less liquidity. Growth stocks are generally more sensitive to market risk and thus may be more volatile than other stocks. 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. Investing in foreign markets involves the risk of social and political instability, market illiquidity, and currency volatility.

Aston Funds has no editorial control over the content, subject matter, and timing of the original article and are independent of MutualFundWire.com and its publisher. 

Before investing, carefully consider the fund’s investment objectives, risks, charges and expenses. Contact 800 992-8151 for a prospectus or a summary prospectus containing this and other information. Read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC.

Investment Advisor Services:   800-597-9704 or www.astonfunds.com

1st Quarter 2013 

Congress finally provided some near-term clarity on the U.S. tax structure at the beginning of 2013. This visibility, combined with ongoing monetary stimulus from the U.S. Federal Reserve and a modest improvement in U.S. economic activity, fueled a significant rally within the equity market, while bonds were mostly flat.

The Fund slightly trailed its composite 60% S&P 500 Index/40% Barclays US Government Credit Index as the growth leaning equity portion of the portfolio lagged the broader market S&P 500 during the quarter. An underweight position in Industrials combined with a smattering of holdings in Technology and Energy were the primary detractors on the equity side.

Tech firms Juniper, Oracle, and EMC declined as investors became concerned about a reduction in corporate information technology spending. We trimmed the portfolio’s position in Oracle after the company reported disappointing fiscal third-quarter results. We think the combination of economic uncertainty, starting with the fiscal cliff and more recently the sequester, is causing company chief financial officers (CFOs) to tighten purse strings. At the same time, corporations are seeing a heightened level of technology disruption associated with the cloud, big data, in-memory storage, and BYOD (bring your own devices into the workplace). We added to EMC, however, as the weak year-to-date performance provided an attractive valuation for a company we expect to deliver stronger relative earnings strength in 2013.

Occidental Petroleum continued to lag the energy sector and detracted from performance. We added to the position after the company's fourth quarter results provided evidence that management is making progress towards its goal of reducing operating costs per barrel back toward 2011 levels. Production volumes, driven by oil, were ahead of expectations, and the company raised the dividend—providing valuation support for the stock.  

Strong Healthcare and Staples
Positives on the equity front during the quarter included overweight positions in the surging Healthcare and Consumer Staples sectors, and an underweight Technology stake. Healthcare was the top performing sector among the large-cap indices, with a sharply rising holding in Allergan boosting the portfolio’s returns. Consumer Staples stocks weren’t far behind, with Costco contributing positively to results. 

Although Technology suffered mightily on absolute terms from the continued and notable decline in Apple, the Fund benefitted on a relative basis from its underweight stake versus the benchmark. We had reduced the portfolio’s position in Apple after the company issued a range of guidance that fell below analysts' expectations. Earnings guidance appears to be coming down as the strong iPhone launch quarter tends to lead to greater seasonal slowing, while the continued enthusiasm for the iPad Mini putting downward pressure on gross margins from a shifting product mix. We further trimmed the position later in the quarter on concerns that the company is not positioned competitively in the smartphone market due to consumers’ preference for a larger screen size. The company’s production schedule may prohibit it from launching a competitive product until 2014. 

Elsewhere, General Electric rebounded from a lagging fourth quarter to help performance in the solidly performing Industrials sector to offset the Fund’s underweight position. Monsanto outpaced other stocks in the lagging Materials sector in contributing to relative performance. 

More Equity Buys and Sells
We established a position in diversified global healthcare company Sanofi during the quarter.  The company is a leader in Emerging Markets, is well positioned in the diabetes and vaccines markets, and is benefiting from strong launches in its Consumer Health Care division and its companion animal care market. We continued to build the position as the stock price weakened on 2013 guidance that was modestly below analysts' estimates. Despite the near-term headwinds, we think the company remains on track to meet its 2012-2015 growth and dividend objectives.

We added American Express to the portfolio as the company has expense flexibility and has shown a propensity in recent quarters to return 100% of net income to shareholders in the form of dividend payments and share repurchases. The stock was trading at a rare price/earnings multiple discount to the S&P 500 and at a wide multiple discount to competitors Visa and MasterCard, despite having shown the ability to deliver solid earnings in an uncertain environment. In addition, the company has restored confidence that the credit profile of the company’s customers has improved through lower credit losses and delinquencies. 

Notable additions to current positions during the quarter included Biogen IDEC, United Parcel Service, and Nike. We increased the portfolio’s position in Biogen after the stock price weakened following news that the phase 3 trial of the company's ALS (Lou Gehrig’s disease) product failed. Although the failed trial was disappointing, we believe the lower price presented an attractive opportunity to add to the stock ahead of the company's oral Multiple Sclerosis (MS) therapy launch. We added to it further after subsequent quarterly results demonstrated stable demand in the company's major franchises and after U.S. approval of the company's oral MS product.

International trade volumes, particularly out of Asia, are improving at UPS as its domestic ground business remains solid due to e-commerce. Recent cost actions to boost profit margins should also lead to stronger earnings momentum as we move through 2013, and we expect the company to further support the share price with a sizable share repurchase and another dividend increase.

Nike continued to deliver better-than-expected gross margins and enjoy robust sales in North America. The company has also taken decisive action to position itself for sustainable growth in China by focusing on building brand connections with consumers, improving productivity and profitability, and adapting apparel products to align with the needs of Chinese consumers. The company has a consistent record of delivering growth in revenue, earnings, and cash returns to shareholders, and proven its ability to sustain long-term growth opportunities. Nike has a diverse business mix and we think has the necessary financial discipline and balance sheet strength to effectively manage risk in a volatile environment. 

Two positions were sold from the Fund during the quarter. Express Scripts was eliminated as benefits from the company's merger with Medco are waning and we think earnings growth will decelerate sharply. This reflects the roll-off of additional United Health claims and the fully consolidated post-merger comparisons of the last nine months of 2012. We also sold the small remaining position in Las Vegas Sands after the stock price moved up nicely on signs that the Chinese economy has turned the corner, resulting in a stock price that was close to our estimate of fair value.

Elsewhere, Abbott Labs spun off its pharmaceutical division at the beginning of the year. Although the Fund kept the “new” Abbott, as the company's diverse mix of businesses provides ample opportunity for margin expansion and earnings upside relative to analysts' muted expectations, we sold the spun-off AbbVie pharmaceutical division. AbbVie relies heavily on the Humira drug, and we do not have confidence that the company will be able to achieve the 10% earnings growth that we require over the long term. 

Bond Market
Treasury yields rose slightly during the first quarter as the economy improved. Despite the improvement, we continue to expect a range-bound environment for Treasury yields. Federal fiscal headwinds are likely to cause Gross Domestic Product (GDP) growth to downshift, and we expect the Federal Reserve to continue its bond buying program, limiting further increases in yields such as normally occur in an economic expansion.

Investors are likely to continue to seek incremental yield in the low interest-rate environment, and this demand should lead to continued outperformance of Corporate bonds. While we continue to favor high-quality, intermediate Corporates, we have modestly reduced the degree to which the portfolio is overweight the sector on the fixed-income side. This is because the yield differential, or spread, between Corporate and Treasury bonds has narrowed to its long-term average, implying that the performance advantage to Treasuries is now more limited. We remain defensively positioned in terms of duration, or interest-rate risk, reflecting the poor risk/reward opportunity in the low-yield environment. 

Stock Outlook
The stock market could be in what strategists describe as a sweet spot of moderate economic growth, low inflation, and accommodative Federal Reserve monetary policy. Nevertheless, we think it is extended after recent gains, and a pullback in share prices would not be surprising as economic growth most likely slows in the period ahead. We believe any stock market setback to be limited, however. Recession risk is low, monetary policy expansive, stock market valuations fair to full, though not extreme, and investors are enthusiastic, but not yet euphoric.

Although the Fund has fully participated in the market’s advance, we believe its high quality holdings remain reasonably valued with the opportunity for greater earnings growth due to their financial strength and global diversification. In addition, many of the Fund’s holdings have above-average dividend yields and dividend growth prospects. We think both growth and yield will be scarce in the years ahead as the developed world deleverages and the Federal Reserve strives to keep both short and long-term interest rates low.

Montag & Caldwell Investment Counsel

As of March 31, 2013, Juniper Networks comprised 1.23% of the portfolio's assets, Oracle – 1.18%, EMC – 0.97%, Occidental Petroleum – 1.34%, Allergan – 2.02%, Costco – 1.46%, Apple – 0.57%, General Electric – 2.25%, Monsanto – 2.43%, Sanofi – 1.96%, American Express – 1.00%, Visa – 1.77%, Biogen IDEC – 1.51%, United Parcel Service – 2.02%, Nike – 1.50%, and Abbott Laboratories – 2.10%.

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, consider the Fund’s investment objectives, risks, charges, and expenses. Contact 800 992-8151 for a prospectus or summary prospectus containing this and other information. Please, read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC.

1st Quarter 2013 

The first quarter of 2013 was fantastic for domestic equity investors, with double-digit returns across all market-cap segments. Aggressive and unconventional monetary policy globally has led to the longest period of low interest rates in a generation. This has fueled a revival in the housing market and led to consumer sentiment hitting a four-year high.

As we mentioned in our third quarter 2012 commentary, the consumer is king and his home is his castle. A resurgent consumer economy provides a substantial foundation from which other sectors of the domestic economy can rebound. The rebirth of the U.S. oil and gas industry is revolutionary and its potential impact on the broader economy could rival that of the Internet during the 1990s. After a period of major investment in commodities over the last decade, inflation should remain subdued, allowing the consumer to continue to recover and maintain his standing in the royal court. 

Slight Underperformance
All sectors of the Fund’s Russell 1000 Index benchmark delivered positive returns during the first quarter, but three sectors within the Fund had negative total returns leading to a slight underperformance versus the index. Weak stock selection within Technology, Materials, Telecommunications, and Healthcare was the primary detractor from relative results. Within Technology, top-10 holding Apple had another disappointing quarter as the increasing threat from competing products continued to pressure the stock.

The Materials sector was hit hard by the sharp fall in commodity prices during the quarter, which negatively affected a number of mining stocks. Iron ore miner Cliff Natural Resources disappointed investors by drastically reducing its dividend. We sold the Fund’s position given management’s inability to execute its strategy. Royal Gold traded down in sympathy with the price of gold. We too sold this holding to fund better relative opportunities.

Other notable individual detractors included two consumer-oriented businesses with unique company-specific problems. Carnival reported strong quarterly results, but analysts lowered guidance on the stock to reflect weaker ticket pricing and greater ship repair costs. Investor sentiment towards the company was also hurt by recent negative publicity. United Natural Foods’ financial results were negatively affected by one-time charges caused by labor disputes.

Stock selection in the Financials and Energy sectors boosted relative performance, aided by an underweight stake in the lagging Technology area. Energy companies Phillips 66 and Range Resources were the portfolio’s top two performers during the quarter. Phillips 66 posted better-than-expected profitability from refining even as it expanded its pipeline business. Independent natural gas company Range Resources has shown better execution than its peers in increasing reserve replacement and boosting profitability from existing wells.

Chicago Bridge & Iron, Walgreen, and Athenahealth rounded out the top-five performers for the quarter. Chicago B&I increased clarity around its acquisition of Shaw Group, and how the combined company will grow profits above initial expectations. Walgreen reported better-than-expected quarterly results and an alliance with AmerisourceBergen. We think the Athenahealth acquisition of Epocrates significantly expands the cross selling opportunities for the firm’s health IT services. 

Portfolio Positioning
The two notable adjustments to the portfolio during the quarter on a sector level were an increase in Financials and a in Materials. Financials, Consumer Discretionary, and Healthcare remained the three largest sectors in the Fund, with Financials taking the lead from Consumer Discretionary. Most of the changes occurred at the stock level, where we finished building positions in five companies.

Of these five new full positions, three stocks fit into our Leaders investment category. Here we look for best-in-class companies where a near-term issue has created a buying opportunity through a lower valuation. We introduced two Leaders within Financials— Arkansas-based Bank of the Ozarks and real estate investment trust (REIT) Redwood Trust. Bank of the Ozarks has been building market share both organically and via acquisitions, having consistently grown earnings and its dividend over the long term by lending conservatively to residential and commercial borrowers. Redwood Trust focuses on buying residential mortgage securities and providing financing to commercial properties via subordinated mortgages. It stands to benefit from any rebound in real estate and demand for mortgage-backed securities. The Fund also completed building a position in American Tower, a telecommunications Leader. Classified as a Financials stock in the benchmark because of its recent conversion to a REIT, American Tower owns and leases antenna space to wireless voice and data providers globally. We believe the company will continue to benefit as wireless carriers roll out advanced networks and services.

One new investment we classify as an Innovator, a company that has a history of introducing new products or services. Specialized semiconductor company Microchip Technology targets a wide range of end user electronic applications. We see the increasing influence of embedded chips in everyday products and think the company can benefit from this trend.

Lastly, we identified one new position that meets the criteria of our Laggard investment category. Although Laggards are typically under a cloud in having failed to deliver shareholder value relative to their competition, we believe these companies have the potential for significant gains in profitability as new or reinvigorated management teams seek to restructure operations. Technology company Yahoo! fits this description.  We believe the new management team headed by Marissa Mayer from Google should provide leadership and more focused development to this digital media company.

Three full positions were sold during the first quarter, in addition to previously mentioned Cliffs Natural Resources and Royal Gold. Valuation and a more rigorous regulatory environment was the reason for the exit from Philip Morris International. Changing dynamics within the natural gas industry that could negatively affect long-term fundamentals led to the sale of Southwestern Energy. Finally, execution was disappointing at Teva Pharmaceutical Industries.

Overall, we remain constructive on the domestic economy and expect the rest of the world to catch up. We think this is an attractive environment for equity investments and while sparks and flares will keep us ever vigilant, we remain focused on the positive longer-term trend.

TAMRO Capital Partners

Alexandria, Virginia

As of March 31, 2013, Apple comprised 2.98% of the portfolio's assets, Cliffs Natural Resources – 0.00%, Royal Gold – 0.00%, Carnival  – 1.64%, United Natural Foods – 1.72%, Phillips 66 – 2.43%, Range Resources – 2.31%, Chicago Bridge & Iron – 2.08%, Walgreen – 2.03%, Athenahealth – 1.93%, Bank of the Ozarks – 1.42%, Redwood Trust – 1.36%, American Tower – 1.64%, Microship Technology – 1.44%, and Yahoo! – 0.77%.

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

Before investing, consider the Fund’s investment objectives, risks, charges, and expenses. Contact 800 992-8151 for a prospectus or summary prospectus containing this and other information. Please, read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC. 

1st Quarter 2013 

Climbing the proverbial “wall of fear” equities in general—and the small-cap market in particular—shrugged off January concerns about the “fiscal cliff” and sequestration of government spending on the way to posting double-digit gains for the quarter. In addition, the market overcame varying bouts of investor anxiety regarding the effects of higher payroll taxes on consumer spending, the potential effects of Cyprus bank failures on the European continent, and the flare-up of tensions on the Korean Peninsula.

U.S. economic data came in generally better than expected and U.S. housing continued its recovery, buoying personal consumption through the so-called wealth effect. Thus far, consumer outlays have been strong enough to mitigate the dwindling growth in state and municipal spending. Company management teams at several of the Fund’s holdings have indicated that their U.S. businesses are in decent shape and that there seems to be a trend toward shorter supply lines and a bolstering of U.S., Mexican, and Canadian manufacturing at the expense of Western Europe and the Far East. All of which bodes well for the economy and the U.S. stock market.

Quality trends within the Fund’s Russell 2000 Value Index benchmark were mixed for the quarter, with larger market-capitalization companies outperforming smaller ones. Companies whose share price was more than $20 outperformed those under $5, and companies with earnings outperformed non-earners. The exception was companies with high debt levels, which also outperformed. Overall, we would suggest that the portfolio experienced a modest tailwind towards our higher-quality approach to picking stocks. 

Stock Picking Boost
The Fund outperformed its benchmark during the quarter, boosted primarily by strong stock selection within Consumer Discretionary and an overweight stake in Industrials. AFC Enterprises (owner and operator of the Popeyes fast-food restaurant chain) was the portfolio’s best performing individual stock. The company continued to execute extremely well. We trimmed the position during the period, however, as the shares appear fairly valued. Although an overweight to the Materials sector, one of the worst performing areas of the benchmark, hurt relative returns, stock selection within the sector was strong. Specialty paper manufacturer Glatfelter led the way after rallying on news of its announcement of a potentially accretive acquisition.

Sector allocation was a modest negative during the quarter, as an underweight position in Financials and the aforementioned overweight to Materials weighed on returns. The poor relative performance of the portfolio’s real estate investment trust (REIT) holdings added to the woes within Financials.

Lackluster Healthcare holdings were the primary detractor from relative returns, however, with Invacare the single-worst performing stock. A cessation of production at a wheelchair plant as part of a consent decree with the Food & Drug Administration (FDA) hampered the company. Invacare has spent considerable funds and management time addressing the issues raised by the FDA, and think they have made considerable progress in remediation. We have struggled with the stock given the earnings potential and likely appreciation should they receive a clean re-inspection by the FDA and make progress on longer-term margin goals. We decided we did not have enough conviction to add to the Fund’s small holding given the uncertainty, and began selling the position late in the quarter. 

New Buys
We initiated five new positions in the Fund during the quarter, including PacWest Bancorp, M/A–COM  Technology Solutions (MTSI), and Mentor Graphics. PacWest is the 12^th-largest bank based in California and offered a solid management team, reasonable valuation, franchise value, above-average dividend yield, and potential to exceed consensus earnings targets following its consummation of the pending acquisition of First California. We think the bank represents a nice geographic diversification from the portfolio’s existing exposure to regional banks.

MTSI is one of the market leaders in the high performance radio frequency and microwave semiconductor markets. Our feeling is that the company was orphaned after being purchased by AMP in the late ‘90s and subsequently becoming part of Tyco. Under relatively new leadership we think the company has a chance to improve results, moving margins closer to its well-regarded competitor Hittite Microwave.

Mentor Graphics is the smallest of the “Big 3” in EDA (Electronic Design Automation) software, behind Synopsys and Cadence Design Systems. We think the industry can continue to post solid revenue growth in a reasonable environment for semiconductor research and development spending. Under pressure from activist shareholder Carl Icahn, Mentor has improved margins but still has some room to catch the industry leaders. We think the large discount to its peers and historical valuation are excessive and with continued good execution expect the stock to gap to close.

We sold three stocks from the portfolio during the quarter, one after the company (Duff & Phelps) received a proposed takeout offer. We reluctantly threw in the towel on ScanSource, an interesting and valuable niche tech company. The shares have been mired around the $30 level for 10 years, with periodic rallies to the high $30s followed by downdrafts to the high $20s. We are tired of the treadmill and think our energy can be put to better use elsewhere as we find we lack sufficient enthusiasm to take a more meaningful position.

Recent results at aerospace firm Cubic were below expectations due to a generally weak environment on the defense side of the business, and start-up costs on some transportation contracts. With the passing of the CEO, we expect some type of stock sale by the family. Although possible that the entire company might be sold, we prefer not to anchor our investment thesis on a sale. The shares appear undervalued, but the next few quarters might be difficult in the current environment and we have less confidence in estimating “normalized” earnings. 

Outlook
From a thematic perspective, we continue to favor the economically sensitive areas of the market, since the macroeconomic environment in the U.S. continues to improve at a measured pace. After nearly seven years of acting as a drag on Gross Domestic Product (GDP), housing’s self-sustaining recovery troops along, underpinned by still tight supply-demand conditions, historically high affordability, and rising prices. The wealth effect on individuals should reinforce confidence along with modest improvements in job growth. 

We continue to believe the portfolio is attractively valued. Corporate balance sheets are in excellent shape, and most companies continue to generate healthy amounts of free cash flow. We finally saw one of the Fund’s companies become a takeout target at the end of 2012, and remain convinced that there is significant pent up demand for more deals. Talk of a potential U.S. “manufacturing renaissance” might make the greater U.S. exposure of small-cap stocks more attractive to foreign corporate buyers as well as to U.S. equity investors.

Silvercrest Asset Management Group

New York, NY

As of March 31, 2013, AFC Enterprises comprised 1.77% of the portfolio's assets, Glatfelter – 2.75%, Invacare – 0.64%, PacWest Bancorp – 1.53%, M/A-COM Technology Solutions – 1.27%, and Mentor Graphics – 1.23%.

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

Before investing, consider the Fund’s investment objectives, risks, charges, and expenses. Contact 800 992-8151 for a prospectus or summary prospectus containing this and other information. Please, read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC.

1st Quarter 2013 

With many pundits declaring the performance in the U.S. equity markets as due to it being the only “game in town”, recent economic news remained less convincing. Non-farm payroll data was particularly disappointing with an increase of only 88,000 during March after February’s figure of 268,000 suggested the labor market might be showing some improvement. Further complicating projections for first quarter growth was the unemployment rate dropping to 7.6% on the back of 206,000 people leaving the labor force.

The continued “jobless” recovery poses significant trade-offs for central bankers, highlighted by the most recent Federal Open Market Committee (FOMC) minutes suggesting some members were in favor of ending quantitative easing programs as early as the end of 2013—based on solid improvement in the outlook for the labor market. Although this meeting convened before March’s jobs report, it offers insight into what might motivate an early exit. Bond markets, however, discounted the effects of such an early exit as yields fell markedly subsequent to the release of the minutes.

Retail sales have also shown resilience thus far in 2013. Downward revisions to January and February, and a contraction in March’s figure show a much weaker picture than how the year started off. With inflation continuing to be contained, it is hard to envision a scenario where economic fundamentals substantiate any alterations to current fed easing policies that would alter the fixed-income landscape anytime soon.

The Fund outperformed its Barclays Capital U.S. Aggregate Bond Index benchmark in posting modest gains during the first quarter of 2013. Most sectors of the benchmark were relatively flat, as US Treasury rates remained relatively steady during the period. An overweight stake in the mortgage-backed security (MBS) sector led the outperformance for the portfolio, as non-Agency residential MBS securities increased in price. In addition, holdings in Emerging Markets fixed-income performed well, adding to the outperformance. This asset class is not part of the index, but we think offers further diversification benefits to the Fund. Finally, an underweight position in the Treasury sector aided relative performance as the sector was down fractionally for the quarter. 

Treasury Market
Treasury yields spent the first quarter in a narrow range, as bullish and bearish developments were in rough balance in both the U.S. and Europe. The quarter began with a lurch toward higher yields on a combination of fast money selling and the release of the FOMC minutes that spooked investors concerned about an early end to the Fed’s asset purchase program. Throughout the quarter, statements by Chairman Bernanke and other FOMC members convinced observers that the Fed would not prematurely withdraw monetary support for the current weak recovery.

The flight-to-quality bid for Treasuries was boosted in March by the Cyprus banking crisis. The Cyprus “bailout” was the first such operation that included a haircut for unsecured depositors. European politicians and regulators issued conflicting statements as to whether the Cyprus bailout was a “template” for future operations or a one-time occurrence. The prospect of depositor losses threatens to dent confidence in European banks generally, raising the prospect of bank runs and capital flight in future bank solvency crises.

The 10-year Treasury note ended 2012 with a yield of 1.76%, spent the first quarter in a range of 1.85% to 2.05% and ended the first quarter of 2013 at 1.85%. The entire Treasury yield curve seemed frozen in place, with the 2-year note yield pegged near 0.25% and longer yields low by historical standards but well above shorter maturities.

The government agency sector performed slightly better than comparable duration Treasuries. Agency credit quality improved as Fannie Mae and Freddie Mac returned to profitability. The future of these agencies remains unclear, as neither the Administration nor the U.S. Congress seems inclined to tackle the issue. 

MBS Still Strong
Prices for non-Agency MBS advanced in March, capping off a strong quarter of performance, with lower-priced securities benefiting the most. This was especially true of the subprime sector, which continued to perform well due to the real or exaggerated housing market recovery. It is important to note that the market is already pricing in a housing market recovery in the fixed-rate prime and alt-A market. For this reason, one of the only places to get some incremental yield is currently in the subprime space.

Currently near-par bonds have traded with relatively low yields (approximately 4%) and subprime allows for some additional yield if one believes the improving housing market story. An improving housing market isn’t the only contributor, however, to the increase in pricing in the marketplace. A slowdown in activity and a shrinkage in supply also helped to explain the price increases.

Agency MBS outperformed Treasuries as well, as prepayment speeds were down 2-3 Conditional Prepayment Rate (CPR). Expectations are for speeds to pick up a few CPR over the next few months. This would put prepayment speeds in the mid to high 20s CPR, which is where prepayments have been for the past year. A stronger housing market could help these numbers grow slightly in the near future. This stronger housing market also could decrease the chances of immediate incremental action by Washington politicians to help the situation. 

Global Headlines
The European sovereign debt crisis again returned to the forefront of investors’ minds this month as one of the smallest eurozone members, Cyprus, sought a bailout for its slumping financial sector. It also appears that another relatively small eurozone economy, Slovenia, may require a recapitalization of its banks. Despite apparent missteps by European policymakers in immediately addressing the Cypriot crisis, risk assets such as Emerging Markets debt were mostly able to recover from initial headline reactions and finish higher amid mixed-to-positive global economic data.

In other news that could potentially impact Emerging Markets, investors in Argentina continue to await an appellate court ruling on payment to holdout creditors from prior debt swaps. One potential outcome appears to be that the lower court’s ruling will be upheld and Argentina will be ordered to pay par value, even though the government has explicitly stated it would not payout on terms better than those given to creditors in prior debt exchanges. If Argentina does not pay the holdouts as ordered by the court, it may enter technical default. Given its stated willingness to pay creditors who had participated in the prior exchanges, Argentina could potentially offer those creditors the option of swapping their bonds to local law, though significant implementation hurdles would likely affect any swap.

Elsewhere, Venezuela’s President-elect Nicolas Maduro ratcheted up his anti-U.S. rhetoric during his campaign, though it remains to be seen if his bluster is electioneering or a genuinely hardline policy. In East Asia, increasingly harsh rhetoric and a military buildup by North Korea has sharply raised geopolitical risk of a regional conflict erupting. 

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, consider the Fund’s investment objectives, risks, charges, and expenses. Contact 800 992-8151 for a prospectus or summary prospectus containing this and other information. Please, read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC. 

1st Quarter 2013 

The Fund outperformed its Barclays Capital U.S. Aggregate Bond Index benchmark during the quarter. Both sector allocation and security selection benefitted the portfolio, as an overweight position in Corporate bonds outperformed duration matched Treasuries. In addition, the portfolio was underweight mortgage-backed securities (MBS) which underperformed duration matched Treasuries despite continued purchases by the Federal Reserve due to investor concerns over rising interest rates. The Fund’s allocation to floating rate notes also aided performance, as these securities provide attractive incremental yield to the portfolio with little interest rate exposure.

The portfolio’s emphasis on longer dated investment grade securities was the biggest detractor from performance as the yield curve steepened during the quarter, amid positive signs of economic growth. From a quality perspective, an overweight to BBB-rated securities detracted from performance, as AA-rated securities outperformed that group and A- and AAA-rated bonds in general. 

Outlook
According to the Federal Open Market Committee (FOMC) of the U.S. Federal Reserve, recent data suggest that the United States economy may have returned to “moderate economic growth following a pause late last year” on positive economic indicators. Increases in household spending and business fixed investment were partially offset by “somewhat more restrictive” fiscal policy.

In our view, the Committee continues to broadcast an important message: the high-impact period for monetary policy solutions is behind us and that going forward the central bank cannot offset economic drag from fiscal policy concerns indefinitely. The central bank noted that inflation has been running below its longer-term targets, and it has a benign outlook for future inflation. The Committee voted to continue its purchases of mortgage-backed securities and Treasuries “until the outlook for the labor market has improved substantially in a context of price stability.” 

Although the overall unemployment rate decreased during February, so did the participation rate.  While the headline unemployment rate continues its steady decline, with fewer members of the labor force seeking employment it is unlikely the Federal Reserve views the overall results as a healthy labor market. Accordingly, it is unlikely we see a change in policies during the second quarter. 

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, consider the Fund’s investment objectives, risks, charges, and expenses. Contact 800 992-8151 for a prospectus or summary prospectus containing this and other information. Please, read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC. 

1st Quarter 2013 

The performance of U.S. stocks was quite strong during the first quarter of 2013, as the relative strength and stability of the U.S. economy attracted investors away from weaker and less stable regions of the global economy. Mid-cap stocks outperformed large- and small-cap stocks as the Fund’s S&P MidCap 400 Index benchmark gained 13.5% compared with returns of 10.6% for the broad market and large-cap oriented S&P 500 Index and 12.4% for the small-cap Russell 2000 Index.

The Fund’s returns were even stronger. The performance contribution was broad-based with 25 stocks in the portfolio up more than 10% and only two stocks down more than 10%. Tax preparation firm H&R Block was the best performer during the quarter as an improving employment outlook and successful cost saving efforts provided catalysts to unlock value that the company had built as it refocused on its core tax business. We trimmed the Fund’s position due to valuation following the run-up in its price.

The next top contributors were Boston Scientific and Cree. Boston Scientific experienced improved pricing trends for its cardiovascular products and continued to buy back shares of its own stock. Cree is a leading supplier of LED lighting products that raised guidance and introduced a new lower-priced LED bulb that should drive faster adoption of this new technology.

Notable detractors from performance included Akamai Technologies and CGGVeritas (Cie Gen Geophysique), both having declined more than 10% during the quarter. Although results for the period met expectations, Akamai announced that it plans to ramp up investments in sales and marketing to broaden its customer base, leading to reduced near-term earnings. CGG is a manufacturer of geophysical equipment and provider of seismic data that has been a relatively small holding within the Fund. Among other stocks with smaller declines that had little impact on overall performance were Nuance Communications, Jabil Circuit, and Harris Corp. 

Maintaining Focus
The significant appreciation in the U.S. stock market over the past few months presents an interesting environment for investors. With the market’s recent performance, it is difficult not to expect or prepare for a correction. But how do you prepare for such a possibility? To achieve long-term performance goals, it is important to follow a consistent approach when choosing investments. It is also imperative to remain focused on the long-term prospects of companies without ignoring short-term developments. A key way that we achieve this is by paying close attention to the changing valuation of the portfolio’s holdings and adjusting them accordingly.

For example, we first purchased healthcare firm Hospira for the Fund in October 2011. Hospira is the world’s leading provider of injectable drugs and infusion technologies, with its injectable division a niche category within the generic pharmaceuticals market. Injectable pharmaceuticals require advanced expertise, and thus possess greater barriers to entry than oral generics. 

Hospira’s stock had declined nearly 50% in the three months preceding the Fund’s investment primarily due to manufacturing issues and a warning letter from the U.S. Food & Drug Administration (FDA) relating to its Rocky Mount, North Carolina facility. Margins, cash flow, and earnings became depressed as the company corrected these issues. We maintained that the manufacturing issues encountered by Hospira were fixable, and that these issues gave us the opportunity to purchase a market leader with good global growth prospects at an attractive valuation. The manufacturing issues that led to the FDA warning letter related to poor documentation and processes rather than bad product. Moreover, many of the drugs that the company manufactures are in short supply, and we think the FDA would be reticent to take harsh action and limit supply further. We were comfortable with the risk/reward profile that Hospira presented at the time, as well as its current valuation, and believe that our patience will eventually be rewarded.

Positioning and Outlook
There were two new purchases and one sale of note during the quarter. We initiated a position in in leading offshore oil and gas construction firm McDermott International as well as First Solar, a supplier of solar power components and systems. We sold long-time holding Mentor Graphics after it reached our price target.

We expect worldwide economic growth to continue at a moderate pace, though not without some difficulties. Europe continues to deal with one crisis after another, China is growing but expectations have been scaled back, and Japan is implementing more aggressive stimulus programs. In the U.S., trends for housing, employment, and auto sales are up but may experience short-term setbacks, while sequestration and implementation of healthcare reform add some uncertainty to the outlook.

Valuation metrics for the portfolio have become richer along with that of the overall market. We continue to trim positions when stock valuations are high and add to positions with more attractive prices. We believe that with the market move we have seen thus far in 2013, stock selection has become even more important. We remain focused, and endeavor to reposition the Fund to maintain attractive valuations relative to its benchmark and the S&P 500.

Fairpointe Capital

Thyra E. Zerhusen, Chief Investment Officer

Marie L. Lorden, Portfolio Manager

Mary L. Pierson, Portfolio Manager

As of March 31, 2013, H&R Block comprised 2.27% of the portfolio’s assets, Boston Scientific – 4.39%, Cree – 2.65%, Akamai Technologies – 2.54%, Cie Gen Geophysique – 0.73%, Nuance Communications – 2.30%, Jabil Circuit – 2.09%, Harris Corp. – 1.49%, Hospira – 3.82%, McDermott International – 2.20%, and First Solar – 1.40%.

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

Before investing, consider the Fund’s investment objectives, risks, charges, and expenses. Contact 800 992-8151 for a prospectus or summary prospectus containing this and other information. Please, read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC.

1st Quarter 2013 

The first quarter of 2013 was fantastic for domestic equity investors, with double-digit returns across all market-cap segments. Aggressive and unconventional monetary policy globally has led to the longest period of low interest rates in a generation. This has fueled a revival in the housing market and led to consumer sentiment hitting a four-year high.

As we mentioned in our third quarter 2012 commentary, the consumer is king and his home is his castle. A resurgent consumer economy provides a substantial foundation from which other sectors of the domestic economy can rebound. The rebirth of the U.S. oil and gas industry is revolutionary and its potential impact on the broader economy could rival that of the Internet during the 1990s. After a period of major investment in commodities over the last decade, inflation should remain subdued, allowing the consumer to continue to recover and maintain his standing in the royal court. 

Slight Underperformance
All sectors of the Fund’s Russell 2000 Index benchmark, and all but one of the sectors in the portfolio delivered positive returns during the first quarter as the Fund slightly underperformed the benchmark. Holdings in the Consumer Discretionary, Consumer Staples and Energy delivered relatively weak performance, with an overweight position in the strong Consumer Staples area also hurting relative returns.

The Fresh Market, Chico’s FAS, and United Natural Foods were among the notable individual detractors during the quarter. Fresh Market announced disappointing same-store sales growth and weaker than expected guidance, contributing to a sell-off in the stock. We eventually sold the full position as the competitive landscape was becoming more of a headwind for the company. Organic revenue growth was lower than expected for specialty apparel retailer Chico’s, and management provided cautious guidance. United Natural Foods’ financial results were negatively affected by one-time charges caused by labor disputes.

Although an underweight position in suffering Materials stocks aided relative results, most of the standout performers in the portfolio came from the Financials, Technology, and Healthcare sectors. In Financials, top-holding Bank of the Ozarks reported strong quarterly results and the acquisition of another regional bank on the open market, while real estate investment trust (REIT) Redwood Trust moved higher on the announcement of an increase in the company’s quarterly dividend. Rural hospital operator Health Management Associates reported results in-line with expectations, but investors seemed to show enthusiasm for the company’s prospects under healthcare reform. Finally, telecom provider Acme Packet agreed to be acquired by Oracle, surging more than 20%. 

Portfolio Positioning
There were no major adjustments at the sector level during the quarter, as Financials, Consumer Discretionary, and Healthcare remained the three largest sectors in the Fund. Most of the changes to the portfolio occurred at the stock level. Typically, we only report on new investments after we have completed building a full position in the Fund. Thus, most of the stocks discussed below were initiated prior to the first quarter, and only reached full position status through appreciation or additional buys this year.

Of the eleven new full positions, six stocks fit into our Leaders investment category. Here we look for best-in-class companies where a near-term issue has created a buying opportunity through a lower valuation. Tootsie Roll and Sanderson Farms, both Consumer Staples companies, met this criteria as high ingredient costs temporarily pressured operating margins at the food companies. Industrials firms Raven Industries and Landstar System, and Energy holding Lufkin Industries also suffered what we consider temporary setbacks. Each suffered weak revenue growth due to the slowdown in global economies, but we anticipate that conditions will improve. Lastly, leading pawn-shop operator First Cash Financial is showing a clear expansion in profitable growth that we believe is not reflected in its valuation.

Four of the new investments we classify as Innovators, companies that have a history of introducing new products or services. Three Technology firms—Cavium, Cirrus Logic, and Power Integration—touch on the major trends of mobility, cloud computing, and energy efficiency. Meanwhile, Tempur-Pedic International is a company that has found a novel way to build a mattress that relieves pressure, with the goal of improving the quality of sleep.

Lastly, we identified one new position that meets the criteria of our Laggard investment category. Although Laggards are typically under a cloud having failed to deliver shareholder value relative to their competition, we believe these companies have the potential for significant gains in profitability as new or reinvigorated management teams seek to restructure operations. A new management team at Consumer Staples firm Cott Corp. is effectively boosting profitability of this private label and contract manufacturer of beverages by instituting more operational controls and identifying higher margin product initiatives.

Four full positions were sold during the first quarter, in addition to the previously mentioned Acme Packet and The Fresh Market. We parted company with long-time holding Chicago Bridge & Iron after it surpassed $5 billion in market cap, growing out of the market-cap range for the Fund.

Unfortunately, increased uncertainty surrounding the ability to execute led to the sale of the other three stocks. Energy exploration and production company Comstock has been affected by the glut of natural gas that has depressed the price of the commodity. We prefer to focus on the beneficiaries of the depressed pricing rather than the producers. Iberiabank was used as a source of funds for new opportunities due to our growing uncertainty regarding management’s plan to boost profitability. On-line realty site Zillow was sold due to poor visibility of operating trends for the company.

Overall, we remain constructive on the domestic economy and expect the rest of the world to catch up. We think this is an attractive environment for equity investments and while sparks and flares will keep us ever vigilant, we remain focused on the positive longer-term trend.

TAMRO Capital Partners

Alexandria, Virginia

As of March 31, 2013, The Fresh Market comprised 0.00% of the portfolio's assets, Chico’s FAS – 1.73%, United Natural Foods – 1.96%, Bank of the Ozarks – 2.81%, Redwood Trust – 2.76%, Health Management Associates – 2.20%, Acme Packet – 0.00%, Tootsie Roll – 1.25%, Sanderson Farms – 1.49%, Raven Industries – 0.51%, Landstar System – 1.89%, Lufkin Industries – 1.70%, First Cash Financial –  1.78%, Cavium – 1.83%, Cirrus Logic – 1.42%, Power Integration – 1.43%, Tempur-Pedic International – 2.08%, and Cott Corp. – 1.57%.

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

Before investing, consider the Fund’s investment objectives, risks, charges, and expenses. Contact 800 992-8151 for a prospectus or summary prospectus containing this and other information. Please, read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC.

1st Quarter 2013

The first quarter of 2013 saw a continuation of the strong market returns witnessed throughout 2012. On the heels of a 17.5% return in 2012, the Fund’s Russell 1000 Value Index benchmark gained 12.3% during the quarter. Markets pushed to an all-time high as investors showed renewed faith in the global economic recovery following a painful four-year post financial crisis period. Despite continuing concerns over the problems within the eurozone (Cypress, Italy, Greece, etc.) investors drove the U.S. markets to heights not seen since 2007. Investors appeared convinced that Federal Reserve stimulus is helping and that the slow improvement in the U.S. economy will result in Chairman Bernanke continuing to pump money into the system for the foreseeable future. This provides a good economic backdrop for a continuation of low interest rates and improved growth prospects for companies.

All 10 sectors within the Russell 1000 Value finished in positive territory for the quarter. Technology, Consumer Staples, and Healthcare were the best performing sectors, with Materials, Telecommunications, and Energy the weakest areas. Although the Fund held up well versus the broader market (as represented by the S&P 500 Index), it trailed its benchmark by a few percentage points.

Stock selection within Technology, Industrials, and Consumer Staples detracted the most from performance relative to the benchmark, as did an underweight position in Consumer Staples. Apple and Oracle were the major laggards in the tech area, with Apple the top detractor for the second quarter running as it dropped more than 16%. Investors focused on softening demand for Apple’s core products, specifically it appears that end-demand for Apple’s 10” iPad and iPhone5 has lessened, reflecting a share loss to competitors in both the tablet and smartphone markets. Recent competitive threats also seemed to hit the shares of Oracle, as investor concern over the application software space surfaced.

Other significant underperformers included Royal Dutch Shell and Capital One. Royal Dutch was the second largest detractor to relative performance after management reported disappointing fourth quarter results and the stock was penalized accordingly. Results were 10% below consensus expectations as capital expenditures continued to weigh on near-term results and the outlook into 2013 was muted. Capital One also reported a disappointing fourth quarter and gave 2013 guidance that was less robust than Wall Street was expecting. The results were primarily due to lower-than-expected asset yields and higher charge-offs associated with its credit card division. 

Solid Consumer and Energy Picks
Top contributing sectors for the portfolio during the quarter included Consumer Discretionary and Energy, while the lack of exposure to the lagging Materials and Telecommunications sectors also aided relative returns. Both Materials and Telecom traded down as investors tired of defensive stocks, a sign of improving investor sentiment.

Stock selection and an underweight position drove the outperformance within Energy. Global integrated energy firm Hess was the top performing stock in the portfolio as the company announced plans to sell its U.S. oil storage terminal network as well as its refining business. The market viewed this positively as the company intends to focus on its core strength, exploration and production, going forward. In addition, an activist investor has proposed a number of initiatives that should spur management to further streamline the company, which we think would be viewed favorably by the market.

Strong performances by Mattel and Hasbro boosted returns within Consumer Discretionary. Mattel announced positive fourth quarter results as management reported market share gains in both the U.S and Europe. U.S. retail inventory was down and generally in good shape across most brands. We think lower inventory levels should position the company positively as we progress further into the year.

Other top contributors in the portfolio included Morgan Stanley and Western Digital. Western Digital delivered impressive fourth quarter results and remained committed to returning cash to shareholders. Specifically, management reiterated its commitment to a significant payout of excess cash via dividend and share repurchases. Morgan Stanley followed a strong year in 2012 with a solid first quarter as profits rebounded across all business segments and management provided an optimistic outlook into 2013. Given the strong performance and less attractive discount to our calculated valuation, we sold the position from the Fund. 

Portfolio Positioning
Despite the market’s recent strong performance, we think valuations remain compelling by both traditional measures and Cornerstone’s proprietary valuation work. Our Fair Value Model now indicates that 68% of the stocks in our 800 stock large-cap universe are undervalued. Using normalized earnings, we calculate the price of the universe at 70.6% of fair value.

Aside from normal additions and trims, we added four new names to the portfolio—Cummins, Emerson Electric, JPMorgan Chase, and Unum Group. Cummins is a Fortune 500 company that designs, manufactures, distributes and services diesel and natural gas engines, electric power generation systems, and engine related components. It has a strong management team, excellent balance sheet, and a diversified business mix across products and geographies. We think the company is viewed less-cyclically now given the growth in their power generation segment and its expansion within the engine components segment. The valuation was attractive based on our fair value calculation.

Emerson Electric is a standout engineering services firm with one of the most respected management teams in the Industrials sector. David Farr is only the third CEO in the 56-year history of the company. He has focused the company on Emerging Markets, which should lead to higher growth relative to its peers. Global macroeconomic concerns and the integration of two recent acquisitions have weighed on the stock, resulting in an attractive valuation. Coupled with strong fundamentals, a solid balance sheet, strong free cash flow and a healthy yield, the stock is a strong addition to the portfolio.

Fundamental improvement since the financial crisis and modest underperformance relative to its peers led to an attractive valuation at JPMorgan. Its recent underperformance was due in no small part to the so-called “London Whale” trading issue, which had a negative impact on both the company’s stock price and its otherwise exemplary reputation. Highly regarded CEO Jamie Dimon led the firm out of the financial crisis looking better than most peers, and financially the company has healthy looking capital reserves. In short, we see an excellent opportunity in an attractively valued, high-quality company with a strong strategic and financial position.

In addition to Morgan Stanley, Apache, Teva Pharmacueticals, and Merck were sold during the quarter to make room for the new holdings. Independent energy firm Apache showed modest fundamental deterioration, making it no longer one of our 30 best stocks. A 2010/2011 spending spree was probably well timed and entirely consistent with the core competency of the company, but it increased the firm’s debt position and affected cash flows. Although possibly manageable, it put pressure on organic growth, which has not been a core competency of the company in the past. This coupled with the ever-present geopolitical risk from the company’s significant production in Egypt, as well as compelling opportunities elsewhere, caused us to exit the position.

Teva was another stock sold owing to deteriorating fundamentals, as the company’s core competency in traditional generic drugs appears to be eroding due to increased competition and a lack of focus. The extent of future opportunities in biosimilar drugs is vague and difficult to predict. In addition, a new CEO has had difficulty articulating this strategy and a significant driver of current earnings, Copaxone, remains at risk from competing drugs and generic completion. 

We significantly trimmed Merck toward the end of the quarter for valuation reasons after a solid run-up in the stock. Merck had outperformed the S&P 500 the last two years despite some meaningful setbacks and a notable decline in sales. Previously the stock had no embedded expectations for its pipeline drugs, but this seems to be no longer the case at its current valuation. Given the strong performance and less attractive valuation it is no longer among our 30 best ideas.

Concluding Comments
We continue to find considerable value in the market. We are enthusiastic about the portfolio’s positioning and our ability to improve the quality of the holdings while owning market leading, cash flow rich, and attractively priced companies in the process. We endeavor not to be swayed by the “noise” in the market, however, which appears to be changing quarter to quarter. While, there may continue to be periods of strength and weakness, we will not stray from our process which we think is time tested.

Cornerstone Investment Partners

As of March 31, 2013, Apple comprised 3.48% of the portfolio’s assets, Oracle  – 3.36%, Royal Dutch Shell – 3.67%, Capital One Financial – 3.29%, Hess – 3.77%, Mattel –3.97%, Hasbro – 2.87%, Western Digital – 3.43%, Cummins – 1.47%, Emerson Electric – 2.42%, JPMorgan Chase – 2.33%, Unum Group – 2.17%, and Merck – 1.02%.

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

Before investing, consider the Fund’s investment objectives, risks, charges, and expenses. Contact 800 992-8151 for a prospectus or summary prospectus containing this and other information. Please, read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC.

1st Quarter 2013

Strong corporate earnings reports, positive economic news, and the strongest January rally since 1997 helped to push U.S. equities sharply higher during the first quarter of 2013. Aided by increasing evidence of a healthy recovery in housing, better than expected employment and consumer reports, and reassuring comments on interest rates from the Federal Reserve, the market carried on past poor Gross Domestic Product numbers and the March 1 sequestration deadline to close the quarter at record levels. Essentially all of the broad industry sectors participated in the rally, with particularly strong gains from Healthcare and consumer-related groups. Energy was strong as well, while Telecom and Technology stocks lagged.

Across the market-cap spectrum, small- and mid-cap U.S. stocks (as represented by the Russell indices) posted double-digit gains, and were modestly stronger than the large-cap benchmarks. Growth generally lagged value, though not among small-cap stocks, as the Fund’s Russell 2000 Growth Index gained 13.2%.

The Fund slightly outperformed the benchmark during the quarter, aided by stock selection within the Consumer Discretionary, Healthcare, and Industrials sectors—three sectors that together comprise more than half the index. Office Depot and Arctic Cat were two of the key holdings in Consumer Discretionary that boosted returns, the former after the announcement of its merger with OfficeMax. The office supply category had already been trending higher on expected consolidation, and we had been trimming Office Depot (the position was entirely sold by the end of the quarter) and adding to OfficeMax in the weeks leading into the deal agreement in late February. The Fund continued to hold OfficeMax as of quarter end. Recreational vehicle maker Arctic Cat essentially reversed losses from the prior quarter, helped by increased sales of snowmobiles.

Hospital holdings were especially strong for the portfolio within Healthcare. Both Health Management Associates and Universal Health Services advanced more than 30%, and continued to be meaningful positions within the Fund. In Industrials, Triumph Group was among the portfolio’s stronger stocks. Triumph is an aerospace systems manufacturer, and commercial sales growth outstripped declines on the defense side during the period. Staffing outsourcer Kelly Services, part of the professional services category within Industrials, rebounded strongly as flexible staffing firms provided a valuable service amid the ongoing choppy economy.

Technology was the Fund’s weakest sector during the quarter after being one of the portfolio’s strongest sectors in 2012. A number of stocks, primarily among Internet- and software-related names, that had been up meaningfully toward the end of last year were off the pace at the beginning of 2013. Liquidity Services, which operates online auction facilities for commercial and government surpluses, reported slightly slower revenue growth due to the lumpy nature of its business. Shares of AVG Technologies retreated more than 10% due to a management transition. We cut the portfolio’s position back substantially as a result.

Other stock underperformers included account receivables management company Encore Capital and Volcano Corp. Medical equipment maker Volcano gave guidance on 2013 that contained further investment spending and a slight earnings drag from foreign exchange movements. We maintained positions in both of these names.

As we’ve outlined in the past, our strategy seeks to achieve superior returns by identifying unrecognized growth potential across all industry sectors. We seek to identify firms with high quality business models, distinct competitive advantages, proven management teams, and significant growth potential. Revenue growth, margin expansion, and the ability to positively surprise and revise estimates are key characteristics we seek in holdings for the Fund. We think our focus on the key investment drivers of each stock and the avoidance of “noise” and non-critical news items remains a hallmark to adding value in small-caps.  

Andrew Morey
Lee Munder Capital Group, LLC

As of March 31, 2013, Office Depot comprised 0.00% of the portfolio's assets, Arctic Cat – 1.25%, OfficeMax – 2.35%, Health Management Associates – 4.89%, Universal Health Services – 3.57%, Triumph Group – 4.86%, Kelly Services – 1.90%, Liquidity Services – 2.37%, AVG Technologies – 0.48%, Encore Capital – 3.32%, and Volcano Corp. – 3.18%.

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

Before investing, consider the Fund’s investment objectives, risks, charges, and expenses. Contact 800 992-8151 for a prospectus or summary prospectus containing this and other information. Please, read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC.

1st Quarter 2013

Strong Quarter
Congress finally provided some near-term clarity on the U.S. tax structure at the beginning of 2013. This visibility, combined with ongoing monetary stimulus from the U.S. Federal Reserve and a modest improvement in U.S. economic activity, fueled a significant rally in the equity market. The Fund’s Russell 1000 Growth Index benchmark gained 9.5%, while the broader market S&P 500 Index increased 10.6%.

The Fund outperformed the benchmark during the quarter aided by overweight positions in Healthcare and Consumer Staples, and an underweight stake in Technology. Healthcare was the top performing sector among the large-cap indices, with a sharply rising holding in Allergan boosting the portfolio’s returns. Consumer Staples stocks weren’t far behind, with Costco contributing positively to results. 

The Technology suffered from the continued and notable decline in Apple, which the Fund was underweight versus the benchmark. We had reduced the portfolio’s position in Apple after the company issued a range of guidance that fell below analysts' expectations. Earnings guidance appears to be coming down as the strong iPhone launch quarter tends to lead to greater seasonal slowing, while the continued enthusiasm for the iPad Mini putting downward pressure on gross margins from a shifting product mix. We further trimmed the position later in the quarter on concerns that the company is not positioned competitively in the smartphone market due to consumers’ preference for a larger screen size. The company’s production schedule may prohibit it from launching a competitive product until 2014. 

Elsewhere, General Electric rebounded from a lagging fourth quarter to help performance in the solidly performance Industrials sector to offset the Fund’s underweight position. Monsanto outpaced other stocks in the lagging Materials sector in contributing to relative performance. 

Other holdings in Technology, Energy, and the previously noted underweight in Industrials were the primary detractors from relative performance. Tech firms Juniper, Oracle, and EMC declined as investors became concerned about a reduction in corporate information technology spending. We trimmed the portfolio’s position in Oracle after the company reported disappointing fiscal third-quarter results. We think the combination of economic uncertainty, starting with the fiscal cliff and more recently the sequester, is causing company chief financial officers (CFOs) to tighten purse strings. At the same time, corporations are seeing a heightened level of technology disruption associated with the cloud, big data, in-memory storage, and BYOD (bring your own devices into the workplace). We added to EMC, however, as the weak year-to-date performance provided an attractive valuation for a company we expect to deliver stronger relative earnings strength in 2013.

Occidental Petroleum continued to lag the energy sector and detracted from performance. We added to the position after the company's fourth quarter results provided evidence that management is making progress towards its goal of reducing operating costs per barrel back toward 2011 levels. Production volumes, driven by oil, were ahead of expectations, and the company raised the dividend—providing valuation support for the stock.  

More Buys and Sells
We established a position in diversified global healthcare company Sanofi during the quarter.  The company is a leader in Emerging Markets, is well positioned in the diabetes and vaccines markets, and is benefiting from strong launches in its Consumer Health Care division and its companion animal care market. We continued to build the position as the stock price weakened on 2013 guidance that was modestly below analysts' estimates. Despite the near-term headwinds, we think the company remains on track to meet its 2012-2015 growth and dividend objectives.

We added American Express to the portfolio as the company has expense flexibility and shown a propensity in recent quarters to return 100% of net income to shareholders in the form of dividend payments and share repurchases. The stock was trading at a rare price/earnings multiple discount to the S&P 500 and at a wide multiple discount to competitors Visa and MasterCard, despite having shown the ability to deliver solid earnings in an uncertain environment. In addition, the company has restored confidence that the credit profile of the company’s customers has improved through lower credit losses and delinquencies. 

Notable additions to current positions during the quarter included Biogen IDEC, United Parcel Service, and Nike. We increased the portfolio’s position in Biogen after the stock price weakened following news that the phase 3 trial of the company's ALS (Lou Gehrig’s disease) product failed. Although the failed trial was disappointing, we believe the lower price presented an attractive opportunity to add to the stock ahead of the company's oral Multiple Sclerosis (MS) therapy launch. We added to it further after subsequent quarterly results demonstrated stable demand in the company's major franchises and after U.S. approval of the company's oral MS product.

International trade volumes, particularly out of Asia, are improving at UPS as its domestic ground business remains solid due to e-commerce. Recent cost actions to boost profit margins should also lead to stronger earnings momentum as we move through 2013, and we expect the company to further support the share price with a sizable share repurchase and another dividend increase.

Nike continued to deliver better-than-expected gross margins and enjoy robust sales in North America. The company has also taken decisive action to position itself for sustainable growth in China by focusing on building brand connections with consumers, improving productivity and profitability, and adapting apparel products to align with the needs of Chinese consumers. The company has a consistent record of delivering growth in revenue, earnings, and cash returns to shareholders, and proven its ability to sustain long-term growth opportunities. Nike has a diverse business mix and we think has the necessary financial discipline and balance sheet strength to effectively manage risk in a volatile environment. 

Two positions were sold from the Fund during the quarter. Express Scripts was eliminated as benefits from the company's merger with Medco are waning and we think earnings growth will decelerate sharply. This reflects the roll-off of additional United Health claims and the fully consolidated post-merger comparisons of the last nine months of 2012. We also sold the small remaining position in Las Vegas Sands after the stock price moved up nicely on signs that the Chinese economy has turned the corner, resulting in a stock price that was close to our estimate of fair value.

Elsewhere, Abbott Labs spun off its pharmaceutical division at the beginning of the year. Although the Fund kept the “new” Abbott, as the company's diverse mix of businesses provides ample opportunity for margin expansion and earnings upside relative to analysts' muted expectations, we sold the spun-off AbbVie pharmaceutical division. AbbVie relies heavily on the Humira drug, and we do not have confidence that the company will be able to achieve the 10% earnings growth that we require over the long term. 

Outlook
The stock market could be in what strategists describe as a sweet spot of moderate economic growth, low inflation, and accommodative Federal Reserve monetary policy. Nevertheless, we think it is extended after recent gains, and a pullback in share prices would not be surprising as economic growth most likely slows in the period ahead. We believe any stock market setback to be limited, however. Recession risk is low, monetary policy expansive, stock market valuations fair to full, though not extreme, and investors are enthusiastic, but not yet euphoric.

Although the Fund has fully participated in the market’s advance, we believe its high quality holdings remain reasonably valued and offer more assured earnings growth due to their financial strength and global diversification. In addition, many of the Fund’s holdings have above-average dividend yields and dividend growth prospects. We think both growth and yield will be scarce in the years ahead as the developed world deleverages and the Federal Reserve strives to keep both short and long-term interest rates low.

Montag & Caldwell Investment Counsel

As of March 31, 2013, Allergan comprised 3.20% of the portfolio's assets, Costco – 2.46%, Apple – 0.84%, General Electric – 3.61%, Monsanto – 3.91%, Juniper Networks – 1.97%, Oracle – 1.96%, EMC – 1.61%, Occidental Petroleum – 2.21%, Sanofi – 3.14%, American Express – 1.62%, Visa – 2.83%, Biogen IDEC – 2.46%, United Parcel Service – 3.35%, Nike – 2.48%, and Abbott Laboratories – 3.50%.

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

Before investing, consider the Fund’s investment objectives, risks, charges, and expenses. Contact 800 992-8151 for a prospectus or summary prospectus containing this and other information. Please, read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC.

1st Quarter 2013

U.S. Equity Momentum Rally
The first quarter of 2013 featured a strong, momentum-driven rally in US equities, as the broad market S&P 500 Index gained 10.6%. The index breached its previous closing high of 1565.15 on the final day of March, a level that was last seen more than five and a half years ago just prior to the global financial crisis. Although the new closing high was hailed as an important psychological breakthrough, the more remarkable point is that although the S&P 500 has more than doubled since its low point in March 2009, many investors feel that they have made only slow progress in rebuilding their wealth. Rightly or wrongly, there remains a deep distrust of equities, and there was little evidence of the much-ballyhooed “Great Rotation” from bonds to stocks during the quarter.

There were several notable differences among the market leaders and laggards during the quarter. Relatively defensive sectors, namely Healthcare, Consumer Staples, and Utilities led with gains of 15.8%, 14.6%, and 13.0%, respectively, while the growth-oriented and economically sensitive Technology and Materials sectors were up only 4.6% and 4.8%.

In contrast to U.S. equities, which were supported by encouraging signs of steady though slow improvement in employment and housing, European stocks continued to be plagued by distinctly weaker economic fundamentals, not to mention the banking crisis (and policy debacle) in Cyprus. Consequently, the MSCI Europe Index lagged with a gain of only 2.7% in US dollars (5.5% in euros). Emerging markets did even worse, with the MSCI EM Index slipping 1.6%. Most notably, China fell 4.5% in the face of policy restraint and higher-than-expected inflation. The stand-out among non-US markets was Japan, which jumped 11.6% in US dollars (21.4% in yen) as the new administration pledged aggressive easing.

Within fixed-income, the Fed’s “QE Infinity” was generally supportive of US Treasuries, though the yield curve did continue to steepen modestly. Although the 10-year Treasury yield ended the quarter only slightly higher than year-end, it did flirt with the 2% level several times when investors began to fret about how and when the Fed would eventually unwind its program. Investors’ appetite for yield pushed the high-yield sector higher, while investment-grade corporates came under pressure. In Europe, the European Central Bank’s policy of accommodation resulted in stable yields on Spanish and Italian 10-year bonds. The euro reversed course and weakened versus the dollar, however, especially in the wake of the Italian elections and events surrounding Cyprus. The yen continued to drop against the dollar on expectations of monetary stimulus. 

Long Bias Wins Out
The Fund posted reasonable gains during the quarter despite its hedged positioning, though it did lag its gained HFRX Equity Hedge Index benchmark. One reason that the benchmark did better is that many equity hedge funds, as widely reported in the industry press, increased their long exposures, resulting in less hedging. In contrast, the portfolio’s net long equity exposure remained in the range of 30% to 35%. The Fund did maintain its edge over the index for the trailing 12-month period through the end of March, however.

Collectively, the portfolio’s Long Bias and Hedged Equity allocations accounted for the bulk of the Fund’s return. In particular, long biased and opportunistic funds participated most significantly in the market rally, though core hedged equity fund and multi-asset funds had solid gains despite substantial short exposure or cash reserves. The laggards within equities were an Emerging Market long/short equity fund and a value-oriented hedged global fund, but these were relatively small allocations and therefore had a limited impact. Hedged Credit and Strategic Fixed Income allocations generally produced steady, moderate returns. High-yield and mortgage exposures in particular tended to add value. 

Elsewhere, the holding in a merger arbitrage-related manager continued to generate relatively stable results as corporate events tended to be more relevant to the portfolio than market action. The convertible arbitrage-oriented manager produced a similarly stable risk/return profile. In the global macro area, the Fund’s underlying manager continued to diversify across a wide range of eclectic sub-strategies in multiple asset classes. Because a number of these strategies are well-hedged and less correlated, the fund had a relatively stable but moderate gain for the quarter.

Current Allocations
The Fund’s strategy allocations were largely stable throughout the quarter, the core of which represent a diverse set of equity-oriented allocations accounting for nearly half of the portfolio. Although the allocation to Hedged Credit and Strategic Fixed Income increased marginally from 30% to 32.5%, Arbitrage and Global Macro stayed at roughly 10% and 7.5%, respectively. We did make several changes in manager allocations in each strategy area during the quarter, however.

With equity-oriented strategies representing the largest single allocation in the Fund, it is important to note that this broad category encompasses a diverse mix of long-biased, hedged, multi-asset, and global strategies. We continue to focus our allocations on core managers with relatively more stable risk/return characteristics, and have increased the diversification of the group at the margin by adding a long-biased US hedged equity fund and a long-biased emerging markets hedged equity fund.

Within the fixed-income allocation, we scaled back Hedged Credit from 17% to just under 9%, while increasing Strategic Fixed Income from 13% to 23.5%. This shift reflects the changing opportunity set as well as manager-specific considerations. Part of our “top down” strategy has been to trim high-yield bonds, due to tighter spreads and diminished upside potential, while increasing allocations to more opportunistic and unconstrained funds, especially those with a global approach. Part of our “bottom up” strategy has been to reallocate to funds that are more performance oriented.

The composition of the portfolio’s Arbitrage holdings has been changed by dividing it between merger arbitrage and convertible arbitrage/option hedging. We cut merger arbitrage from 10% to 5%, as the upside of the strategy has been limited due to reduced merger & acquisition (M&A) activity and relatively narrow spreads. We have also focused on a single fund that has been able to add value by emphasizing smaller transactions. The convertible arbitrage/option hedging strategy has tended to exhibit more stable risk/return characteristics than the merger/income fund that it replaced.

Noteworthy within the Global Macro classification is that we have continued to avoid long/short commodities and trend-following strategies as many of the funds in these areas remain out of sync with the markets.

As noted earlier, due to the ongoing potential for renewed volatility in the financial markets, we maintained the Fund’s net equity exposure in the 30% to 35% range. This was supported by the relatively defensive stance of some of the portfolio’s core managers and the continued inclusion of non-equity related strategies.

Outlook
The pendulum of investor sentiment has swung back and forth between two perspectives ever since the global credit crisis of 2008. The negative side has focused on the debt crisis in Europe, doubts about the resilience of China, and fears of tepid growth and policy paralysis in the US. The positive side has reflected strong corporate earnings, and efforts by central banks to provide stimulus. Year-to-date, equity markets—at least in the U.S.—have demonstrated their ability to trend higher when negative concerns dissipate and positive news predominates.

Will the “pendulum” of market sentiment continue to gyrate back and forth? Most recently, liquidity and momentum have been powerful forces. Nevertheless, market trends can still be interrupted by policy and political uncertainties.

Long-term, the outlook is relatively positive, as the global economy is expected to “muddle through,” corporate cash flows and balance sheets among US companies are strong, and equity valuations generally are fair. Although the first quarter rally in equities is alluring, a measured response is prudent. We therefore are maintaining a diversified mix of equity-oriented, credit-oriented, arbitrage, and macro strategies, with different degrees of correlation and market sensitivity. We believe that the Fund is well positioned to live up to its history of producing attractive risk-adjusted returns over time. 

Lake Partners, Inc.
Stamford, 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 include 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, consider the Fund’s investment objectives, risks, charges, and expenses. Contact 800 992-8151 for a prospectus or summary prospectus containing this and other information. Please, read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC.

1st Quarter 2013

The rally in U.S. equities continued during the first quarter of 2013. Investors shrugged off noise from foreign corners such as Cyprus and the Korean peninsula in pushing equities steadily higher. Domestic economic news, while not stellar, did reflect growing conviction in a housing recovery, job growth, and better consumer sentiment despite the notable dysfunction in Washington D.C. Of course, ‘risk’ assets continued to benefit from the sustained accommodative policies of the U.S. Federal Reserve. 

Smaller sized companies in general led the way, but not by much. The small-cap Russell 2000 Index gained 12.4%, followed closely by the large-cap Dow Jones Industrials. The broad market S&P 500 Index rose 10.6%. The laggard among the common indices was the technology and growth stock laden NASDAQ Index, which delivered an 8.5% return. Real Estate Investment Trusts (REITs) trailed them all, however. The Fund’s FTSE/NAREIT Equity REIT Index benchmark gained a more modest 8.1% during the quarter after handily outdistancing the broader equity market since mid-2009.

The Fund lagged its benchmark modestly during the quarter. Notable positive contributions from positions in small-cap Healthcare property owners Sabra Health Care REIT and Medical Properties Trust, along with small-cap STAG Industrial, were offset by lagging performance from hotel operator Orient Express Hotels, data center owner Digital Realty, and large-cap American Tower.  

First quarter earnings reports for REITs offered few negative surprises and dividend growth remains robust on a cap-weighted basis. We forecast impressive growth in per share cash available for distribution (CAD) for the year, which should allow for healthy dividend growth across the sector. REITs as a whole recently traded at an estimated 4% premium to net asset value (NAV)—well within the 10% premium/discount bandwidth typical of the sector over extended periods. Given these valuation parameters, coupled with visible external acquisition and development growth plans for many REITs, we believe that the outlook for the REIT sector remains bright.

Equity REITs have demonstrated the durability of their business models in recent years, with the professional management and operation of high quality commercial real estate properties backstopped by sound balance sheets. During the 2008/2009 financial crisis, REIT prices were pummeled amid the tumult as the availability of capital dried up and investors viewed them in the same light as ordinary equities. The cash flows generated by their underlying portfolios of well-leased properties fluctuated to a far lesser extent, however. As investors attained clarity as to real estate market fundamentals and the durability of the cash flow generation potential of REITs, it became clear that the inherent value of owned real estate portfolios were rising and stabilizing. The strong positive returns of REITs since the financial crisis parallel recovering commercial real estate fundamentals and valuations—aided by continuing low interest rates and muted volumes of competing new supply and development.

With the growing awareness of the underlying fundamental strength of REITs, we think the asset class makes a compelling long-term component of any well-diversified portfolio.

Harrison Street Securities
Chicago, IL

As of March 31, 2013, Sabra Health Care REIT comprised 3.80% of the portfolio's assets, Medical Properties Trust – 2.67%, STAG Industrial – 1.58%, Orient Express Hotels – 1.67%, Digital RealtyTrust – 3.40%, and American Tower – 8.01%.

Note: The Fund is classified as non-diversified and may be more susceptible to risk than funds that invest more broadly. In addition, REITs may decline from deteriorating economic conditions, changes in the value of the underlying property, and defaults by borrowers. Small- and mid-cap equities are considered riskier than large-cap equities due to greater potential volatility and less liquidity. 

Before investing, consider the Fund’s investment objectives, risks, charges, and expenses. Contact 800 992-8151 for a prospectus or summary prospectus containing this and other information. Please, read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC.

1st Quarter 2013

The Fund sharply lagged the broad market S&P 500 Index during the first three months of 2013 as equities rose strongly. This is consistent with the performance expectations of a hedged portfolio, which by definition limits upside returns—particularly when the market is up more than 10% in a single quarter, as it was during the first quarter—in exchange for the potential of downside protection. Our strategy of owning put options to help guard against a significant decline in the equity market acts to decrease returns during a sustained market advance. The Fund’s results during the period were more in line with its hedged peers, though it still trailed modestly.

The impact of our hedging strategy was evident in the performance of the portfolio’s underlying holdings. The equity-only portion of the portfolio only slightly lagged the S&P 500, showing that the hedging strategy was the primary reason for the underperformance relative to the broader market during the quarter.

In an effort to decrease the drag that selling calls and buying put options has on results, we have become much more aggressive in rotating the portfolio out of positions, such as call options that are selling close to intrinsic values, that no longer are attractive.  In addition, we have deceased the size of the put positions in the portfolio in absolute dollars given the current low valuation of those options. In place to help guard against a significant market decline, we think we are now able to buy the same amount of potential downside protection for half the price of what we thought was needed last year. The result of these changes was evident in March, when the Fund still lagged a rising S&P 500, but the gap narrowed considerably. 

In regards to the underlying equity positions, the Fund was overweight Consumer Discretionary,  Technology, Telecomm, and Utilities at the end of March. It was underweight Energy, Consumer Staples, Financials, Healthcare, and Materials. Given our bottom-up, fundamental approach to stock-picking, the common thread in this positioning was a function of valuation as measured by cash flow and current yield. As of the end of the quarter, the underlying holdings in aggregate delivered a greater yield than that of the S&P 500 while trading at a significantly cheaper price based on company cash flows than the index.

Ron Altman                                                   
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, consider the Fund’s investment objectives, risks, charges, and expenses. Contact 800 992-8151 for a prospectus or summary prospectus containing this and other information. Please, read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC.

1st Quarter 2013 

U.S. markets continued to surge during the first quarter and optimism grew as momentum built toward the end of 2012 continued into 2013. The Dow Jones Industrial Average eclipsed its 2007 peak and traders pushed the broad market S&P 500 Index above its 1,565 high water mark on the final trading day of March. Americans appeared to embrace the notion that while the economic recovery was slow, there were clear, observable improvements in the economy.

Unfortunately, as the quarter came to a close Europe again threatened to undermine the market’s gains in the form of a financial crisis in Cyprus. Although a second bailout agreement eliminated the ill-conceived plan to tax insured deposits, the mere proposal of this solution by the European Central Bank (ECB) and International Monetary Fund (IMF) served notice to depositors throughout southern Europe. U.S. markets largely ignored the headlines as they pushed toward new highs, but whether this apparently blasé attitude owed itself to ignorance or increased risk tolerance, it most likely indicates investor faith in the ability of the Federal Reserve and the ECB to contain the damage, yet again.

This was not a typical risk accumulation-rally, however. Consistent with a strong risk rally, low-quality stocks, as measured by Bank of America/Merrill Lynch, handily outperformed high-quality stocks, but high-beta (volatility) stocks significantly underperformed. Defensive sectors such as Healthcare, Consumer Staples, and Utilities all gained 13% or more and were the best performing areas in the S&P 500. A number of value factors were among the top indicators during the period as well. Clearly, market participants were more selective in the risks they were willing to take even as the market advanced.

Following the favorable resolution of the dividend tax uncertainty, dividend stocks performed well on an absolute basis. According to Ned Davis Research, the stark performance differential between high-yield and low-yield stocks that dominated 2012 was absent during the first quarter of 2013. The highest yielding stocks in the S&P 500 (first quartile) modestly outgained the lowest yielding (fourth quartile). 

High Conviction Picks Surge
The Fund outperformed its Russell 3000 Value Index benchmark during the quarter. The outperformance was a bit surprising given the strong absolute return of the index. Since the Fund’s inception there have been 15 three-month periods in which the benchmark returned more than 10% and this is only the second time the portfolio has outperformed amid such a sharp increase (the other being the third quarter of 2010).

In a reversal of 2012, there was broad outperformance among our highest conviction positions. Of the Fund’s top-20 holdings at the end of 2012, 16 outperformed the benchmark during the first quarter! As we discussed in our fourth quarter 2012 commentary, the holdings that outperformed the benchmark last year were generally smaller than average in position size, while the portfolio’s largest positions were among the worst performers.    

Both sector allocation and stock selection had a positive impact on relative results during the quarter. Holdings in eight of 10 sectors of the portfolio had a positive total effect on relative results, with stock selection in the Financials and Telecommunication Services sectors being the most significant. 

The Fund’s top contributor was Sabra Healthcare REIT, which was also the top performing holding in 2012. In an earnings report that exceeded expectations, management announced further progress on savings from refinancing, which can serve as a basis to boost dividend growth, as well as diversification away from their largest tenant. Management laid out a clear path for continued diversification of tenant risk and expectations for the announcement of three multi-year deals (each for 10 new facilities) in the coming months. Investors have cheered Sabra’s progress, sending shares steadily higher the last several quarters. Given an attractive yield and strong execution by management, we maintained the position in the stock despite it having moved to a premium versus our assessed Absolute Value.

Drugstore network Walgreen’s shares steadily increased throughout the quarter as earnings exceeded expectations and investors realized the potential benefit to the firm from the implementation of the Affordable Care Act and the return of Express Scripts customers following last year’s dispute. Wall Street praised the announcement of a comprehensive 10-year distribution agreement with AmerisourceBergen. We believe that Walgreen’s partnerships with AmerisourceBergen  and others provide the company with a long runway for business and dividend growth.

General Mills, BlackRock, and railroad Norfolk Southern rounded out the top-five contributors. General Mills rallied on news an acquisition offer for rival Heinz, and better than expected fiscal earnings and raised guidance for the fiscal year. The company raised its dividend and committed to returning greater levels of cash flow to shareholders next year with at least a 2% reduction in shares outstanding. We reduced the portfolio’s position for the first time as it traded at a premium to our Absolute Value. BlackRock was among our highest conviction holdings at the end of 2012, but we trimmed it multiple times during the quarter as it began trading at a significant premium. Norfolk Southern’s stock benefited from improved sentiment surrounding rail companies, but 2013 results may prove volatile. 

Lackluster Tech
Only four positions had a negative contribution to the total return and only five positions had a negative effect relative to the benchmark in excess of 10 basis points during the quarter. Two sectors had negative relative results overall, with stock selection in Technology having the most significant impact. Although holdings in Intel and Microsoft underperformed the broader portfolio, the sector’s return still beat the total return for the Russell 3000 Value.  

American Greetings was the largest negative contributor to performance. In September 2012, the board received a premium buyout offer from CEO Zev Weiss and COO Jeffrey Weiss. The stock reacted positively, trading around the buyout price through the middle of January 2013. The stock sold off in late January on rumors that the Weiss family was having difficulty in obtaining financing for the buyout. (Note: On April 1, 2013, after quarter end, the company announced that its board had signed a definitive agreement to be acquired by the Weiss family and the stock jumped more than 10%.)

Another negative contributor was Occidental Petroleum, the largest independent exploration and production company in the United States. The company lowered its international production guidance, highlighting the divergence between its improving U.S. operations and periodic issues overseas. Wall Street also seemed to fret over the potential distraction caused by a dispute in the executive suite. We remain confident in CEO Stephen Chazen, however, and the company raised its dividend during the quarter—its tenth consecutive annual increase--and we believe there is significant value in the chemicals and midstream segments. We increased the Fund’s position to its initial target weight.

Utility company Entergy also detracted from returns. As the operator of six regulated utilities, Entergy has several key rate cases in 2013 in jurisdictions where allowed return-on-equity may come under pressure. The future of its wholesale business is also hazy, as cheap natural gas-fired generation is depressing power prices, causing some nuclear operators to close high-cost plants. We had kept the position small due to the relatively low conviction and the stalled dividend. In the wake of recent quarterly results, we determined that while the current yield was attractive our conviction was unlikely to increase over a reasonable investment horizon, and we sold the position. 

One Beacon Insurance Group and specialty chemical company Innophos Holdings were the other lowest contributors to performance. One Beacon reported fourth quarter earnings that were below expectations, driven by increased catastrophe losses and investment spending. Innophos, added to the portfolio in March, was among the lowest contributors not because of performance but due to the relatively small size of the position. 

Portfolio Positioning
As markets continued to advance and valuations remained elevated, we focused on reducing or eliminating overvalued positions and rationalizing lower conviction positions. Four positions were established and five eliminated during the quarter. Six holdings that were among the top-20 at year-end were significantly reduced, with five of these trimmed due to valuation. We reduced the position in Lockheed Martin due to the risk that sequestration presented to its beleaguered F-35 fighter jet project. Although portfolio turnover was higher than in recent quarters, it was still well within what we consider a normal range, and little actually changed from the portfolio that underperformed during the post-quantitative easing (QE3) market surge at the end of 2012.

Changes in the relative positioning of the Fund were minor, the most notable occurring in the Industrials sector. The portfolio’s overweight position decreased due to the elimination of Waste Management, which was trading at premium to our assessed Absolute Value. This sale combined with the reduction in Lockheed was more than offset by an increase in Iron Mountain. Elsewhere, the relative overweight in the Consumer Discretionary sector increased primarily owing to the introduction of Coach and an increased weighting in Darden Restaurants. Within Energy, we eliminated ConocoPhillips as Occidental Petroleum was increased, and we introduced Williams Partners L.P. to the portfolio. 

Williams Partners is a master limited partnership (MLP) that owns and operates approximately 15,000 miles of midstream and long haul transportation pipelines focused on gathering, processing, and transporting natural gas. With favorable secular tailwinds and a powerful geographic footprint of pipelines, we believe the company is positioned strongly to deliver an attractive, growing stream of cash flow to investors over our investment horizon. We think the firm’s shareholder orientation is in the right place as evidenced by its sizeable yield and growing distributions, which management intends to increase annually going forward. The stock was trading at a 23% discount to our assessed Absolute Value at the time of initial purchase.

Outlook
After closely following negotiations in Washington  D.C. for months, we were relieved that the most exciting news out of Congress this quarter was the first federal budget proposal from the Senate in four years. Despite warnings of fire and brimstone if the sequester spending cuts were allowed to occur, reality has proven much less drastic to date. This recent period of relative peace and quiet, however, could be interrupted by the secondary impacts of the small, yet perhaps important, global events such as the implosion in Cyprus.

The strong market performance during the first quarter has heightened our concerns about broader market valuations, however. Despite efforts to reduce and eliminate positions trading at premium valuations, our discount-to-value measure for the portfolio surged to its highest levels—indicating that valuations are rich. Without a return to healthy sales and earnings growth or an increase in merger and acquisition (M&A) activity, it is difficult for us to justify substantial increases in the valuations we are employing for holdings in the portfolio. The negative tone that has dominated recent management guidance is weighing on expectations for coming S&P 500 company earnings, now projected to decline. It is too early to make the call for a wave of M&A pushing multiples higher for mid-to-large cap companies.

The massive surge in quantitative easing recently initiated by the Bank of Japan could push the market even higher, but after years of quantitative easing in the developed world, the incremental benefits of these programs on earnings and the broader economy appear to be reduced. There is a very real risk that another wave of easy money and a more bearish outlook for bonds could effectively “de-couple” the equity markets from the broader economy and corporate earnings.  The discount-to-value of the portfolio suggests that this may have already happened to some extent, but the impact could prove extreme if inflows into equities increase significantly in the coming quarters.

We were pleased with the performance of the Fund since the start of the new year. As expected, the resolution of tax uncertainty removed a significant headwind and even allowed the portfolio to outperform in a market where we would normally have expected it to lag. Strong dividend growth and large share repurchases suggest that company management teams are more focused on returning capital to shareholders, and the relative performance associated with these announcements demonstrates investor preference for this as well. Although we believe that modest earnings growth and multiple expansion will drive an attractive total return for U.S. equity markets in 2013, a market correction does appear to be due.

The Fund still has delivered the solid relative returns that we expect on days when the benchmark declined. If the market corrects, we believe the portfolio is well positioned to help cushion the blow. We remain focused on reducing positions that are trading at premiums to our assessed Absolute Value and taking advantage of individual opportunities as they arise.

River Road Asset Management

14 April 2013

As of March 31, 2013, Sabra Healthcare REIT comprised 2.00% of the portfolio's assets, Walgreen Co. – 1.99%, General Mills – 2.04%, BlackRock – 1.51%, Norfolk Southern – 2.03%, Intel – 1.91%, Microsoft – 1.06%, American Greetings – 0.74%, Occidental Petroleum – 1.79%, Entergy – 0.00%, OneBeacon Insurance Group – 0.44%, Innophos Holdings – 0.27%, Lockheed Martin – 1.03%, Iron Mountain – 1.60%, Coach – 0.98%, Darden Restaurants – 1.55%, and Williams Partners LP – 1.36%.

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, consider the Fund’s investment objectives, risks, charges, and expenses. Contact 800 992-8151 for a prospectus or summary prospectus containing this and other information. Please, read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC.

1st Quarter 2013 

U.S. markets continued to surge during the first quarter and optimism grew as momentum built toward the end of 2012 continued into 2013. The Dow Jones Industrial Average eclipsed its 2007 peak and traders pushed the broad market S&P 500 Index above its 1,565 high water mark on the final trading day of March. Americans appeared to embrace the notion that while the economic recovery was slow, there were clear, observable improvements in the economy.

Unfortunately, as the quarter came to a close Europe again threatened to undermine the market’s gains in the form of a financial crisis in Cyprus. Although a second bailout agreement eliminated the ill-conceived plan to tax insured deposits, the mere proposal of this solution by the European Central Bank (ECB) and International Monetary Fund (IMF) served notice to depositors throughout southern Europe. U.S. markets largely ignored the headlines as they pushed toward new highs, but whether this apparently blasé attitude owed itself to ignorance or increased risk tolerance, it most likely indicates investor faith in the ability of the Federal Reserve and the ECB to contain the damage, yet again.

This was not a typical risk accumulation-rally, however. Consistent with a strong risk rally, low-quality stocks, as measured by Bank of America/Merrill Lynch, handily outperformed high-quality stocks, but high-beta (volatility) stocks significantly underperformed. Defensive sectors such as Healthcare, Consumer Staples, and Utilities all gained 13% or more and were the best performing areas in the S&P 500. A number of value factors were among the top indicators during the period as well. Clearly, market participants were more selective in the risks they were willing to take even as the market advanced.

Following the favorable resolution of the dividend tax uncertainty, dividend stocks performed well on an absolute basis. According to Ned Davis Research, the stark performance differential between high-yield and low-yield stocks that dominated 2012 was absent during the first quarter of 2013. The highest yielding stocks in the S&P 500 (first quartile) modestly outgained the lowest yielding (fourth quartile). 

High Conviction Picks Surge
The Fund outperformed its Russell 3000 Value Index benchmark during the quarter. In a reversal of 2012, there was broad outperformance among our highest conviction positions. Of the Fund’s top-20 holdings at the end of 2012, 16 outperformed the benchmark during the first quarter! As we discussed in our fourth quarter 2012 commentary, the holdings that outperformed the benchmark last year were generally smaller than average in position size, while the portfolio’s largest positions were among the worst performers.     

Both sector allocation and stock selection had a positive impact on relative results during the quarter, and 18 holdings out of 63 increased their regular dividend payments. Holdings in seven of 10 sectors of the portfolio had a positive total effect on relative results, with stock selection in the Financials and an overweight position in Consumer Staples being the most significant. 

The Fund’s top contributor was drugstore network Walgreen Co., shares of which steadily increased throughout the quarter as earnings exceeded expectations and investors realized the potential benefit to the firm from the implementation of the Affordable Care Act and the return of Express Scripts customers following last year’s dispute. Wall Street praised the announcement of a comprehensive 10-year distribution agreement with AmerisourceBergen. We believe that Walgreen’s partnerships with AmerisourceBergen  and others provide the company with a long runway for business and dividend growth.

The second largest contributor was asset manager BlackRock, as assets under management increased, operating margins expanded, and the firm hiked its dividend and disclosed it had repurchased shares.  Investors cheered these results, pushing the stock above our calculated Absolute Value. This gave us an opportunity to trim the position, though it remained a core holding in the Fund.

General Mills, railroad Norfolk Southern, and Kimberly-Clark rounded out the top-five contributors. General Mills rallied on news an acquisition offer for rival Heinz, and better than expected fiscal earnings and raised guidance for the fiscal year. The company raised its dividend and committed to returning greater levels of cash flow to shareholders next year with at least a 2% reduction in shares outstanding. Norfolk Southern’s stock benefited from improved sentiment surrounding rail companies, but 2013 results may prove volatile. Kimberly-Clark was among our highest conviction holdings in 2012, but we reduced it during the quarter as it also traded up sharply following the Heinz deal and was trading at a premium to our Absolute Value. 

Lackluster Tech
Just two positions had a negative contribution to the total return and only five positions had a negative effect relative to the benchmark in excess of 10 basis points during the quarter. Three sectors had negative relative results overall, with stock selection in Technology having the most significant impact. Although holdings in Intel and Microsoft underperformed the broader portfolio, the sector’s return still beat the total return for the Russell 3000 Value. 

Occidental Petroleum was the largest negative contributor to performance. The company lowered its international production guidance, highlighting the divergence between its improving U.S. operations and periodic issues overseas. Wall Street also seemed to fret over the potential distraction caused by a dispute in the executive suite. We remain confident in CEO Stephen Chazen, however, and the company raised its dividend during the quarter—its tenth consecutive annual increase--and we believe there is significant value in the chemicals and midstream segments. We increased the Fund’s position to its initial target weight.

Another poor performer was Utility company Entergy. As the operator of six regulated utilities, Entergy has several key rate cases in 2013 in jurisdictions where allowed return-on-equity may come under pressure. The future of its wholesale business is also hazy, as cheap natural gas-fired generation is depressing power prices, causing some nuclear operators to close high-cost plants. We had kept the position small due to the relatively low conviction and the stalled dividend. In the wake of recent quarterly results, we determined that while the current yield was attractive our conviction was unlikely to increase over a reasonable investment horizon, and we sold the position. 

Specialty chemical company Innophos Holdings, Western Union, and accessories retailer Coach were the other lowest contributors to performance. All were among the bottom contributors not because of poor performance, but because they were recently added positions with relatively small position sizes. 

Portfolio Positioning
As markets continued to advance and valuations remained elevated, we focused on reducing or eliminating overvalued positions and rationalizing lower conviction positions. Four positions were established and five eliminated during the quarter. Five holdings that were among the top-20 at year-end were significantly reduced, with four of these trimmed due to valuation. We reduced the position in Lockheed Martin due to the risk that sequestration presented to its beleaguered F-35 fighter jet project. Although portfolio turnover was higher than in recent quarters, it was well within what we consider a normal range, and little actually changed from the portfolio that underperformed during the post-quantitative easing (QE3) market surge at the end of 2012.

Changes in the relative positioning of the Fund were minor, the most notable occurring in the Industrials sector. The portfolio’s overweight position decreased due to the elimination of Waste Management, which was trading at premium to our assessed Absolute Value. This sale combined with the reduction in Lockheed was more than offset by an increase in Iron Mountain. Elsewhere, the relative overweight in the Consumer Discretionary sector increased primarily owing to the introduction of Coach and an increased weighting in Darden Restaurants. The portfolio’s underweight position in Healthcare increased after trimming AstraZeneca due to deteriorating fundamentals and a stalled dividend.

The largest new position added to the Fund was Williams Partners, a master limited partnership (MLP) that owns and operates approximately 15,000 miles of midstream and long haul transportation pipelines focused on gathering, processing, and transporting natural gas. With favorable secular tailwinds and a powerful geographic footprint of pipelines, we believe the company is positioned strongly to deliver an attractive, growing stream of cash flow to investors over our investment horizon. We think the firm’s shareholder orientation is in the right place as evidenced by its sizeable yield and growing distributions, which management intends to increase annually going forward. The stock was trading at a 23% discount to our assessed Absolute Value at the time of initial purchase. 

Outlook
After closely following negotiations in Washington  D.C. for months, we were relieved that the most exciting news out of Congress this quarter was the first federal budget proposal from the Senate in four years. Despite warnings of fire and brimstone if the sequester spending cuts were allowed to occur, reality has proven much less drastic to date. This recent period of relative peace and quiet, however, could be interrupted by the secondary impacts of the small, yet perhaps important, global events such as the implosion in Cyprus.

The strong market performance during the first quarter has heightened our concerns about broader market valuations, however. Despite efforts to reduce and eliminate positions trading at premium valuations, our discount-to-value measure for the portfolio surged to its highest levels—indicating that valuations are rich. Without a return to healthy sales and earnings growth or an increase in merger and acquisition (M&A) activity, it is difficult for us to justify substantial increases in the valuations we are employing for holdings in the portfolio. The negative tone that has dominated recent management guidance is weighing on expectations for coming S&P 500 company earnings, now projected to decline. It is too early to make the call for a wave of M&A pushing multiples higher for mid-to-large cap companies.

The massive surge in quantitative easing recently initiated by the Bank of Japan could push the market even higher, but after years of quantitative easing in the developed world, the incremental benefits of these programs on earnings and the broader economy appear to be reduced. There is a very real risk that another wave of easy money and a more bearish outlook for bonds could effectively “de-couple” the equity markets from the broader economy and corporate earnings.  The discount-to-value of the portfolio suggests that this may have already happened to some extent, but the impact could prove extreme if inflows into equities increase significantly in the coming quarters.

We were pleased with the performance of the Fund since the start of the new year. As expected, the resolution of tax uncertainty removed a significant headwind and even allowed the portfolio to outperform in a market where we would normally have expected it to lag. Strong dividend growth and large share repurchases suggest that company management teams are more focused on returning capital to shareholders, and the relative performance associated with these announcements demonstrates investor preference for this as well. Although we believe that modest earnings growth and multiple expansion will drive an attractive total return for U.S. equity markets in 2013, a market correction does appear to be due.

The Fund still has delivered the solid relative returns that we expect on days when the benchmark declined. If the market corrects, we believe the portfolio is well positioned to help cushion the blow. We remain focused on reducing positions that are trading at premiums to our assessed Absolute Value and taking advantage of individual opportunities as they arise.

River Road Asset Management

14 April 2013

As of March 31, 2013, Walgreen comprised 2.18% of the portfolio's assets, BlackRock – 1.61%, General Mills – 2.15%, Norfolk Southern – 2.36%, Kimberly-Clark – 2.15%, Intel – 2.17%, Microsoft – 1.18%, Occidental Petroleum – 2.01%, Entergy – 0.00%, Innophos Holdings – 0.29%, Western Union – 0.56%, Coach – 1.08%, Lockheed Martin – 1.17%, Iron Mountain – 1.79%, Darden Restaurants – 1.71%, AstraZeneca – 0.69%, and Williams Partners LP – 1.53%.

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, consider the Fund’s investment objectives, risks, charges, and expenses. Contact 800 992-8151 for a prospectus or summary prospectus containing this and other information. Please, read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC.

1st Quarter 2013 

Stocks soared during the first quarter of 2013 as investors cheered the resolution of the fiscal cliff, positive momentum in the housing sector, and the enormous liquidity that continued to flow from the U.S. Federal Reserve and other global central banks. The rally elevated most of the major U.S. equity indices to new, all-time highs, including the Dow Jones Industrial Average, the small-cap Russell 2000 and, on the final trading day of the quarter, the S&P 500. All this despite seemingly stretched valuations, higher taxes, the government sequester, weak European economic data, and (most surprisingly) the banking crisis emanating from Cyprus—an event that almost certainly would have rattled markets just 12 months ago. The only laggard was the NASDAQ composite, which remained roughly 35% below its 2000 tech bubble peak.

Small-cap stocks led large-caps for the second consecutive quarter, with the Russell 2000 returning 12.4% versus 10.6% for the large-cap oriented S&P 500. The best performing size segment, however, was once again mid-caps, with the Russell Midcap index gaining 13.0%. Style performance across the market-cap spectrum was mixed as value outperformed among large- and mid-cap stocks but lagged in small-caps. The Fund’ s Russell 2500 Value Index benchmark returned 13.4% versus 12.2% for the Russell 2500 Growth Index. 

Given the strong rally, it was surprising that low-beta (volatility) stocks outperformed high-beta among the small-to-mid cap stocks within the Fund’s benchmark. This might imply that while investors still have an appetite for risk assets, they are trying to dial down the relative level of risk they are taking. If this is the case, it might further imply that equity markets are due for a pause, if not a more significant correction.

Supporting this position, high-quality stocks also outperformed. Benchmark stocks in the first quintile for highest return-on-equity (ROE) bested the stocks with the lowest ROE by a healthy margin. As discussed in detail last quarter (and in prior commentaries over the years), low-beta and high-quality leadership factors typically benefit the portfolio’s low volatility style of investing.  

Mid-Stage of the Market Cycle
The Fund kept pace amid the quarter’s strong rally, though it underperformed its benchmark just slightly by quarter-end. As we have noted in the past, the most challenging phase of the market cycle for our style is the early stage when investors are aggressively accumulating risk. This is the stage when high-beta/low-quality stocks tend to lead. Two years ago, we wrote that the early stage of this cycle had finally ended in February 2011 and the mid-stage had begun, which should have a positive impact on the portfolio’s relative returns.

Since that time, the Fund has performed well, despite a headwind created by strong real estate investment trust (REIT) performance. One of the largest underperforming sectors in the portfolio during that period was Financials, more specifically REITs. Our strategy does not invest in REITs, as we take an institutional approach that treats real estate as a separate asset class. In the past, this has not had a material impact on intermediate to longer-term returns. During the last two years, however, investors have bid up income generating investments such as REITs. Thus, the impact of not investing in REITs has been material.

REITs may not reverse their upward trend in the near-term with interest rates expected to remain low. Still, we think REITs are trading at historically high valuations. When the Fed does begin to signal a change in policy, REITs could dramatically reverse, counteracting the headwind faced the last couple of years. 

(Note: River Road excluded GEO Group from this analysis of REIT performance, as GEO only converted to a REIT effective January 1, 2013. Occasionally, a holding will convert to REIT status after we have initiated a position. This is typically positive, as REITs receive a relatively high multiple on their earnings. Such was the case with GEO, the Fund’s top performing holding the past two quarters. While we do not buy REITs, we do not feel compelled to sell immediately if a stock converts to REIT status, preferring instead to sell after the stock’s price has closed the valuation gap.  This is what has occurred with GEO.) 

Consumer Discretionary and Financials Boost
Consumer Discretionary and Financials were the two sectors with the highest contribution to relative performance during the first quarter. Consumer Discretionary benefited from both an overweight allocation and stock selection, while strong stock selection boosted Financials.

As noted above, the top individual performer was Geo Group. The second largest provider of outsourced prison services in the United States, Geo converted into a REIT and management announced that it would refinance the company’s credit facility during the first half of 2013, allowing the company to increase its current dividend. The stock attracted increased investor attention, gaining inclusion into more REIT indices. As the portfolio’s largest holding at the beginning of the quarter, we cut the position in half as it approached our calculated Absolute Value.

Madison Square Garden and Big Lots were the standouts within Consumer Discretionary. MSG is the owner of the eponymous sports facility and of the New York Knicks, hockey’s New York Rangers, and an affiliated regional sports network. The year started on a positive note when the National Hockey League (NHL) reached an agreement with the players’ union ending a four-month lockout. Later, MSG surprised investors with better-than-expected quarterly results, as higher affiliate and advertising revenue drove strong cash flow growth. We significantly trimmed the portfolio’s position as shares traded near our Absolute Value. Closeout retailer Big Lots rallied in January on a strong earnings report and rumors that private equity may be looking again at potentially acquiring the firm. The balance sheet also improved as the company used free cash flow to pay down debt.

Although the Fund does not typically invest in “high tech” companies, we commonly invest in “lower tech” companies. DST Systems, a top-five contributor during the quarter, is a good example of the type of tech companies in which we like to invest. It is the largest third-party provider of mutual fund shareholder accounting services. These outsourced back office services offer strong margins, long-term contracts, and high switching costs. The company reported robust organic revenue growth with meaningful margin expansion during the period. While still a high-conviction holding, we trimmed the position as the risk/reward profile became less favorable given the stock’s recent appreciation. 

Lagging Industrials
The Healthcare sector posted the highest returns in the benchmark during the quarter, but results in that area of the portfolio as well as poor stock selection within Industrials hurt returns. The biggest detractor within Industrials, and the broader portfolio, was human resources firm Insperity. The company reported strong fourth quarter results, but the stock sold off on lowered earnings guidance for 2013. Management noted that new business additions would not offset the higher attrition of large accounts and less hiring within its customer base. Insperity had expanded its sales staff in anticipation of new business associated with increased regulations for small-medium business owners. With an overall gain in the portfolio’s position, we took advantage of the price weakness to add to the holding.

Another poor performing Industrials name was Layne Christensen, the world’s largest driller of water wells. The company preannounced losses in its Heavy Civil segment. This was not a surprise since the company has been working through unprofitable legacy contracts priced by the previous management team. The current management team noted that the backlog of Heavy Civil was improving for fiscal year 2014. We took advantage of the price weakness to increase the Fund’s position closer to our target weight.

Mining stock Pan American Silver reported fourth quarter results that were in-line with expectations, but from early February through the end of the quarter the price of silver declined substantially. Although we expect the company will remain sensitive to changes in silver prices, we think there is a significant discount between the value of the company’s proven reserves and the current spot prices for silver. We initiated a position in the portfolio in January in the belief this gap would close over time. 

Portfolio Positioning
The Fund purchased 13 new holdings and sold 19 during the quarter. This high level of activity followed a year of unusually low turnover in the portfolio, owing primarily to the large number of companies that achieved their price target during the quarter. Seventeen holdings achieved our Absolute Value price targets, including two from strategic takeovers. We liquidated only two holdings due to declining fundamentals or accumulated losses.

A positive catalyst for the market (and the portfolio) has been acquisitions and share buybacks.  The market experienced a material upswing in merger & acquisition (M&A) activity beginning towards the end of last year and extending into the first quarter. The portfolio experienced takeover bids at Alterra Capital Holdings and WMS Industries, as well as a major asset sale by Atlantic Tele-Network that was similar to an acquisition. Heightened M&A activity has historically been a positive catalyst for portfolio performance and the recent pick-up appears to be consistent with that trend.

New positions in the Fund were diversified across industry groups and continued to trend toward smaller market-caps, where we are finding valuations most attractive. The biggest challenge during the quarter was establishing a full position before the rising market lifted share prices beyond what we were willing to pay. An example of this was pay-TV network Starz Liberty Capital.

Starz spun-off from John Malone’s Liberty Media in January 2013 at a substantial discount relative to industry peers, especially given that the firm’s networks—Starz and Encore—are the second most-watched premium duo in the United States (behind HBO). Wall Street sell-side analysts initiated coverage of the stock with an almost unanimous negative opinion on concerns about Starz’s ability to renew licensing agreements and the firm’s lack of original content. That issue was addressed in February when the company successfully extended its contract with Sony Pictures for an additional five years (through 2021) at similar terms. Regarding content, CEO Chris Albrecht brings an impressive record of developing original content from his previous tenure as CEO at HBO. We think he will have time to expand the firm’s library of original content beyond its initial hit show Spartacus. By quarter end, the market awarded the stock a multiple closer to those of other premium networks and we trimmed the position as it approached our Absolute Value.

We strategically reduced 13 positions in all, most of which were related to price appreciation. We also strategically increased positions in 26 existing holdings, among these the largest increases were in Tower Group and Cloud Peak Energy. We stated last quarter that we have been comfortable with the Fund’s positions and sector weights (excluding Financials) over the past two years and, looking into 2013, did not foresee any major shifts in allocation. This remains the case. 

Outlook
The downside of the recent equity rally is that we think it has pushed valuations to an extreme level. At the end of 2012, we calculated the discount-to-Absolute Value for the portfolio as 80%, indicating room for modest upside. Not more than three months later it was trading at 87%—a   new, all-time high and well above its historical peak of 86%. This is a cautionary signal to investors, though we continue to find new ideas trading at attractive prices (which is unusual in a period of extremely high valuations). Unfortunately, many of these opportunities have proven difficult to buy due to limited liquidity and/or stock prices that are rapidly moving higher. Portfolio growth and valuation metrics also continue to look attractive relative to respective benchmark metrics and the multiples we are using for the top-20 holdings are well below historical peak—both positive indicators for future relative performance. 

The challenge with valuation is that while small-cap stocks are clearly priced at a premium, so is nearly every other asset class. Unlike 2006, which was a consumer-driven equity bubble, the current market appears to reflect an overall liquidity bubble. This presents a unique asset allocation challenge for investors.

From our perspective, the market is due for a correction. In the absence of a major negative catalyst, and as long as the Fed and European Central Bank (ECB) remain supportive, we think any correction should be reasonably modest in depth and duration. Although we expect small-cap earnings growth expectations to contract in the months ahead, we believe positive momentum in the housing, employment, and financial markets will help to maintain a reasonable level of growth—at least for the next few quarters. In additional, M&A activity is at a healthy level and there is ample investor cash waiting for a more attractive entry point into U.S. equities. That said, this rally and the overall profit cycle are beginning to look very mature. Thus, we are keeping expectations firmly in check.

River Road Asset Management

14 April 2013

As of March 31, 2013, Geo Group comprised 2.42% of the portfolio’s assets, Madison Square Garden – 1.94%, Big Lots – 3.17%, DST Systems – 3.33%, Insperity – 1.35%, Layne Christiansen – 0.56%, Pan American Silver – 1.29%, Alterra Capital – 0.00%, WMS Industries – 0.00%, Atlantic Tele-Network – 1.29%, Starz Liberty Capital – 0.74%, Tower Group – 1.46%, and Cloud Peak Energy – 1.13%.

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, consider the Fund’s investment objectives, risks, charges, and expenses. Contact 800 992-8151 for a prospectus or summary prospectus containing this and other information. Please, read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC.

1st Quarter 2013

Stocks soared during the first quarter of 2013 as investors cheered the resolution of the fiscal cliff, positive momentum in the housing sector, and the enormous liquidity that continued to flow from the U.S. Federal Reserve and other global central banks. The rally elevated most of the major U.S. equity indices to new, all-time highs, including the Dow Jones Industrial Average, the Russell 2000 and, on the final trading day of the quarter, the S&P 500. All this despite seemingly stretched valuations, higher taxes, the government sequester, weak European economic data, and (most surprisingly) the banking crisis emanating from Cyprus—an event that almost certainly would have rattled markets just 12 months ago. The only laggard was the NASDAQ composite, which remained about 35% below its 2000 tech bubble peak.

Small-cap stocks led large-caps for the second consecutive quarter, with the small-cap Russell 2000 returning 12.4% versus 10.6% for the large-cap oriented S&P 500. The best performing size segment, however, was once again mid-caps, with the Russell Midcap index gaining 13.0%. Style performance across market-caps was mixed, as value outperformed among large- and mid-cap stocks but lagged among small-caps. The Fund’ s Russell 2000 Value Index benchmark returned 11.6% versus 13.2% for the Russell 2000 Growth Index. 

Given the strong rally, it was surprising that low-beta (volatility) stocks outperformed high-beta among the small-cap stocks within the benchmark. This might imply that while investors still have an appetite for risk assets, they are trying to dial down the relative level of risk they are taking. If this is the case, it might further imply that equity markets are due for a pause, if not a more significant correction.

Supporting this position, high-quality stocks also continued their multi-quarter outperformance streak. Stocks in the first quintile for highest return-on-equity (ROE) in the Russell 2000 Value bested the stocks with the lowest ROE by a healthy margin. As discussed in detail last quarter (and in prior commentaries over the years), low-beta and high-quality leadership factors typically benefit the portfolio’s low volatility style of investing.  

Mid-Stage of the Market Cycle
The Fund kept pace amid the quarter’s strong rally in modestly outperforming its benchmark. As we have noted in the past, the most challenging phase of the market cycle for our style is the early stage when investors are aggressively accumulating risk. This is the stage when high-beta/low-quality stocks tend to lead. Two years ago, we wrote that the early stage of this cycle had finally ended in February 2011 and the mid-stage had begun, which should have a positive impact on the portfolio’s relative returns.

Since that time, the Fund has performed well, despite a headwind created by strong real estate investment trust (REIT) performance. The largest underperforming sector in the portfolio during that period was Financials, more specifically REITs. Our strategy does not invest in REITs, as we take an institutional approach that treats real estate as a separate asset class.  Historically, this has not had a material impact on intermediate to longer-term returns. During the past two years, however, investors have bid up income generating investments such as REITs.  Thus, the impact of not investing in REITs has been material.   

REITs may not reverse their upward trend in the near-term with interest rates expected to remain low. Still, we think REITs are trading at historically high valuations. When the Fed does begin to signal a change in policy, REITs could dramatically reverse, counteracting the headwind faced the last couple of years. 

(Note: River Road excluded GEO Group from this analysis of REIT performance, as GEO only converted to a REIT effective January 1, 2013. Occasionally, a holding will convert to REIT status after we have initiated a position. This is typically positive, as REITs receive a relatively high multiple on their earnings. Such was the case with GEO, the Fund’s top performing holding the past two quarters. While we do not buy REITs, we do not feel compelled to sell immediately if a stock converts to REIT status, preferring instead to sell after the stock’s price has closed the valuation gap.  This is what has occurred with GEO.) 

Tech and Consumer Discretionary Boost
Technology and Consumer Discretionary were the two sectors with the highest contribution to relative performance during the first quarter. Tech holdings benefited from strong stock selection, while both an overweight allocation and stock selection helped within Consumer Discretionary.

As noted above, the top individual performer was Geo Group. The second largest provider of outsourced prison services in the United States, Geo converted into a REIT and management announced that it would refinance the company’s credit facility during the first half of 2013, allowing the company to increase its current dividend. The stock attracted increased investor attention, gaining inclusion into more REIT indices. As the portfolio’s largest holding at the beginning of the quarter, we cut the position in half as it approached our calculated Absolute Value.

Madison Square Garden and Big Lots were the standouts within Consumer Discretionary. MSG is the owner of the eponymous sports facility and of the New York Knicks, hockey’s New York Rangers, and an affiliated regional sports network. The year started on a positive note when the National Hockey League (NHL) reached an agreement with the players’ union ending a four-month lockout. Later, MSG surprised investors with better-than-expected quarterly results, as higher affiliate and advertising revenue drove strong cash flow growth. We significantly trimmed the portfolio’s position as shares traded near our Absolute Value. Closeout retailer Big Lots rallied in January on a strong earnings report and rumors that private equity may be looking again at potentially acquiring the firm. The balance sheet also improved as the company used free cash flow to pay down debt.

Although the Fund does not typically invest in “high tech” companies, we commonly invest in “lower tech” companies. DST Systems, a top-five contributor during the quarter, is a good example of the type of tech companies in which we like to invest. It is the largest third-party provider of mutual fund shareholder accounting services. These outsourced back office services offer strong margins, long-term contracts, and high switching costs. The company reported robust organic revenue growth with meaningful margin expansion during the period. While still a high-conviction holding, we trimmed the position as the risk/reward profile became less favorable given the stock’s recent appreciation. 

Lagging Industrials
The only sector with a negative contribution to relative returns during the quarter was Industrials, which suffered from poor stock selection. The primary detractor within that sector, and the broader portfolio, was human resources firm Insperity. The company reported strong fourth quarter results, but the stock sold off on lowered earnings guidance for 2013. Management noted that new business additions will not offset the higher attrition of large accounts and less hiring within its customer base. Insperity had expanded its sales staff in anticipation of new business associated with increased regulations for small-medium business owners. With an overall gain in the portfolio’s position, we took advantage of the price weakness to add to the holding.

Another poor performing Industrials name was Layne Christensen, the world’s largest driller of water wells. The company preannounced losses in its Heavy Civil segment. This was not a surprise since the company has been working through unprofitable legacy contracts priced by the previous management team. The current management team noted that the backlog of Heavy Civil was improving for fiscal year 2014. We took advantage of the price weakness to increase the Fund’s position closer to our target weight.

Mining stock Pan American Silver reported fourth quarter results that were in-line with expectations, but from early February through the end of the quarter the price of silver declined substantially. Although we expect the company will remain sensitive to changes in silver prices, we think there is a significant discount between the value of the company’s proven reserves and the current spot prices for silver. We initiated a position in the portfolio in January in the belief this gap would close over time. 

Portfolio Positioning
The Fund purchased 11 new holdings and sold 15 during the quarter. This high level of activity followed a year of unusually low turnover in the portfolio, owing primarily to the large number of companies that achieved their price target during the quarter. Thirteen holdings achieved our Absolute Value price targets, including two from strategic takeovers. We liquidated only two holdings due to declining fundamentals or accumulated losses.

A positive catalyst for the market (and the portfolio) has been acquisitions and share buybacks.  The market experienced a material upswing in merger & acquisition (M&A) activity beginning towards the end of last year and extending into the first quarter. The portfolio experienced takeover bids at Alterra Capital Holdings and WMS Industries, as well as a major asset sale by Atlantic Tele-Network that was similar to an acquisition. Heightened M&A activity has historically been a positive catalyst for portfolio performance and the recent pick-up appears to be consistent with that trend.

New positions in the Fund were diversified across industry groups and continued to trend toward smaller market-caps, where we are finding valuations most attractive. The biggest challenge during the quarter was establishing a full position before the rising market lifted share prices beyond what we were willing to pay. An example of this was pay-TV network Starz Liberty Capital.

Starz spun-off from John Malone’s Liberty Media in January 2013 at a substantial discount relative to industry peers, especially given that the firm’s networks—Starz and Encore—are the second most-watched premium duo in the United States (behind HBO). Wall Street sell-side analysts initiated coverage of the stock with an almost unanimous negative opinion on concerns about Starz’s ability to renew licensing agreements and the firm’s lack of original content. That issue was addressed in February when the company successfully extended its contract with Sony Pictures for an additional five years (through 2021) at similar terms. Regarding content, CEO Chris Albrecht brings an impressive record of developing original content from his previous tenure as CEO at HBO. We think he will have time to expand the firm’s library of original content beyond its initial hit show Spartacus. By quarter end, the market awarded the stock a multiple closer to those of other premium networks and we trimmed the position as it approached our Absolute Value.

We strategically reduced 13 positions in all, most of which were related to price appreciation. We also strategically increased positions in 27 existing holdings, among these the largest increases were in Tower Group and Cloud Peak Energy. We stated last quarter that we have been comfortable with the Fund’s positions and sector weights (excluding Financials) over the past two years and, looking into 2013, did not foresee any major shifts in allocation. This remains the case. 

Outlook
The downside of the recent equity rally is that we think it has pushed valuations to an extreme level. At the end of 2012, we calculated the portfolio’s discount-to-Absolute Value as 79%, indicating room for modest upside. Not more than three months later it was trading at 85%—a   new, all-time high and well above its historical peak of 83%! This is a cautionary signal to investors, though we continue to find new ideas trading at attractive prices (which is unusual in a period of extremely high valuations). Unfortunately, many of these opportunities have proven difficult to buy due to limited liquidity and/or stock prices that are rapidly moving higher. Portfolio growth and valuation metrics also continue to look attractive relative to respective benchmark metrics and the multiples we are using for the top 20 holdings are well below historical peak—both positive indicators for future relative performance.

The challenge with valuation is that while small-cap stocks are clearly priced at a premium, so is nearly every other asset class. Unlike 2006, which was a consumer-driven equity bubble, the current market appears to reflect an overall liquidity bubble. This presents a unique asset allocation challenge for investors.

From our perspective, the market is due for a correction. In the absence of a major negative catalyst, and as long as the Fed and European Central Bank (ECB) remain supportive, we think any correction should be reasonably modest in depth and duration. Although we expect small-cap earnings growth expectations to contract in the months ahead, we believe positive momentum in the housing, employment, and financial markets will help to maintain a reasonable level of growth—at least for the next few quarters. In additional, M&A activity is at a healthy level and there is ample investor cash waiting for a more attractive entry point into U.S. equities. That said, this rally and the overall profit cycle are beginning to look very mature. Thus, we are keeping expectations firmly in check.   

River Road Asset Management

14 April 2013

As of March 31, 2013, Geo Group comprised 2.57% of the portfolio’s assets, Madison Square Garden – 1.73%, Big Lots – 3.25%, DST Systems – 3.18%, Insperity – 1.39%, Layne Christiansen – 0.53%, Pan American Silver – 1.08%, Alterra Capital – 0.00%, WMS Industries – 0.00%, Atlantic Tele-Network – 1.30%, Starz Liberty Capital – 0.76%, Tower Group – 1.46%, and Cloud Peak Energy – 1.13%.

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, consider the Fund’s investment objectives, risks, charges, and expenses. Contact 800 992-8151 for a prospectus or summary prospectus containing this and other information. Please, read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC. 

1st Quarter 2013 

Stocks soared during the first quarter of 2013 as investors cheered the resolution of the fiscal cliff, positive momentum in the housing sector, and the enormous liquidity that continued to flow from the U.S. Federal Reserve and other global central banks. The rally elevated most of the major U.S. equity indices to new, all-time highs, including the Dow Jones Industrial Average, the small-cap Russell 2000 and, on the final trading day of the quarter, the S&P 500. Investors shrugged off more turmoil in Southern Europe and remained focused on accommodative central banks and steady improvement in the U.S. economy. One gauge of how consistent the rise was during the first quarter was that the CBOE Market Volatility Index (the “VIX”), a measure of the volatility of S&P 500, dropped 30%.

Alternative strategies in general did not keep pace with the double-digit returns of the stock market during the quarter, and this was the case with the Fund relative to its long-only Russell 3000 Index benchmark. This is understandable given that most alternative portfolios are hedged. The Fund did outperform a majority of its long-short peers. We were pleased it captured 62% of the benchmark’s impressive gain with only an average of 50% net long equity exposure, aided by strong security selection in both the long and short portions of the portfolio. 

Strong Long Performance
Holdings in the long portfolio outperformed the benchmark by a solid margin. The market rewarded defensive and predictable businesses during the quarter as the bulk of the long portfolio’s top contributors came from the Consumer Staples and Utilities sectors, as well as the media industry.

The top-three long positions featured a take-out, a spin-off, and a “cannibal” (i.e. Berkshire Hathaway Vice-Chairman Charlie Munger’s term for a company that buys back significant stock). Slot machine and video game terminal manufacturer and distributor WMS Industries suffered from a stagnant replacement cycle and regulatory product delays that punished the stock throughout 2012. It had the best balance sheet among its peers to withstand any future industry weakness, though, and we thought the company had a attractive pipeline for 2013. Scientific Games also thought the shares attractive and announced that it was purchasing WMS in January 2013 at a 59% premium to the previous day’s closing price.

The spin-off was Starz Liberty Capital, which split from John Malone’s Liberty Media in January 2013 at a substantial discount relative to industry peers, especially given that the firm’s networks—Starz and Encore—are the second most-watched premium duo in the United States (behind HBO). Wall Street sell-side analysts initiated coverage of the stock with an almost unanimous negative opinion on concerns about Starz’s ability to renew licensing agreements and the firm’s lack of original content. That issue was addressed in February when the company successfully extended its contract with Sony Pictures for an additional five years (through 2021) at similar terms. Regarding content, CEO Chris Albrecht brings an impressive record of developing original content from his previous tenure as CEO at HBO. We think he will have time to expand the firm’s library of original content beyond its initial hit show Spartacus. By quarter end, the market awarded the stock a multiple closer to those of other premium networks.

Cable network operator Viacom owns six of the top-25 cable networks based on subscribers, and its Nickelodeon channel has remained the dominant force in children’s programming for more than 30 years. Weak ratings for its primary channels had weighed on the stock price, but management is addressing the ratings rough patch with new talent and programming and the depressed stock price with massive share buybacks.

Holdings in the short portfolio underperformed the benchmark overall during the quarter, aiding performance. The most reliable method for generating profits on the short side was dividend cuts. Given artificially low interest rates, we believe investors are bidding up some dividend-paying stocks primarily for their yield. Three of the top-four positive short positions in the portfolio cut their dividends resulting in significantly declines in their stock prices. 

Short Losers
The bulk of the individual holdings with the lowest contribution to returns during the quarter were short positions, while commodity-related stocks hurt on the long side. Although our fundamental thesis remained intact for each of the portfolio’s three biggest losers—Albany International, Best Buy, and R.R. Donnelley & Sons—all three short positions traded higher amid the general euphoria for equities during the quarter.

Paper industry supplier Albany International surprised us by trading significantly higher during the quarter in reaching close to an average market multiple (on earnings) for its stock. The market shrugged off its lackluster fourth quarter results in trading higher. The firm’s revenues have shrunk steadily along with the printing industry the past six years, and it suffers from an underfunded pension and other post-retirement benefits that total more than 14% of its market-cap. We trimmed the position five times throughout February and March, well below our stop-loss target price. This is an example of why we are comfortable with seemingly wide initial stop-loss prices, as our other risk controls typically kick in before severe losses can mount.

Electronics retailer Best Buy also bucked what we considered deteriorating fundamentals in trading higher. The firm’s stores have become showrooms for online competitors as same-store sales have fallen in four of the past five years. Mass merchants, warehouse clubs, and online retailers have consistently undercut Best Buy on pricing, capturing market share. We are skeptical that management’s efforts to return an increasing amount of capital to shareholders is sustainable. We thought founder Dick Schulze’s inability to secure financing for a leveraged buyout in early March was a positive for the Fund’s short position. We were wrong as the market chose instead to focus on new CEO Hubert Joly’s “Renew Blue” plan, which is an attempt to improve bottom-line results by matching online prices, shrinking the store size, and cutting costs.

We think Mr. Joly’s background is impressive, but we also think his $20 million compensation package is excessive. Similar to other struggling retailer turnaround stories (e.g. Sears, J.C. Penney), we think our long-term short thesis remains intact. As famed investor Warren Buffett instructed in his 1989 shareholder letter, “When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.” The Fund “stopped” out (sold the position when it hit our stop-loss target) of its Best Buy short position during the quarter, but we will reassess the situation in three months when the stock returns from our cooling off list and re-joins our short watch list.

More than 60% of R.R. Donnelley’s revenue is attributable to end markets that are either not growing or steadily shrinking—magazines, catalogs, retail inserts, books, directories, forms, labels, etc. Donnelley also destroys capital, having recognized more than $4 billion of restructuring and impairment charges over the last five years. Its fourth quarter results beat expectations, however, sparking a sharp rise in the stock. We think that Donnelley is a crowded short, which makes it particularly volatile around earnings reports and other newsworthy events. We understand this dynamic and strive not to allow it to shake us out of solid short positions. Employing our unrealized loss sell discipline, we chose to make two small trims in the position during the latter part of the quarter.

In summary, glimmers of hope in each short position—an unprofitable segment is improving at Albany, a new CEO has big plans at Best Buy, and Donnelley reported less-bad-than-expected results—resulted in losses for the portfolio. Our risk controls required action for each loser, but we only eliminated one of the three positions and simply trimmed the other two positions. We designed these risk controls to reduce exposure to losing short positions, but not to eliminate indiscriminately carefully researched shorts where the fundamental thesis remains intact.    

Portfolio Positioning
Our discount-to-Absolute Value indicator for the portfolio crossed into “extremely overvalued” territory during the first quarter. Not only does the indicator, which measures the weighted average discount-to-Absolute Value of our top-20 long holdings, aid us in positioning the total portfolio for a correction and/or bear market, it also helps us keep the long portfolio fresh. For example, as the indicator signaled “extremely overvalued”, we trimmed back more expensive long positions and cheaper long positions moved into the top-20 holdings. This process brought our indicator back down, ending the quarter at a greater discount to our aggregate Absolute Value.

The Fund ended the quarter with a net long equity exposure of 48%. With only half of the portfolio exposed to the market, we believe it is positioned for a move in either direction by the market. If the market declines, we will happily put some cash to work and accept more market risk in exchange for higher expected returns. Cash typically accumulates on the long side of the portfolio in rapidly rising markets, as we reduce winning positions and often struggle to find attractive new long holdings, while risk controls prevent the short portfolio from getting too large. The Fund ended the quarter with a sizeable cash position. The cash stake is not a top-down allocation but a residual of our process. If the market continues its ascent in the second quarter, the cash position will likely grow larger and the portfolio will become more prepared for a market correction.

If the market continues to rise, we think that the Fund’s long portfolio of superior companies with predictable and sustainable cash flows will continue to shine. We will invest in companies that do not produce predictable results, but we cannot develop the same fundamental conviction in them and tend to limit these two groups—commodities and retail stocks—to just 15% each of the total portfolio. Roughly 20% of the portfolio was invested in these types of stocks as of quarter end. Of the two groups, we have found the most value in various commodity companies, including coal, natural gas, oil, potash, and precious metals. Each position owns a unique asset and has a solid balance sheet.

Almost 40% of the short portfolio was concentrated in retailing and housing/real estate positions.  We are not pairs-traders, but we do not mind that nearly 60% of the portfolio’s long retailing position is hedged with retailing short positions. We re-introduced several housing-related short positions during the quarter. Fortunately, our risk controls forced the elimination of several housing-related short positions early in 2012 that went on to advance much further. Housing companies have not earned their cost of capital over a full cycle. We think some investors are valuing housing-related companies as if another 2005 to 2007 housing boom is right around the corner. As several housing-related shorts lost their momentum, we added them to the short portfolio. 

Objective Update
History suggests that a relentless rise in the stock market can induce complacency and make shorting seem pointless. The original class of hedge fund managers allowed their market exposures to rise (and not hedge!) along with the “go-go” markets of the 1960s, only to crash and burn during the early 1970s. Between the close of 1968 and September 30, 1970, the 28 largest hedge funds lost two-thirds of their capital and most of the remaining hedge funds were wiped out in the 1973-1974 bear market. We see signs that investors may again be becoming too cavalier in regards to risk. During the first quarter, margin debt expanded back to 2007 levels while short interest retreated to five-year lows.

We designed this long-short strategy to participate in rising markets, but not recklessly so. We have no interest in fighting the Fed or the tape. Our typical net market exposure range of 50% to 70% is higher than many traditional hedge funds. Once prices advance to a level that does not make sense to us (i.e. more than 80% on our discount-to-Absolute Value indicator), however, we transition our focus from participation to capital preservation. We see multiple red flags that confirm and support our anxiety over current market valuations, including aggressive consensus profit expectations and heavy insider selling. If the market continues its advance, we will not be lured into complacency and are prepared to live through a period of uncomfortable defensiveness. With nearly a quarter of the portfolio residing in cash, we will remain patient and wait for our favorite businesses to become more attractively priced.

River Road Asset Management

14 April 2013

As of March 31, 2013, WMS Industries comprised 0.00% of the portfolio's assets, Starz Liberty Capital – 0.00%, Viacom – 2.80%, Albany International – (1.16%), Best Buy – (0.00%), and R.R. Donnelley & Sons – (0.91%).

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

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

Before investing, consider the Fund’s investment objectives, risks, charges, and expenses. Contact 800 992-8151 for a prospectus or summary prospectus containing this and other information. Please, read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC. 

1st Quarter 2013

Portfolio Review
The Fund significantly underperformed its Russell 2000 Value Index during the first quarter of 2013. High cash levels, which averaged 56% during the period, contributed to the poor relative performance. The equity holdings within the portfolio also lagged the benchmark.          

Pan American Silver, AuRico Gold, and Contango Oil & Gas were among the biggest detractors to performance, each posting negative returns for the quarter. Mining companies Pan American and AuRico both declined meaningfully as the broader mining industry remained under pressure. Pan American announced production and cash cost results that were in-line with expectations but a 7% decline in silver prices during the period weighed on the company’s shares. AuRico announced growth in reserves, a much improved balance sheet, and an unchanged production forecast, but suffered along with other gold mining shares. The company’s strong balance sheet has more cash than debt, and its stock trades at a discount to tangible book value. Although we expect volatility to continue in the mining sector, the portfolio continued to hold Pan American and added to the position in AuRico throughout the quarter.

Independent natural gas and oil company Contango performed poorly, announcing disappointing operating results mainly due to lower natural gas prices and expenses associated with two dry wells. We expect results to improve this quarter due to higher natural gas prices and lower exploration expenses. Contango continued to trade at a discount to our valuation, and we maintained the position in the portfolio.      

FLIR Systems Boost
The largest positive contributor to performance during the quarter was FLIR Systems. The company is the leading provider of infrared technology, servicing both commercial and government markets. The company’s products detect infrared radiation and convert it into a video signal. Despite announcing a decline in 2012 revenue and earnings, the company forecasted higher revenues and earnings per share in 2013. As business trends improved, the stock responded favorably and approached our calculated valuation. We reduced the position due to the smaller discount-to-value.

Other notable contributors included Owens & Minor and Harris Teeter Supermarkets. Owen and Minor is the leading distributor of consumable medical and surgical supplies to acute-care facilities. While the firm is experiencing margin headwinds from hospital consolidation and group purchasing organization contract renewals, management successfully offset gross margin pressure by reducing overhead and rationalizing suppliers. We believe the firm’s consistent operating results and dividend yield add to its attractiveness, but reduced the Fund’s position after the stock reached our estimated fair value.

An increasingly promotional environment pressured gross margins during grocery chain Harris Teeter’s most recent quarter. Management, however, was successful in maintaining positive same-store sales through its pricing strategies. In February, the stock responded favorably to the firm’s announcement that two private equity companies had approached it expressing interest in purchasing the chain. There has since been speculation that several large national grocers have potentially entered the negotiations. We trimmed the position in the stock as its price reached our calculated valuation.

Portfolio Positioning
Cash levels increased from 51% at the beginning of the quarter to 57% by the end of March.  Cash levels remain high as we continued to have difficulty finding a sufficient number of attractively priced small-cap stocks. The average valuation metrics of our potential buy list remained expensive as of quarter-end.

The largest new position added during the quarter was previously mentioned AuRico Gold.

The firm has two mines in production in the favorable mining jurisdictions of Canada and Mexico. It has also shifted from a frequent acquisitions and divestitures strategy toward optimizing the production and value of its current mining assets. Management views opportunities at its existing mines as more attractive than external opportunities.

Recent divestitures and an improving free cash flow profile enabled AuRico to strengthen its balance sheet, which ended the quarter with $150 million in net cash. With its new focus on increasing production at developed mines, the company is not expected to make acquisitions or need additional capital. Thus, we anticipate the company will continue to focus on free cash flow generation and the return of capital to shareholders. It announced its first quarterly dividend during the period.

Although mining is inherently a volatile business with clear operating risks, we believe we have taken these risks into consideration by using an above average discount rate in our free cash flow valuation calculation. Furthermore, we are comforted by AuRico’s strong balance sheet, return on internal capital focus, and determination to enhance shareholder returns with its growth in production and free cash flow.

Including the Fund’s position in Pan American Silver, the portfolio had a 6.4% weight in precious metal mining companies at quarter-end. With the mining sector down 20% year-to-date and 30% during the past year, we believe there is value in this out of favor industry. When analyzing mining companies, we focus on those that possess both strong balance sheets and developed mines that generate free cash flow. Because of these traits, we believe we can be patient with both positions and wait for the value of their underlying assets to be realized. 

Outlook
The operating environment for the majority of the small-cap businesses we follow did not meaningfully change during the quarter. Profits continue to be healthy with moderating year-over-year growth rates. Housing and auto related businesses continued to improve, though operating results of consumer-related businesses remain inconsistent overall. Domestic risks linger, such as rising gas prices, U.S. budget uncertainty, and higher taxes. Growing concerns surrounding the government sequestration affected defense spending. Volumes were mixed across the Transportation industry, with most companies reporting low single-digit growth.  Several businesses claimed, without clear or consistent reasoning, that they expect improved results in the second half of 2013. The majority of management commentary was little changed from the previous quarter, and most companies expect 2013 to be similar to 2012.

In our recent quarterly commentaries, we have discussed the corporate profit cycle, its sustainability, and the natural cyclicality of individual businesses we consider in our valuation calculations. Our belief remains that profit cycles of businesses are non-linear and this cycle will not proceed on its current trajectory indefinitely. With corporate profits at record levels and margins elevated, we are committed to normalizing free cash flow for valuation purposes. While this valuation technique may appear overly conservative during profit booms and overly aggressive near troughs, it has served our strategy well during past cycles. By smoothing the extremes of the profit cycle, we believe we can determine business valuations more accurately versus extrapolating recent operating results far into the future.

We believe extrapolation risk is one of the most important forms of risk to consider when investing, but it is an issue seldom discussed by the investment community and academia. In fact, it is difficult to find a standard definition. We define extrapolation risk as the tendency of investors to forecast recent operating conditions and trends too far into the future. Incurring excessive extrapolation risk can lead to inaccurate valuations, poorly timed investment decisions, and permanent loss of capital. Although few in the industry frequently discuss extrapolation, it is a common form of investment risk and is incurred by most market participants throughout each profit cycle.

Investment analysts often extrapolate near-term results when forecasting future earnings. In 2007, near the previous profit cycle’s peak, analysts were expecting earnings per share for the broad market S&P 500 Index to be $100 in 2008 and $106 in 2009. Actual results were approximately 12% and 35% lower, respectively, with S&P 500 earnings per share declining to $68 near the end of 2009. Stocks responded negatively to the disappointing results, with many investors incurring significant losses. Based on current earnings expectations and record high equity prices, we believe analysts and investors are again assuming meaningful extrapolation risk. Earnings estimates for 2013 and 2014 not only assume current record profits will be maintained but that profit growth will accelerate. Specifically, analysts are expecting earnings of companies in the S&P 500 to increase 15% in 2013 and another 12% in 2014. Based on our analysis of a broad range of businesses and industries, we believe estimates of double-digit earnings growth over the next two years are difficult to justify. Therefore, we are avoiding making similar assumptions in our valuation calculations.

Similar to the equity markets, we believe extrapolation risk is clearly on display in the bond markets. According to Dow Jones, the junk bond market broke another record during the quarter with yields declining to 5.56%. In our opinion, given historical default rates, junk bond yields are not providing investors with a sufficient margin of error. Bloomberg recently noted that the long-term average global junk bond default rate is 4.7%, while the 12-month trailing default rate is 2.7%. Given current yields on junk bonds, we believe investors are extrapolating near-term default rates instead of relying on long-term averages. Memories seem to be short as it was only a few years ago in 2009 that junk bond default rates reached 10.2%! Due to the current record low interest-rate environment, we believe investors desperate for yield are ignoring historical default rates and are assuming the Federal Reserve, through its use of quantitative easing, can suppress bond yields indefinitely. We do not believe government intervention in the bond market is sustainable and are avoiding extrapolating current interest rates for valuation purposes.

In addition to equity and bond market participants, we believe the Federal Reserve frequently falls victim to extrapolation risk by assuming near-term economic and profit trends will persist for an extended period. During the previous profit boom, the Federal Reserve pointed to elevated profits in its forecast for continued economic expansion. The Federal Reserve’s August 2007 minutes state, “Participants expected that business investment would be supported by solid fundamentals, including high profits, strong business balance sheets, and moderate growth in output.” A few months later, the National Bureau of Economic Research declared that a recession officially began. More recently, during the semiannual monetary policy report to Congress in February 2013, Chairman Bernanke downplayed concerns about a potential equity bubble fueled by ultra-loose monetary policy by referencing elevated corporate profits. In March 2013, Chairman Bernanke again pointed to high profits when asked about record high stock prices. Chairman Bernanke stated, “I don't think it's all that surprising that the stock market would rise given that there has been increased optimism about the economy and the share of income going to profits has been very high.” We believe Chairman Bernanke’s comments on asset prices and profits suggest the Federal Reserve is again extrapolating the current economic and profit environment too far into the future.

We have a differing view. All-time high stock prices, analyst profit expectations, junk bond yields, and statements from the Federal Reserve all suggest record corporate profits will increase from current levels. We believe the profit cycle has reached a plateau, with the future direction of profits remaining uncertain.  In fact, profit margins of larger companies are already showing signs of stress, with margin contraction contributing to the 2% decline in S&P 500 earnings per share during the fourth quarter of 2012. Margin contraction at the later stage of a profit cycle is not unusual. As profit cycles mature, businesses generating above average operating margins typically attract natural threats to profitability. Elevated margins often lead to scrutiny from competition, labor, government, suppliers, and customers. As cycles mature, the assumption that a non-recessionary environment will continue indefinitely is eventually challenged as the drivers of the expansion fail to sustain perpetual growth. We believe the natural cyclicality of the business cycle will ultimately prevail. We believe extrapolating profits at this stage of the cycle carries meaningful risk and should be avoided.

The tendency of investors to extrapolate influences the price of the small-cap equities we analyze, which affects our investment decisions. When small-cap prices are expensive, we often take a more contrarian stance by not only holding a large cash position, but also avoiding sectors that display above average levels of extrapolation risk. For example, we currently have limited exposure to the improving housing market and consumer discretionary stocks. While we acknowledge housing is improving and unemployment has declined, at current prices we do not believe investors in these sectors will be adequately compensated for the risk assumed. For instance, homebuilder stocks have returned 69% the past year, with some even selling above enterprise values (market cap plus debt) seen during the recent housing bubble. Although operating results are improving, valuations of homebuilder stocks suggest investors are extrapolating unrealistic earnings growth far into the future. Avoiding certain sectors displaying excessive extrapolation risk has hurt the Portfolio’s performance year-to-date, similar to prior speculative periods, but we believe our positioning will help reduce the risk of permanent capital loss and adverse performance in future periods.

As we avoid sectors of the small-cap market that we believe are pricing in overly optimistic future results, we are attracted to areas where investors appear too pessimistic. Several of the Fund’s recent purchases have been in industries where we believe investors are extrapolating near-term trends too far into the future. For example, the portfolio’s largest holding is WPX Energy, a leading domestic natural gas producer in the United States with sizeable natural gas reserves. We believe WPX Energy is a high-quality exploration and production business selling at an attractive price relative to the replacement value of its natural gas assets. Despite our favorable view of the company’s assets, its stock has significantly underperformed the broad market over the past year, declining 11%. Investors have punished the natural gas sector due to concerns over abundant natural gas supplies and depressed natural gas prices. Instead of extrapolating the large natural gas supply surplus and low prices of the past year, we attempt to normalize the historically volatile natural gas cycle. We believe depressed natural gas prices are already leading to a more favorable supply and demand balance. For example, demand has increased over the past year as electric utilities increase use of natural gas in place of coal.  Furthermore, a sharp drop in rigs searching for natural gas has affected supply. Many of the natural gas producers we analyze are expecting production to decline 5% to 15% in 2013, which should further reduce supply. During the past year, higher demand and slowing production growth significantly reduced the inventory surplus. Although the fundamentals of the natural gas industry have improved considerably over the past year, many of the natural gas stocks we follow remain depressed and, in our opinion, represent a compelling opportunity.

As an investment manager, we have experienced similar periods of elevated profits and expensive valuations. Based on our experience, as the profit cycle matures and extrapolation risk increases, it is beneficial to position the portfolio in a more contrarian manner. We are following the same contrarian path in the current cycle, with a large cash position and an increasing weight in businesses we believe are undervalued and very out of favor. We do not believe extrapolating the current environment to justify record small-cap prices is appropriate, nor do we believe it will help us achieve our long-term absolute return goal. While we understand the potential opportunity costs associated with our contrarian positioning, we remain steadfast in our valuation discipline of only assuming risk when being adequately compensated.  Furthermore, we remain committed to the diligent management of risk during periods of excessive valuation and remain flexible in order to act decisively once volatility and opportunity returns. 

River Road Asset Management

12 April 2013

As of March 31, 2013, Pan American Silver comprised 3.44% of the portfolio's assets, AuRico Gold – 2.91%, Contango Oil & Gas – 1.00%, FLIR Systems – 2.29%, Owens & Minor – 2.02%, Harris Teeter Supermarkets – 2.29%, and WPX Energy – 4.05%.

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, consider the Fund’s investment objectives, risks, charges, and expenses. Contact 800 992-8151 for a prospectus or summary prospectus containing this and other information. Please, read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC. 

1st Quarter 2013

A significant resurgence of investor enthusiasm toward equities once again greeted the turn of the calendar. Despite new fundamental headwinds associated with the U.S. payroll tax increase, federal budget sequester, and a fresh round of concerns about Europe, the market responded favorably to the removal of domestic tax policy uncertainty, a rebound in U.S. economic activity from depressed levels during the fourth quarter, and additional monetary stimulus from the Federal Reserve.

The economy is indeed off to a better-than-expected start to the new year. Given recent employment gains and positive trends in consumer and business spending, first-quarter real Gross Domestic Product (GDP) appeared to have grown at a healthy clip. Federal fiscal headwinds, however, will present more of a challenge in the period ahead as the Congressional Budget Office (CBO) estimates that fiscal policy will trim real GDP growth this year. Despite the strong start, we think the combination of fiscal policy and a still sluggish global economic environment will likely keep real GDP growth modest for the year as a whole. 

Lagging Tech and Consumer Picks
Similar to the first quarter of 2012, which also benefited from central bank intervention, lower-quality stocks—specifically non-earning and low return-on-equity (ROE) companies— materially outperformed. This contributed to the Fund’s relatively poor performance during the quarter, which was primarily isolated to the month of March. From the beginning of the year through February, the portfolio was roughly even with its Russell Midcap Growth Index benchmark before falling behind.

A combination of both stock selection and sector allocation weighed on returns, with holdings in the Technology and Consumer Discretionary sectors among the worst laggards. Tech stocks Juniper Networks and F5 Networks both fell on growing concerns about the health of equipment spending in the communications sector. Two of the portfolio’s largest Consumer Discretionary picks also noticeably lagged the benchmark as that sector significantly advanced. Both LKQ Corp. and PVH Corp. gained more than 40% in 2012, so some consolidation or pullback was natural. We continue to believe the long-term outlook for both companies remains bright. We took advantage of stock weakness in LKQ following a quarterly earnings disappointment to add back to the Fund’s position, having reduced it late last year, as part of our sell and valuation discipline.

Separately, specialty grocer The Fresh Market detracted from performance after announcing weaker than expected results. Even though our favorable view of the firm’s positioning within the industry and long-term growth potential did not change, we decided to exit the position until the drivers of the weakness in company sales become more apparent. 

The Fund benefited from an overweight stake in Energy, the top performing sector in the Russell Midcap Growth Index, and a standout performance by construction & engineering service provider Jacobs Engineering Group. Jacobs Engineering benefited from continued backlog growth and growing enthusiasm about a potential boom in petrochemical capital spending. Within Energy, Core Laboratories and Oceaneering International profited from easing global growth fears coupled with solid company-specific fundamentals. We added to the portfolio’s position in Core Labs after the company reported solid results and gave guidance above analyst expectations.  

Positioning and Outlook
In addition to eliminating The Fresh Market, we sold the Fund’s positions in Nvidia, SM Energy, McCormick, and Starwood Hotels. McCormick and Starwood both reached our estimate of fair value during the quarter, while Nvidia and SM Energy were eliminated due to lackluster underlying business trends relative to expectations. New positions included semiconductor maker Xilinx and diversified financial services company Raymond James.   

After a robust start to the year, the stock market appeared extended and investor sentiment became enthusiastic. As a result, a pullback in share prices would not be a surprise. Underlying conditions for the stock market remain favorable, however, given corporate profits and continued U.S. Federal Reserve accommodation. Any near-term setback would be limited, in our estimation, as the risk of recession is low, inflation is tame, interest rates low, liquidity ample, and valuations are full though not excessive. Longer-term, we continue to expect the overall rate of economic growth to remain subdued, but remain optimistic that the portfolio is well positioned owing to its ownership of superior and attractively priced growth prospects. 

M. Scott Thompson, CFA                  

Andrew W. Jung, CFA

April 3, 2013

As of March 31, 2013, Juniper Networks comprised 2.34% of the portfolio’s assets, F5 Networks – 2.04%, LKQ – 2.63%, PVH – 1.92%, The Fresh Market – 0.00%, Jacobs Engineering Group – 2.23%, Core Laboratories – 2.13%, Oceaneering International – 2.87%, Xilinx – 1.95%, and Raymond James – 1.49%.

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

Before investing, consider the Fund’s investment objectives, risks, charges, and expenses. Contact 800 992-8151 for a prospectus or summary prospectus containing this and other information. Please, read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC.

1st Quarter 2013

Similar to 2012, the market has begun the year with extremely strong performance during the first quarter. Although the Fund’s absolute numbers would have put it in good position relative to its Russell 1000 Value Index benchmark for most quarters, if not years, we came up short this period. The underperformance does not dampen our enthusiasm. We continue to believe, as we do every day, that the portfolio is positioned to generate outperformance for shareholders over the long run.

The performance of the Russell 1000 Value was fairly broad, with six sectors—Technology, Consumer Staples, Healthcare, Utilities, Industrials, and Consumer Discretionary—outperforming the overall index. The Fund was overweight four of these six sectors, Utilities and Healthcare the exceptions, but stock selection yielded less than desirable results. Holdings in six out of 10 sectors underperformed their respective sector and/or the overall benchmark. In addition, the portfolio was overweight Energy and Materials, two of the index’s weaker sectors during the quarter. Overall, both stock selection and sector allocation were negative versus the benchmark.

Lagging Metals, Soaring Health
The portfolio sectors with the lowest level of contribution were Materials, Consumer Discretionary, and Technology. All of the Fund’s holdings in Consumer Discretionary and Materials underperformed, in the case of the latter owing to a high exposure to metals. Iron ore miner Cliffs Natural Resources, in particular, declined more than 50% due to concerns regarding capacity and demand for iron ore. Within Technology, only Western Digital among the Fund’s holdings outperformed, while the free-fall in Apple continued. 

Apple poses a challenge to investors as it produces solid fundamentals, maintains a balance sheet without debt, and has a cash hoard that would probably qualify it as an emerging market country. Yet the company trades at a discount to the market because it has been awhile since it has released another revolutionary product amid competitive issues regarding its market share struggle with Samsung, among others.

Another laggard was independent energy company Newfield Exploration. The company has had challenges with its exploration and production portfolio. We believe these concerns are more than accounted for in the price of the stock, however. All three of the individual detractors to performance mentioned remained holdings in the portfolio.

Financials, Energy, and Healthcare were the three sectors with the highest contribution to returns during the quarter. Financials exhibited strong stock selection with eight out of nine stocks in the portfolio outperforming its benchmark sector. The only laggard in the group was top-10 holding Aflac. A majority of Energy stocks outperformed with most industry groups within the sector performing well except for the internationally integrated companies. Marathon Petroleum was the standout, as it continued to benefit from solid demand fundamentals for refined crude products.

Performance in Healthcare was aided by strong results from Health Management Associates and Gilead Sciences. Both companies benefitted from the soaring performance of the sector overall, and gained favor in the market with their improving company fundamentals. Along with Marathon, we continue to view these stocks as value creating opportunities and they remained holdings in the portfolio.

Staying the Course
Clearly, one of the areas in which we take pride as investment managers—stock picking—was under siege during the quarter. What happened? Did we lose our way? Has our process begun to be less effective? Did we change our process? The answer to these questions is a resounding NO! Nothing has changed in our process and we believe it to be just as effective as it has been in identifying value over time. What has become more pronounced is timing. As we constantly say, we cannot control the timing, duration or magnitude of outperformance. All we can do is position the portfolio to where we believe it can achieve it by identifying value creating opportunities based on closing the gap between a discounted stock price and solid company fundamentals.

Value is determined by a stock trading at a minimum of a 30% discount to what we believe is fair value. Creating is the soundness of the company in terms of the probability of continuing as a relevant, ongoing concern. Opportunity is the fact that sound fundamentals purchased at significant discounts typically reward investors quite handsomely… over time. It often takes time for the market to recognize value, and inevitably it is not in sync with the typical quarterly reporting cycle.

Some notable value creating opportunities identified and purchased during the quarter included Accenture, Campbell Soup, McGraw-Hill, United Parcel Service, and Nordstrom. Each stock met our criteria listed above and were fully vetted by fundamental analysis as to their potential as a portfolio holding.

Stocks eliminated during the quarter due to sector adjustments and/or valuation or fundamental issues included Baxter International, United Therapeutics, Eli Lilly, Federated Investors, Halliburton, and Herbalife. These changes were primarily driven by the dynamic interrelationships of the sectors as we positioned the portfolio to exploit value creating opportunities. As we share regarding our investment philosophy, “We have a core process but no core holdings.”

The result of this and related activity during the quarter was an increase in the portfolio’s exposure to Technology, Financials, Energy, Materials, and Consumer Discretionary, while exposure to Healthcare decreased. All other sectors essentially remained the same when market appreciation or depreciation is taken into account.

Déjà vu
Déjà vu is French and literally means “already seen”. While it seems strange, basically, déjà vu is the feeling, notion, or inclination that what you are experiencing has been previously experienced in a similar if not the same way. This first quarter has been a déjà vu experience for us. 

The Fund’s absolute performance was reminiscent of the first quarter of 2012, though its relative performance was clearly not the same. Nevertheless, the opening of the first of four quarters has been a good one. The domestic economy appears to be on the mend at a tepid but gradually accelerating pace. The United States has become the dog more so than the tail of dictating global economic fortunes. The stock market is reflecting this optimism despite other headwinds that are yet to be resolved.

China is still not growing at the rapid rate of the recent past, Middle East unrest continues, Japan is not contributing very much growth, and Europe is still attempting to repair the tattered fragmented nations that make up the European Union. In essence, the United States is not a bad place to be. But, has it been given too much credit too soon?

We think that 2013 will be a defining year. Equities are becoming more attractive as Armageddon outcomes subside, replaced by less dire projections. Alternatives are still few when comparing equities to bonds and cash. At some point, the Federal Reserve will have to treat the markets like adults who can stomach real food rather than babies surviving on instant formula. The result will likely be higher interest rates. Rates will rise because inflation will rise because demand will dictate that limited supplies of goods and services must be purchased at higher prices. At least that is what the economics I was taught suggests.

If so, I think that the Fund’s current positioning will prove quite advantageous. The portfolio is positioned to take advantage of a resurgence of global economic growth. If not growth, at least a change in perception regarding the most draconian expected outcomes for growth. In essence, I think the Fund should benefit if the market agrees that cyclical, economically sensitive assets are priced too cheaply and the more defensive areas are priced too rich. I think the Fund should benefit if the global economic environment is deemed at least as attractive as the currently more highly prized domestic area. I think the Fund should benefit if investors again find assets attractive that trade at a significant discount to what the underlying assets should be worth.

I think the Fund should benefit when the market gets back to investing and ceases to be enamored by a fleeting sense of certainty and security that is more volatile than the current situation suggests. Areas such as the interest rate sensitive sectors like Financials, Utilities and Telecom have been propped up by the Federal Reserve induced strangulation of fair market prices of all things bonds. Once the vice grip is released and real underlying values are allowed to be ascertained, we think something interesting will happen. Assets will move more freely towards true value rather characteristic value.

Our approach to investing is based primarily on capital appreciation, though we are measured in total return. Dividend yield and income is coupled with capital appreciation to produce total return. Due to the dearth of opportunities in bonds, investors have focused on getting income from stocks, which has caused one out of a myriad of characteristics to be the primary object of desire. When yields move against them and equity assets are priced more appropriately, we think the full value of the asset rather than one characteristic will work in the Fund’s favor.

When will it happen? How grand will it be? How long will it last? I do not know. What I do think is that the Fund and its shareholders will be there to benefit. 

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

April 2, 2013

As of March 31, 2013, Cliffs Natural Resources comprised 1.24% of the portfolio's assets, Western Digital – 2.51%, Apple – 1.59%, Newfield Exploration – 1.37%, Aflac – 2.71%, Marathon Petroleum – 3.42%, Health Management Associates – 3.00%, Gilead Sciences – 2.05%, Accenture – 2.02%, Campbell Soup – 1.16%, McGraw-Hill Companies – 2.65%, United Parcel Service – 0.99%, and Nordstrom – 0.80%.

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, consider the Fund’s investment objectives, risks, charges, and expenses. Contact 800 992-8151 for a prospectus or summary prospectus containing this and other information. Please, read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC. 

Aston Partners with Lee Munder Capital Group  to Provide Investors Access to Opportunities in Emerging Markets

CHICAGO — April 1, 2013 — Aston Asset Management, LP (Aston) has launched a new mutual fund, the ASTON/LMCG Emerging Markets Fund (Tickers:  ALEMX N-Class, ALMEX I-Class), which seeks to provide long-term capital appreciation by investing in emerging markets in Latin America, Eastern and Southern Europe, the Middle East, Africa and Asia. 

Lee Munder Capital Group, LLC (LMCG) acts as subadviser to the ASTON/LMCG Emerging Markets Fund (the Fund). Under normal market conditions, at least 80 percent of the Fund’s portfolio will be invested in equity securities including depositary receipts representing companies listed in the MSCI Emerging Markets IMI Index.  The Fund will also invest in the securities of exchange-traded funds (ETFs) and exchange-traded notes (ETNs) that track an emerging market index.  LMCG’s emerging markets investment philosophy is a bottom-up, quantitative approach.  It seeks to exploit inefficiencies in the market by identifying stocks with attractive valuations that also have good growth prospects and high quality of earnings. By selecting stocks that rank well on a variety of metrics, LMCG aims to diversify its source of returns in different market environments.

“We are committed to selecting experienced, boutique investment managers with proven expertise in distinct areas of the market to help us bring new strategies to mutual fund investors,” said Stuart D. Bilton, Chairman and Chief Executive Officer of Aston. “Our experience working with LMCG has shown us their strong capabilities, and we believe this new Fund will give investors a compelling alternative to the equity markets of developed countries.”

Gordon Johnson, Ph.D., CFA; Shannon Ericson, CFA; and Vikram Srimurthy, Ph.D., CFA; serve as the Fund’s Portfolio Managers. Mr. Johnson is Lead Portfolio Manager of LMCG’s emerging markets strategy, while Ms. Ericson and Mr. Srimurthy are Portfolio Managers and Analysts for the strategy.  

“We look forward to expanding our relationship with Aston and giving investors an opportunity to access emerging markets that we think offer significant growth potential in the years ahead,” said Kenneth L. Swan, CEO of LMCG.  “Today emerging markets are more than the “BRICS” (Brazil, Russia, India, China and South Africa); we see opportunities in many places including, Korea, Taiwan, Mexico, Malaysia, and Thailand.

”The firm also acts as subadviser to the ASTON/LMCG Small Cap Growth Fund (ACWDX/ACWIX).

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

About 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 sub-adviser and the needs of clients. As of February 28, 2013, Aston is the adviser to 23 mutual funds with total net assets of approximately $12.5 billion. Our funds are distributed nationally through intermediaries including registered investment advisers, model platforms, broker-dealers, consultants, retirement platforms and wealth management teams.

Important considerations: 
The Fund invests in emerging markets securities which tend to be more volatile and less liquid than securities traded in developed countries.   Foreign securities involve risks related to adverse political and economic developments unique to a country or a region, currency fluctuations or controls.

The Fund invests in Exchange-Traded Funds (ETFs) which are securities of other investment companies and Exchange-Traded Notes (ETNs) which combines aspects of a bond and ETF.  These securities seek to track the performance of an index by holding all, or a sampling of the securities or bonds of that index and may not be able to exactly replicate the performance it seeks to track.  Shareholders of the Fund bear their proportionate share of the other investment company fees and expenses as well as their share of the Fund fees and expenses. The value of an ETN is also subject to the credit risk of the issuer.

The Fund also invests in Real Estate Investment Trusts (REITs) which may be affected by changes in the value of their underlying properties and small to mid-cap company stocks that are considered riskier than large-cap stocks due to greater potential volatility and less liquidity.  The Fund is newly-formed and does not have an operating history.

The MSCI Emerging Markets Index IMI is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets.

Before investing carefully consider the fund’s investment objectives, risks, charges and expenses. Contact 800-992-8151 or visit the Aston Funds website at www.astonfunds.com  for a prospectus or a summary prospectus containing this and other information. Read it carefully.

Aston Funds are distributed by Foreside Funds Distributors LLC.

1st Quarter 2013 

It was a good quarter for international equity markets as the Fund’s MSCI EAFE Index benchmark rose just more than 5%. Japan was the best performing region in gaining 11.6%, followed by Pacific Ex-Japan. Both the United Kingdom (UK) and Europe Ex-UK regions posted tepid gains in underperforming the benchmark, while Emerging Markets fell 1.6%. Healthcare was the best performing sector in the benchmark, rising 12% during the quarter, followed closely by Consumer Staples. The Materials sector was the worst performing sector, and along with Energy and Utilities posted losses for the period. Those three sectors were the only ones not to outperform the overall index during the quarter.

The Fund sharply underperformed its benchmark during the quarter owing mainly to stock selection, though asset allocation didn’t help either. An overweight position in Emerging Markets and an underweight to Consumer Staples, combined with stock selection in both areas, were the primary factors behind the relative underperformance. Holdings in Emerging Markets telecom stocks underperformed, though the biggest individual detractor during the quarter was Chinese search engine Baidu. Golden Agri-Resources was the notable laggard within Staples. Elsewhere, stock selection within Healthcare, Financials, and the Pacific Ex-Japan also trailed the benchmark, with China Pacific Insurance and Roche among the detractors.

Stock selection in the Consumer Discretionary sector and in the Europe Ex-UK region boosted relative performance during the quarter. Within Consumer Discretionary, Internet mall operator Rakuten and auto-parts maker Denso in Japan helped returns, while a new position in Adidas in Europe added to results there. 

Buys and Sells
The purchase of Adidas was one of many changes to the portfolio during the quarter. We believe the German running shoe manufacturer should be able to grow earnings through margin improvements. Other purchases for the Fund included Russian bank Sberbank and

Russian mobile operator Mobile Telesystems. We expect Mobile Telesystems to be able to grow earnings as the availability of low-cost smartphones increases in Russia in the coming years. Another new position was established in UK household products company Reckitt Benckiser. We feel the market is underestimating the earnings power of the company, especially their key pharmaceutical product Suboxone.

We sold seven stocks from the portfolio during the quarter, three after solid recoveries in their stock price, three on analyst downgrades, and one after a buyout bid. A strong rebound in performance led to the sale of salmon producer Marine Harvest, Korean telecom company KT Corp., and life insurer Resolution. We sold the holding in Cairn Energy largely on the back of our top-down downgrade to the Energy sector as a whole. Analyst downgrades on Russian natural gas giant Gazprom and UK pharmaceutical company Shire, the former on concerns over the high levels of capital spending it is undertaking, led to its sale of both stocks.

Finally, following a bid for Japanese cable operator Jupiter Telecommunications we sold the position to fund higher conviction ideas in Japan such as Takeda Pharmaceutical, Japan Tobacco, previously mentioned Denso, and factory automation play Mitsubishi Electric. All of these stocks came highly recommended by our regional analysts, and fit well with our top-down view that weakness in the yen will selectively benefit strong companies operating in good end-markets. 

Outlook
The positive first quarter result for international equities continued the good run of performance the group has seen since the middle of 2012. Japan performed well on the back of continued hopes for further monetary easing and yen weakness. New Prime Minister Abe has continued to promote a reform agenda and the new leadership at the Bank of Japan has managed the unusual feat of beating already raised expectations with some very bold policy easing. Such action is likely to continue to weaken the yen, aiding the competitiveness of Japanese industry. Domestic reflation plays are also likely to continue to benefit from this policy shift. This might eventually broaden into a widespread Japanese economic recovery though it remains too early to see strong evidence of this yet.

Attention will now turn to Abe’s new growth package, which he is likely to announce in June. One of the most significant changes of view from our top-down Strategic Policy Group has been the upgrade of Japan to our highest regional rating in response to the above developments. This has led to the new additions to the portfolio noted above that focus on finding companies that are likely to see an improved competitive position because of the weakening yen, but which also sell into strong end-markets. For now, this is less a view that overall global growth will accelerate or that Japanese domestic growth will improve, but more a recognition that many Japanese companies having suffered the last four years under a very strong yen will reclaim the market share they lost.

In Europe, we have seen a number of developments that prove the end of that region’s economic crisis remains some way off. Data remains soft, with unemployment continuing to rise to new records and industrial production remaining weak. German manufacturing now sits squarely in the crosshairs of a more competitive Japanese manufacturing sector. The situation in Cyprus continues to evolve with a number of potential repercussions threatening the euro zone. With the likelihood of a large confiscation of deposits in Cyprus, the risk remains high that deposit flight in other peripheral economies applies renewed funding pressures on the European banking sector as depositors seek to protect their wealth.

Italy remains without a government several weeks after an inconclusive election, with the anti-establishment Five Star party under the leadership of Beppe Grillo holding the balance of power. It is hard to see how the reform agenda in Italy can maintain momentum in this political climate. Political tensions are likely to continue as austerity fatigue and the high unemployment rate bolster protest movements. Italy should not be seen as a unique case but more as a precursor to what is likely to come with increasing frequency. We continue to believe that political developments as much, or more, than economic issues threaten to reignite a renewed crisis phase. From a top-down perspective, Europe is not one of our favored regions and the Fund has a significant underweight there, especially in peripheral countries and commercial banks.

On a brighter note, the economic recovery in the U.S. continues to gain traction led by the housing and the auto sectors. Housing activity continues to show strong incremental improvement while house price rises appear to be accelerating and broadening. With policy likely to remain highly supportive in the near-term, the U.S. is likely to be a source of stability and may prove to be the only significant growth engine for the global economy.

We’ve have grown incrementally more cautious on Emerging Markets, with our Strategic Policy Group downgrading the region to a neutral rating. China faces the headwinds of new leadership intent on stamping out corruption and investment excesses. The result has been a less accommodative policy environment. In addition, the ongoing intention of the leadership to rebalance the economy away from exports and investment towards greater consumption continues to add an element of uncertainty to the economic outlook. We have also seen increased strain in Latin America with developments in Brazil in particular worrying investors. With Gross Domestic Product (GDP) growth low and inflation accelerating, Brazil appears to be approaching the limits of its recent growth model as the focus there is on credit expansion and consumption growth. A substantial reform agenda now looks required to address these concerns.

With Chinese growth moderating and likely to be less materials intensive with its attempt to shift expansion towards consumption, our Strategic Policy Group has downgraded both the Materials and Energy sectors to an underweight rating. We have thus begun to lower the portfolio’s stake in Energy. The Fund has long held very low exposure to cyclical Materials stocks, preferring to invest in the structural themes of agricultural and precious metal miners. With respect to recently hard hit miners, we continue to remain constructive on the medium-term outlook as the key drivers of negative real interest rates and strong central bank demand will continue to exert upward pressure on the price of gold. In the short-term, we have reduced the portfolio’s exposure slightly, aware that the improving U.S. economy will continue to raise expectations of an approaching policy tightening, while retaining our view that eventually such expectations will prove incorrect.

We have also sought to lower the stock/country specific risk embedded within the Fund’s holdings. Despite the continued strength we have seen in equity markets, leadership continues to remain largely focused within traditionally defensive sectors such as Healthcare and Consumer Staples. We continue to be of the view that the internal dynamics of the market support our view of a relatively muted global growth recovery, with equities supported by strong liquidity and the associated hunt for yield. This environment is likely to persist in the near-term, but we think it will ultimately favor structural growth stocks.

Baring Asset Management  

London, UK

As of March 31, 2013, Baidu comprised 1.07% of the portfolio's assets, Golden Agri-Resources – 1.09%, China Pacific Insurance – 0.70%, Roche – 1.56%, Rakuten – 1.32%, Denso – 1.40%, Adidas – 1.42%, Sberbank – 1.29%, Mobile Telesystems – 1.06%, Reckitt Benckiser – 1.25%, Takeda Pharmaceutical – 1.25%, Japan Tobacco – 1.62%, and Mitsubishi Electric – 1.24%.

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

Before investing, consider the Fund’s investment objectives, risks, charges, and expenses. Contact 800 992-8151 for a prospectus or summary prospectus containing this and other information. Please, read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC.

By Montag & Caldwell Investment Counsel

The stock market has delivered strong gains since the end of the financial crisis, but it has not been a smooth ride. The economic recovery following the financial crisis of 2008 has been tepid at best, with much of the market’s sterling rise fueled by extraordinary measures taken by governments and central banks across the globe. Whenever government has tried to step back and allow the economy to stand on its own by ceasing to prop it up with further liquidity, markets have shifted their focus to concerns over sovereign debt levels, leading to sharp contractions in equities. The potential for volatility increases as attempts to address fiscal policy and deal with mounting government debt is postponed.

Montag & Caldwell (Montag) believes that amid this troubled economic environment investors should look toward high-quality growth companies for their equity exposure. Many investors have become fearful of equities amid growing uncertainty and volatility in the market, driven by top-down government and central bank actions. In the long run, however, we think that strong company fundamentals will win out over the ephemeral charm of speculative earnings boosted by easy short-term financing. Montag is a $13 billion asset manager that has focused on high-quality growth stocks since the 1970s and has managed the ASTON/Montag & Caldwell Growth Fund (MCGFX) Fund since 1994. We think that now is a critical time for investors to once again embrace a disciplined, long-term approach focused on high-quality stocks. 

High-Quality Growth Defined
With regard to our large cap investment philosophy, it might be wise to start with a definition of "high-quality growth." We define this type of growth as a company that can maintain a secular growth rate of an average of at least 10% annually over the next 10 years. The important distinction here in terms of quality is the ability for a company to sustain peak-to-peak or trough-to-trough earnings growth over such a long period. Within that framework, we then look for earnings momentum catalysts and stocks trading at a discount to what we think a company is worth.

The valuation component to our process ties in with our search for high-quality growth. We calculate a company's intrinsic value based on the quality of the fundamentals of each individual company, and use that valuation to initiate positions in stocks at roughly a 10 to 20 percent discount. For the earnings momentum catalyst, we demand that a company have near-term earnings growing faster than the overall market (as presented by the S&P 500 Index) for the next six-to-twelve months before a stock can be added to the portfolio.

Using this approach the Fund outperformed its Russell 1000 Growth Index benchmark (a 1.30% annualized gain to -1.19% for the index) since the beginning of the current secular bear market in March 2000 through the end of 2012. [Note: The Fund’s performance for the trailing 1-, 5-, and 10-year periods through 12/31/12 were 12.70%, 1.93%, and 6.35% annualized, respectively, compared with 15.26%, 3.12%, and 7.52% for its benchmark.]  The Fund has been able to deliver this strong performance not only because we capture upside potential in the market, particularly during strong fundamental growth markets, but also because the portfolio typically suffers less during more volatile or down market environments. The caveat to the upside potential is that the portfolio tends not to do as well on a relative basis during more-speculative market environments. Thus, the Fund typically lags the benchmark when we think stock prices are not accurately reflecting company fundamentals, though it has done well on an absolute basis. In our view, more-speculative stocks certainly led the charge in 2012 and on and off during the past 12 years, most notably since the rebound from the financial crisis beginning in March 2009.

Challenging Year in 2012
There were plenty of headwinds in 2012—a recession in Europe, slowing growth within Emerging Markets, sluggish economic growth in the U.S., a contentious presidential election, and the year-end fiscal cliff—making for a volatile and challenging fundamental market environment. Although the Russell 1000 Growth returned more than 15% in 2012, much of that gain—and the Fund’s relative underperformance—came during the first two months of the year, when equity markets were up dramatically following the long-term refinancing operation (LTRO) carried out by the European Central Bank (ECB). Indeed, if you excluded January and February from last year’s results, the portfolio outperformed both the benchmark and the S&P 500 Index as market volatility increased on concerns about those economic headwinds.

The universe of S&P 500 stocks climbed and eventually maintained its gains during 2012, even as earnings estimates declined throughout the year. The US Federal Reserve and other central banks continued to provide liquidity via low rates and quantitative easing through asset purchases. As evident by Chart 1 above, the market was focused more on the speculative increase in Fed liquidity during the year than the fundamentally driven moderating earnings growth.

To put this into perspective, Chart 2 below shows how our style in managing the Fund varies from the benchmark during different types of market environments since its 1994 inception. On a calendar year basis, the Fund’s relative returns versus the Russell 1000 Growth tend to underperform amid speculative market environments, such as the 1998-1999 technology bubble, cyclical bounces in 2003 and 2009, and the Federal Reserve driven quantitative easing (QE) and Operation Twist rallies beginning in 2010 and continuing on-and-off through 2012. Thus, there have been a number of external headwinds to a high-quality growth investment approach since the financial crisis of 2008. Policy headwinds that we do not think can last much longer.

The performance data quoted represents past performance. Past performance is no guarantee of future results. Investment return and principal value will fluctuate so that an investor’s shares, upon redemption, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. For performance data current to the most recent month-end, please visit our website at www.astonfunds.com. The total expense ratio is 1.06%.

Secular Bear Market
The current bear market for equities essentially started in March 2000. From that time through the end of 2012, the Russell 1000 Growth Index delivered a negative return compared with a positive return for the Fund. One of the most important pillars to investing is that you simply cannot give up a lot on the downside and expect to create wealth over the long term. During this ongoing secular bear market, the Fund has actually gained ground, not lost, following strong absolute returns during the 1990s. The bear market has been going on for 13 years, and we think it is our valuation discipline and emphasis on quality that has allowed the portfolio to do so well during the difficult periods.

It has been so long since the last secular bull market that people forget that the Fund achieved strong returns prior to the technology bubble. We think another period led by high-quality growth stocks is approaching after the liquidity-driven rallies ultimately subside. In 2012, fundamentals weakened, but the Fed was successful in propping up the market and pushing share prices higher through its unconventional monetary policies. What was different in 2012 versus 2010 or 2011 was that the Fed policies did not end. The market began to correct downward toward the middle of the year in anticipation of another end to the liquidity boost when the Fed suggested that they were likely to maintain Operation Twist and additional quantitative easing through the end of the year. By year-end, they were “all in” in terms of continued easing. Right now, the Federal Reserve is buying $85 billion of government bonds a month, essentially financing the entire U.S. deficit on an annual basis. All indications are that they plan to continue this deficit financing through the rest of 2013.

We haven't been big fans of quantitative easing. The government has never manipulated asset prices like this before—it is truly historic. It has changed historical, fundamental, and technical analysis applications, just as it has influenced asset prices. It has clearly had a positive effect on current stock, bond, and to some extent real estate prices, but now the government is more or less stuck with slow growth because of its heightened debt-to-GDP (Gross Domestic Product) ratio. Eventually the government needs to implement sound fiscal and monetary policies, stabilize debt-to-GDP, and address the fiscal deficit issues or the country will have some sort of financial crisis again.

Each time the Fed has paused in its quantitative easing, in 2010 and 2011, the market declined significantly. The fundamentals are about the same. The extra liquidity has not changed a great deal on that front. The global economy remains mature and sluggish amid a mature and weakened earnings cycle, with unresolved fiscal consolidation issues. Although we think the market is roughly fully valued, it can move higher as the Fed continues to implement quantitative easing and the fiscal consolidation issues are postponed. This policy of running trillion dollar deficits and unlimited money printing is not sustainable over the long run, however. While we are still hopeful that a fix is possible, and our outlook has been for an end to the secular bear market in 2013 or 2014, the worst thing that could happen is for these issues to continue to be put off and the debt allowed to be extended even further out.

Whither Profit Margins?
The main problem at the company level, as we see it, is that profit margins are near all-time highs. Historically, it is typical for there to be a cyclical recovery in employment along with a cyclical recovery in profitability. As seen in Chart 3 below, while there has been some progress in the unemployment rate this recovery cycle, it has been well short of historical norms. Corporations have benefited greatly from huge deficit spending and low interest rates as they have kept employment costs low. They have been very cautious in hiring people, focusing on stabilizing revenue growth and controlling costs as a means to profit growth. But most of the productivity benefits from lower costs have been realized now. With profit margins at very high levels and overall growth likely to be moderate going forward, we think profit growth is also going to be moderate, and that is without the highly likely potential for a reversion to a mean level of profit growth.

With margins as high as they are now, a resulting decline from any future disappointment could be steeper than typically experienced in the past. There has already been a big recovery in margins and many of the estimates for profit growth this year are dependent on significant margin improvement, which we believe is unlikely. Reams of academic work show that when an economy reaches the level of debt-to-GDP that the U.S. is approaching, you have slower growth (particularly after a financial crisis). Still, there is a solution. We are a very rich nation and with the right policies we can get back to healthier growth once our debt is stabilized.

High-Quality Answer
We are optimistic that amid this environment the outlook for high-quality large-growth companies is relatively brighter than other equity options because these types of stocks are reasonably valued with what we believe is more-assured growth owing to their financial strength and global diversification. In addition, many of these companies have above average dividend yields and dividend growth prospects as investors shy away from a developed world that still has too much debt. Whether the government procrastinates or addresses the issues, growth and yield are going to be scarce in the period ahead and we think that these companies are best positioned to provide both in this kind of environment.

In terms of valuation, the picture closely mirrors what we saw in 2000, but this time in favor of large-cap stocks. Back then, the sentiment was very negative toward the value of the “average” stock, so the pre-conditions were in place for the average stock to do quite well. Now, the average stock is fairly priced, margins are in the process of peaking, and earnings momentum is slowing. In contrast, larger companies (as represented by the 25 biggest companies in the S&P 500 Index, as seen in Chart 4 below) in general, and high-quality large-growth companies in particular, are attractively valued relative to the broader market and we think likely to exhibit a stronger earnings stream over the next several years. We also see this trend in the price/earnings (P/E) ratios of various segments of the market, with small-value stocks the most expensive—trading at 93% of their average P/E for the last 20 years—and large-growth companies the cheapest at 73%.¹

¹ Source: JPMorgan Chase. P/E ratios are calculated and provided by Russell based on IBES consensus estimates of earnings over the next 12 months. Data as of 12/31/12.

The Fund’s holdings are currently trading at roughly 72% of our calculation of fair value of the market. In terms of 2013, we think these high-quality growth companies could show about 10% to 12% earnings growth and secular growth rates of 10%. We typically take a balanced approach to sector positioning in the portfolio, but now it is tilted more toward defensive growth areas because of the maturity of the earnings cycle and our work showing a big deceleration in earnings momentum and low overall long-term earnings growth. We think more-cyclical stocks are fully priced, based on the need for margin improvement. The market seems to be counting on a second half recovery in 2013, which we believe is too optimistic.

The Federal Reserve's quantitative easing has desensitized the market to valuation for the past several years, but this situation cannot last. After favoring high-quality cyclical stocks prior to the financial crisis that performed well, we thought that the recovery would be a two-stage process. First, a volatile period when high quality would probably hold up better than most stocks followed by a full economic rebound that would set the stage for the next secular bull market, led by a rotation to high-quality growth companies. We think that this outlook still applies, just that the Fed altered the timing of the true rebound as it fueled a speculative interlude with its unprecedented monetary policy. Although the timing remains uncertain and the Fed’s excesses may have to be corrected for, we continue to believe that a new secular bull market is coming, led by high-quality growth companies. We think these types of stocks simply are the best positioned to provide relatively attractive growth at reasonable valuations, just as small- and mid-caps stocks were so poised in 2000.

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

Before investing, consider the Fund’s investment objectives, risks, charges, and expenses. Contact 800 992-8151 for a prospectus or summary prospectus containing this and other information. Please, read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC.

The information contained in this article originated from excerpts from a January 17, 2013 webcast, and is provided by Montag & Caldwell Investment Counsel (“Montag & Caldwell”), a subadviser utilized by Aston Asset Management, LP (“Aston”). Montag & Caldwell is not an affiliate of Aston and their views do not necessarily reflect those of 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 Montag & Caldwell 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.or visit www.astonfunds.com.

4th Quarter Commetary

On January 1, 2013, the U.S. House of Representatives approved legislation that staved off a large portion of the income tax increases associated with the Fiscal Cliff. The bill maintained tax cuts for individuals earning less than $400,000 ($450,000 household), while increasing taxes for those earning above this threshold in generating an estimated $600 billion in additional revenue during the next 10 years. Had the House not acted, the resulting stalemate would have immediately increased taxes for all Americans and reduced certain domestic and defense expenditures by $110 billion. 

The mandatory tax increases and spending cuts were put in place to prevent further increases in the nation’s debt ceiling, without which the U.S. could have faced sovereign default. Although Congress provided welcome tax relief for the majority of U.S. consumers, it merely postponed for 60 days a significant portion of the nation’s fiscal debate. In our view, this deal represents the “low hanging fruit” in these negotiations. As the U.S. once again reaches its statutory debt limit, the negotiations over spending will prove even more critical. The U.S. ratio of total amount of the debt outstanding has overtaken every $1 of GDP produced, indicating that the government must deleverage or face potential consequences such as a further downgrade of the U.S. sovereign debt rating.

Turning to monetary policy, the Federal Open Market Committee announced in December that it would purchase longer-term US Treasuries after the completion of its “Operation Twist” program to extend the average maturity of its Treasury holdings. This return to nominal Treasury purchases was not surprising to us, primarily given relatively benign inflation data. Furthermore, the unemployment rate remains elevated, job market participation is still anemic, and business fixed investment continues to slow. We view both hiring and business investment as strongly constrained by the neutral-to-negative sentiment of business managers and executives towards the government’s fiscal uncertainties.

While the U.S. public sector balance sheet reaches unprecedented amounts of borrowing, the private sector has streamlined its operations and borrowings. Thus, the recovery in corporate profits has also has occurred at a much faster pace than that of either investment or hiring. As we head into 2013, both the operating profiles and balance sheets for the private sector are in historically strong positions, while those of the public sector are at their weakest, and facing significant headwinds. Given the limited maneuverability of the public sector and its reliance upon political discourse, we believe this relationship is likely to hold for the intermediate future. 

Strong Corporates

The Fund outperformed its Barclays Capital Aggregate Bond Index benchmark during the quarter. Sector, quality, and security selection aided the portfolio’s performance. An overweight stake in credit securities outperformed duration (a measure of interest-rate sensitivity) matched Treasuries during the quarter as the option-adjusted spread (OAS) on Corporate bonds tightened. An overweight stake in the bonds of large U.S. banks further boosted results as the Financials sector was a standout performer within the index. An underweight stake in Treasuries also helped portfolio returns, as that sector of the market was negative for the quarter. Moreover, much of the Fund’s Treasury exposure was in the form of Treasury Inflation-Protected Securities (TIPS), which benefitted from increasing inflation expectations and outperformed nominal Treasuries. Our decision to overweight lower-quality, investment grade bonds in the portfolio also helped relative performance as that group outperformed.

Portfolio structure also had a positive effect. The portfolio is structured in a barbell fashion, emphasizing high quality, floating-rate notes on the short-term end of the yield curve and lower quality investment grade securities on the long end. Longer duration credit securities outperformed during the quarter as spread curves flattened.

Outlook

In the current fiscal and monetary environment, we anticipate that investment grade corporate issuers (and therefore their debt) will weather near-term volatility with a more attractive total return profile than government securities, with one notable exception—TIPS. In terms of inflation, we anticipate that the dollar may weaken against the backdrop of further fiscal concerns for the U.S., which would indicate the potential for increases in both energy and other commodity prices. We estimate that to reach a “normal” unemployment rate, the U.S. would need to add approximately three million additional jobs. Based on the Federal Reserve’s comments, however, it is likely that they will consider slowing the use of quantitative tools (e.g. Treasury purchases) in advance of the target employment rate. The healthy financial position of U.S. corporations indicates that there is substantial capacity to add labor quickly to reduce the nation’s unemployment rate, which we consider likely towards the second half of 2013—another factor which may increase inflation expectations. Higher inflation expectations and lower unemployment are both possible during 2013 and are consistent with the Committee’s dual mandate and Chairman Bernanke’s comments that 2013 could be a “good year” for the U.S. economy.

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, consider the Fund’s investment objectives, risks, charges, and expenses. Contact 800 992-8151 for a prospectus or summary prospectus containing this and other information. Please, read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC.

4th Quarter 2012

Substance Over Style

Mid-cap stocks outperformed large- and small-cap stocks during the fourth quarter and full year 2012. This is not unusual, as mid-caps have demonstrated a history of outperformance that goes back at least 15 years (as measured by the performance of the Russell indices). We think mid-sized companies have certain characteristics that make them an attractive and distinct investment relative to other U.S. equities. Although mid-caps may exhibit more volatility than more-established large-cap companies they tend to have greater growth potential, whereas versus small-caps they typically have more stable business records and less volatility. Mid-sized companies are also preferred acquisition targets since they have the ability to provide a greater overall impact to an acquirer’s bottom line than smaller acquisitions.

The strength of mid-cap stocks was reflected in the absolute returns of the Fund as they exceeded that of the broad market S&P 500 Index and the small-cap oriented Russell 2000 Index for the quarter and the year. The portfolio’s performance did marginally lag that of its S&P Midcap 400 Index benchmark for both periods, however. No single stock had a dramatic effect on fourth quarter results, though an overweight stake in Technology detracted from relative performance as that sector underperformed the overall index.

Notable individual stock underperformers during the quarter were New York Times Company, Unisys, and Nuance Communications. After surging higher during the summer, New York Times pulled back on profit taking during the fourth quarter. The stock had been one of the Fund’s top performers during each of the two previous quarters. Unisys suffered from softer demand in their services and federal business following strong earnings during the first half of the year. Nuance is transitioning to an on-demand business model, which caused a revenue miss that disappointed investors.

Top performing stocks during the quarter included Cree, Southwest Airlines, and Varian Medical Systems. Cree, a leader in LED lighting products, was added to the portfolio in 2012. The company reported stronger than expected earnings, market share gains, and margin expansion.  Southwest rebounded from a weak third quarter performance after announcing new revenue initiatives and significant share repurchases. Medical device manufacturer Varian made significant share repurchases and delivered strong results during the quarter, with orders, revenue, and earnings all above analysts’ expectations.

Full Year Highlights

As we noted in last quarter’s commentary, the portfolio is structured and managed to participate in the long-term growth of companies across a variety of market environments. The recent choppy market environment has provided opportunities to add to strong secular growers suffering temporary setbacks in their stocks and to trim positions that have appreciated substantially. These changes were conducted with an eye toward company fundamentals that we think are best understood in the context of longer time horizons. Thus, we note some of the highlights of the past year as examples of this investment philosophy in action.

Printing and image service company Lexmark International was the Fund’s worst performer during the year. Two thousand twelve marked a year of transition for the firm as they implemented a major restructuring plan to diversify their revenue base and offset secular printing challenges. The company exited the inkjet business in order to focus on its managed print services and software capabilities. Lexmark returned 50% of its free cash flow to shareholders through significant buybacks and dividends, and remained a bargain trading at near book value by the end of the year. We added to the Fund’s position near its third quarter lows prior to a significant rebound in the stock prior to year-end.

Two other major detractors during the year were FMC Technologies and previously mentioned Nuance Communications. FMC provides equipment for deep-sea oil production. Although the company delivered impressive year-over-year earnings growth, they uncharacteristically missed four quarters of consensus earnings estimates citing North American weakness, higher project costs, and supply chain issues—all of which helped to drive the stock down. The execution issues are in part a function of higher volumes and the challenges associated with managing growth, including adding employees. The company’s order backlog is solid and the long-term outlook for deepwater oil development and production is strong. Thus, we added to the portfolio’s position.

Nuance was the Fund’s best performing stock in 2011, but gave back some of its gains after delivering disappointing results in the first and fourth quarters. Nuance presents a strong long-term secular play on voice recognition technology, where it is the industry leader, particularly in the consumer (automobiles) and healthcare (digitization of healthcare records) markets. After having trimmed the position earlier in the year at higher levels, we maintained the position amid its fourth quarter struggles.

Media conglomerate Gannett publishes more than 80 daily U.S. newspapers with affiliated online sites, including USA Today. Strong broadcast revenues, mainly from Olympic coverage and political spending, more than offset weak print advertising in making the stock the portfolio’s top performer for the year. With an increase in digital subscribers and the successful implementation of a “pay wall” model, we think the stock is still attractively valued relative to its fundamentals, though we did trim the position given its substantial appreciation during the year.

Long-time holding Akamai was another top-performer during the year. The firm announced better than expected results in each quarter and continued its strong execution in all geographical regions despite weak macroeconomic trends. The announcement that Co-Founder and Chief Science Officer Tom Leighton would take the position as the new CEO cleared up uncertainties about the company’s strategic direction and future leadership. Although we think the company remains poised to benefit from current significant Internet traffic and security trends, we trimmed the position after its strong 2012 such that it is not a top-10 holding for the first time in several years.

Finding Value in “Value” Stocks

In a year that saw many value investors dipping into traditional growth areas of the market, we found value in “value” stocks. This is not a change in our investment philosophy as much as a reflection of current market dynamics. The difference between so-called growth and value is typically little more than the priority between bottom line growth and price. As companies’ results are negatively affected during difficult times, stock prices often fall farther than fundamentals would warrant. Such has been the case for us during the past year, as companies that we think have strong long-term growth characteristics have become cheaper amid greater short-term uncertainty. Thus, they still have the growth that we look for, but have become “value” stocks as reported by third-party quantitative ranking systems published by firms such as Morningstar and Russell.

During the last twelve months, several stocks have been added to the portfolio based on being significantly cheaper relative to their fundamentals than others reduced or eliminated as they have met the market’s growth expectations and appreciated significantly. This “re-balancing’ comes as a natural result of our investment process that seeks to fund the best blend of price and long-term fundamentals. This has positioned the portfolio closer to the so-called value end of the spectrum in recent quarters. To be clear, we do not manage the portfolio in terms of the “style box” or weight it with a specific percentage of value or growth stocks. We invest where we see the greatest opportunity to capture upside potential by investing in companies that we believe are undervalued yet still offer strong long-term growth.

Perspective

We remain positive on the global economic outlook. The U.S. recovery is progressing, growth in China has improved, and Europe is stabilizing. In the U.S., employment, auto sales, and the housing market are improving and business and consumer confidence are trending upwards.  Lower energy prices should also enhance economic growth, while merger and acquisition activity has picked up pace and may even get stronger during 2013.

The political situation in Washington unfortunately remains clouded. The “fiscal cliff” became a “slope” with government spending cuts not taking place, but still under consideration. Still, most U.S. companies are in good financial health while undertaking significant share-buyback programs and increasing their dividends that has aided stock prices.

We think the portfolio overall is attractively valued relative to the earnings and growth potential of its holdings as well as those in benchmark. At the same time, we believe the portfolio’s mid-cap holdings have a better balance sheet profile and the potential to be more profitable. Holdings are well-diversified geographically, have the ability to grow market share, and in many cases represent “must have” products or services able to make their clients more efficient. 

Fairpointe Capital

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

As of December 31, 2012, New York Times Company comprised 3.17% of the portfolio’s assets, Unisys – 2.12%, Nuance Communications – 2.20%, Cree – 2.21%, Southwest Airlines – 2.86%, Varian Medical Systems – 2.69%, Lexmark International – 2.53%, FMC Technologies – 2.33%, Gannett – 3.35%, and Akamai Technologies – 2.81%.

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

Before investing, consider the Fund’s investment objectives, risks, charges, and expenses. Contact 800 992-8151 for a prospectus or summary prospectus containing this and other information. Please, read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC.

4th Quarter 2012

The “risk on” trade prevailed within the Fund’s Russell 2000 Value Index benchmark during the fourth quarter, as higher beta (volatility) stocks and sectors outperformed. Higher-quality stock trends were more mixed, for both the quarter and the full year 2012, and certainly less favorable than the generally “high-quality” tailwind of 2011. On the sector level, Materials and Consumer Discretionary were among the top areas in the index during the quarter, delivering solid gains, while Healthcare and Utilities posted losses as the laggards. 

The Fund slightly outperformed its benchmark during the quarter, but trailed it for the full year. Although we were disappointed to fall behind the index in the Fund’s first year, we were pleased to have generated double-digit returns for investors. Last year proved to be a difficult one for active managers in general, as an analysis by Bank of America/Merrill Lynch indicates that only 35% of small-cap value and 28% of small-core funds beat their benchmarks in 2012.

Overweight positions in Industrials and Materials aided performance during the quarter, while an overweight stake in Healthcare was the only meaningful sector allocation that detracted from relative performance. Stock selection in the portfolio outperformed in six sectors of the Russell sectors, with the best relative performance in Healthcare, led by Invacare. The Fund’s edge was fairly modest in most of the other outperforming sectors.

Although sector allocation and stock selection were both positive contributors for the quarter, they detracted from relative returns for the year. Poor stock selection in Financials and Materials overwhelmed generally positive results elsewhere.

Portfolio Positioning

We initiated five new holdings in the portfolio during the quarter—Lithia Motors, Fair Isaac, Chemtura, Entegris, and Steris. Oregon based Lithia is the ninth-largest auto dealer in the U.S., serving mostly smaller markets west of the Mississippi. In a rebounding auto market, we thought the shares were attractively valued relative to earnings estimates for the next 12 months. Although Fair Isaac is listed as a Financials stock, we think of it more as a technology company. With its omnipresent FICO score, it is the market leader in credit scoring and has been extending its franchise into decision management, fraud detection, and customer management for financial institutions. The company reports solid free cash flow and return-on-invested-capital metrics, and its stock was trading at an attractive valuation relative to double-digit long-term earnings per share growth marked by high recurring revenues.

Chemtura is a specialty chemical company in the midst of a restructuring that involves selling some of its lower margin businesses in an effort to attain some ambitious sales and earnings goals. Although we think the goals might be a bit too ambitious, particularly on the sales side, the company has been executing well of late and has made progress in its restructuring. If it gets just halfway toward its goals, we think that the stock would still represent an attractive value relative to its expected growth. The firm’s current CEO formerly managed Hercules (which was eventually sold to Ashland), and he may be repeating the same game plan with Chemtura. 

Entegris is a manufacturer and supplier of products and services used to maintain the purity and integrity of critical materials in semiconductor and other high-technology manufacturing. Two-thirds of its business is consumables, including liquid and gas filters used in the semiconductor manufacturing process. The company is trading at a discount to our current estimated fair value. Entegris also possesses some appeal as a potential takeout candidate given its high market share in technology applications, which may look attractive to larger, more diversified filter manufacturers. Steris has improved its portfolio over the past couple of years and we think it is poised to show low double-digit earnings growth with solid cash generation that will enable shareholder-friendly capital allocations.

We eliminated two holdings from the portfolio during the quarter, Mistras Group and Thermon Group Holdings. Mistras was sold due to spotty execution and Thermon due to its reaching our fair valuation target. Both stocks were part of the overweight stake in Industrials, and the proceeds from the sales were redeployed to other areas.

Outlook

Looking ahead, we are conscious that U.S. politicians averted the “Fiscal Cliff” from a tax perspective but still face formidable issues over the next few months related to the debt ceiling and sequestration of government spending. Both issues could have a significant impact on the economy if not resolved, and will certainly weigh on investor psychology in the near term. That said, we think the broader picture is attractive as we sense the U.S. economy is becoming relatively more competitive versus other nations. The company management teams of holdings in the portfolio are indicating, and recent news reports seem to confirm, a trend toward more U.S. manufacturing. As such, we think the U.S. equity market presents some exciting opportunities. 

From a thematic perspective, we continue to favor economically sensitive areas of the market, since the macroeconomic environment is grudgingly getting better. Several industries look geared for recovery, including autos and housing, as they are likely to benefit from pent-up demand. While we are unlikely to own such cyclical and capital-intensive businesses as homebuilders, automakers, or airlines directly, we’ll look for derivative equity investments that benefit from the same trends.

We are also pleased to note that after a lengthy acquisition drought one of the portfolio holdings, Duff & Phelps, become the object of takeover interest on the last day of the year. The company announced that it had agreed to be acquired by a private equity consortium. We believe there is significant pent up demand for merger and acquisition activity in the small-cap space, and with the recent partial resolution of the “Fiscal Cliff”, we may at last have a catalyst to get things rolling. Overall, we sense modest optimism from management teams of holdings in the Fund for 2013, and we find the portfolio itself attractively valued. 

Silvercrest Asset Management Group
New York, NY

As of December 31, 2012, Invacare comprised 0.89% of the portfolio's assets, Lithia Motors – 1.69%, Fair Isaac – 1.67%, Chemtura – 1.62%, Entegris – 1.28%, Steris – 1.23%, and Duff & Phelps – 1.95%.

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

Before investing, consider the Fund’s investment objectives, risks, charges, and expenses. Contact 800 992-8151 for a prospectus or summary prospectus containing this and other information. Please, read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC.

4th Quarter 2012

Signs of an economic recovery continued around the globe during the fourth quarter. Among the positives witnessed were industrial production picking up, manufacturing sectors rebounding, a recovery in housing, improving economic conditions in China and Japan, and a low interest rate and inflationary environment. Politics once again dominated the headlines, however, with the U.S. Presidential election, concerns over the fiscal cliff, and struggles in Europe and the Middle East seeming to rule the day. Given this macroeconomic influence, markets experienced increased volatility and higher correlations during most of the quarter. These conditions proved to be a tough environment for active managers as most benchmarks finished close to the top quartile in their universes. High benchmark results have historically proven to be unsustainable and active managers tend to perform better during the periods following such spikes.

The Fund’s Russell 1000 Value Index benchmark finished the quarter in positive territory in gaining 1.5%. Consumer Discretionary was the best performing sector of the index, followed by Financials, and Technology, which were also positive. On the downside, Telecommunications was by far the biggest laggard, with Energy delivering losses as well. Lastly, Utilities proved to be a drag on overall market performance as the pursuit of dividend yield earlier in the year had pushed these stocks to unrealistic valuations. The Fund underperformed the benchmark for the period in posting a small loss.

Apple Drop

Stock selection in the Technology, Consumer Discretionary, and Consumer Staples sectors were the primary detractors from performance during the quarter. After having been the best performing stock in the portfolio through the first three quarters of the year, Apple retreated 20% during the final quarter as investors focused on the competitive threats to the company’s dominant iPhone and iPad products. Microsoft followed a weak third quarter with an underperforming fourth quarter. Global PC demand remains weak and the disappointing early reception by consumers for Windows 8 led to a retreat in the stock. The marked panned Hewlett-Packard’s long-awaited restructuring plan as likely insufficient to prevent continued market share loss by the company. The stock was the Fund’s worst performer for the year, and given the continued fundamental deterioration in its business, we sold the position.

Another individual holding that notably detracted from performance during the period was Teva Pharmaceuticals. At its annual Investor Day in December, new CEO Jeremy Levin laid out the company’s strategy going forward. Although the plan seemed reasonable, it could take some time to bear fruit. Overall, investors seemed disappointed with the firm’s outlook and penalized the stock. The company still is one of the more attractive names in our work, though, and remains a holding in the portfolio.

The top contributing sectors for the quarter were Industrials and Financials. An overweight stake in Industrials boosted by the performance of Eaton and General Dynamics aided relative performance. Eaton was the best performer within the Industrial sector and the second best stock in the portfolio. Following the completed acquisition of Cooper Industries, Eaton’s revenue mix is expected to be more diversified, primarily derived from an electrical business that is viewed as less cyclical. The market has thus begun to re-rate Eaton’s prospects, rewarding the stock with a higher price for its earnings.

Stock selection drove performance in Financials as Citigroup and Morgan Stanley were two of the top four performers in the portfolio. After a strong third quarter, the market viewed an abrupt and surprise change of the CEO and other top management at Citigroup favorably. The company has a renewed focus on execution and expenses, and is supposed to announce its first dividend increase since 2007 early in 2013. The market reacted positively to an improving capital markets environment that should be a major benefit to Morgan Stanley. In addition, the Smith Barney integration into Morgan Stanley’s wealth management business appears to be going along as planned and has had a diversifying effect on the company as a whole.

The Fund’s lack of exposure to the Telecom and Utilities sectors, two of the market’s worst three sectors during the fourth quarter, also aided relative returns. Both traded down as investors tired of defensive stocks as optimism about the future increased.

Buys and Sells

Despite strong equity market performance in 2012, we think valuations remain compelling—both on traditional measures and Cornerstone’s proprietary valuation work. Our Fair Value Model now indicates that 72% of the stocks in our 800 stock large-cap universe are undervalued. Using normalized earnings, we now calculate the price of the universe at 74.8% of fair value.

We added four new names to the portfolio during the fourth quarter—3M, Johnson & Johnson, State Street, and Qualcomm. 3M has underperformed the market the past two years despite consistently growing earnings and improving fundamentals. We think that a higher exposure to international markets has kept the stock from reaching the valuation levels we believe that it deserves. Johnson & Johnson remains one of only four U.S. companies to maintain a AAA credit rating. The company has a rock-solid balance sheet and strong drug pipeline, with a valuation that we think is attractive. Custody bank State Street has underperformed the broader market for the last several years (in a weak global economy with low interest rates and increased regulatory capital requirements) despite a long history of resilient earnings and returns. We see upside to the attractively valued stock over the long-term as the macroeconomic concerns subside.

Qualcomm is the world's largest fabless semiconductor producer and the largest provider of wireless chipset and software technology, which powers the majority of all 3G devices commercially available today. The company continues to benefit from the proliferation of smartphones globally, recently adding the market share leader in its chip business (Apple). Qualcomm is a quality company with a cheap valuation. It is at the center of a high growth industry, benefiting from overall industry growth in its patent portfolio and in its integrated circuit business through its market share.

In addition to the above-mentioned Hewlett-Packard, we sold Eli Lilly, Staples, and Vale from the portfolio. A long-time holding, we parted with Lilly given strong outperformance over the past two years as our investment thesis has played out. We purchased Staples during the third quarter based on extremely attractive valuations and our belief that its domestic business was fundamentally sound. During the fourth quarter, management detailed a global turnaround plan that, in our opinion, didn’t truly address some of the fundamental deterioration that is going on at the company. Lastly, iron ore producer Vale is a name that we exited as concerns began to mount over the Brazilian government’s influence over the company. Investors, including ourselves, began to question whose best interest management is trying to appease—shareholders or the Brazilian government. Given these conditions, we decided to exit the name.

Concluding Comments

We continue to find considerable value in the market and are enthusiastic about the portfolio’s positioning as well as our ability to improve the quality of the holdings while still owning market leading, cash flow rich, and attractively priced companies in the process. We are determined not to be swayed by the whims of the market, which appear to be changing quarter to quarter. Although there may continue to be periods of strength and weakness, we will not stray from our sensible and time-tested process .

Cornerstone Investment Partners

As of December 31, 2012, Apple comprised 4.06% of the portfolio’s assets, Microsoft  – 3.47%, Hewlett-Packard – 0.00%, Teva Pharmaceuticals – 3.38%, Eaton – 3.86%, General Dynamics –3.17%, Citigroup – 5.01%, Morgan Stanley – 3.50%, 3M – 2.94%, Johnson & Johnson – 1.92%, State Street – 2.06%, and Qualcomm – 2.34%.

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

Before investing, consider the Fund’s investment objectives, risks, charges, and expenses. Contact 800 992-8151 for a prospectus or summary prospectus containing this and other information. Please, read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC.

4th Quarter 2012

Led by European and Emerging Markets, global equities remained strong through the final quarter of 2012, pushing most indices to positive, mid-teen returns for the full year. By comparison, U.S. equities were held in relative check during the quarter, as the election and political posturing weighed on the domestic market. Investors balanced the prospect that the fiscal cliff stalemate would push the economy back into recession, even as economic indicators in key sectors—housing, employment, and manufacturing in particular—showed improving signs. Globally, economic growth in 2012 was slow and uneven but still positive, helped by the concerted and broad-based support from government central banks.

Small- and mid-caps stocks outpaced large-caps domestically during the fourth quarter, bringing the full year returns across the market-cap spectrum into a relatively narrow range (as measured by the Russell benchmarks). Sector performance within the growth indices was strongest within Industrials and Materials and, to a lesser extent, Consumer Discretionary. The latter two sectors also closed out 2012 among the top-performing industry groups for the year as a whole.

Stellar Year

The Fund delivered positive returns for the quarter in outpacing its Russell 2000 Growth Index benchmark. For the full year, the portfolio substantially outperformed the benchmark. Stock selection was broadly positive across sectors for the year and strongest in the Healthcare, Technology, and Energy sectors during the fourth quarter.

Within Healthcare, acute care hospital names continued to boost performance. Tenet Health Care beat guidance all year long with the stock further boosted by the company’s fourth quarter announcement of a meaningful share repurchase plan for 2013. We decided to sell the position as the stock had soared up to that point during the year, gaining 30% in the fourth quarter alone. A sizeable position in Health Management Associates also aided returns.

Key performance drivers in Technology included anti-virus software developer AVG Technologies and IT services firm VeriFone Systems. A tie-up with Yahoo!, announced in December, keyed the advance for AVG. In Energy, Gulfport Energy and Oasis Petroleum contributed to positive comparisons for the quarter and the year.

Offsets to the positive performance during the fourth quarter were primarily in individual names, but rolled up to the sector level the Fund did lag by a small margin in Consumer Discretionary and Materials. The modest shortfall in Materials was attributable mostly to an underweight stake in the sector, but shares of specialty metals producer Allegheny Technologies dropped roughly 10%. Shutterfly and Arctic Cat were two of the weaker names in the Consumer Discretionary sector offsetting holdings in the retailer sub-group that were generally positive.

Unrecognized Growth

Our strategy seeks to achieve competitive returns by identifying unrecognized growth potential wherever it exists across all industry sectors. We seek to identify firms with high-quality business models, distinct competitive advantages, proven management teams, and significant growth potential. Revenue growth, margin expansion, and the ability to positively surprise and revise estimates are key characteristics in the portfolio’s holdings. We want these firms to have duration and sustainability of these characteristics based on their competitive positions in the industry. Our success stems from the experience and focus of our investment team, who possess extensive knowledge of small-cap companies and their key industry drivers.  

Andrew Morey
Lee Munder Capital Group, LLC

As of December 31, 2012, Tenet Health Care comprised 0.00% of the portfolio's assets, Health Management Associates – 5.07%, AVG Technologies – 2.00%, Verifone Systems – 1.33%, Gulfport Energy – 2.30%, Oasis Petroleum – 0.52%, Allegheny Technologies – 0.00%, Shutterfly – 1.69%, and Arctic Cat – 1.96%.

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

Before investing, consider the Fund’s investment objectives, risks, charges, and expenses. Contact 800 992-8151 for a prospectus or summary prospectus containing this and other information. Please, read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC.

4th Quarter 2012

The Year of the American Consumer

Stocks delivered above average, double-digit returns for U.S. equities in 2012, with large-cap stocks (represented by the Russell 1000 Index) beating out small-cap stocks (Russell 2000 Index) by a nose. Value stocks outdistanced growth by more than two percentage points in both areas, with most of the outperformance for value coming during the fourth quarter. The main reason behind these results seems to be increasing investor appreciation for improved fundamentals within the Financials sector, which was the top-performing large-cap sector and among the top-three areas in the small cap universe. Along with improved fundamentals, financial services companies seem to be successfully adapting to their new regulatory environment. If the much-improved trend for the group were to continue, it would be a significant positive for the market and the economy.

The slow but steady expansion of the economy that we anticipated did occur in 2012, marked by dramatic improvement in the housing market and grudging improvement on the jobs front. Those two factors helped to push consumer confidence to a four and a half year high. As confidence has improved and the consumer de-levered, Americans have gone back to doing what we do best—shop. Given that approximately two-thirds of U.S. Gross Domestic Product (GDP) is comprised of consumer spending, the confidence and expenditures of consumers is the key to growth going forward. Interestingly, in the nearly four-year period since the recession trough in 2009, the Consumer Discretionary sector has been the best-performing large-cap sector and among the top-three for small-caps. We think further appreciation in home prices, improved access to credit, and steady, if unspectacular, job growth should help to accelerate this trend as we move through 2013.

Late Year Rally

Stocks moved higher in November and December, helping the Fund’s Russell 1000 Index benchmark to recoup its October losses in barely edging into positive territory for the quarter. The Fund, however, did not finish in positive territory, as relatively weak stock selection caused it to underperform the index. Stock selection in the Technology, Healthcare, and Financials sectors was the biggest detractor on an absolute basis, with Healthcare also underperforming the benchmark the most.

Athenahealth and Express Scripts were among the laggards in Healthcare. Online recordkeeping and health-services company Athenahealth dropped sharply after reporting quarterly revenue and bookings that were lower than expectations. The stock rebounded somewhat during the December rally, but not enough to prevent it from being one of the Fund’s five worst performers for the quarter. Pharmacy benefit manager Express Scripts reported strong quarterly results, but indicated that 2013 earnings estimates may be too aggressive. This raised visibility concerns regarding participant enrollment for its health plan customers.

The two biggest individual detractors from performance were Apple and Royal Gold. Apple sold off after the launch of its latest version of the iPhone on fears of softer demand. We still think Apple is an industry innovator that has built a powerful digital media ecosystem that commands premium pricing for its devices. Significant app and digital media sales have generated record levels of cash for the company, which we think it will now begin to return to shareholders in the form of stock buybacks and dividends. Royal Gold was hit by the falling price of gold plus the issuance of stock to fund the purchase of additional royalties. We believe the company’s unique business model enables investors to capture value in the precious metals sector without incurring many of the operating risks associated with owning and managing physical assets. Led by an experienced management team, Royal Gold has used its ample capital position to invest in attractive assets during periods of industry weakness, leaving it positioned to produce significant earnings growth going forward.         

On the positive side, holdings in Industrials, Energy, and Telecommunications aided both absolute and relative returns. Top-10 holding Colfax was a top stock for the second quarter in a row as management provided details on its growth strategy during the firm’s first ever analyst day meeting. The firm is a key supplier of piping systems to a variety of industries building out global energy infrastructure. Chicago Bridge & Iron was another Industrials stock that performed well, as it completed a major acquisition that fueled improving contract performance. Management also delivered positive guidance and outlook for 2013.

The portfolio’s biggest winner was CarMax—the leader in the used-car superstore niche. The stock rose on strong quarterly results driven by improved sales conversions in response to attractive offers through the company’s financing segment. The firm appears to be successfully emerging from the economic turmoil and securitization market freezes that pummeled results in 2008-2009, with resumed plans for modest growth. Although shifts in consumer behavior and the financial markets can affect short-term results, the company seems to have built a better mousetrap that is hard for others to replicate.

Portfolio Changes

As always, the portfolio’s positioning and sector allocations come from opportunities that we have identified through our bottom-up company fundamental analysis and valuation work. Only subtle changes were made during the fourth quarter, with Consumer Discretionary changing places with Financials as the top-weighted sector in the portfolio, followed by Healthcare. Year over year, the portfolio saw a significant decrease in exposure to Technology (the largest sector weight at the end of 2011), Industrials, and Energy, with those assets redirected toward opportunities in Consumer Discretionary and Consumer Staples. The changes from a year ago reflected a shift towards a strengthening domestic economy and the consumer, which altered the bottom-up dynamics. Financials was the lone survivor among the top-three sector weights from the previous year. 

Eight stocks became full-positions through purchase, appreciation or a combination of the two during the fourth quarter, including American International Group (AIG), Kinder Morgan, and Mondelez International. The U.S. government effectively nationalized global insurance company AIG following the 2008 financial crisis. The company has undergone a remarkable turnaround as new management has invested in IT systems and underwriting resources, sold off non-core businesses, and successfully paid back all borrowed funds to the U.S. Treasury. We think the company is now well positioned to both grow market share and improve profitability.

Pipeline owner Kinder Morgan connects every link of the energy supply chain from producers to processors to refiners and consumers. The company charges customers a fee to use its infrastructure, much like a toll-taker charges a toll for the use of a highway or bridge, except it also requires a long-term contract. This business model has historically meant that the firm’s financial performance has been much less volatile than the prices of the commodities that rely on its infrastructure. With its economies of scale and scope, we believe the company is likely to be a major beneficiary of the coming energy infrastructure reconfiguration.

Mondelez International is the recently spun off global snacks segment of Kraft Foods that includes such worldwide favorite brands as Oreo, Cadbury and Trident. The company’s focus is on growing sales and earnings in underpenetrated Emerging Markets. It should also benefit from economies of scale and cross-selling opportunities afforded by its 2010 acquisition of Cadbury. With 15 “Power Brands” generating more than $500 million each in annual sales, we believe the company has ample assets to increase shareholder value over time.

Six full positions were sold during the quarter. Company-specific reasons led to the sale of AGCO and BMC Software, as AGCO reported quarterly results that were shy of expectations and lowered guidance for the year while BMC essentially put itself up for sale, thus limiting the long-term opportunity. The Fund pocketed profits from EOG Resources, F5 Networks, and Mosaic and used the proceeds to fund what we believe to be better relative opportunities. Finally, depressed shares in Iberiabank were replaced with another depressed name where we have more confidence in management’s ability to execute.

Full Year Recap and Outlook

Unconventional and accommodative monetary policy ultimately trumped investor concerns over fiscal policy, the Presidential election, and weakness overseas in making 2012 an above-average year for stock returns across the domestic market-cap spectrum. The Federal Reserve entered uncharted waters when it announced open-ended quantitative easing through the ongoing purchasing of government securities. Other central banks waded in by mimicking the Fed in word if not deed, further contributing to the global liquidity cycle. The domestic economy continued to expand while the housing and job markets recovered to boost consumer sentiment. 

The Fund underperformed its benchmark for the full year owing to slightly negative stock selection, notably in sectors where the portfolio was actually positively weighted. Holdings in the Consumer Discretionary, Financials, and Technology sectors were the biggest detractors to relative performance, with names such as Tempur-Pedic International, Bed Bath & Beyond, and Goldman Sachs among the major disappointments. Energy, Consumer Staples, and Materials were the sectors that added the most to relative returns, with Athenahealth, Home Depot, and Phillips 66 among the top individual performers.

With the Federal Reserve indicating it will continue its easy-money policies until unemployment hits 6.5%, subject to inflation limitations, the markets entered 2013 with a significant tailwind and we anticipate ample investment opportunities in the new year. Although higher individual tax rates in the U.S. could weigh on sentiment and growth, the offset could be ongoing economic improvement in key Emerging Markets and perhaps even a stabilization of conditions in Europe.  Here at home, we expect consumers to further find their footing and the overall economy to benefit from improving credit and lending conditions. On balance, we think the U.S. economy should continue to enjoy a slow and steady expansion, much like that which we have experienced recently. Interestingly, despite stocks significantly outperforming bonds during the past four years there have been large net outflows from equity funds into fixed-income securities. Maybe this year we could see investors begin to re-allocate assets back towards equities.

TAMRO Capital Partners

Alexandria, Virginia

As of December 31, 2012, Athenahealth comprised 1.64% of the portfolio's assets, Express Scripts – 1.96%, Apple – 5.35%, Royal Gold – 2.09%, Colfax – 2.19%, Chicago Bridge & Iron – 1.75%, CarMax – 2.33%, American International Group – 1.51%, Kinder Morgan – 1.52%, Mondelez International – 1.39%, Tempur-Pedic International – 0.72%, Bed, Bath & Beyond – 1.87%, Goldman Sachs – 0.00%, Home Depot – 1.98%, and Phillips 66 – 2.07%.

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

Before investing, consider the Fund’s investment objectives, risks, charges, and expenses. Contact 800 992-8151 for a prospectus or summary prospectus containing this and other information. Please, read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC.

4th Quarter 2012

Climbing a Wall of Worry

The markets faced several headwinds in 2012, including recession in Europe, slowing growth in Emerging Markets, sluggish Gross Domestic Product (GDP) growth in the U.S., deteriorating corporate profit growth, a contentious presidential election, and political gridlock over the "fiscal cliff".  Even so, markets climbed the proverbial wall of worry and U.S. stock indices notched solid gains in 2012. In fact, despite all of the issues confronting investors, at no point during the year did the broad market S&P 500 Index fall into negative territory. That said, the gains were largely made during the first quarter. Although stocks advanced nicely off their early June lows, the major market indices finished the year at roughly the levels first reached in April. 

Despite the worrisome headlines, there were a few positives supporting stocks in 2012. Resilient corporate profit margins (despite slowing profit growth), an easing of strains in European sovereign debt markets, and an incipient recovery in the U.S. housing market were just a few of the catalysts that drove the stock and bond markets higher. Perhaps most importantly, the Federal Reserve and other global central banks continued to provide abundant liquidity via low interest rates and asset purchases (quantitative easing). While we have been skeptical that such monetary policy would improve economic fundamentals, with economic data throughout the year seeming to support that contention, the Fed has been able to engineer higher stock and bond prices through their unwavering commitment to unconventional monetary policies. Although the risks of unwinding these measures are unknown, the market seemed content to ride the excess liquidity higher.  

This liquidity-driven market environment was evident in the underlying performance dynamics of the market. The hallmark of liquidity-driven rallies has historically been the outperformance of lower-quality stocks and more-cyclical sectors, with 2012 seemingly another textbook example. According to BofA/Merrill Lynch Quantitative Strategy Research, low-quality stocks (those ranked B-minus or worse) outperformed higher quality names (B-plus or better) by roughly 3 percentage points during the year, with the Financials and Consumer Discretionary sectors, more cyclical by nature, pacing the broader market. While we expected the market to grind higher in 2012, we were surprised by these leadership characteristics. Our expectation that higher-quality, more-defensive growth stocks and sectors would provide market leadership proved off the mark despite macroeconomic fundamentals unfolding much as we anticipated. 

MSCI Falls

The Fund finished the fourth quarter of 2012 in slightly positive territory, lagging its Russell Midcap Growth Index benchmark. For the year, it significantly underperformed the index. Weak stock selection was the primary driver of the underperformance for both periods.

Holdings in Financials, Energy, and Consumer Staples were the biggest drag on performance during the quarter. Financial services firm MSCI shares fell sharply after mutual fund company Vanguard announced a plan to transition their index funds away from MSCI indices. Given the implications the Vanguard announcement has for both near-term profit forecasts and longer-term growth possibilities, we sold the position from the portfolio. Specialty grocer Fresh Market within Consumer Staples fell after a disappointing earnings report in October. Our investment disciplines requires we take action following major profit disappointments, either buying if we deem the shortfall to be transitory in nature or eliminating the position if we think it undermines our original investment thesis. We added to Fresh Market as the earnings disappointment, which centered mostly on higher than expected expenses associated with new store openings, did not weaken our belief that the company has robust growth potential.

Oil and gas equipment provider Core Laboratories pre-announced weaker than expected third quarter results in the Energy space. The shortfall was attributable to a let up in Canada and in gas-directed drilling, both well-known pressures that haven’t been completely offset by strong oil-related trends. International and deep-water results continue to show steady improvement, and with the second half of 2012 looking like a potential bottom for North American activity levels, we think the set-up into 2013 looks more promising.

Warnaco Acquisition

Stock selection in Consumer Discretionary, Technology, and Healthcare was positive, aiding relative returns. Apparel maker Warnaco was among the Fund’s top performers during the quarter, as it agreed to be acquired by another portfolio holding, PVH Corp, at a substantial premium. We sold the portfolio’s position following the announcement. Juniper Networks and Amphenol were the two standouts within Technology, while Varian Medical Systems enjoyed strong gains after reporting a strong fiscal fourth quarter that demonstrated better than expected revenues, margins, and orders.

Temporary staffing company Robert Half within Industrials was another top individual contributor. The company benefitted from ongoing positive job growth and could profit from the implementation of President Obama’s Affordable Care Act if businesses turn to temporary staffing to avert the added costs the program levies on employers.

Positioning and Outlook

In addition to the sales of MSCI and Warnaco, the Fund exited its position in Omnicom given a subdued outlook for the global advertising firm. New additions to the portfolio included San Francisco-based First Republic Bank, which provides banking and wealth management services to high net worth individuals, and discount retailer Dollar Tree.

Now nearly four years into a recovery, the current market environment is a study in contrasts.  Housing appears to have bottomed as corporate profit margins appear to be peaking. Consumers have worked to restore balance to their finances, while much heavy lifting remains to repair our country’s fiscal situation. Chinese growth appears to be stabilizing while the European Union remains mired in recession. We think these offsetting factors will continue to create market volatility as we progress through 2013. More importantly, we think valuations for quality growth stocks remain attractive. In an environment in which earnings growth may be scarce and less predictable than perhaps the market is anticipating, we think the Fund is well positioned to deliver positive and more-differentiated returns relative to the benchmark in the year ahead. 

M. Scott Thompson, CFA                  Andrew W. Jung, CFA
January 7, 2013

As of December 31, 2012, MSCI comprised 0.00% of the portfolio’s assets, The Fresh Market – 1.50%, Core Laboratories – 1.37%, Warnaco Group – 0.00%, PVH Corp – 2.20%, Juniper Networks – 2.72%, Amphenol – 2.40%, Varian Medical Systems – 2.14%, Robert Half International – 2.75%, First Republic Bank – 1.53%, and Dollar Tree – 1.44%.

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

Before investing, consider the Fund’s investment objectives, risks, charges, and expenses. Contact 800 992-8151 for a prospectus or summary prospectus containing this and other information. Please, read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC.

4th Quarter 2012

Subadvisor and Name Change

Effective January 31, 2013, Lee Munder Capital Group (LMCG) was appointed as subadviser and the Fund’s name was changed from the ASTON/Veredus Small Cap Growth Fund to the ASTON Small Cap Fund. There is no change in the Fund’s current investment objective, principal investment strategies, or management fees. The portfolio manager for the Fund will be Andrew Morey, a partner of LMCG, who has been the manager of the ASTON Small Cap Growth Fund since its November 2010 inception.

Click here (126 KB, PDF) for commonly asked questions and answers concerning the change in the name and subadvisor to the Fund.

Proposed Merger of the Fund

At a meeting held on December 13, 2012, the Board of Trustees of the Aston Funds Trust approved the merger of this Fund into the ASTON Small Cap Growth Fund (also run by Andrew Morey), subject to the approval of shareholders. If approved by the shareholders, the merger will occur as soon as practicable, likely on or about March 31, 2013.

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

Before investing, consider the Fund’s investment objectives, risks, charges, and expenses. Contact 800 992-8151 for a prospectus or summary prospectus containing this and other information. Please, read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC.

4th Quarter 2012

International equity markets delivered a strong quarter of performance with the Fund’s MSCI EAFE Index benchmark gaining more than 6%. Europe ex-UK was the best performing region followed by Pacific ex-Japan, while the UK was the worst performing region in rising a little more than 4%. Consumer Discretionary and Financials were the best performing sector, both up double-digits, while Telecommunications was the worst.

The Fund delivered positive performance during the quarter, but well behind that of the benchmark. Asset allocation—notably an overweight to Israel—was a moderate negative to relative performance, but it was stock selection that served as the main cause of the overall underperformance. Holdings in the Materials sector, followed by picks in Financials, were the primary detractors. Materials suffered from the weak performance of gold mining stocks, as they gave back much of their good third quarter performance. In particular, a sharp sell-off of Centamin on the back of rising political tensions in Egypt hurt returns. Stock selection in the Industrials sector detracted from performance as well, with a weak performance from Japanese motor manufacturer Nidec the largest negative contributor in that area.

By region, stock selection in the UK, mainly in Materials and Energy, and Japan were the two biggest negative factors. The position in Japanese online retailer Rakuten was the largest single source of underperformance as investors worried over the rollout of its new e-reader. In general, Japanese stock selection suffered from insufficient exposure to the beneficiaries of the weakening Yen.

Portfolio Positioning

We made a number of changes to the portfolio during the quarter, including the sale of gold miner Centamin. Through all of the turmoil in Egypt the past two years, there had been no major disruptions to Centamin’s operations. The recent political tensions over the creation of a new constitution, however, look to us like they might have the potential to be materially disruptive. Following a meeting with company management, we also sold the holding in Nidec. We sold because the company is undertaking a change of strategic direction that changes the investment case for the stock.

We have been looking for some time at Japanese car manufacturers for investment opportunities. As a result, the Fund purchased a position in Toyota Motor. Toyota has an excellent position in the recovering U.S. car market as well as a good Emerging Markets business. If Japan is successful in weakening the Yen and stimulating domestic growth, this should be supportive of the investment case.

Other new holdings purchased during the quarter were China Pacific Insurance Group and Experian. China Pacific is the best capitalized of the mainland Chinese insurance companies. It has leading positions in selling life and non-life insurance to the Chinese consumer. This is a market that we believe has good long-term growth opportunities. UK consumer credit agency Experian is a leader in bringing consumer credit checking services to new markets. We feel the valuation of the stock looks attractive relative to its growth opportunities, particularly in Emerging Markets such as Brazil.

Outlook

International equities had a good finish to a solid year of performance for the MSCI EAFE Index. This strong return belies what has been a difficult economic and political backdrop for much of the world, though there have been some bright spots. The US economic recovery continues, led by housing and autos. Economist Robert Shiller, who famously predicted the U.S. housing crash, is cautious about the sustainability of the housing recovery, but the recovery in auto sales looks real. The average age of the U.S. fleet looks old relative to its history, and the rise in auto sales looks likely to continue as Americans feed their pent-up demand for newer automobiles.

The U.S. outlook would be unequivocally good were it not for the political, fiscal, and monetary mess that the country finds itself in. The recent acrimonious fiscal cliff standoff and the 13th hour compromise agreement highlight the political discord that exists. And there is more discord to come as the focus now shifts to the March deadline for raising the federal debt ceiling. The absurdity of the situation is best illustrated by the semi-serious talk in recent days of the Treasury issuing a $1 trillion platinum coin as a way for the Obama administration to bypass the debt ceiling restriction.

Paper money is a confidence game. It has no intrinsic value, and therefore its value, and its viability, is dependent on the ongoing confidence of its users. What does talk of minting a $1 trillion coin, by fiat, do to views about the value of money? Central banks and governments the world over need to be careful, because once confidence in the money is lost it can be difficult to regain. Just ask Zimbabweans, who abandoned their currency in 2009, or the Hungarians in 1946, or the Germans in 1923. In all, there were 28 hyperinflations during the 20th century, and all occurred under fiat currency regimes.

China has also been a bright spot. The Chinese economy has improved on the back of very strong investment growth. We note, however, that this investment growth has been funded to a large extent by Wealth Management Products (WMP). These products are bank loans that have been bundled into a trust structure and sold to investors—forming part of what is known as the shadow banking system. With bank savings rates so low, savers have been coaxed into buying these WMPs. Recent defaults on a few WMPs have attracted the attention of the Chinese authorities. Meanwhile, medium- and long-term bank lending to companies in China actually declined 18% year-on-year according to a Bernstein analysis. We continue to see the Chinese economy growing well in 2013, however, that view would change if we did not see adequate sources of funding for that growth.

Japan’s economy in the latter part of 2012 has slipped back into recession. It has now been more than 20 years since the Japan bubble burst and we have yet to see a sustained economic recovery. Meanwhile, an aging population, a worsening fiscal position, and a decline in competitiveness in many industries finally seems to be bringing things to a head. The election in December saw the LDP party return to power under Prime Minister Shinzo Abe. Abe seems determined to shake Japan out of its deflationary funk and he has talked about policies to generate inflation and weaken the Yen. Those policies include increased monetization by the Bank of Japan, increased fiscal spending on infrastructure projects, and using foreign exchange reserves to purchase the bonds of other countries. Japan is walking a high wire. With a government debt-to-GDP (Gross Domestic Product) ratio exceeding 200%, the inflation that Abe hopes to generate could trigger a debt crisis if it leads to higher interest rates before an economic recovery takes hold. On the other hand, it is a mark of the desperation of Japan’s political class that such extreme measures are being pursued.

Economically, Europe has not been a bright spot either. The economies of many countries within Europe are in, or near, recession. The most recent unemployment data from Eurostat for November continued to show a deteriorating trend with the euro area unemployment rate reaching a new high of 11.8%. Scarier still is that youth unemployment in the region now exceeds 24%, and in Spain it sits at more than 56%. Automobile sales continued to plummet, particularly in the peripheral economies. Bank lending is falling, but loose monetary policy by the European Central Bank (ECB) has helped to avoid a crisis. The Long Term Refinancing Operation (LTRO) reduced the refinancing risk for European banks, and ECB President Mario Draghi’s announcement of Outright Monetary Transactions (OMT) in September of 2012 reduced the refinancing risk for governments. As a result of these enormous policy measures, financial indicators in Europe do not indicate a crisis. European bank paper and peripheral Italian and Spanish government bonds are trading at spreads well below their crisis levels. In our view, however, now that these financial indicators have been locked down by governments and the central bank they are less relevant as a crisis indicator. Instead, the best indicator of crisis in Europe is now political, and that will be driven by the electorate. If European economies do not start to show signs of improvement then the citizens of Italy, Spain, Greece, Portugal and Ireland are likely to agitate for change, and that is where the next European crisis is likely to come from.

The point of setting the scene as 2013 begins is to highlight how politically, fiscally and monetarily abnormal the world remains. We did see solid returns for equities in 2012, but some of those returns look to be based on investor’s expectations of a return to normalcy. Instead, our view remains that we are in an environment where real growth will be lower than we have historically seen in a recovery even though nominal growth is likely to be higher. We continue to look for companies that have pricing power and good earnings growth in this environment. We will look to companies that benefit from the Communication Revolution and Financials and Healthcare companies with Asian and Emerging Market exposure. Holdings in precious metals miners did not perform well in 2012, but we retain high conviction that these companies, along with agricultural commodity firms, should benefit from non-economically sensitive demand growth. In the current environment of ultra-loose monetary policy, we believe these stocks will perform well.

Finally, we have made some changes to the Fund’s Japanese holdings. We increased exposure to the auto sector with the previously mentioned purchase of Toyota, partly on the back of what looks to be a sustainable recovery in the large U.S. auto market and partly because of its good exposure to growing Emerging Market demand. The second change to our view in Japan is that the new government appears, to us, to be serious about weakening the Yen and helping the Japanese export sector to compete. Thus, the portfolio has been updated to reflect this change in view. 

Baring Asset Management
London, UK

As of December 31, 2012, Centamin comprised 0.01% of the portfolio's assets, Nidec – 0.00%, Rakuten – 1.05%, Toyota Motor – 1.39%, China Pacific Insurance Group – 0.56%, and Experian – 1.19%.

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

Before investing, consider the Fund’s investment objectives, risks, charges, and expenses. Contact 800 992-8151 for a prospectus or summary prospectus containing this and other information. Please, read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC.

4th Quarter 2012

Quarterly Commentary not yet available, please check back.

4th Quarter 2012

The actions of central banks and central governments once again dramatically affected financial markets throughout 2012. The year began with a rally fueled by the Long-Term Refinancing Operation (LTRO) carried out by the European Central Bank (ECB) and ended amid concern about the “fiscal cliff” in the United States. Meanwhile, the U.S. Federal Reserve continued to experiment with new forms of monetary policy. Against this backdrop, global economic growth slowed and U.S. corporate profit growth continued to decelerate. Markets seemed to focus more on the liquidity provided by central banks than on the moderating economic and earnings outlook. In our opinion, there continues to be a divergence between the stock market and corporate fundamentals.

For the year, the Fund delivered solid absolute returns but lagged both its composite 60 % S&P 500 Index/40% Barclays US Government Credit Index benchmark due primarily to the equity portion of the portfolio. Many of the equity holdings that helped performance in 2011 did not fully participate in the major equity rally sparked by additional central bank monetary stimulus during the first six weeks of 2012. Volatility increased during the spring and summer as growth concerns resurfaced in Europe, the United States, and China. The stock market gave back some of its early gains during this period, and the Fund delivered solid relative performance. As summer ended, both the Fed and the ECB provided additional support for financial markets and the portfolio participated fully in the ensuing rally. Equity markets subsequently sold off during the fourth quarter, as investors feared the potential destabilization from the “fiscal cliff” as well as a potentially significant increase in taxes on dividends, the latter of which affected several of the portfolio’s higher-yielding, dividend-paying stocks. The Fund’s sizeable position in Corporate bonds mostly aided performance during the year.

Fourth Quarter Laggards

The Fund posted a small loss and trailed its benchmark during the fourth quarter, again driven by the stock portfolio. Stocks within the Healthcare and Industrials sectors weighed on relative performance. Pharmacy benefit manager Express Scripts fell after management issued guidance for 2013 that was below analyst estimates. Still, the company expects that ongoing positive trends in the business, including reduced drug purchase costs, increased generic usage, and greater productivity associated with its recent merger with Medco will offset the weak business environment and the impact of elevated unemployment. Although General Electric enjoyed strong gains earlier in the year, the stock declined during the quarter as most other industrial stocks rose. We ultimately trimmed the position to reflect more moderate earnings growth than we had previously expected despite the stock trading at reasonable valuation levels.

Other notable stock detractors included Bed, Bath & Beyond, Occidental Petroleum, and Wells Fargo. Several of the Fund’s holdings within Consumer Discretionary gained more than the benchmark sector return, but Bed, Bath & Beyond declined more than 11% on further fallout from last quarter’s weak earnings guidance. Occidental continued to lag the Energy sector and we reduced the position as rising costs and capital spending have tempered investor enthusiasm for the company's better than average volume growth. Wells Fargo was flat as most financials rose. We remain positive, and increased the Fund’s stake in the stock, due to our view that expense cuts, strong mortgage volumes, and an improving housing market would provide catalysts for better results for the company.

Tech Boost

Relative performance benefited primarily from solid stock selection in Technology and Consumer Staples during the quarter. An underweight position in Apple relative to the Russell 1000 Growth Index driven in part by our risk controls limiting the absolute size of any one position in the portfolio, aided returns as Apple declined nearly 20%. We had also reduced the Apple position early in the quarter after the company reported earnings below expectations.  Margin pressure from the release of several new or updated products and the departure of a senior executive was also cause for concern. We eventually added back to the position twice as the stock declined significantly to a compelling valuation with confirming data of increasing product build activity and lower component costs heading into 2013.

Juniper Networks and Visa also contributed positively to performance during the period. IP network provider Juniper reported solid third quarter results, and we added to the portfolio’s position on evidence that North American carrier spending is picking up, new products are gaining traction, and sequential growth in backlog and product deferred revenue. 

Unilever and Costco were the standout holdings within Consumer Staples. Unilever rose following the company’s better than expected third quarter trading update. Although a number of companies have made it clear that Emerging Market growth rates have slowed, Unilever did not report a slowdown—implying that the company is benefiting from market share gains. Costco outperformed the sector as the company reported strong same store sales comparisons and benefitted from an increase in membership fee income. 

New Holdings: Biogen and Johnson Controls

We established new positions in Biogen, Johnson Controls, and retained and increased the position in Kraft Foods spin-off Mondelez International. Biotech firm Biogen has a diverse product portfolio of multiple sclerosis treatments as well as new products in development.  The company has an oral multiple sclerosis (MS) treatment that has been accepted for review by the FDA and is expected to launch in the U.S. during the first half of 2013. 

We think Johnson Controls, a manufacturer of automotive systems and building controls, stands to benefit from energy efficiency and clean energy trends. A recent shortfall in execution led to a decline in the stock price that provided an opportunity to add the name to the portfolio at an attractive valuation. The company has a long record of delivering consistent returns and growth. Mondelez, the former global snacks component of Kraft, is the more growth-driven of the two entities. We think earnings momentum is likely to accelerate into 2013, while the foreign currency backdrop has improved. In addition, initial 2013 guidance was likely conservative due to the very early stage at which it was provided following the split from Kraft. The company is also likely to be awarded $1 to $1.5 billion in proceeds from arbitration proceedings with Starbucks. 

Elsewhere, we increased the size of current positions in Oracle and Qualcomm. Oracle again reported solid results with upside from new license sales, total revenue, profit margins, and earnings, as better software sales once again offset weak hardware sales. We added to the position on modest price weakness as we expect improving sales force productivity following strong new sales hires last year, anticipation of less drag from foreign currency exchange, and further aggressive share repurchases. We think wireless chip maker Qualcomm’s aggressive push to 4G LTE and leading-edge 28nm is starting to pay off with share gains, rising average selling prices, and increasing production—all driving upward revisions to estimates.

Sold—Kraft Foods, Amazon, and Omnicom

Three stocks were sold outright from the portfolio—Kraft Foods Group, Amazon.com, and advertising firm Omnicom Group. After its split with the faster growing Mondelez business, we don’t think Kraft’s remaining North American grocery segment is likely to sustain the 10% or more earnings growth over the next 10 years that our process requires. We eliminated Amazon as the stock traded at a 20% premium to our estimated present value.

Omnicom is losing many of the catalysts we first outlined when we re-established the portfolio’s position in early 2011. The Olympics and elections have passed, while global economic growth continues to moderate and is at risk from an adverse shock. Amid the political and economic uncertainty, customers are reducing discretionary advertising and marketing spending, leading to a moderation in organic revenue growth at the firm. 

We also trimmed Ebay and Visa as both stocks traded near our estimate of present value, and reduced the Fund’s stake in Google and Stryker on company concerns. Google reported disappointing third quarter results that raised concerns about its desktop-to-mobile advertising transition and the strategic value of the Motorola acquisition. Ongoing leadership changes at Stryker and our lack of conviction in the company's ability to generate double-digit earnings growth next year led to the reduction in that stock. Recent hospital surveys have shown deterioration in capital expenditures, increased negotiation pressure on device prices from group purchasing organizations (GPOs), and a continued lack of recovery in utilization. 

Outlook

In 2013, we think the bond market is likely to experience an environment similar to that of 2012. We expect range-bound yields for US Treasury bonds as slow economic growth and central bank measures to suppress interest rates continues. We expect outperformance of corporate bonds, with investors seeking incremental yield in a low interest rate environment. The Federal Reserve announced that it would continue its program of purchasing $40 billion per month of mortgage backed securities and an additional $45 billion per month of longer-term Treasury securities.

We think this will be an important source of demand, keeping interest rates at low levels. Investors’ search for high-quality, income-generating assets we believe will result in a further reduction in the yield differential between Corporate and Treasury bonds, allowing Corporate bonds to deliver relatively good returns. We are maintaining a duration (a measure of interest-rate sensitivity) position in the portfolio that is shorter than the benchmark bond index given

the unfavorable risk/reward profile of bonds at absolute low interest rate levels, while favoring high quality, intermediate maturity Corporate bonds.

Stocks mostly marked time during the fourth quarter of 2012 after having recovered nicely during the third quarter from their second quarter declines. Overall, though, equities still showed strong year-to-date returns even though global economic growth weakened during the year and U.S. earnings growth slowed thanks to a highly accommodative Federal Reserve that helped to boost the values of financial assets such as stocks and corporate bonds. We believe the market may continue to consolidate its gains amid sluggish global economic growth and weakened U.S. earnings growth. At the same time, earnings expectations for 2013 seem too high.

Now nearly four years into a recovery, the current market environment is a study in contrasts.  Housing appears to have bottomed as corporate profit margins appear to be peaking. Consumers have worked to restore balance to their finances, while much heavy lifting remains to repair our country’s fiscal situation. Chinese growth appears to be stabilizing while the European Union remains mired in recession. We think these offsetting factors will continue to create market volatility as we progress through 2013. More importantly, we think valuations for quality growth stocks remain attractive. In an environment in which earnings growth may be scarce and less predictable than perhaps the market is anticipating, we think the Fund is well positioned to deliver positive and more-differentiated returns relative to the benchmark in the year ahead.

Montag & Caldwell Investment Counsel

As of December 31, 2012, Express Scripts comprised 1.82% of the portfolio's assets, General Electric – 2.22%, Bed, Bath & Beyond – 0.87%, Occidental Petroleum – 1.19%, Wells Fargo – 1.92%, Apple – 2.41%, Juniper Networks – 1.46%, Visa – 1.80%, Unilever – 1.32%, Costco – 1.84%, Biogen – 0.62%, Johnson Controls – 0.30%, Mondelez International – 2.06%, Kraft Foods Group – 0.00%, Oracle – 2.05%, Qualcomm – 2.61%, eBay – 1.34%, Google – 1.28%, and Stryker – 1.36%.

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, consider the Fund’s investment objectives, risks, charges, and expenses. Contact 800 992-8151 for a prospectus or summary prospectus containing this and other information. Please, read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC.

4th Quarter 2012

Through the effects of Superstorm Sandy, the fourth quarter witnessed an additional round of quantitative easing from the Federal Reserve and a resolution to the so-called “fiscal cliff” that was not reached until after markets closed on New Year’s Eve. The S&P 500 Index finished the fourth quarter only down slightly and the Barclays Aggregate Bond Index finished the quarter up slightly. The lack of real movement among these two broad indices largely supported the economic news during the quarter. After seeing a large spike during November, jobless claims ended the quarter at roughly the same level they started. Construction spending expanded in October, and then subsequently contracted in November (December’s figures were not yet available).

Factory orders were similarly subdued. Commentators partially, and in some cases largely, blamed these and other tepid growth figures in both the financial markets and the broader economy on the uncertainty of the fiscal cliff. With that obstacle now passed, the looming debt ceiling debate seems the next most plausible rationale for weak economic expansion in the quarter to come. Some causes for optimism in the coming year include the rebound in the housing market, which showed solid performance in new, existing, and pending home sales figures that have risen strongly from post-recession lows. As the economy heads into the 43rd month since the official end of the recession, economic figures have turned the corner and shown stabilization if not growth in most areas. Hopefully, the upcoming fiscal cliff negotiations will not hinder this progress. 

Underweight Treasuries

The Fund outperformed its Barclays Capital U.S. Aggregate Bond Index benchmark during the quarter. An underweight to US Treasuries helped relative performance as that sector declined. Allocations to Emerging Markets fixed-income and Commercial mortgage-backed securities (CMBS) added to the relative outperformance as these asset classes performed well. An overweight position to the entire mortgage-backed securities (MBS) sector, which delivered negative returns in the benchmark for the quarter, ended up being a mixed bag as the portfolio’s holdings outperformed as non-Agency MBS did well. Finally, while the credit sector was the top performing area of the index, the Fund was slightly underweight.

The Fund substantially outperformed the benchmark for calendar year 2012, with allocations to Emerging Markets and non-Agency MBS leading the way. The Fund was underweight the US Treasury sector the entire year, further helping performance as that sector was the worst performing area of the index.

Fiscal cliff negotiations drove US Treasury trading through December as bond prices rose or fell with each press release, news story, or rumor in the market. Thus, December was typical of 2012 as a whole, as governments around the globe intervened in markets with the objective of boosting liquidity and pushing rates lower. The Federal Reserve ended 2012 extending its MBS purchase program and replacing “Operation Twist” with a new program of outright Treasury buying. The Fed was active in the Treasury and Agency MBS markets throughout the year in pursuit of the full employment half of its dual mandate. The result was a yield curve at year-end that was remarkably close to where it began the year. Short-term interest-rates were virtually unchanged, not surprising as the Fed maintained the 0% to 0.25% Federal Funds target rate that has been in place since December 2008. The short-rate “guidance” convinced investors that low-rate policy would continue for the foreseeable future, helping intermediate-term yields.

Among other government securities, the year saw improved financial stability at Fannie Mae and Freddie Mac. Income-starved investors looking for yield responded by shifting funds into these agencies, with agency spreads to Treasuries narrowing throughout the year. The agency sector gained 2.16% for the year, besting comparable duration Treasuries by nearly a percentage point. Five-year agencies were only slightly cheaper to Treasuries by year-end, however, leaving dim prospects for further outperformance in 2013.

Treasury Inflation-Protected Securities (TIPS) performed well in 2012 as the Federal Reserve’s aggressive monetary accommodation increased concerns about future inflation. Tax-exempt issues likewise did well. The prospect of higher tax rates helped municipal bonds throughout most of the year, though in December the market was hit with fears of a cap on the interest exemption for municipals.

Strong Emerging Markets

All three sectors of Emerging Markets (EM) fixed-income—external sovereign, corporate debt, and local currency bonds—posted strong positive returns during the month of December and for all of 2012. Entering 2012, global markets faced several key risk factors that carried over from 2011, including the sovereign debt and liquidity crisis in the eurozone and slowing growth in China. In addition, the November presidential elections and the looming “fiscal cliff” of government spending cuts and tax increases raised uncertainty as to whether one of the bright spots in the global economy would lose its luster. Many of these challenges were met by central bankers providing supportive monetary policy as government policymakers’ fiscal actions were limited. Much of the accommodative policy came from lowering or maintaining historically low rates, which made EM debt, in comparison to developed markets, an attractive alternative asset class given their comparatively higher yields.

Going into 2013, EM performance looks like it can expect support from a number of tailwinds.  

We think the sector is in a strong technical position as inflows are expected to remain strong, with some third parties (EPFR Global and JP Morgan) anticipating $70 billion into the asset class for 2013. Credit fundamentals have improved for EM issuers as well. In conjunction with those two points, EM bonds are likely to see more rating upgrades, though perhaps at a slower pace.

Given this backdrop, we continue to favor corporate issues over sovereigns, as they offer the potential for credit improvements at relatively attractive valuations. Although we anticipate credit fundamentals to continue improving for both EM corporates and sovereigns, we feel that the sovereign sector has already priced in a significant amount of optimistic market conditions, especially relative to corporate credits. The yields offered by EM corporate credits remain attractive relative to those of similarly rated U.S. Industrial credits, as we find that EM corporates across all rating categories are trading cheaper than their developed market counterparts—often by significant margins. We expect these spread differentials to contract as global market sentiment improves throughout the year and EM corporates improve their credit metrics. By contrast, EM sovereign credits are trading significantly tighter than similarly rated U.S. Industrial credits.

Commercial MBS

CMBS ended the fourth quarter with somewhat of a muted tone after a stellar year comprised of consistent supply and demand technicals. During the quarter, the market was well supported despite a robust new issuance calendar. Markets were also well bid on the secondary side as the low-rate environment and risk rally in other asset classes caused CMBS to garner attention on a relative-value basis. 

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 the borrower level allows us to assess risk adequately. Looking forward, our outlook for the sector remains cautious given uncertainties surrounding fiscal cliff implications as well as macroeconomic headwinds.

Still Overweight Mortgages

The fourth quarter 2012 was not simply a continuum of the entire year in the mortgage space. During the quarter, we had upward price movement, reduction in tradable supply, and better performance in defaults and severities. The issue of the difference between primary and secondary mortgage spreads continued to be a very hot topic with the Federal Reserve that will probably not resolve itself until the industry catches up and gains more capacity. We expect a continued reduction in supply in the year ahead, with increasing prices on the supply that remains. We also expect continued eminent domain discussions and new rulings for underwriters on how to underwrite and who can qualify.

Agency MBS outperformed the benchmark in December but underperformed for the year. Lower coupon mortgages were down in price while mid-to-higher coupons were flat. During the year, lower coupon passthroughs ended up in price while higher coupon passthroughs declined. This price action was generally attributable to higher prepayments on HARP-eligible higher coupon collateral driving down prices, while the Federal Reserve focused their purchasing power on the lower coupon MBS driving those yields down.

Housing prices have leveled off on a non-seasonally adjusted basis nationwide the past few months. If this trend continues, or if housing takes a turn for the worse, there could be a greater likelihood of further government involvement in the mortgage market. Overall prepayment speeds (pre-payment risk is an important component in mortgage investing) have remained at historic lows relative to the current low primary mortgage rate levels. The spread between the primary and secondary rate remains relatively wide, with no basis for this to change over the short-term in order to keep future prepayment expectations in line with current rates. The Fund continues to be overweight the entire MBS sector of the market.

Global Credit

The tightening of corporate credit spreads coupled with lower interest rates contributed to outstanding returns for investment grade and high yield corporate bonds in 2012. In stark contrast to 2011, excess returns for both investment grade and high yield corporate bonds were positive in 2012 as corporate credit outpaced the returns posted by US Treasury securities. Bonds from the Financials sector led the spread tightening in both the investment grade and high yield markets.

Higher-quality issues (rated single-A or better) underperformed their lower rated counterparts within investment grade bonds given the predilection of investors to trade down the risk curve to reach for yield. The same was true for high yield, as lower quality bonds outperformed their higher rated counterparts. The trailing 12-month speculative grade default rate picked up slightly in high yield from its 2011 year-end low. According to Barclays, ratings migration will likely continue to favor downgrades in 2013.

It could be mathematically difficult to experience anywhere near the same returns in investment grade and high yield corporate bonds in 2013 as those generated in 2012, unless one assumes that credit spreads return to the tightest levels recorded (February 2007) or interest rates drop significantly below current levels. Assuming corporate credit spreads tighten modestly and interest rates remain steady, corporate credit could generate returns in the low-to-mid single digits in 2013. Technical factors dominated the corporate bond market to a significant extent in 2012 given investors’ appetite for yield.

Long-term, the preponderance of credit spread tightening may have run its course as fundamental considerations eventually prevail. A number of domestic and global factors could adversely affect issuers’ credit strength from a fundamental risk perspective in 2013. U.S. domestic budget deficit issues, slowing growth in China, and deepening recessions in Europe and Japan could pressure cash flow for issuers with global operations. For that reason, DoubleLine continues to remain defensively positioned in corporate bonds issued by firms with long-term, sustainable competitive advantages and strong balance sheets able to better weather economic storms.

Outlook

Similar to 2011, the first several months of 2012 saw strong gains in “riskier” asset classes such as equities and commodities, as apprehension over a disorderly eurozone breakup from the fall of the prior year faded. Improving signs in the U.S. economy supported this “risk-on” environment as investors appeared to shake off ratings downgrades of troubled “periphery” nations in the eurozone. The lack of dire headline developments from the struggling currency block and the European Central Bank’s second Long-Term Refinancing Operation (LTRO) plan to provide additional liquidity to banks across the union helped to drive Corporate and EM spreads tighter.

Many of the same near-term headwinds that affected the markets over the past year are likely to be seen in 2013. The eurozone and European periphery will continue to struggle with weak growth, high unemployment, high debt/Gross Domestic Product (GDP) and extremely strict austerity measures.  Fiscal cliff uncertainty in the U.S. has given way to a new debate over the debt ceiling. Global markets may be underestimating the negative sentiment that may come out of this debate over the next few months, which could prove nastier than recent negotiations over the fiscal cliff. Even with the comfort of China guiding towards healthy growth for 2013, its next generation of leaders will still have their plates full with a slowing growth rate, domestic issues such as the one child policy and rampant corruption, and increasing foreign policy turmoil as they relate to the U.S. and its neighbors, particularly Japan. In Japan, the ramifications of a new extremely pro-growth government have yet to be fully felt throughout Asia. Remaining on the radar screen are the ongoing geopolitical tensions between Israel and Iran, as well as reverberations of the “Arab Spring” in countries like Syria and Egypt.

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, consider the Fund’s investment objectives, risks, charges, and expenses. Contact 800 992-8151 for a prospectus or summary prospectus containing this and other information. Please, read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC.

4th Quarter 2012

The Year of the American Consumer

The recently concluded calendar year 2012 delivered above-average, double-digit returns for US equities, with large-cap stocks (represented by the Russell 1000 Index) beating out small-cap stocks (Russell 2000 Index) by a nose. Value stocks outdistanced growth by more than two percentage points in both areas, with most of the outperformance for value coming during the fourth quarter. The main reason behind these results seems to be increasing investor appreciation for improved fundamentals within the Financials sector, which was the top-performing large-cap sector and among the top-three areas in the small cap universe. Along with improved fundamentals, financial services companies seem to be successfully adapting to their new regulatory environment. If the much-improved trend for the group were to continue, it would be a significant positive for the market and the economy.

The slow but steady expansion of the economy that we anticipated did occur in 2012, marked by dramatic improvement in the housing market and grudging improvement on the jobs front. Those two factors helped to push consumer confidence to a four and a half year high. As confidence has improved and the consumer de-levered, Americans have gone back to doing what we do best—shop. Given that approximately two-thirds of U.S. Gross Domestic Product (GDP) is comprised of consumer spending, the confidence and expenditures of consumers is the key to growth going forward. Interestingly, in the nearly four-year period since the recession trough in 2009, the Consumer Discretionary sector has been the best-performing large-cap sector and among the top-three for small-caps. We think further appreciation in home prices, improved access to credit, and steady, if unspectacular, job growth should help to accelerate this trend as we move through 2013.

December Rally

A December rally helped markets to recoup losses from earlier in the quarter, with the Fund’s Russell 2000 Index benchmark finishing in positive territory for the period. The Fund, however, did not finish in positive territory, as relatively poor stock selection caused it to underperform the benchmark. Overweight stakes in the Consumer Staples and Healthcare sectors also detracted from performance, but it was the impact of stock selection within the Industrials, Consumer Discretionary, Energy, and Consumer Staples sectors had the biggest negative impact.

Comstock Resources, The Fresh Market, and BJ’s Restaurants were among the notable laggards during the quarter. Comstock, an oil and gas exploration and development company, was hurt by a significant decline in natural gas prices during the quarter. Specialty grocer Fresh Market announced future comparable store sales guidance that was below expectations, while BJ’s reported weaker-than-expected revenues and earnings amid concerns over heightened competition in the casual dining industry. The biggest individual detractor from performance, however, was online real estate service Zillow on worries about slowing growth in its advertising business.

On the positive side, holdings in Technology aided both absolute and relative returns during the quarter led by Acme Packet and CommVault Systems. Telecom equipment provider Acme maintained guidance despite the tepid economy. With telecom capital expenditures expected to increase in 2013, we think this innovator’s ability to smooth the transfer of data will be in demand amid the still rapidly growing wireless space. Data management software company CommVault (a 1996 spinoff from Lucent Technologies) continued to execute well, and reported better-than-expected quarterly results during the period.

Other top individual performers included top-10 holdings Colfax and Redwood Trust. Colfax was a top stock for the second quarter in a row as management provided details on its growth strategy during the firm’s first ever analyst day meeting. The firm is a key supplier of piping systems to a variety of industries building out global energy infrastructure. Redwood is a real estate investment trust (REIT) that invests in residential mortgage loans and commercial real estate financing that beat earnings estimates and raised its annual dividend.

Portfolio Changes

As always, the portfolio’s positioning and sector allocations are based on opportunities that we have identified through our bottom-up company fundamental analysis and valuation work. Only subtle changes were made during the fourth quarter, with the three largest sector weightings in Financials, Consumer Discretionary, and Healthcare remaining the same from the previous quarter. Year over year, the portfolio saw a significant decrease in exposure to Industrials (the largest sector weight at the end of 2011) Energy, and Technology. The changes from a year ago reflected a shift towards a strengthening domestic economy and the consumer, which altered the bottom-up dynamics. Financials was the lone survivor among the top-three sector weights. 

Four stocks reached full-position status through purchase, appreciation or a combination of the two during the fourth quarter, including Titan International and Cloud Peak Energy. Titan is the leading manufacturer of off-highway tires and wheels used for heavy machinery in construction, agriculture, and mining. The company is still run by its founder, who led a management buy-out of the company in 1990. Financial performance has been mixed due largely to the end-markets that it serves, but industry consolidation (now a 3-company market) and tenacious negotiations for new capacity have yielded scale and pricing advantages to the only company focused entirely on this segment. Indeed, the stock was among the Fund’s best performers during the fourth quarter after the company beat expectations and provided better-than-expected long-term guidance.

Cloud Peak is a leading producer of Powder River Basin coal, the single largest coal producing area in the U.S. As with any producer of commodities, Cloud Peak is a price taker and must focus on low costs as a competitive advantage. It boasts a non-unionized labor force, safe and efficient surface mining, a proven mine acquisition strategy, and low-cost transport as the keys to profitability. Low natural gas prices and increased regulatory risks have caused coal to fall out of favor with electricity producers, but there are initial indications that natural gas prices could rise again, allowing coal to become more competitive. In addition, the firm is using the current low price environment to accelerate its push into Asian and European coal markets. 

Seven positions were sold during the quarter, and can be broadly classified into two categories—management issues and relative opportunities. In the case of the former, management execution fell short of our expectations with AeroVironment and Websense, while Contango Oil & Gas faced potential disruption from an anticipated change in senior management.

Better relative opportunities became available as a stretched valuation led us to take profits in East West Bancorp. UMB Financial had executed well, but profitability was under pressure. The failure to win FDA approval for its next generation drug left United Therapeutics with a barren product pipeline and severely diminished growth prospects. Finally, we sold Forward Air, a depressed stock, to buy another equally depressed name in which we had more confidence of a turnaround. 

Full Year Recap and Outlook

Unconventional and accommodative monetary policy ultimately trumped investor concerns over fiscal policy, the Presidential election, and weakness overseas in making 2012 an above-average year for stock returns across the domestic market-cap spectrum. The Federal Reserve entered uncharted waters when it announced open-ended quantitative easing through the ongoing purchasing of government securities. Other central banks waded in by mimicking the Fed in word if not deed, further contributing to the global liquidity cycle. The domestic economy continued to expand while the housing and job markets recovered to boost consumer sentiment. 

The Fund outperformed its benchmark for the full year, driven by strong stock selection. Holdings in the Healthcare, Materials, and Technology sectors were the biggest contributors to relative performance, led by names such as Athenahealth, Westlake Chemical, and Ixia. Picks within Industrials, Energy, and Consumer Staples hurt returns, with AeroVironment, Contango Oil & Gas, and Treehouse Foods among the major disappointments. Underweight stakes in Materials and Financials, plus an overweight to Energy, also detracted from performance.

With the Federal Reserve indicating it will continue its easy-money policies until unemployment hits 6.5%, subject to inflation limitations, the markets entered 2013 with a significant tailwind and we anticipate ample investment opportunities in the new year. Although higher individual tax rates in the U.S. could weigh on sentiment and growth, the offset could be ongoing economic improvement in key Emerging Markets and perhaps even a stabilization of conditions in Europe.  Here at home, we expect the consumer to further find their footing and the overall economy to benefit from improving credit and lending conditions. On balance, we think the U.S. economy should continue to enjoy a slow and steady expansion, much like that which we have experienced recently. Interestingly, despite stocks significantly outperforming bonds during the past four years there have been large net outflows from equity funds into fixed-income securities. Maybe this year we could see investors begin to re-allocate assets back towards equities. 

TAMRO Capital Partners
Alexandria, Virginia

As of December 31, 2012, Comstock Resources comprised 1.81% of the portfolio's assets, The Fresh Market – 1.98%, BJ’s Restaurants – 1.40%, Zillow – 1.45%, Acme Packet – 2.33%, CommVault Systems – 2.16%, Colfax – 2.69%,  Redwood Trust – 2.31%, Titan International – 1.53%, Cloud Peak Energy – 1.77%, Athenahealth –  1.95%, Westlake Chemical – 0.00%, Ixia – 2.26%, AeroVironment – 0.00%, Contango Oil & Gas – 0.00%, and Treehouse Foods – 1.09%.

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

Before investing, consider the Fund’s investment objectives, risks, charges, and expenses. Contact 800 992-8151 for a prospectus or summary prospectus containing this and other information. Please, read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC.

4th Quarter 2012

U.S. equity markets were buffeted throughout the final quarter of 2012 by the apparent financial stress centered on the so-called “fiscal cliff” political drama. Emotions and stock prices waxed and waned to the mumblings of Washington D.C. Fundamental news seemed to matter less to market expectations than the collective suspension of corporate decision-making induced by gridlock and directionless Federal legislative and fiscal agendas. 

Large-capitalization stocks backed off, while small-caps fared better. The S&P 500 Index slipped slightly during the quarter, but ended 2012 with a full year return of 16%. The small-cap oriented Russell 2000 Index advanced a modest 1.9% during the quarter and finished 2012 roughly on par with the S&P 500. Thus, for all the hand wringing, 2012 turned out to be a pretty good year for equities.

Equity real estate investment trusts (REITs) more than held their own during the quarter and the year in besting the above indices. The Fund’s FTSE/NAREIT Equity REIT Index benchmark rose roughly 3% during the quarter and nearly 20% for the year. We think the performance of REITs reflects their durable underlying contractual cash flows, sustained access to attractively priced capital, rising occupancy levels and stabilizing rents, and consistent dividend hikes. Although REITs generally trade like equities, which they are, in the short run, we believe their simple, transparent, real estate ownership structure over longer time spans (i.e. the multiple years in a typical real estate cycle) deliver total returns akin to commercial real estate returns. In recent quarters, REIT returns have been augmented by their ability to productively invest a growing quantity of retained cash flow as well as develop additional properties, at yields well above their blended cost of capital.

The Fund itself performed in line with its benchmark during the quarter, while besting it by a decent margin for all of 2012. Positive factors for relative performance during the quarter came from large-cap holdings such as cell-tower owner American Tower and timber landlord Weyerhaeuser. Small-cap health care property owners Sabra Health Care REIT and Medical Properties Trust also continued to contribute. These performances helped to offset performance drags from the likes of New York City office REIT SL Green and data center owners Digital Realty and Dupont Fabros. 

We think the REIT sector as a whole has the potential to grow and generate excess cash for distribution through further dividend increases. The sector recently traded at a modest discount to calculated net asset value (NAV)—well within the 10% premium/discount bandwidth typical of the sector over extended periods. Given these valuation parameters, coupled with visible external acquisition and development growth plans, we believe REITs can continue to generate healthy returns for investors in 2013.  

Harrison Street Securities
Chicago, IL

As of December 31, 2012, American Tower comprised 8.24% of the portfolio's assets, Weyerhaeuser – 4.78%, Sabra Health Care REIT – 2.24%, Medical Properties Trust – 3.65%, SL Green – 5.10%, Digital RealtyTrust – 2.99%, and DuPont Fabros Technology – 1.77%.

Note: The Fund is classified as non-diversified and may be more susceptible to risk than funds that invest more broadly. In addition, REITs may decline from deteriorating economic conditions, changes in the value of the underlying property, and defaults by borrowers. Small- and mid-cap equities are considered riskier than large-cap equities due to greater potential volatility and less liquidity.

Before investing, consider the Fund’s investment objectives, risks, charges, and expenses. Contact 800 992-8151 for a prospectus or summary prospectus containing this and other information. Please, read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC.

4th Quarter 2012

A Tale of Two Markets

The fourth quarter of 2012 was a tale of two markets for equities. During the first two weeks of October, the S&P 500 Index struggled—and failed—to hold its high for the year, which coincided, ironically, with the Federal Reserve’s announcement of another round of quantitative easing (QE3) in mid-September. The index then went into a sharp tailspin on worries about the potential fiscal cliff and political dysfunction in Washington. By the middle of November, the S&P 500 had declined 5.8%. From that point through year-end, however, the market managed to climb back up, albeit erratically, as sentiment responded to signs that there would be a compromise on taxes.

The S&P 500 finished the quarter down slightly, though small-cap value stocks (as represented by the Russell 2000 Value Index) outperformed with a gain of more than 3%. International equities followed a similar pattern, but with less downside and significantly more upside—with the MSCI EAFE Index dropping only 3% by November and finishing the quarter up 6.6%.

In fixed-income, the US Treasury yield curve steepened, with the 10-year bond yield ending the year at 1.76% after touching the 1.6% range at mid-quarter. Spreads continued to narrow for high yield and corporate bonds. The meaningful development in European fixed-income was a decline in yields on Spanish and Italian 10-year bonds, reflecting the impact of the European Central Bank’s (ECB) supportive policies. Consequently, the euro tended to strengthen versus the dollar. In contrast, the yen weakened significantly against the dollar, particularly when it became clear that Shinzo Abe would be elected Prime Minister on a platform that included pressuring the Bank of Japan to engage in increased monetary stimulus.

Equity-oriented Boost

The Fund gained ground during the quarter, outperforming its HFRX Equity Hedge Index benchmark, further boosting positive results for 2012 and calendar year outperformance over the benchmark. All of the portfolio’s long-biased and long/short equity-oriented allocations made positive contributions to performance during the quarter, and collectively accounted for the bulk of returns due to a combination of strong stock selection and effective hedging.

Elsewhere, Hedged Credit and Strategic Fixed Income strategies did well as spreads narrowed. High yield and mortgage exposures in particular tended to add value. Holdings within Merger Arbitrage generated relatively stable results as corporate events tended to be more relevant to their portfolios than market action. In the Global Macro area, the Fund’s one underlying manager not only had a solid gain but was less correlated as a number of its eclectic sub-strategies proved productive.

The allocation to a long/short Commodities strategy slipped as its quantitative approach remained out of sync with the market. Fortunately, it was a small allocation, which was sold early during the quarter.

Risk management is integral to our investment approach and the Fund remained within our guideline volatility targets throughout the year. Daily returns did not exceed ±1% on any trading day. There was no monthly drawdown* of more than 4%, which per our strategy would have required adjustment to exposures in the portfolio. In fact, the Fund provided positive returns in every month of the year except May.

Positioning

Due to the ongoing potential for volatility in the financial markets, we maintained the portfolio’s net equity exposure in the 30% to 35% range (the Fund’s guideline net equity exposure range is 20% to 50%). This position was supported by the relatively defensive stance of some of the portfolio’s core underlying managers and the continued inclusion of non-equity related strategies such as long/short Hedged Credit, Strategic Fixed Income, and Global Macro.

Although the core of the portfolio remains a diverse set of equity-oriented allocations, we adjusted several other strategy areas during the quarter. We increased the allocation to Hedged Credit and Strategic Fixed Income from 25% to 30% of net assets. Merger Arbitrage was reduced to 10% from 15%, and the combined allocation to Global Macro/Commodities was scaled back from 8.5% to 7.5% with the previously mentioned elimination of the out-of-sync commodities manager.

Equity-oriented funds accounted for 50% of the portfolio as of the end of December, only slightly higher than the 48% allocation ending the third quarter. This broad category encompasses a diverse mix of long-biased, hedged, multi-asset, and global strategies. We continued to focus allocations on core managers with relatively more stable risk/return characteristics.

The increase in the fixed-income arena came mostly in the Hedged Credit area, which comprised roughly 17% of the allocation by year-end versus 13% for Strategic Fixed Income. The funds in this area tend to take a global approach, long and short, to a wide range of opportunities. Currently, there is a strategic emphasis on opportunities in the US non-agency mortgage-backed securities (MBS). The added weighting came at the expense of the Merger Arbitrage allocation, where we think the upside has been limited due to reduced merger & acquisition (M&A) activity and relatively narrow spreads.

Outlook

As evident again during the fourth quarter of 2012, the “pendulum” of investor sentiment has swung back and forth between two perspectives since the global credit crisis of 2008. The negative side has focused on the debt crisis in Europe, doubts about the resilience of China, and fears of tepid growth and policy paralysis in the U.S. The positive side has reflected strong corporate earnings and efforts by government central banks to provide stimulus. The fourth quarter was a fitting example of how sentiment has vacillated in response to policy and political issues—equities slumped when rhetoric in Washington concerning the fiscal cliff became contentious, and rose when negotiations appeared to be progressing.

Thus far, there are few signs of a slowing in the swing of the pendulum. Policy and political issues that have dogged investors remain unresolved, particularly the debt ceiling and budget sequester in the U.S. Furthermore, the U.S. faces a fiscal drag from recent tax increases. Conversely, Europe seems to be struggling towards finding a way to address its debt problems, and China’s economy appears to be turning the corner.

Longer term, the outlook is relatively positive, as the global economy is expected to “muddle through” on the back of strong corporate cash flows and balance sheets in the U.S. as well as generally fair equity valuations. It is the near-term that is challenging. Thus, we are maintaining a diversified mix of equity-oriented, credit-oriented, arbitrage, and macro strategies, with different degrees of correlation and market sensitivity. 

Lake Partners, Inc.
Stamford, Connecticut

Past performance is no guarantee of future results.

* “Drawdown” is the percentage peak-to-trough decline in performance for a specific period, often used as a measure of investment risk.

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 include 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, consider the Fund’s investment objectives, risks, charges, and expenses. Contact 800 992-8151 for a prospectus or summary prospectus containing this and other information. Please, read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC.

4th Quarter 2012

The actions of central banks and central governments once again dramatically affected financial markets throughout 2012. The year began with a rally fueled by the Long-Term Refinancing Operation (LTRO) carried out by the European Central Bank (ECB) and ended amid concern about the “fiscal cliff” in the United States. Meanwhile, the U.S. Federal Reserve continued to experiment with new forms of monetary policy. Against this backdrop, global economic growth slowed and U.S. corporate profit growth continued to decelerate. Markets seemed to focus more on the liquidity provided by central banks than on the moderating economic and earnings outlook. In our opinion, there continues to be a divergence between the stock market and corporate fundamentals.

For the year, the Fund lagged both its Russell 1000 Growth Index benchmark and the broad market S&P 500 Index. Looking back, many of the holdings in the portfolio that helped performance in 2011 did not fully participate in the major equity rally sparked predominately by additional central bank monetary stimulus during the first six weeks of 2012. Volatility increased during the spring and summer as growth concerns resurfaced in Europe, the United States, and China. The market gave back some of its early gains during this period, and the Fund delivered solid relative performance. As summer ended, both the Fed and the ECB provided additional support for financial markets and the portfolio participated fully in the ensuing rally, outpacing both the Russell 1000 Growth and the S&P 500.

Equity markets subsequently sold off during the fourth quarter, as investors feared the potential destabilization from the “fiscal cliff” as well as a potentially significant increase in taxes on dividends. The latter concern affected several of the portfolio’s higher-yielding, dividend-paying holdings. For the December quarter, the Fund posted a small loss in declining slightly more than its benchmark.

Fourth Quarter Laggards

Holdings within the Healthcare and Industrials sectors weighed on relative performance during the fourth quarter. The stock of pharmacy benefit manager Express Scripts fell after management issued guidance for 2013 that was below analyst estimates. Still, the company expects that ongoing positive trends in the business, including reduced drug purchase costs, increased generic usage, and greater productivity associated with its recent merger with Medco will offset the weak business environment and the impact of elevated unemployment. Although General Electric enjoyed strong gains earlier in the year, the stock declined during the quarter as most other industrial stocks rose. We ultimately trimmed the position to reflect more moderate earnings growth than we had previously expected despite the stock trading at reasonable valuation levels.

Other notable detractors from relative performance included Bed, Bath & Beyond, Occidental Petroleum, and Wells Fargo. Several of the Fund’s holdings within Consumer Discretionary gained more than the benchmark sector return, but Bed, Bath & Beyond declined more than 11% on further fallout from last quarter’s weak earnings guidance. Occidental continued to lag the Energy sector and we reduced the position as rising costs and capital spending have tempered investor enthusiasm for the company's better than average volume growth. Wells Fargo was flat as most financials rose. We remain positive, and increased the Fund’s stake in the stock, due to our view that expense cuts, strong mortgage volumes, and an improving housing market would provide catalysts for better results for the company.

Tech Boost

Relative performance benefited primarily from solid stock selection in Technology and Consumer Staples during the quarter. An underweight position in Apple relative to the Russell 1000 Growth Index driven in part by our risk controls limiting the absolute size of any one position in the portfolio, aided returns as Apple declined nearly 20%. We had also reduced the Apple position early in the quarter after the company reported earnings below expectations.  Margin pressure from the release of several new or updated products and the departure of a senior executive was also cause for concern. We eventually added back to the position twice as the stock declined significantly to a compelling valuation with confirming data of increasing product build activity and lower component costs heading into 2013.

Juniper Networks and Visa also contributed positively to performance during the period. IP network provider Juniper reported solid third quarter results, and we added to the portfolio’s position on evidence that North American carrier spending is picking up, new products are gaining traction, and sequential growth in backlog and product deferred revenue. 

Unilever and Costco were the standout holdings within Consumer Staples. Unilever rose following the company’s better than expected third quarter trading update. Although a number of companies have made it clear that Emerging Market growth rates have slowed, Unilever did not report a slowdown—implying that the company is benefiting from market share gains. Costco outperformed the sector as the company reported strong same store sales comparisons and benefitted from an increase in membership fee income. 

New Holdings: Biogen and Johnson Controls

We established new positions in Biogen, Johnson Controls, and retained and increased the position in Kraft Foods spin-off Mondelez International. Biotech firm Biogen has a diverse product portfolio of multiple sclerosis treatments as well as new products in development.  The company has an oral multiple sclerosis (MS) treatment that has been accepted for review by the FDA and is expected to launch in the U.S. during the first half of 2013. 

We think Johnson Controls, a manufacturer of automotive systems and building controls, stands to benefit from energy efficiency and clean energy trends. A recent shortfall in execution led to a decline in the stock price that provided an opportunity to add the name to the portfolio at an attractive valuation. The company has a long record of delivering consistent returns and growth. Mondelez, the former global snacks component of Kraft, is the more growth-driven of the two entities. We think earnings momentum is likely to accelerate into 2013, while the foreign currency backdrop has improved. In addition, initial 2013 guidance was likely conservative due to the very early stage at which it was provided following the split from Kraft. The company is also likely to be awarded $1 to $1.5 billion in proceeds from arbitration proceedings with Starbucks. 

Elsewhere, we increased the size of current positions in Oracle and Qualcomm. Oracle again reported solid results with upside from new license sales, total revenue, profit margins, and earnings, as better software sales once again offset weak hardware sales. We added to the position on modest price weakness as we expect improving sales force productivity following strong new sales hires last year, anticipation of less drag from foreign currency exchange, and further aggressive share repurchases. We think wireless chip maker Qualcomm’s aggressive push to 4G LTE and leading-edge 28nm is starting to pay off with share gains, rising average selling prices, and increasing production—all driving upward revisions to estimates.

Sold—Kraft Foods, Amazon, and Omnicom

Three stocks were sold outright from the portfolio—Kraft Foods Group, Amazon.com, and advertising firm Omnicom Group. After its split with the faster growing Mondelez business, we don’t think Kraft’s remaining North American grocery segment is likely to sustain the 10% or more earnings growth over the next 10 years that our process requires. We eliminated Amazon as the stock traded at a 20% premium to our estimated present value.

Omnicom is losing many of the catalysts we first outlined when we re-established the portfolio’s position in early 2011. The Olympics and elections have passed, while global economic growth continues to moderate and is at risk from an adverse shock. Amid the political and economic uncertainty, customers are reducing discretionary advertising and marketing spending, leading to a moderation in organic revenue growth at the firm. 

We also trimmed Ebay and Visa as both stocks traded near our estimate of present value, and reduced the Fund’s stake in Google and Stryker on company concerns. Google reported disappointing third quarter results that raised concerns about its desktop-to-mobile advertising transition and the strategic value of the Motorola acquisition. Ongoing leadership changes at Stryker and our lack of conviction in the company's ability to generate double-digit earnings growth next year led to the reduction in that stock. Recent hospital surveys have shown deterioration in capital expenditures, increased negotiation pressure on device prices from group purchasing organizations (GPOs), and a continued lack of recovery in utilization. 

Outlook

Stocks mostly marked time during the fourth quarter of 2012 after having recovered nicely during the third quarter from their second quarter declines. Overall, though, equities still showed strong year-to-date returns even though global economic growth weakened during the year and U.S. earnings growth slowed thanks to a highly accommodative Federal Reserve that helped to boost the values of financial assets such as stocks and corporate bonds. We believe the market may continue to consolidate its gains amid sluggish global economic growth and weakened U.S. earnings growth. At the same time, earnings expectations for 2013 seem too high.

Now nearly four years into a recovery, the current market environment is a study in contrasts.  Housing appears to have bottomed as corporate profit margins appear to be peaking. Consumers have worked to restore balance to their finances, while much heavy lifting remains to repair our country’s fiscal situation. Chinese growth appears to be stabilizing while the European Union remains mired in recession. We think these offsetting factors will continue to create market volatility as we progress through 2013. More importantly, we think valuations for quality growth stocks remain attractive. In an environment in which earnings growth may be scarce and less predictable than perhaps the market is anticipating, we think the Fund is well positioned to deliver positive and more-differentiated returns relative to the benchmark in the year ahead.

Montag & Caldwell Investment Counsel

As of December 31, 2012, Express Scripts comprised 3.03% of the portfolio's assets, General Electric – 3.68%, Bed, Bath & Beyond – 1.42%, Occidental Petroleum – 1.83%, Wells Fargo – 3.17%, Apple – 3.71%, Juniper Networks – 2.34%, Visa – 2.84%, Unilever – 2.27%, Costco – 3.00%, Biogen – 1.06%, Johnson Controls – 0.51%, Mondelez International – 3.44%, Kraft Foods Group – 0.00%, Oracle – 3.50%, Qualcomm – 4.42%, eBay – 2.15%, Google – 1.99%, and Stryker – 2.27%.

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

Before investing, consider the Fund’s investment objectives, risks, charges, and expenses. Contact 800 992-8151 for a prospectus or summary prospectus containing this and other information. Please, read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC.

4th Quarter 2012

Reversal of Post-Election Slump

The fourth quarter of 2012 provided a fitting end to what was a volatile, yet successful, year for equity investors. The broad market S&P 500 Index traded modestly higher in early October before experiencing a sharp, post-election decline. The slump reversed on surprisingly positive employment data, with stocks later propelled by rising optimism for a resolution of the fiscal cliff.  The final surge arrived on December 31, as news emerged that lawmakers had finally cobbled together the framework for a deal.

Small-cap value stocks led the market during the fourth quarter and all of 2012, but the dispersion of returns was narrow for the year as the large-cap oriented Russell 1000 Index only outperformed the small-cap Russell 2000 Index by mere basis points. From a style perspective, value significantly outperformed growth across market-cap spectrum for both the quarter and the year.

High-beta (volatility) stocks led the market all year long and propelled the rally that followed the election, while high-yield stocks were blown away. Within the S&P 500, the highest beta stocks (fifth quintile) outgained the lowest volatility stocks (first quintile) by more than 10 percentage points for the quarter and the year. According to Ned Davis Research, stocks with the lowest dividend yields in the S&P 500 outgained the highest yielding by an astonishing amount (23.4% to 3.2%) for the full year, including by a six-percentage point margin during the fourth quarter.

The prospects for dividend investing brightened with the New Year, however. In December, a flurry of companies rushed to pay special dividends or move regular payments forward in response to a 3.8% dividend income surcharge related to healthcare reform and the risk that favorable tax treatment of dividend income would expire in 2013. After much speculation and concern, Congress finally passed the American Taxpayer Relief Act of 2012, averting the tax cliff. Although the debt ceiling and spending debates were put off until February, we were pleasantly surprised that the net impact of the bill on dividend stocks was consistent with, if not better than, our best case scenario.

While we expected that dividend taxes were going to increase, Congress exercised restraint in maintaining the status quo for most investors and increasing the tax modestly for investors in the top tax brackets. They preserved the parity between the treatment of capital gains and dividends.  Most importantly, the new tax rates were made permanent, eliminating a significant uncertainty for taxable investors in dividend stocks.

Rough Quarter, Rough Year

The Fund underperformed its Russell 3000 Value Index benchmark during the quarter, and substantially underperformed for the year. This was the first time that the Fund had underperformed the index during a full calendar year since its August 2005 inception. At the same time, it has delivered returns with significantly less standard deviation (a measure of volatility of returns) than the benchmark through the end of 2012.

Both sector allocation and stock selection had a negative effect on overall relative performance in 2012, with stock selection within eight out of 10 sectors and sector allocation in five sectors hurting performance. Financials detracted from results the most owing to weak stock selection and an underweight position. Despite providing the highest absolute return in the portfolio, holdings in Financials underperformed the benchmark sector by more than seven percentage points. This underperformance was largely attributable to the lack of exposure to banking giants Bank of America, Citigroup, Goldman Sachs Group, and JPMorgan Chase & Co.

During the fourth quarter, stock selection negatively affected relative performance within six sectors, with the largest impact coming from holdings in Financials and Consumer Discretionary. The poor results in Financials were due primarily to positions in CME Group and PNC Financial Services, while Darden Restaurants and Kohl’s drove the underperformance in Consumer Discretionary.

Darden is the owner and operator of full-service casual dining chains, including Olive Garden, Red Lobster, and LongHorn Steakhouse. The stock gapped down in December after it pre-announced poor fiscal second quarter same-store sales and significantly lowered earnings guidance for its fiscal year ending May 2013. Several of the company’s promotions did not have the desired effect on sales and traffic, primarily due to a lack of focus on affordability. Darden also suffered from bad publicity relating to reports that it was exploring ways to minimize the costs of the new healthcare mandate by reducing employee hours. Despite these near-term obstacles, we think the firm has enduring restaurant brands with strong growth prospects, leading us to maintain the Fund’s position.

Off-mall department store retailer Kohl’s reported disappointing November same-store sales after signs of a positive turn in the business since late June. Despite the operational setbacks, the company has rewarded shareholders with stock buybacks, and in November the Board of Directors again increased the firm’s share repurchase authorization. With a healthy dividend yield, double-digit free cash flow yield, and strong commitment to shareholders, we are comfortable maintaining the position. 

Elsewhere, global telecommunications company Vodafone reported weak first half results in November driven by a significant decline in service revenue in Southern Europe and impairments related to operations in Italy and Spain. Profits declined in both Northern and Southern Europe as the company faced intense competition and lower mobile termination rates. Although performance outside of Europe and the company’s 45% stake in Verizon Wireless were bright spots, it was not enough to offset the European results. Given the poor fundamentals of the business in Europe and uncertainty of future dividends out of Verizon Wireless, the dividend growth outlook for Vodafone has become increasingly challenged. We trimmed the position at a loss in accordance with our sell discipline.

The biggest negative stock contributors for the year came from a variety of industries. Railroad Norfolk Southern encountered slumping demand for carloads of coal as utilities switched to cheaper natural gas. Shares of Intel suffered during the second half of the year following a disappointing second quarter earnings release and cuts to guidance for the next two quarters. The stock bottomed in November when the company made the surprise announcement that President and CEO Paul Otellini would retire from the company and the Board of Directors in May 2013. Kohl’s fourth quarter slide made it one of the portfolio’s worst performers for the year.

Positive Energy

Only three economic sectors in the portfolio had a positive absolute return during the quarter compared with seven sectors in the benchmark. Four sectors had a positive effect on relative results, with Energy providing the most significant impact owing to an underweight position. Sector allocation overall was also positive, aided by the Energy underweight and an overweight in Consumer Discretionary. Only two sectors aided relative performance during the year, with Energy again the biggest contributor due an underweight position and strong stock selection, and positive stock selection in Utilities adding value. Positions in Seadrill and Occidental Petroleum drove much of the outperformance in Energy in 2012.

Asset manager BlackRock was the top individual contributor to performance during the quarter.  The stock rallied as lingering market concerns about the possibility of Chairman and CEO Larry Fink departing for the U.S. Treasury abated, allowing the market to refocus on the firm’s ongoing stellar execution in growing its global brand, diversified business lines, and ample free cash flow. Part of BlackRock’s strong contribution to the portfolio resulted from our decision to increase the position size during the second quarter of 2012. Shares have since approached our assessed Absolute Value, but we have maintained the position due to our favorable expectations for the company’s business model and attractive return-of-capital actions via ongoing dividend hikes and opportunistic share repurchases.

Industrial equipment and casket-maker Hillenbrand made two significant announcements that boosted its stock. It announced the accretive acquisition of German bulk material handling equipment manufacturer Coperion Capital to diversify its industrial equipment business and the company reported better than expected fourth quarter results, driven by stabilization in its core casket business, significant revenue growth, and margin improvement in the process equipment segment.

Steel producer Nucor sold off earlier in the year as economic concerns and bearish commentary from management regarding a rise in U.S. steel imports weighed on investor expectations. Those concerns eased as Nucor’s financial results came in above Wall Street expectations. In October the company announced better than expected third quarter results that, while down somewhat year-over-year, showed sequential growth. In addition, Nucor raised its base dividend for the 40th consecutive year.

The biggest contributors for the year were a mixed bag. Sabra Healthcare REIT made a number of acquisitions to grow its portfolio of properties and opportunistically reduced financing costs. Interest savings from aggressive refinancing as well as acquisitions are driving increased cash flow and our calculated Absolute Value. Real estate investment trusts (REITs) continued to deliver in 2012, and while we are not going to chase relative values to add to the portfolio’s limited exposure to REITs, Sabra is still trading at a discount to our Absolute Value.

Kimberly-Clark, a global health and hygiene company that manufactures and markets tissue, personal care, and healthcare products, repeatedly topped analyst quarterly estimates and raised annual earnings guidance. The company also committed more than a $1 billion to share buybacks in 2012 and had one of the highest dividend yields among its peers. Finally, BlackRock’s fourth quarter rally and shareholder friendly actions made it one of the year’s top performers as well.

Portfolio Changes

Among the Fund’s 73 holdings at quarter end, 14 had increased their regular dividend payments and two—Pfizer and Sysco—announced dividend increases payable during the first quarter of 2013. Eleven holdings either paid a special dividend or accelerated their regular payments to the fourth quarter due to the uncertainty surrounding the fiscal cliff and potential dividend tax increase in 2013.

Four new positions were established and four eliminated during the quarter, but turnover was relatively low and there were only modest changes in the overall relative positioning of the portfolio. The position in Energy increased marginally with the introduction of Occidental Petroleum, reducing the portfolio’s substantial underweight slightly. The introduction of Emerson Electric and Geo Group boosted the Fund’s overweight in Industrials despite the sale of United Technologies at a premium to our assessed Absolute Value.

The largest new position added during the quarter was Emerson Electric, a leading industrial manufacturer that serves a wide customer base with a diversified portfolio of products. The company focuses on high quality, strong service, and innovation (1,000+ patent portfolio) to differentiate itself from competitors. This has led to consistent returns and an economic moat despite the competitive nature of its industry. Management has a stated goal of returning 50% of annual cash flows to shareholders through dividends and repurchases. The company is a dividend aristocrat with double-digit compound annual growth in its dividend since 1956. The stock was trading at a 16% discount to our assessed Absolute Value at the time of initial purchase.

Another notable change for 2012 was the addition of two new Master Limited Partnerships (MLPs). MLPs have played an important role in the portfolio in the past, but we sold most of these holdings as valuations soared at the end of 2009. The past year marked the end of 12 consecutive years of outperformance for MLPs versus the S&P 500 as measured by the Alerian MLP Index. The group garnered significant attention in recent years, but finally succumbed to a wave of new equity issuance, poor energy sector performance, and tax concerns. This pull back offered the opportunity to begin building a position in the group again, and we are evaluating others for consideration in 2013.

Thoughts on Performance in 2012

In terms of relative performance, 2012 was clearly a challenging year for the Fund. Not only was it the first calendar year that it underperformed its benchmark since inception, but the magnitude of relative underperformance was significant. In analyzing the results, we’ve previously noted the remarkable underperformance of high-yielding and dividend-paying stocks, but also want to highlight two other factors that contributed to turning 2012 into a perfect storm against the Fund.

Although high-yield stocks underperformed dramatically, stocks with high dividend growth rates surged. According to Merrill Lynch’s Quantitative Strategy (MLQS) team, dividend growth was one of the best performing factors for the year, despite dividend yield being one of the worst. We focus on companies that can and do grow their dividend, but the market in 2012 was dominated either by companies initiating a new dividend or those that significantly increased their dividend payout from a previously low yield. The vast majority of these companies did not qualify for inclusion in the portfolio before their dividend increases as they did not meet our minimum yield requirement. 

An analysis of the portfolio’s holdings also revealed that losses from individual stocks were limited, but so was the size of the portfolio’s biggest winners. Of holdings with a positive (18) or negative (8) impact of 25 basis points or more, the average weight of the winners was only 0.92% versus a 1.76% average weight for the eight big losers. We were too conservative in our position sizing, especially among holdings that had lower yields. Thus, the income bias of the our strategy essentially proved to be an impediment.

The lesson we have learned from this is to realize that we need to be increasingly conscious of a company’s total potential shareholder yield. This is a function of not only the current yield, but expected dividend growth and planned share repurchases. Last year demonstrated that while we cannot lose sight of the portfolio’s dividend income objective, in a low rate and (increasingly) low growth environment, additional components of total shareholder yield demand more attention. We correctly identified during the third quarter that sizing was an issue and a need to better assess a holding’s conviction, discount to value, and total shareholder yield at the time we initiate a new position to better capitalize on our best ideas.

Outlook

Although our outlook is not a forecast, our perspective of the economic and market environment can affect our stock valuations and portfolio positioning. Valuations are the primary driver of our outlook. When stocks are cheap we get excited, but as the discount declines we get more cautious. With our discount-to-Absolute Value calculation for the portfolio at 93%, we are again cautious about broader market valuations especially as earnings growth slows.

Despite modest economic growth and firmer employment data, US Federal Reserve monetary policy remains hyper-aggressive. Chairman Bernanke has explicitly expressed his strong preference for higher asset values during periods of deflationary pressure and deleveraging.  He also recently declared the Fed would continue to provide extraordinary stimulus until unemployment reached 6.5%. While it is unlikely we will see a 6.5% headline unemployment figure in 2013, 7% is a possibility if growth accelerates. Furthermore, Fed officials Bullard and Plosser have stated that quantitative easing (QE) measures could end at 7%. Either way, we think the Fed continues to stimulate equity prices, but if unemployment drops more quickly than expected, the Fed is likely to begin to withdraw its more extraordinary stimulus measures sooner than the market currently anticipates. 

Fiscal policy is poised to be the major headwind as we look ahead, however. Higher taxes, lower federal spending, fewer economic incentives for business, and the upcoming debt ceiling debate collectively represent the greatest risk to our outlook. As recently reported by the New York Times, upper income earners now face the heaviest tax burden in more than 30 years. The debt ceiling debate promises to be highly contentious and, according to ISI Research, spending cuts are highly unlikely to produce the longer-term savings necessary to keep credit rating agencies from further downgrading U.S. debt.  Various actions already taken in association with the fiscal cliff are likely to shave an estimated 1.0% to 1.5% from Gross Domestic Product (GDP) in 2013. That massive drag comes at a time when corporate profit growth is slowing dramatically.  If there is one concern that should keep investors up at night, it is the chaos and policies currently emanating from our capitol. 

There is a profound and lingering nervousness among businesses, consumers, and investors hanging over this recovery. That is not uncommon following a major financial crisis, especially one resulting in massive credit deleveraging. Fortunately, stocks have thus far successfully climbed the wall of worry. With China averting a hard landing and European tail risks diminishing, we see investors facing fewer global macro concerns in 2013 than in 2012. Closer to home, ongoing improvement in both employment indicators and the housing market could lift sentiment. This should be positive for fundamental stock pickers, as investor focus shifts away from the macro and toward the micro.

The threat of a significant dividend tax increase has hung over the heads of dividend investors for more than a decade. There is little doubt that some of the underperformance in 2012 was the market discounting this risk for 2013. The permanent removal of that threat clears the way for dividend-oriented strategies to participate in what we believe is a secular bull market for “income replacement” securities. Therefore, we anticipate that there will be some reversion of the 2012 underperformance in 2013, which should contribute positively to expected return over the near- to intermediate-term. We remain steadfast in our focus on stocks with high and growing dividends, healthy balance sheets, and attractive valuations, as well as opportunities presented by heightened market volatility. 

River Road Asset Management
16 January 2013

As of December 31, 2012, CME Group comprised 1.20% of the portfolio's assets, PNC Financial Services – 1.25%, Darden – 1.22%, Kohl’s – 1.43%, Vodafone – 1.47%, Norfolk Southern – 1.92%, Intel – 2.12%, Seadrill – 0.00%, Occidental Petroleum – 0.99%, BlackRock – 2.16%, Hillenbrand – 1.46%, Nucor – 1.45%, Sabra Healthcare REIT – 1.76%, Kimberly-Clark  – 2.41%, Pfizer – 1.73%, Sysco – 2.08%, Emerson Electric – 1.32%, Geo Group – 0.51%, and United Technologies – 0.00%.

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, consider the Fund’s investment objectives, risks, charges, and expenses. Contact 800 992-8151 for a prospectus or summary prospectus containing this and other information. Please, read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC.

4th Quarter 2012

Reversal of Post-Election Slump

The fourth quarter of 2012 provided a fitting end to what was a volatile, yet successful, year for equity investors. The broad market S&P 500 Index traded modestly higher in early October before experiencing a sharp, post-election decline. The slump reversed on surprisingly positive employment data, with stocks later propelled by rising optimism for a resolution of the fiscal cliff.  The final surge arrived on December 31, as news emerged that lawmakers had finally cobbled together the framework for a deal.

Small-cap value stocks led the market during the fourth quarter and all of 2012, but the dispersion of returns was narrow for the year as the large-cap oriented Russell 1000 Index only outperformed the small-cap Russell 2000 Index by mere basis points. From a style perspective, value significantly outperformed growth across market-cap spectrum for both the quarter and the year.

High-beta (volatility) stocks led the market all year long and propelled the rally that followed the election, while high-yield stocks were blown away. Within the S&P 500, the highest beta stocks (fifth quintile) outgained the lowest volatility stocks (first quintile) by more than 10 percentage points for the quarter and the year. According to Ned Davis Research, stocks with the lowest dividend yields in the S&P 500 outgained the highest yielding by an astonishing amount (23.4% to 3.2%) for the full year, including by a six-percentage point margin during the fourth quarter.

The prospects for dividend investing brightened with the New Year, however. In December, a flurry of companies rushed to pay special dividends or move regular payments forward in response to a 3.8% dividend income surcharge related to healthcare reform and the risk that favorable tax treatment of dividend income would expire in 2013. After much speculation and concern, Congress finally passed the American Taxpayer Relief Act of 2012, averting the tax cliff. Although the debt ceiling and spending debates were put off until February, we were pleasantly surprised that the net impact of the bill on dividend stocks was consistent with, if not better than, our best case scenario.

While we expected that dividend taxes were going to increase, Congress exercised restraint in maintaining the status quo for most investors and increasing the tax modestly for investors in the top tax brackets. They preserved the parity between the treatment of capital gains and dividends.  Most importantly, the new tax rates were made permanent, eliminating a significant uncertainty for taxable investors in dividend stocks.

Rough Quarter

The Fund underperformed its Russell 3000 Value Index benchmark during the quarter. Stock selection negatively affected relative performance within six sectors, with the largest impact coming from holdings in Financials and Consumer Discretionary. The poor results in Financials were due primarily to positions in CME Group and PNC Financial Services, while Darden Restaurants and Kohl’s drove the underperformance in Consumer Discretionary.

Darden is the owner and operator of full-service casual dining chains, including Olive Garden, Red Lobster, and LongHorn Steakhouse. The stock gapped down in December after it pre-announced poor fiscal second quarter same-store sales and significantly lowered earnings guidance for its fiscal year ending May 2013. Several of the company’s promotions did not have the desired effect on sales and traffic, primarily due to a lack of focus on affordability. Darden also suffered from bad publicity relating to reports that it was exploring ways to minimize the costs of the new healthcare mandate by reducing employee hours. Despite these near-term obstacles, we think the firm has enduring restaurant brands with strong growth prospects, leading us to maintain the Fund’s position.

Off-mall department store retailer Kohl’s reported disappointing November same-store sales after signs of a positive turn in the business since late June. Despite the operational setbacks, the company has rewarded shareholders with stock buybacks, and in November the Board of Directors again increased the firm’s share repurchase authorization. With a healthy dividend yield, double-digit free cash flow yield, and strong commitment to shareholders, we are comfortable maintaining the position. 

Elsewhere, global telecommunications company Vodafone reported weak first half results in November driven by a significant decline in service revenue in Southern Europe and impairments related to operations in Italy and Spain. Profits declined in both Northern and Southern Europe as the company faced intense competition and lower mobile termination rates. Although performance outside of Europe and the company’s 45% stake in Verizon Wireless were bright spots, it was not enough to offset the European results. Given the poor fundamentals of the business in Europe and uncertainty of future dividends out of Verizon Wireless, the dividend growth outlook for Vodafone has become increasingly challenged. We trimmed the position at a loss in accordance with our sell discipline.

Positive Energy

Only three economic sectors in the portfolio had a positive absolute return during the quarter compared with seven sectors in the benchmark. Four sectors had a positive effect on relative results, with Energy providing the most significant impact owing to an underweight position. Overall sector allocation was marginally positive.

Asset manager BlackRock was the top individual contributor to performance during the quarter.  The stock rallied as lingering market concerns about the possibility of Chairman and CEO Larry Fink departing for the U.S. Treasury abated, allowing the market to refocus on the firm’s ongoing stellar execution in growing its global brand, diversified business lines, and ample free cash flow. Part of BlackRock’s strong contribution to the portfolio resulted from our decision to increase the position size during the second quarter of 2012. Shares have since approached our assessed Absolute Value, but we have maintained the position due to our favorable expectations for the company’s business model and attractive return-of-capital actions via ongoing dividend hikes and opportunistic share repurchases.

Steel producer Nucor sold off earlier in the year as economic concerns and bearish commentary from management regarding a rise in U.S. steel imports weighed on investor expectations. Those concerns abated, however, as Nucor’s financial results came in above Wall Street expectations.  In October the company announced better than expected third quarter results that, while down somewhat year-over-year, showed sequential growth. In addition, Nucor raised its base dividend for the 40th consecutive year.

Leading Brazilian telecommunications company Telefonica Brasil reported strong earnings throughout 2012, but the stock suffered for much of the year as investor attention focused on speculation that parent company Telefonica SA might sell all or part of its 74% stake in the Brazilian company. The stock bounced back in December after management of Telefonica SA confirmed they were working on a plan to list 10% to 15% of their Latin American operations. Although no formal plan has been released, Telefonica SA may combine its various telecom interests into a single company, which would likely be headquartered in Brazil. Based on our prior experience with the combination of Vivo and Telesp to create Telefonica Brasil, we believe that minority shareholder rights will be respected in a potential merger with Telefonica SA’s other holdings. Furthermore, the need to reduce leverage at the parent company level is consistent with our desire for high and growing dividends from Telefonica Brasil. We share investor optimism reflected in the December rally for a potential combination, and maintained the Fund’s position.

Portfolio Changes

Among the Fund’s 64 holdings at quarter end, 14 had increased their regular dividend payments and two—Pfizer and Sysco—announced dividend increases payable during the first quarter of 2013. Eleven holdings either paid a special dividend or accelerated their regular payments to the fourth quarter due to the uncertainty surrounding the fiscal cliff and potential dividend tax increase in 2013.

Four new positions were established and two eliminated during the quarter, but turnover was relatively low and there were only modest changes in the overall relative positioning of the portfolio. The sale of Meredith reduced the position in Consumer Discretionary and the portfolio’s overweight in the sector versus the benchmark. The introduction of Emerson Electric and Geo Group boosted the Fund’s overweight in Industrials despite the sale of United Technologies at a premium to our assessed Absolute Value. The position in Energy also increased marginally with the introduction of Occidental Petroleum, reducing the portfolio’s substantial underweight slightly.

The largest new position added during the quarter was Emerson Electric, a leading industrial manufacturer that serves a wide customer base with a diversified portfolio of products. The company focuses on high quality, strong service, and innovation (1,000+ patent portfolio) to differentiate itself from competitors. This has led to consistent returns and an economic moat despite the competitive nature of its industry. Management has a stated goal of returning 50% of annual cash flows to shareholders through dividends and repurchases. The company is a dividend aristocrat with double-digit compound annual growth in its dividend since 1956. The stock was trading at a 16% discount to our assessed Absolute Value at the time of initial purchase.

Outlook

Although our outlook is not a forecast, our perspective of the economic and market environment can affect our stock valuations and portfolio positioning. Valuations are the primary driver of our outlook. When stocks are cheap we get excited, but as the discount declines we get more cautious. With our discount-to-Absolute Value calculation for the portfolio at 93%, we are again cautious about broader market valuations especially as earnings growth slows.

Despite modest economic growth and firmer employment data, US Federal Reserve monetary policy remains hyper-aggressive. Chairman Bernanke has explicitly expressed his strong preference for higher asset values during periods of deflationary pressure and deleveraging.  He also recently declared the Fed would continue to provide extraordinary stimulus until unemployment reached 6.5%. While it is unlikely we will see a 6.5% headline unemployment figure in 2013, 7% is a possibility if growth accelerates. Furthermore, Fed officials Bullard and Plosser have stated that quantitative easing (QE) measures could end at 7%. Either way, we think the Fed continues to stimulate equity prices, but if unemployment drops more quickly than expected, the Fed is likely to begin to withdraw its more extraordinary stimulus measures sooner than the market currently anticipates. 

Fiscal policy is poised to be the major headwind as we look ahead, however. Higher taxes, lower federal spending, fewer economic incentives for business, and the upcoming debt ceiling debate collectively represent the greatest risk to our outlook. As recently reported by the New York Times, upper income earners now face the heaviest tax burden in more than 30 years. The debt ceiling debate promises to be highly contentious and, according to ISI Research, spending cuts are highly unlikely to produce the longer-term savings necessary to keep credit rating agencies from further downgrading U.S. debt.  Various actions already taken in association with the fiscal cliff are likely to shave an estimated 1.0% to 1.5% from Gross Domestic Product (GDP) in 2013. That massive drag comes at a time when corporate profit growth is slowing dramatically.  If there is one concern that should keep investors up at night, it is the chaos and policies currently emanating from our capitol. 

There is a profound and lingering nervousness among businesses, consumers, and investors hanging over this recovery. That is not uncommon following a major financial crisis, especially one resulting in massive credit deleveraging. Fortunately, stocks have thus far successfully climbed the wall of worry. With China averting a hard landing and European tail risks diminishing, we see investors facing fewer global macro concerns in 2013 than in 2012. Closer to home, ongoing improvement in both employment indicators and the housing market could lift sentiment. This should be positive for fundamental stock pickers, as investor focus shifts away from the macro and toward the micro.

The threat of a significant dividend tax increase has hung over the heads of dividend investors for more than a decade. There is little doubt that some of the underperformance in 2012 was the market discounting this risk for 2013. The permanent removal of that threat clears the way for dividend-oriented strategies to participate in what we believe is a secular bull market for “income replacement” securities. Therefore, we anticipate that there will be some reversion of the 2012 underperformance in 2013, which should contribute positively to expected return over the near- to intermediate-term. We remain steadfast in our focus on stocks with high and growing dividends, healthy balance sheets, and attractive valuations, as well as opportunities presented by heightened market volatility. 

River Road Asset Management
16 January 2013

As of December 31, 2012, CME Group comprised 1.35% of the portfolio's assets, PNC Financial Services – 1.45%, Darden – 1.36%, Kohl’s – 1.53%, Vodafone – 1.49%, BlackRock – 2.42%, Nucor – 1.61%, Telefonica Brasil – 1.60%, Pfizer – 1.99%, Sysco – 2.23%, Meredith – 0.00%, Emerson Electric – 1.47%, Geo Group – 0.56%, Occidental Petroleum – 1.10%, and United Technologies – 0.00%.

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, consider the Fund’s investment objectives, risks, charges, and expenses. Contact 800 992-8151 for a prospectus or summary prospectus containing this and other information. Please, read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC.

4th Quarter 2012

Mixed Fourth Quarter Amid Strong 2012 

The fourth quarter provided a fitting end to what was a volatile, yet successful year for equity investors. Stocks traded modestly higher in October before experiencing a sharp, post-election decline. Surprisingly positive employment data later led to a reverse of the slump with stocks propelled by rising optimism for a resolution of the fiscal cliff. The final surge arrived on December 31, as news emerged that lawmakers had finally cobbled together the framework for a deal.

Small-cap stocks led for the quarter, as the Russell 2000 Index gained 1.85%, nearly two percentage points more than the large-cap oriented Russell 1000 and S&P 500 Indices. For 2012, large and small-cap stocks delivered equally robust returns, with all three indices returning roughly 16%. Small- to mid-cap stocks were the best performing segment, with the Fund’s Russell 2500 Index benchmark gaining nearly 18%.

With Financials posting stellar returns and Technology stocks lagging, value stocks handily outperformed growth across the market-capitalization spectrum (as represented by the Russell indices) for both the quarter and 2012. Indeed, among small- to mid-caps, the Russell 2500 Value outpaced its small/mid-cap growth index rival for the first time in three years.

High-beta (volatility) stocks fueled the fourth quarter rally as risk aversion fell. The highest beta stocks (fifth quintile) in the benchmark outgained the lowest beta (first quintile) by more than six percentage points. High-beta stocks in the benchmark also led for all of 2012. Extended high-beta leadership this late in an economic recovery is unusual and, in our opinion, is a direct consequence of the Federal Reserve’s aggressive monetary policies. Fortunately, high-beta leadership has not coincided with low-quality outperformance, as higher-quality stocks led the benchmark during the first three quarters of the year before falling off during the fourth quarter rally. This is likely due to slowing profit growth, which encourages investors to bid up stocks with strong earnings metrics.

Active Managers Disappoint in 2012

Active small-value managers performed well during the fourth quarter in general, with 66% outperforming the benchmark, but they struggled in 2012 as just 35% outperformed. Since early 2011, we have commented on the unusually large percentage of small-value managers that have outperformed during recent periods of high-beta leadership—a trend that is counter to our long-term observations. Small-cap managers lagged in 2012, however, despite high-beta leadership. We believe the reason was the significant underperformance managers experienced during the second quarter, when low-beta stocks significantly outperformed and just 12% of small-value managers beat the benchmark. (Note: The second quarter was a particularly strong quarter for our low-volatility, high-quality style of investing.)

Active managers across the size and style spectrum have struggled against their benchmarks the past few years. Large-caps have been a particularly challenging segment, though small-caps have not performed well either. Small-cap managers posted their worst relative performance since 2008, and fewer than half of all active small-value managers have now outperformed since 2000.

As active managers have struggled, fund flows have shifted dramatically toward index funds and exchange-traded funds (ETFs) dedicated to U.S. stocks. Unfortunately, large flows into index funds and ETFs typically leads to higher equity correlations and a more challenging performance hurdle for active fundamental managers. Long-term, however, these flows result in crowded trades that can create inefficiencies for active managers to exploit.

It is difficult to say exactly why managers have struggled against the benchmark recently.  Certainly, high equity correlations related to global macroeconomic events and strong ETF flows have been contributors. Within the small-cap space, value managers have suffered from outperformance in the Financials sector, particularly in real estate investment trusts (REITs)—where managers have generally been underweight.   

Weak Health

The Fund underperformed its benchmark during the quarter, and substantially underperformed for the year. As noted in previous commentaries, the most challenging phase of the market cycle for our style is the early, high-beta/low-quality stage, which we believe ended in February 2011. Since that time, the portfolio has performed reasonably well in outperforming the benchmark. During this period, stock selection has been strong and volatility and turnover have remained consistently low.

The sectors with the lowest contribution to relative return during the fourth quarter and 2012, respectively, were Healthcare and Consumer Discretionary. Healthcare underperformed due to both an overweight allocation and poor stock selection, including one of the quarter’s largest negative contributors—skilled nursing and rehab services provider Ensign Group. Consumer Discretionary performance in 2012 was adversely affected by stock selection, most notably that of closeout retailer Big Lots. 

Among the biggest individual detractors during the quarter were Ascena Retail Group, Endeavor International, and Energen. Specialty apparel store operator Ascena (dressbarn, maurices, Lane Bryant, Catherines, and Justice) sold off when the company reported results that were above expectations, but management failed to raise full-year guidance. They were also conservative in their estimates for synergies from the Charming Shoppes acquisition completed in June. The company expects to reduce overhead during the next three years to improve profitability and solid sales and earnings growth. We took no action on the position.

Independent oil and gas exploration and production firm Endeavor fell after the company failed to close two previously announced acquisitions of attractive North Sea assets. Although the company announced the acquisitions in December 2011, management did not disclose until December 2012 that there were insurmountable complications in negotiating the abandonment liabilities. These operational setbacks combined with increased balance sheet leverage significantly reduced our margin for error and impaired our investment thesis. We sold most of the Fund’s position just prior to year-end as the situation deteriorated.

Energen, another energy exploration and production company, reported disappointing fiscal third quarter results due to a variety of production issues, mostly infrastructure related, that will likely temporarily affect. Poor results at two new wells at some of the firm’s more promising projects also dampened investor enthusiasm. As a result, the company lowered its production guidance for 2012 and 2013. Our assessed Absolute Value did not materially change and we maintained the portfolio’s position during the quarter.

Laggards for the full year 2012 were a mixed bag. Closeout retailer Big Lots lowered earnings expectations and guided toward its first negative annual comparisons in more than 10 years. Discretionary sales have been weak and management is working on various initiatives to address its merchandising issues. We eliminated the position in The Dolan Company, a provider of mortgage default processing and litigation services. The “robo-signing” scandal prompted mortgage servicers to delay processing foreclosures, which we believed would be temporary.  Non-foreclosure solutions like short sales appear to have successfully resolved many delinquent mortgages, however. Finally, IT distributor Ingram Micro suffered after its new CEO announced the acquisition of Brightpoint, a global distributor for the cell phone industry. We lowered our assessed Absolute Value due to increased balance sheet risk and the potential for dilution, and significantly trimmed the position at a small loss during the second half of the year.

Strong Industrials

The sector with the highest contribution to relative return for both the fourth quarter and all of 2012 was Industrials. Stock selection drove performance led by the Fund’s top-performing stock for both periods, Geo Group. In 2012, Utilities and Technology also provided strong relative performance, with Utilities benefitting from a significant underweight position and Technology driven primarily by stock selection.

Shares of private prison operator Geo Group rallied when its Board of Directors announced the company would be converting into a REIT on January 1, 2013. To conform to the REIT rules of the Internal Revenue Code, the company paid a special dividend during the fourth quarter. The REIT conversion will improve the company’s tax efficiency, lower its cost of capital, and provide additional flexibility for growth opportunities. It should also increase the price investors give the stock as REITs are trading at a significant premium in the current low interest-rate environment. Although we do not typically invest in REITs, we do not feel compelled to sell a portfolio holding that converts into a REIT as long as our calculated discount-to-Absolute Value is compelling. Thus, we maintained the position in Geo during the quarter. 

Other top individual performers during the quarter were Insperity and Madison Square Garden. Insperity provides full-service human resources to small and medium-sized businesses, and reported strong results with higher gross profit due to lower benefit costs. In addition, the company announced a special dividend and a Dutch auction share repurchase plan that cost it little as its stock rallied past the high end of the tender offer. Media and sports conglomerate Madison Square Garden reported solid quarterly results driven by their content deal with Time Warner and increased sales associated with Phase I of the Garden renovation. It helped that the New York Knicks had a fantastic start to their 2012-2013 basketball season. The National Hockey League (NHL) also finally reached a tentative agreement with the players union to end its league-wide lockout, which should eliminate a short-term risk for the company. We trimmed the Fund’s position as the stock approached our assessed Absolute Value.

For the full year, the best contributors were generally the portfolio’s largest holdings, including fourth quarter standouts Geo Group and Madison Square Garden. Strong operating results and the announcement of two industry transactions at attractive price multiples boosted the shares of Equifax, the largest credit bureau in the United States. We aggressively trimmed this long-time holding as it hit our calculated Absolute Value. 

Portfolio Positioning

Five new holdings were purchased and seven sold from the Fund during the quarter. Among the five new positions, two were in the Industrials sector (Layne Christensen and Kelly Services).  The new positions also tended toward the smaller end of the market-cap spectrum, with three having market-caps less than $600 million. Among the companies sold, four achieved our Absolute Value price targets and three were sold due to either accumulated losses and/or a negative change in our fundamental outlook for the firm. Overall, turnover for the year was among the lowest in the Fund’s history.

We have been comfortable with the portfolio’s positions and sector weights (excluding Financials) during the past two years and looking ahead do not foresee any major shifts in allocation. Industry and sector allocations are driven almost exclusively by company-specific opportunities. Perhaps one key difference from 2012 is that multinationals look a bit more attractive as estimates have been slashed along with their stock prices. We are also increasingly concerned about consumer stocks given tax increases and other fiscal headwinds, and will continue to monitor closely.

The largest new position added during the quarter was WMS Industries, one of three major manufacturers and distributors of slot machines and video lottery terminals. WMS has the scale and financial strength necessary to license attractive brands and navigate the labyrinth of regulations across hundreds of jurisdictions. The company is viewed as an innovator within the industry, a position that has led to significant share gains but also increased product risk. WMS struggled in 2011 to commercialize several new products because the complex nature of their latest technologies caused operational and regulatory delays, resulting in competitors regaining market share lost to the company in prior years. After gaining regulatory approvals and rationalizing its pipeline, the firm appears to be back on track.

We previously purchased WMS for the Fund in July 2011 and eliminated the position as a loser in July 2012. The stock subsequently dropped even lower. When we first purchased the stock, the leveraged balance sheets of casino operators were causing a delay in the replacement cycle.  We believed that the company’s strong balance sheet would help them weather that type of operating environment. We did not expect the regulatory delays that caused the market share losses. We are now repurchasing WMS at an attractive discount to our previous sale with the belief that the company’s operating momentum is now on an upswing.  

Outlook

Reflecting on the past decade, it is typical for us to underestimate market returns in the early stages of the profit cycle, be on target in the middle, and then hit or miss in the late stages depending on how overextended valuations become. That has been the case with this current cycle as we underestimated the market recovery during the first two years and were largely in-sync the past two years. As mentioned in our last outlook, the recent slowdown in profit growth may indicate markets are entering the late stage of the cycle. Thus, you may rightfully sense that our conviction in our outlook for this year is a bit more tempered than that of the last two years.

Although our outlook is not a forecast, our perspective of the economic and market environment can affect our stock valuations and portfolio positioning. Valuations are the primary driver of our outlook. When stocks are cheap we get excited, when they are expensive we become more cautious. We would categorize current valuations as approaching full value. In other words, we are more cautious than excited, but not yet sounding the alarm. Employing our proprietary discount-to-Absolute Value measure, valuations were slightly below their historical peak at year-end, but with the market appreciating about 4% since year-end the indicator is now at 81%—uncomfortable territory for us. External measures show small-cap stocks being fairly valued, not grossly overvalued. That said, our proprietary measure has proven to be far more useful in predicting near- to intermediate-term corrections than any external measure we monitor. 

In addition, we believe consensus small-cap profit expectations are too high and likely to fall in the upcoming quarter, just as large-cap expectations have declined in recent months. The current expectation for Russell 2000 median profit growth is in excess of 17%. From our perspective, growth in the range of 8% to 12% for 2013 is more realistic. These factors imply some level of near-term weakness for small-caps as profit expectations decline, but perhaps solid single-digit stock returns over the course of the coming year, though given that we are in the late stages of the economic recovery cycle our conviction is low.

Despite modest economic growth and firmer employment data, US Federal Reserve monetary policy remains hyper-aggressive. Chairman Bernanke has explicitly expressed his strong preference for higher asset values during periods of deflationary pressure and deleveraging.  He also recently declared the Fed would continue to provide extraordinary stimulus until unemployment reached 6.5%. While it is unlikely we will see a 6.5% headline unemployment figure in 2013, 7% is a possibility if growth accelerates. Furthermore, Fed officials Bullard and Plosser have stated that quantitative easing (QE) measures could end at 7%. Either way, we think the Fed continues to stimulate equity prices, but if unemployment drops more quickly than expected, the Fed is likely to begin to withdraw its more extraordinary stimulus measures sooner than the market currently anticipates. 

Fiscal policy is poised to be the major headwind as we look ahead, however. Higher taxes, lower federal spending, fewer economic incentives for business, and the upcoming debt ceiling debate collectively represent the greatest risk to our outlook. As recently reported by the New York Times, upper income earners now face the heaviest tax burden in more than 30 years. The debt ceiling debate promises to be highly contentious and, according to ISI Research, spending cuts are highly unlikely to produce the longer-term savings necessary to keep credit rating agencies from further downgrading U.S. debt. If there is one concern that should keep investors up at night, it is the chaos and policies currently emanating from our capitol.  

There is a profound and lingering nervousness among businesses, consumers, and investors hanging over this recovery. That is not uncommon following a major financial crisis, especially one resulting in massive credit deleveraging. Fortunately, stocks have thus far successfully climbed the wall of worry. With China averting a hard landing and European tail risks diminishing, we see investors facing fewer global macro concerns in 2013 than in 2012. This should be positive for fundamental stock pickers, as investor focus shifts away from the macro and toward the micro.

A significant improvement in CEO confidence would have an especially positive impact on equity markets and the economy. One possible outcome would be improved merger and acquisition (M&A) activity. M&A activity was reasonably healthy in 2012 (best since 2007), but remains constrained by a lack of CEO confidence to invest in future growth. From our perspective, with record levels of corporate cash on balance sheets and depressed secular growth, even a modest improvement in confidence could result in a surge in M&A activity.

Continued improvement in housing and unemployment are wildcards that have received a lot of attention and could provide upside support in 2013. We believe the biggest potential catalyst for stocks in 2013, however, is a true wildcard—a rout of the government bond market. The bubble in government bonds is so massive that a significant rise in rates has the potential to spark a massive outflow of liquidity into stocks, blowing away any otherwise rational equity valuation or forecast model. We are not predicting this to happen, but the potential is very real.

River Road Asset Management

16 January 2013

As of December 31, 2012, Ensign Group comprised 1.51% of the portfolio’s assets, Big Lots – 3.15%, Ascena Retail Group – 2.22%, Endeavor International – 0.18%, Energen – 1.11%, The Dolan Company – 0.00%, Ingram Micro – 0.59%, Geo Group – 3.96%, Insperity – 1.86%, Madison Square Garden – 2.97%, Equifax – 0.55%, Layne Christianson – 0.71%, Kelly Services – 0.50%, and WMS Industries – 0.85%.

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, consider the Fund’s investment objectives, risks, charges, and expenses. Contact 800 992-8151 for a prospectus or summary prospectus containing this and other information. Please, read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC.

4th Quarter 2012

Mixed Fourth Quarter Amid Strong 2012 

The fourth quarter provided a fitting end to what was a volatile, yet successful year for equity investors. Stocks traded modestly higher in October before experiencing a sharp, post-election decline. Surprisingly positive employment data later led to a reverse of the slump with stocks propelled by rising optimism for a resolution of the fiscal cliff. The final surge arrived on December 31, as news emerged that lawmakers had finally cobbled together the framework for a deal.

Small-cap stocks led for the quarter, as the Russell 2000 Index gained 1.85%, nearly two percentage points more than the large-cap oriented Russell 1000 and S&P 500 Indices. For 2012, large and small-cap stocks delivered equally robust returns, with all three indices returning roughly 16%. Mid-caps were the best performing segment, with the Russell Midcap Index gaining more than 17%.

With Financials posting stellar returns and Technology stocks lagging, value stocks handily outperformed growth across the market-capitalization spectrum (as represented by the Russell indices) for both the quarter and 2012. Indeed, among small-caps, the Fund’s Russell 2000 Value Index benchmark outpaced its small-cap growth index rival for the first time in three years.

High-beta (volatility) stocks fueled the fourth quarter rally as risk aversion fell. The highest beta stocks (fifth quintile) in the benchmark outgained the lowest beta (first quintile) by more than four percentage points. High-beta stocks in the benchmark also led for all of 2012. Extended high-beta leadership this late in an economic recovery is unusual and, in our opinion, is a direct consequence of the Federal Reserve’s aggressive monetary policies. Fortunately, high-beta leadership has not coincided with low-quality outperformance, as higher-quality stocks led the benchmark during the first three quarters of the year before falling off during the fourth quarter rally. This is likely due to slowing profit growth, which encourages investors to bid up stocks with strong earnings metrics 

Active Managers Disappoint in 2012

Active small-value managers performed well during the fourth quarter in general, with 66% outperforming the benchmark, but they struggled in 2012 as just 35% outperformed. Since early 2011, we have commented on the unusually large percentage of small-value managers that have outperformed during recent periods of high-beta leadership—a trend that is counter to our long-term observations. Small-cap managers lagged in 2012, however, despite high-beta leadership. We believe the reason was the significant underperformance managers experienced during the second quarter, when low-beta stocks significantly outperformed and just 12% of small-value managers beat the benchmark. (Note: The second quarter was a particularly strong quarter for our low-volatility, high-quality style of investing.)

Active managers across the size and style spectrum have struggled against their benchmarks the past few years. Large-caps have been a particularly challenging segment, though small-caps have not performed well either. Small-cap managers posted their worst relative performance since 2008, and fewer than half of all active small-value managers have now outperformed since 2000.

As active managers have struggled, fund flows have shifted dramatically toward index funds and exchange-traded funds (ETFs) dedicated to U.S. stocks. Unfortunately, large flows into index funds and ETFs typically leads to higher equity correlations and a more challenging performance hurdle for active fundamental managers. Long-term, however, these flows result in crowded trades that can create inefficiencies for active managers to exploit.

It is difficult to say exactly why managers have struggled against the benchmark recently.  Certainly, high equity correlations related to global macroeconomic events and strong ETF flows have been contributors. Within the small-cap space, value managers have suffered from outperformance in the Financials sector, particularly in real estate investment trusts (REITs)—where managers have generally been underweight.   

No REITs

The Fund underperformed the Russell 2000 Value during the quarter, and substantially underperformed for the year. As noted in previous commentaries, the most challenging phase of the market cycle for our style is the early, high-beta/low-quality stage, which we believe ended in February 2011. Since that time, the Portfolio has performed reasonably well in outperforming the benchmark. During this period, stock selection has been strong and volatility and turnover have remained consistently low. The biggest challenge by far has been the Financials sector, including the lack of any REITs in the portfolio.

The Fund does not invest in REITs, as we take a more institutional approach that treats real estate as a separate asset class. Historically, the lack of REIT exposure has had a negligible impact on the relative performance of the strategy. The recent, extraordinarily low interest-rate environment, however, has fueled strong REIT performance resulting in a significant negative impact on relative performance for the year. REITs gained a stunning 27% in 2012, accounting for roughly about half of the portfolio’s underperformance in the Financials sector. If yields on U.S. government bonds should rise, as they have in the beginning of 2013, REITs are likely to underperform given the strong correlation between the two asset classes.

The remaining underperformance in Financials was largely the result of limited (and more conservative) exposure to Banks and Thrifts. Banks have been an underperforming sector in the portfolio for much of the recovery as the more leveraged, and lower-quality, institutions have bounced back sharply from the financial collapse of 2008. We continue to see few opportunities in the commercial bank and thrift industries that meet our investment criteria, preferring instead more transparent and less-volatile investments.

Poor stock selection within Energy, including two of the Fund’s five biggest individual detractors, hurt fourth quarter returns. Despite being of the better performing sectors for the Fund historically, smaller, event-driven investments in Energy have lagged the benchmark during the past two years. Oil and gas exploration/production firms Miller Energy Resources and Endeavor International each suffered from company specific issues.

Miller faced an unexpected temporary shutdown on an important producing oil well and missed management’s stated timetable to restore another gas well, while Endeavor failed to close two previously announced acquisitions of attractive North Sea assets. Miller possesses valuable offshore, onshore, and midstream assets but has a limited number of them, which increases the need for strong operational execution on each well. Despite the setbacks, the management team has a record of increasing production each year and we expect this trend to continue into 2013 with the recent purchase of a high-powered drilling rig. The operational setbacks at Endeavor combined with increased balance sheet leverage significantly reduced our margin for error and impaired our investment thesis. We sold most of the position just prior to year-end as the situation deteriorated.

The biggest individual detractor during the quarter, however, was Ascena Retail Group. Specialty apparel store operator Ascena (dressbarn, maurices, Lane Bryant, Catherines, and Justice) sold off when the company reported results that were above expectations, but management failed to raise full-year guidance. They were also conservative in their estimates for synergies from the Charming Shoppes acquisition completed in June. The company expects to reduce overhead during the next three years to improve profitability and solid sales and earnings growth. We took no action on the position.

Laggards for the full year 2012 were a mixed bag. Closeout retailer Big Lots lowered earnings expectations and guided toward its first negative annual comparisons in more than 10 years. Discretionary sales have been weak and management is working on various initiatives to address its merchandising issues. We eliminated the position in The Dolan Company, a provider of mortgage default processing and litigation services. The “robo-signing” scandal prompted mortgage servicers to delay processing foreclosures, which we believed would be temporary.  Non-foreclosure solutions like short sales appear to have successfully resolved many delinquent mortgages, however. Finally, energy services firm Tetra Technologies re-deployed legacy assets into offshore acquisitions that have disappointed thus far. Interestingly, multiple insiders made several open market share purchases in November. We trimmed the position to manage losses.

Strong Industrials

The sector with the highest contribution to relative return for both the fourth quarter and all of 2012 was Industrials. Stock selection drove performance led by the Fund’s top-performing stock for both periods, Geo Group. In 2012, Utilities and Technology also provided strong relative performance, with Utilities benefitting from a significant underweight position and Technology driven primarily by stock selection.

Shares of private prison operator Geo Group rallied when its Board of Directors announced the company would be converting into a REIT on January 1, 2013. To conform to the REIT rules of the Internal Revenue Code, the company paid a special dividend during the fourth quarter. The REIT conversion will improve the company’s tax efficiency, lower its cost of capital, and provide additional flexibility for growth opportunities. It should also increase the price investors give the stock as REITs are trading at a significant premium in the current low interest-rate environment. Although we do not typically invest in REITs, we do not feel compelled to sell a portfolio holding that converts into a REIT as long as our calculated discount-to-Absolute Value is compelling. Thus, we maintained the position in Geo during the quarter. 

Other top individual performers during the quarter were Insperity and Madison Square Garden. Insperity provides full-service human resources to small and medium-sized businesses, and reported strong results with higher gross profit due to lower benefit costs. In addition, the company announced a special dividend and a Dutch auction share repurchase plan that cost it little as its stock rallied past the high end of the tender offer. Media and sports conglomerate Madison Square Garden reported solid quarterly results driven by their content deal with Time Warner and increased sales associated with Phase I of the Garden renovation. It helped that the New York Knicks had a fantastic start to their 2012-2013 basketball season. The National Hockey League (NHL) also finally reached a tentative agreement with the players union to end its league-wide lockout, which should eliminate a short-term risk for the company. We trimmed the Fund’s position as the stock approached our assessed Absolute Value.

For the full year, the best contributors were generally the portfolio’s largest holdings, including fourth quarter standouts Geo Group and Madison Square Garden. DST Systems was another top holding with strong performance, largely attributable to its new CEO Stephen Hooley monetizing non-core assets and using the proceeds to pay down debt. DST is the largest third-party provider of mutual fund shareholder accounting services and remains a high conviction position.

Portfolio Positioning

Five new holdings were purchased and seven sold from the Fund during the quarter. Among the five new positions, two were in the Industrials sector (Layne Christensen and Kelly Services).  The new positions also tended toward the smaller end of the market-cap spectrum, with three having market-caps less than $600 million. Among the companies sold, four achieved our Absolute Value price targets and three were sold due to either accumulated losses and/or a negative change in our fundamental outlook for the firm. Overall, turnover for the year was among the lowest in the Fund’s history.

We have been comfortable with the portfolio’s positions and sector weights (excluding Financials) during the past two years and looking ahead do not foresee any major shifts in allocation. Industry and sector allocations are driven almost exclusively by company-specific opportunities. Perhaps one key difference from 2012 is that multinationals look a bit more attractive as estimates have been slashed along with their stock prices. We are also increasingly concerned about consumer stocks given tax increases and other fiscal headwinds, and will continue to monitor closely.

The largest new position added during the quarter was WMS Industries, one of three major manufacturers and distributors of slot machines and video lottery terminals. WMS has the scale and financial strength necessary to license attractive brands and navigate the labyrinth of regulations across hundreds of jurisdictions. The company is viewed as an innovator within the industry, a position that has led to significant share gains but also increased product risk. WMS struggled in 2011 to commercialize several new products because the complex nature of their latest technologies caused operational and regulatory delays, resulting in competitors regaining market share lost to the company in prior years. After gaining regulatory approvals and rationalizing its pipeline, the firm appears to be back on track.

We previously purchased WMS for the Fund in July 2011 and eliminated the position as a loser in July 2012. The stock subsequently dropped even lower. When we first purchased the stock, the leveraged balance sheets of casino operators were causing a delay in the replacement cycle.  We believed that the company’s strong balance sheet would help them weather that type of operating environment. We did not expect the regulatory delays that caused the market share losses. We repurchased WMS at an attractive discount to our previous sale with the belief that the company’s operating momentum is now on an upswing.  

Outlook

Reflecting on the past decade, it is typical for us to underestimate market returns in the early stages of the profit cycle, be on target in the middle, and then hit or miss in the late stages depending on how overextended valuations become. That has been the case with this current cycle as we underestimated the market recovery during the first two years and were largely in-sync the past two years. As mentioned in our last outlook, the recent slowdown in profit growth may indicate markets are entering the late stage of the cycle. Thus, you may rightfully sense that our conviction in our outlook for this year is a bit more tempered than that of the last two years.

Although our outlook is not a forecast, our perspective of the economic and market environment can affect our stock valuations and portfolio positioning. Valuations are the primary driver of our outlook. When stocks are cheap we get excited, when they are expensive we become more cautious. We would categorize current valuations as approaching full value. In other words, we are more cautious than excited, but not yet sounding the alarm. Employing our proprietary discount-to-Absolute Value measure, valuations were slightly below their historical peak at year-end, but with the market appreciating about 4% since year-end the indicator is now at 81%—uncomfortable territory for us. External measures show small-cap stocks being fairly valued, not grossly overvalued. That said, our proprietary measure has proven to be far more useful in predicting near- to intermediate-term corrections than any external measure we monitor. 

In addition, we believe consensus small-cap profit expectations are too high and likely to fall in the upcoming quarter, just as large-cap expectations have declined in recent months. The current expectation for Russell 2000 median profit growth is in excess of 17%. From our perspective, growth in the range of 8% to 12% for 2013 is more realistic. These factors may imply some level of near-term weakness for small-caps as profit expectations decline, but perhaps solid single-digit stock returns over the course of the coming year, though given that we are in the late stages of the economic recovery cycle our conviction is low.

Despite modest economic growth and firmer employment data, US Federal Reserve monetary policy remains hyper-aggressive. Chairman Bernanke has explicitly expressed his strong preference for higher asset values during periods of deflationary pressure and deleveraging.  He also recently declared the Fed would continue to provide extraordinary stimulus until unemployment reached 6.5%. While it is unlikely we will see a 6.5% headline unemployment figure in 2013, 7% is a possibility if growth accelerates. Furthermore, Fed officials Bullard and Plosser have stated that quantitative easing (QE) measures could end at 7%. Either way, we think the Fed continues to stimulate equity prices, but if unemployment drops more quickly than expected, the Fed is likely to begin to withdraw its more extraordinary stimulus measures sooner than the market currently anticipates. 

Fiscal policy is poised to be the major headwind as we look ahead, however. Higher taxes, lower federal spending, fewer economic incentives for business, and the upcoming debt ceiling debate collectively represent the greatest risk to our outlook. As recently reported by the New York Times, upper income earners now face the heaviest tax burden in more than 30 years. The debt ceiling debate promises to be highly contentious and, according to ISI Research, spending cuts are highly unlikely to produce the longer-term savings necessary to keep credit rating agencies from further downgrading U.S. debt. If there is one concern that should keep investors up at night, it is the chaos and policies currently emanating from our capitol.  

There is a profound and lingering nervousness among businesses, consumers, and investors hanging over this recovery. That is not uncommon following a major financial crisis, especially one resulting in massive credit deleveraging. Fortunately, stocks have thus far successfully climbed the wall of worry. With China averting a hard landing and European tail risks diminishing, we see investors facing fewer global macro concerns in 2013 than in 2012. This should be positive for fundamental stock pickers, as investor focus shifts away from the macro and toward the micro.

A significant improvement in CEO confidence would have an especially positive impact on equity markets and the economy. One possible outcome would be improved merger and acquisition (M&A) activity. M&A activity was reasonably healthy in 2012 (best since 2007), but remains constrained by a lack of CEO confidence to invest in future growth. From our perspective, with record levels of corporate cash on balance sheets and depressed secular growth, even a modest improvement in confidence could result in a surge in M&A activity.

Continued improvement in housing and unemployment are wildcards that have received a lot of attention and could provide upside support in 2013. We believe the biggest potential catalyst for stocks in 2013, however, is a true wildcard—a rout of the government bond market. The bubble in government bonds is so massive that a significant rise in rates has the potential to spark a massive outflow of liquidity into stocks, blowing away any otherwise rational equity valuation or forecast model. We are not predicting this to happen, but the potential is very real.

River Road Asset Management

16 January 2013

As of December 31, 2012, Ascena Retail Group comprised 2.08% of the portfolio’s assets, Miller Energy Resources – 0.75%, Endeavor International – 0.02%, Big Lots – 2.93%, The Dolan Company – 0.00%, Tetra Technologies – 0.34%, Geo Group – 4.28%, Insperity – 1.78%, Madison Square Garden – 2.88%, DST Systems – 3.75%, Layne Christianson – 0.57%, Kelly Services – 0.47%, and WMS Industries – 0.81%.

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, consider the Fund’s investment objectives, risks, charges, and expenses. Contact 800 992-8151 for a prospectus or summary prospectus containing this and other information. Please, read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC.

4th Quarter 2012

Mixed Fourth Quarter Amid Strong 2012

The fourth quarter provided a fitting end to what was a volatile, yet successful year for equity investors. Stocks traded modestly higher in October before experiencing a sharp, post-election decline. Surprisingly positive employment data later led to a reverse of the slump with stocks propelled by rising optimism for a resolution of the fiscal cliff. The final surge arrived on December 31, as news emerged that lawmakers had finally cobbled together the framework for a deal.

Small-cap stocks led for the quarter, as the Russell 2000 Index gained 1.85%, nearly two percentage points more than the large-cap oriented Russell 1000 and S&P 500 Indices. For 2012, large and small-cap stocks delivered equally robust returns, with all three indices  returning roughly 16%. Mid-caps were the best performing segment, with the Russell Midcap Index gaining more than 17%.  

Stock returns in the U.S. and abroad trounced other asset classes during the year, including fixed-income (Barclay’s Aggregate Bond Index) and commodities (S&P Goldman Sachs Commodity Index). Although Gold (Perpetual Futures Contract) trailed equities, the precious metal posted positive returns for a twelfth consecutive year—the longest winning streak since the U.S. abandoned the gold standard in 1968. The Fund trailed its Russell 2000 Value Index benchmark significantly during the fourth quarter and for the full year 2012. Cash averaged 51% of portfolio assets during the quarter and year, negatively affecting relative performance. The equity holdings in the portfolio also underperformed the benchmark during the quarter, but outperformed for the full year. 

Lagging Stocks 

The biggest individual stock detractors during the quarter were CSG Systems International, Pan American Silver, and Bill Barrett. Despite being a top contributor for the year, CSG Systems was the largest negative contributor during the quarter. CSG’s cable and satellite billing software business has historically generated attractive operating margins and strong free cash flow. Although management’s expectations for 2012 remain unchanged, operating margins declined during the third quarter due to planned increases in operating expenses. In addition to lower margins, we believe uncertainty surrounding contract renewals with Comcast and Time Warner may have contributed to the stock’s decline during the quarter. The Fund continued to hold CSG Systems as its market value remained at a discount to our calculated valuation.

Pan American Silver is the second-largest primary silver mining company in the world with 350 million ounces of silver reserves and seven mines in production. Although annual production and cash cost estimates remain unchanged for 2012, silver prices declined by approximately 12% during the quarter. In addition, rising cash costs and continuing political uncertainty in South America remain a concern. While we acknowledge the operating risks of the business, we are comforted by the firm’s strong balance sheet and significant cash and net working capital.    

Bill Barrett is an exploration and production company focused in the Rockies region. Although oil production growth continued to be strong, lower realized natural gas prices and an unsuccessful exploratory well weighed on quarterly results. The company sold natural gas assets during the quarter that will reduce year-end reserves in 2012 and lower production in 2013. We continue to hold the stock, but at a reduced position size due to the Fund’s purchase of additional energy names with less financial risk.   

The bottom three contributors for the year were Bill Barrett, Contango Oil & Gas, and Pan American Silver. Contango, an exploration and production company focused in the Gulf of Mexico, performed poorly due to low natural gas prices and two unsuccessful drilling attempts on offshore wells.                 

Winners

The largest contributor during the fourth quarter was Covance, a leading contract research organization. Although the company is experiencing strong clinical trial performance, its Central Lab business is stagnant and its early-stage segment is suffering from overcapacity. Management addressed the overcapacity in its early-stage business by consolidating facilities earlier in the year. Covance announced during the quarter, however, that the expected cost savings from capacity rationalizations were materializing earlier than expected. We sold the Fund’s position as the stock increased above our valuation target. 

Two other top performers during the quarter were FLIR Systems and Sykes Enterprises. FLIR is the market-leading provider of infrared technology, servicing both the commercial and government markets. The company’s products detect infrared radiation and convert it into an electronic signal that is then processed into a video signal. Although sales and earnings declined during the period, an improvement in backlog supported management’s belief that earnings will increase during the company’s fiscal fourth quarter. We reduced the position slightly due to its appreciation and reduced discount to our calculated valuation.           

Sykes is a leading outsourced call center operator that has struggled the past 18 months. However, the firm reported slightly better-than-expected sales for the third quarter and increased its full year revenue guidance. Furthermore, capacity utilization improved sequentially as the company began to benefit from ongoing facility rationalizations in all of its geographical segments. The firm completed a sizeable acquisition during the quarter but remains debt free net of cash holdings. We maintained the position in the portfolio as the stock continued to trade  at a discount to our valuation estimate.

The portfolio’s top-three contributors for the year were CSG Systems International, Potlatch, and American Greetings. Previously mentioned CSG Systems reported improved results in both its core business and recently acquired subsidiary during the year, despite its third quarter margin decline. As the fourth-largest timber real estate investment trust (REIT), Potlatch’s shares responded favorably to improved housing starts in the second half of 2012 and the anticipation of a recovering housing market. Greeting card manufacturer American Greetings received a buy-out offer from management in late September that caused its shares to appreciate.

Portfolio Positioning

Cash levels ended the year at 51% of assets, practically unchanged from last quarter. Overall, the fourth quarter was another period marked by higher small-cap prices and limited opportunity even though volatility increased in November. Turnover remained elevated as we rotated out of stocks reaching our valuation estimates and into businesses we believe were selling at discounts. We also increased the portfolio’s rotation out of holdings with higher levels of financial risk. We expect cash levels to remain high given the difficulty we are having finding a sufficient number of attractively priced small-cap stocks.

The largest new position added during the quarter was Total System Services. TSS is the market leading processor of credit card transactions in the United States, with a significant portion of its revenues generated under long-term contracts, providing it with predictable revenue. As an established market leader with recurring revenues, the company generates abundant free cash flow, maintains a strong balance sheet, and meets our definition of a high-quality business.

We had previously sold TSS from the portfolio in early 2012, after it reached our valuation target. A slowdown in earnings growth during the fourth quarter allowed us to repurchase its shares for the Fund below our valuation estimate. Although the company has grown along with the electronic payment industry, earnings growth declined due to a delay in new account conversions and pricing concessions on contracts. We expect earnings growth to remain subdued for the next three quarters as TSS adjusts to these concessions. Nevertheless, we expect the firm to continue to generate meaningful free cash flow during this period and earnings growth to improve in the second half of 2013 as new accounts activate. In conclusion, we think TSS is a high-quality market leader with attractive financial metrics.           

Outlook

The operating environment for the majority of the small-cap businesses we follow remains stagnant. During the quarter, we noticed an increase in dispersion of operating results between sectors. Housing activity continues to rebound but remains below historical averages. Growth in manufacturing and businesses with international exposure, such as technology, has moderated and, in some cases, turned negative. Consumer businesses have reported mixed results with inconsistent trends. The growth in energy infrastructure spending remains positive but has slowed year-over-year. For most industries, regulation and fiscal policy uncertainty increased after the U.S. elections. Most companies remain reluctant to invest heavily in their core businesses while macroeconomic uncertainties persist. Despite a cautious tone permeating from most quarterly reports and conference calls, profits and margins remained elevated on average.  Slowing revenue growth is causing profits to plateau, however, with future trends in earnings unclear. The majority of companies providing outlooks for 2013 are expecting operating results similar to 2012.            

Many investors continued to focus on the U.S. Government’s effort to maintain its fiscal deficit, which reached $1.1 trillion in 2012. As noted in last quarter’s commentary, we believe the boom in government spending and growth in government debt is benefiting the current profit cycle. We continue to question the current cycle’s sustainability without the assistance of trillion dollar fiscal deficits. In November, the Congressional Budget Office (CBO) estimated that the U.S. economy would fall into recession in 2013 if a budget agreement was not met. Assuming the U.S. Government is unable to sustain its fiscal deficits, we believe the probability of a recession and lower corporate profits will increase. We view recessions as a natural part of the economic cycle and believe we have appropriately considered the inevitable return of the next economic contraction in our valuation estimates.  

With small-cap stocks ending the year near record highs, investors do not appear overly concerned about the implications of a recession. In addition to reducing the perceived risk of an economic downturn, we believe the U.S. Government, through its use of extraordinary monetary and fiscal policies, has significantly reduced concern for other forms of risk in a variety of asset classes. In our opinion, the belief that future adverse developments in the economy or asset prices will be met with further government intervention has increased investors’ willingness to assume risk. Although we acknowledge that future government intervention is possible, we do not view it as an adequate form of risk control. We do not assume that politicians or central bankers have the ability to extend economic growth and the current profit cycle indefinitely. Moreover, we are not comforted or persuaded by the Federal Reserve’s quantitative easing or the perception of a “Bernanke Put.” We believe it is our fiduciary duty, not our government’s, to attempt to protect Fund shareholders from the risk of permanent capital loss. 

We think that the most effective form of risk control is investment discipline. Our investment discipline relies heavily on our willingness and ability to remain patient and wait for price. Specifically, the price of a high-quality small-cap business that provides investors with an adequate return relative to risk assumed. We believe an accurate valuation is essential in determining what price to pay for a small-cap business. We attempt to improve the accuracy of our valuations by using the following assumptions in our discounted free cash flow model: a normalized free cash flow estimate, a discount rate that reflects the underlying risk of the business, and a slow to moderate growth rate that considers the mature nature of many of the businesses we review for purchase. Using these variables, our valuations continue to indicate that small-cap stocks are unfavorably priced relative to their risk. When prices do not properly reflect risk, we have the flexibility to hold cash and wait for our opportunity set to improve.  

In addition to deciding if price appropriately compensates us for risk, we view risk from an operating and financial perspective. We define operating risk as the degree of uncertainty of a business’s free cash flow and financial risk as the strength of a business’s balance sheet. When profits are in decline and cash flows are less certain (often during recessions), operating risk is typically priced attractively. When credit spreads are wide and there is concern that companies will have difficulty issuing debt, financial risk is often priced attractively. Currently, with profits high and yields on corporate debt low, we do not believe it is an opportune time to assume meaningful exposure to operating or financial risk. Although we are attempting to limit exposure to both forms of risk, we believe current credit market conditions provide an opportune time to reduce financial risk within the portfolio.    

The environment in the credit market has become exceptionally careless, in our opinion, with limited concern for interest-rate or credit risk. Investors in U.S. Treasuries are accepting considerable interest-rate risk for yields near or below the rate of inflation. Corporate bond prices also appear inflated as investors willingly take on credit risk for meager yields. Yields on investment grade bonds hit an all-time low of 2.73% in November; junk bond yields also fell to a record low with the yield on the Barclays US High-Yield Index falling to 6.07% in December.  Despite record low yields, issuers of bonds are having little difficulty finding buyers. In fact, U.S. corporate bond sales reached a record $1.53 trillion in 2012. According to a recent Bloomberg article, private investors soaked up a portion of this supply as flows into bond mutual funds reached $472 billion in 2012. In addition to increased demand from private investors, the Federal Reserve continues to be a strong source of demand for bonds through its purchases of mortgage backed securities and Treasuries, and is now the largest owner of Treasuries with $1.66 trillion as of December (ahead of China’s $1.16 trillion).  

As a result of ultra-loose credit conditions, we believe it is inappropriate to assume above average levels of financial risk at this time. The equity prices of many small-cap companies holding debt are trading as if they are not exposed to financial leverage. Moreover, many of these companies are generating earnings above levels that would occur in a more normalized interest-rate and credit environment. Given our belief that investors are not being adequately compensated for assuming financial risk, we recently increased our effort to improve the financial quality of the portfolio. At the end of the quarter, the portfolio’s weighted average debt-to-capital ratio was 31.6% versus 41.4% for the Russell 2000 Value Index. The portfolio’s debt coverage ratio (annual cash flow available to meet annual interest and principal payments on debt) was 8.5x versus 4.2x for the benchmark. Assuming that credit markets remain favorable to the sellers of financial risk, we intend to further improve the average financial strength of the businesses in the portfolio. We are also focusing newly committed capital to holdings with strong balance sheets, such as the Fund’s largest new purchase this quarter, TSS, which has no net debt.   

In conclusion, in addition to holding above average cash levels, we are attempting to limit operating and financial risk within the equity portfolio, with particular emphasis on reducing financial risk. Although we are aware that our defensive posture may expose the portfolio to the significant opportunity cost, we believe the pricing of risk will eventually improve and investors will be adequately compensated for remaining patient. Given our current positioning, we would expect to lag the small-cap market during an extended period of rising small cap prices, as was the case in 2012. We could also be wrong in our assessment of operating and financial risk and our equity holdings may underperform in an environment where investors aggressively seek both forms of risk. While we acknowledge the risk of relative underperformance, as a strategy that attempts to achieve attractive absolute returns over a market cycle, we believe the Portfolio is properly positioned and look forward to an altering investment landscape. 

River Road Asset Management

16 January 2013

As of December 31, 2012, CSG Systems International comprised 1.90% of the portfolio's assets, Pan American Silver – 3.80%, Bill Barrett – 0.70%, Contango Oil & Gas – 1.13%, Covance – 0.00%, FLIR Systems – 2.53%, Sykes Enterprises – 3.19%, Potlatch – 0.00%, American Greetings – 1.37%, and Total System Services – 2.51%.

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, consider the Fund’s investment objectives, risks, charges, and expenses. Contact 800 992-8151 for a prospectus or summary prospectus containing this and other information. Please, read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC.

4th Quarter 2012

The fourth quarter provided a fitting end to what was a volatile, yet successful year for equity investors. Stocks traveled almost 8% between their highs and lows during the quarter, but ended the period virtually flat. Several positive catalysts supported equity returns for the full year.  Among the strongest were a significant improvement in the housing market, an extension of the Federal Reserve’s hyper-aggressive monetary policies, and the extraordinary actions by the European Central Bank, which prevented the most severe downside scenarios related to the European debt crisis. New leadership and a re-acceleration of growth allayed fears of a hard landing in China and the associated global impact.

Both long-short mutual funds and private hedge funds, on average, continued to underperform the broader equity market in 2012. We suspect that the increasing impact of global macroeconomic events has made managing net equity exposure particularly difficult in recent years. Large flows into index funds and exchange-trade funds (ETFs) have also likely driven increasing equity correlations.

Strong Long Performance

Relative to a market (represented by the Fund’s Russell 3000 Index benchmark) that barely budged during the quarter, the portfolio outperformed for two primary reasons. First, we added value by effectively managing net long equity exposure. The market declined to its low on November 16, and we gradually increased net long equity exposure from 48% to 65% (exposure peaked the same day the market troughed) by adding to more attractive long positions and trimming less attractive short positions. We designed our “normal” net long equity exposure range (50% to 70%) to be wide enough to make a meaningful contribution for markets like that seen during the quarter, which fluctuated widely between its high and low, but ended near the same place it started. 

Second, strong stock selection in the long portfolio offset weaker performance from the short portion of portfolio. We had identified three opportunities in our third quarter commentary—Consumer Discretionary stocks, economically-sensitive stocks, and ADT, the largest new position in the portfolio. ADT quickly worked out and was the largest positive contributor during the fourth quarter. Four of the quarter’s top-five contributors were economically sensitive stocks.

The performance of the Fund’s Consumer Discretionary holdings highlighted the importance of expectations. More than 90% of the portfolio’s long positions in Consumer Discretionary were positive contributors, benefiting from sector strength and low expectations. Conversely, each of the top five individual short contributors were also from the Consumer Discretionary sector, underscoring that shorting stocks with unrealistic expectations can be profitable despite even in the face of strong sector performance.

In the short portfolio, we poorly timed the initiation of a basket of iron ore and metallurgical coal short positions. This basket accounted for three of the Fund’s top-10 losing short positions during the quarter. An uptick in Chinese infrastructure spending and an extremely cold Chinese winter limited iron ore supply, resulting in iron ore prices nearly doubling from their September lows. Still, we think our fundamental short thesis for the group remains intact long-term. The volatility-driven rally also pushed some the portfolio’s more leveraged short positions higher, dragging down returns.

Long Winners

The three holdings with the highest contribution to returns during the quarter were ADT (long), General Motors (long), and BlackRock (long). Home security firm ADT was quickly “discovered” after being spun off from Tyco by activist investor Corvex Management. The company also announced its intention to repurchase $2 billion worth of stock (more than 20% of its market cap) over the next three years and initiate a quarterly dividend.

General Motors is the largest auto manufacturer in the U.S. with nearly a 20% market share.  Pre-bankruptcy, the “old” GM broke even during periods of average automobile demand (historically between 15 and 19 million cars), earned a profit at the peak, and burned through massive sums of cash at the trough (less than 10 million cars). Having dramatically reduced debt and labor costs through bankruptcy, the “new” GM emerged as a more efficient global competitor that should be profitable at the bottom of the demand cycle in its core North American market. Its most pressing overhang was addressed during the quarter when the U.S. government announced its intent to sell back 40% of its shares to the company immediately and its remaining shares in the open market over the following 12 to 15 months.

Asset manager BlackRock rallied as lingering market concerns about the possibility of Chairman and CEO Larry Fink departing for the U.S. Treasury abated. We appreciate the asset-light economics of the money management business and admire the firm’s evolution into the most diversified asset manager in a volatile industry. Sticky institutional customers that account for more than 80% of total assets provide further stability, while BlackRock’s ownership of ETF provider iShares represents a primary growth driver. 

For the full year, top contributors included Madison Square Garden (long), Big Lots (long), and SEI Investments (long). Long-time holding, Madison Square Garden posted strong results as both the New York Knicks and New York Rangers made the playoffs, the facility renovation progressed smoothly, and rising affiliate fees and ticket prices boosted bottom-line results. Despite the stock dropping more than 25% during the year, closeout retailer Big Lots was a top contributor as we traded the position well. SEI Investments, a provider of middle- and back-office functions for the investment industry, made steady progress throughout the year by adding Global Wealth Platform clients, improving private banking margins, and repurchasing shares at a discount to our assessed Absolute Value.

Quarter/Year Laggards

Holdings with the lowest contribution to portfolio returns during the quarter were Western Union (long), MSCI (long), and Devon Energy (long). Western Union lowered guidance for fiscal year 2012 and provided a disappointing outlook for 2013 in late October that sank the stock. A combination of agent defections in Mexico, increased competition from traditional competitors, and new entrants required the company to cut prices in several key channels, initiate a cost savings plan, and accelerate investments in the business. We overestimated the power and sustainability of the firm’s network, while growing competitive issues suggest the near-to-medium term future may not resemble the past. Our loss of fundamental conviction prompted the elimination of the position from the portfolio. 

Investment index provider MSCI dropped on news that Vanguard would transition 22 ETFs, comprising $131 billion in assets, from MSCI benchmarks to another provider in search of lower fees. The news fueled worries that other large clients might follow suit and/or pricing pressure would ultimately affect MSCI’s core business. We were less troubled about the core subscription business as we were management’s unwillingness to consider share repurchases at attractive prices after the stock decline. Confirming our initial concern, management noted its intention to pursue growth over share repurchases even at depressed levels. Given this frustration and that MSCI accounted for nearly 10% of the portfolio’s unrealized losses, we eliminated the position. Subsequently, ValueAct Capital, a leading activist investor, established a 5% position in MSCI and the company announced a major share repurchase plan (comprising 8% of its market capitalization) in December. The improvement in shareholder orientation has us eager to consider the stock again. However, we typically avoid analyzing a losing stock for three months after a sale to ensure a fresh perspective when we revisit the position. 

We think Devon Energy has sensibly battled the perfect storm of falling natural gas/natural gas liquid prices and widening spreads (the discount it receives from quoted benchmark prices) over the last few years. The company completed two joint ventures with foreign production companies in 2012 to lighten the financial burden of developing the firm’s massive undeveloped resources. The company has raised its dividend annually and repurchased approximately 20% of its shares since 2004. Despite it being one of the Fund’s biggest losers during the quarter, we took no action as there was no change in our fundamental conviction and the stock remained cheap by our work at year-end. 

For 2012, each of the Fund’s major detractors exposed the primary weakness with our risk control framework—stocks that “gap” the wrong way. It is easier to contain gradual losers than those that move violently against us. The three largest losers gapped an average of 34% on just one trading day. There is no single, foolproof method to deal with such stocks, so we rely on several tools to minimize “gap” risk, starting with solid fundamental analysis. Holdings with more operational and/or financial risk are more likely to gap, so they typically encompass smaller position sizes. Finally, we do not average down into losing positions. 

Apart from a hedge in the SPDR S&P 500 ETF, the Fund’s three worst performers for the year were AOL (short), Western Union (long), and Hill-Rom Holdings (long). AOL appeared to be the perfect “value trap” (a stock that appears cheap but can continue to fall because of a deteriorating business model or fundamentals), a source of our favorite short opportunities. Shareholder activism and the monetization of its patent portfolio, however, drove the stock past our pre-determined stop-loss price. The stock proceeded to rally another 73% after our stop-loss discipline forced us to close the short position, avoiding further losses. This served as an example of how we would rather stop losing money than accept the risk of waiting to be proven right. Hospital bed manufacturer Hill-Rom chose to pursue questionable acquisitions rather than buy back stock at bargain prices during the year. If a management team prefers to buy presumably “better” companies than increase its stake in its own core business, we thought it made sense to follow suit—and sold the position.

Portfolio Positioning

The Portfolio entered the fourth quarter with its net long equity exposure below our normal range (50% to 70%) at 44%. Our proactive discount-to-Absolute Value indicator for the portfolio flashed “extremely overvalued” the same day that Chairman Bernanke announced quantitative easing (QE) “infinity” during the third quarter. That announcement also established the market’s high for 2012 and prepared the portfolio for the market’s nearly 8% sell-off through mid-November. We subsequently increased net long equity exposure in the Fund more than 20 percentage points through mid-November as the market declined and long opportunities became more attractive.

One of our primary drivers in positioning the portfolio is to reduce volatility through management of its net long equity exposure. The Fund was, on average, only 55% exposed to the equities during the fourth quarter as valuations remained extended for most of the period. Our calculated discount-to-Absolute Value indicator averaged 76% (relatively close to our “extremely overvalued” level at 80%). The long portfolio ended the year with close to 20% in cash, and we believe was well positioned in the event of a market correction.

The opportunities that we discovered in the long portfolio throughout the year—riskier positions trading at a discount—remained available at year-end. We added to each of the Fund’s long Energy holdings as that sector lagged. The portfolio holds a diverse group of Energy stocks, each with an investment grade balance sheet that we think is essential to long-term value creation in a volatile industry.

We typically limit the percentage of the long portfolio we devote to riskier stocks. For example, we set specific caps for retailers, commodity-based stocks, and special situations. The long portfolio seeks to present a balance between more opportunistic (and riskier) positions, such as the current energy bet, and favorite core holdings (steady and predictable) that comprise larger position sizes. Each of the top-five long holdings at year-end are what we consider to be consistent, repeatable, and recurring business models.

Although the broader market was essentially flat during the fourth quarter, we added to the Fund’s individual short portfolio as high-beta (volatility) and “crowded” stocks led the market, pushing some challenged business models to what we considered over-valued prices. The short portfolio remained defensively positioned as of year-end, with a diversified list of 36 holdings positioned and an average position size of 0.64%. 

The largest new position added during the quarter was DirectTV (long), one of the world’s largest pay-TV companies and the largest satellite television provider in the United States.

The domestic satellite market is a duopoly between DirectTV and DISH Network, with DirectTV relying on customer service and differentiated content offering to become the second largest multichannel video distributor in the U.S. Its domestic business is now focused on maintaining the subscriber base and maximizing cash flow, with growth coming from its Latin American segment. The company has repurchased 55% of its shares outstanding since 2005, and we expect more share buybacks to come.

The two biggest risks facing the company remain cable’s “triple play” threat (TV, internet, phone) and rising programming (particularly sports) costs. Triple play still has yet to catch on in five years, evident by DirecTV posting subscriber growth during the financial crisis, unlike its cable competition. The firm has been able to offset rising programming costs through effective cost controls and raising prices. Thus, we think the stock represents an attractive opportunity.

Annual Review and Objective Update

We were slightly disappointed with the Fund’s return in 2012. Although we outperformed a majority of our peers, we had hoped to participate to a greater degree in a strongly rising market such as that seen in 2012. The portfolio’s relatively low average net long equity exposure of 53% during the year overwhelmed solid stock selection in the long portfolio. We were pleased that the long portfolio outperformed the short portfolio, however, in a market driven by high-volatility stocks.

Businesses with steady and predictable cash flows trading at discount prices were in short supply during the year. Despite maintaining the Fund’s net long equity exposure at the lower end of our “normal” range, it was significantly higher than the typical hedge fund. According to Bank of America Merrill Lynch, the average hedge fund kept its net market exposure between 25% and 35% during 2012. We designed our strategy to participate in bull markets like 2012 by establishing our normal net long equity exposure range relatively high at 50% to 70% (the average hedge fund net market exposure has been approximately 40% according to Bank of America). 

Protecting capital was not difficult in 2012. The market never had a daily close below the closing level of 2011, which has happened only the seven times before since 1928 (the last occurrence was in 1979). The market’s biggest drawdown (peak-to-trough decline) during the year was 10%, in-line with the market’s median calendar-year drawdown since 1950. The portfolio’s maximum drawdown was only 4.9%.

We believe the primary difference between successful and unsuccessful asset managers is that successful managers make small mistakes instead of big mistakes. We leverage a robust set of risk controls—not averaging down on target positions, setting stop-losses, monitoring unrealized losses at the portfolio level, and avoiding momentum in the short portfolio—to help limit the damage individual positions can cause the portfolio. Given the significant market gains in 2012, it’s not surprising that the short portfolio remained the focus of our risk controls at year end. We actively reduced the momentum of the short portfolio during the quarter by trimming higher momentum short positions. If the market grinds even higher in 2013, we expect more risk control action will be necessary as several short positions approached our stop-loss limits near year-end. 

It may be easy for investors to grow complacent after such a smooth ride in 2012, but we designed the strategy for the inevitable bumps in the road. We do not know if sluggish earnings growth, rising interest rates, the debt ceiling debate, or other factors will force the market to consider risk in 2013. We do believe that both our proactive discount-to-Absolute Value indicator and reactive Drawdown Plan are proven tools to help protect capital in challenging environments. Like many of the great money managers of the past—Jesse Livermore, Bernard Baruch, Gerald Loeb, Roy Neuberger—we are uncomfortable losing more than 10% of capital, and thus, have created capital protection tools with potential downside mitigation in mind.  

River Road Asset Management

16 January 2013

As of December 31, 2012, ADT comprised 2.52% of the portfolio's assets, General Motors – 2.70%, BlackRock – 0.00%, Madison Square Garden – 0.00%, Big Lots – 1.25%, SEI Investments – 0.00%, Western Union – 0.00%, MSCI – 0.00%, Devon Energy – 3.00%, SPDR S&P 500 – 0.00%, AOL – 0.00%, Hill-Rom Holdings – 0.00%, and DirecTV – 3.80%.

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

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

Before investing, consider the Fund’s investment objectives, risks, charges, and expenses. Contact 800 992-8151 for a prospectus or summary prospectus containing this and other information. Please, read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC.

4th Quarter 2012

The Fund declined slightly during the last quarter of 2012, trailing the broad market S&P 500 Index by less than a percentage point. As has been the case for most of the year, owning put options to guard against potential market downdrafts and selling call options that provide cash premiums but also cap the upside of the underlying equity holding were the primary drivers of underperformance. Indeed, the Fund’s underlying portfolio of dividend-paying, large-cap value oriented stocks actually posted a gain during the quarter. Most of those gains were a function of stock selection, with holdings in Technology, Industrials, and Consumer Staples providing the biggest boost. Stocks in the Utilities sector represented the bulk of the laggards from the equity segment.

We eliminated positions in Conagra, Eli Lilly, and Lowe’s from the Fund during the fourth quarter. All three had appreciated to a point where, mathematically, there was no economic value left because each was trading well above the strike prices of the call options that we had sold. Essentially those positions came to represent a proxy for cash. The proceeds of the sales were used to purchase what we considered more attractive opportunities in AT&T, Ford Motor, Norfolk Southern, Stryker, and Zimmer Holdings. Stryker and Zimmer are smaller holdings, and, taken together, represent the portfolio substitutes for Eli Lilly. The other three are closer to being full positions. Ford recently announced a doubling of its quarterly dividend, validating the fundamental premise for our decision to add it to the portfolio.

With these portfolio changes we have been able to add a modest amount of additional upside potential to the overall portfolio by substituting out-of-the money call option positions on the new holdings for the in-the-money calls on the replaced names. The combined cap-weighted yield of the new positions is roughly equal to that of the stocks sold, thus the portfolio lost nothing on a dividend-income basis but gained additional option premium and more appreciation potential as a result. 

Ron Altman
Portfolio Manager                            

As of December 31, 2012, AT&T comprised 3.04% of the portfolio's assets, Ford Motor – 1.75%, Norfolk Southern – 2.23%, Stryker – 2.47%, and Zimmer Holdings – 0.80%.

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, consider the Fund’s investment objectives, risks, charges, and expenses. Contact 800 992-8151 for a prospectus or summary prospectus containing this and other information. Please, read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC.

4th Quarter 2012

Annual Review

The Fund underperformed its Russell 1000 Value Index benchmark in 2012. After having a robust start to the year with a strong first quarter, we watched that lead gradually whittled down to a point during the fourth quarter where the portfolio trailed the index. As we often say, “We cannot predict the timing, duration or magnitude of outperformance. All we can do is attempt to position the portfolio to achieve outperformance.”

The performance of the index was relatively narrow, with only four sectors—Consumer Discretionary, Financials, Industrials, and Telecom—outperforming the overall index. Each of these sectors, absent Industrials, had a more domestic orientation than the broader index, which coincided with concerns regarding non-U.S. political and economic issues. The Fund was overweight Consumer Discretionary, neutral in Industrials, and significantly underweight Financials and Telecom due to valuation issues. The result was that we did not look quite like the market in terms of sector representation, and sector allocation had a negative overall effect. Nevertheless, the portfolio was able to keep pace with the index for much of the year despite looking a bit different.

The sectors within the Fund with the lowest level of contribution were Consumer Discretionary, Consumer Staples, and Materials. Collectively, Consumer Discretionary was out of step as all five of the portfolio’s holdings in the sector had lower returns than the benchmark sector. Just as location matters in real estate, timing matters in investing. In similar fashion, Consumer Staples holdings also had lackluster returns relative to the index sector. Finally, a holding in mining company Cliffs Natural Resources hurt returns in Materials, with the stock declining more than 35% during the year on concerns about the effect of steel demand in China on iron ore prices.

Other notable detractors from performance included Herbalife and Endo Health Solutions. Herbalife was targeted twice during the year by noted short-sellers (investors betting on a stock decline rather than a rise) for a business model the short-sellers have deemed a pyramid scheme that is doomed to fail despite 32 years of sustained growth and success. Our current analysis suggests it is a sound business and we have maintained the Fund’s position. Endo Health Solutions is facing generic drug competition at a time when it is trying to extend the patent life of a key drug focused on pain management. Of these stocks, including Cliffs Natural Resources, all remain in the portfolio as we perceive the issues facing the companies as temporary.

Holdings in five out of 10 sectors in the Fund outperformed their respective sector and/or the overall benchmark during the year. The three sectors with the highest contribution were Technology, Healthcare, and Energy. Strong returns from Apple and Western Digital aided performance in Technology, while Gilead Sciences and Express Scripts provided the boost to Healthcare. Biopharmaceutical company Gilead is seeing greater efficacy and success with its focus on infectious disease, including the Hepatitis C market coupled with its HIV franchise.
Refiners led Energy to solid returns, with HollyFrontier more than doubling during the course of the Fund’s holding period. The company benefited from solid crack spread margins for refined products. It is interesting that as of last year’s Annual Review, HollyFrontier was the third worst contributor in the portfolio. For 2012, it yielded the best return in the portfolio and the third highest contribution to performance. As we like to reiterate, we cannot control the timing, duration or magnitude of outperformance, all we can do is to attempt to position ourselves to achieve it. Patience is a part of that positioning.

Fourth Quarter Review

The portfolio underperformed in four out of 10 sectors versus their respective benchmark sector and/or the index overall during the fourth quarter of 2012. Sector allocation was positive and stock selection was negative. Performance for the Russell 1000 Value had a distinctly pro-cyclical growth tilt, as Consumer Discretionary, Financials, Technology, Materials, and Industrials were the five sectors that outperformed. Unfortunately, while the Fund’s sector exposure proved timely, with overweight stakes in Consumer Discretionary, Technology, Materials, and Industrials, stock selection proved less profitable.

The sectors with the lowest level of contribution were Consumer Discretionary, Consumer Staples, and Technology. Consumer Discretionary fell victim to retail exposure that had previously been a bastion of strength, as positions in discount branded retailers such as TJX Companies and Ross Stores disappointed as greater domestic consumer confidence seemed to put the discount area under pressure. In addition, weaker near-term fundamentals at for-profit educator Apollo Group caused that stock to decline significantly. Consumer Staples suffered as four out of five holdings declined, led by a sharp drop in Herbalife.

The decline in Technology led us to coin a new cliché. Instead of “an apple a day will keep the doctor away” concerns regarding Apple’s ability to generate new and exciting products had us wondering if “an Apple a day keeps the alpha away.” (Alpha is a measure of risk-adjusted return.) Apple is one of the most profitable companies in the world and the success has caused skeptics to raise questions about the sustainability of those profits. The questioning is quite similar to concerns raised when Tim Cook took over for Steve Jobs. Thus far, Cook has proven to be quite capable, and we are sticking with the stock.

The three sectors with the highest contribution to returns for the quarter were Industrials, Energy, and Healthcare. Four out of five holdings in the portfolio outperformed in the Industrials sector, led by Copa Holdings. Air passenger and cargo operator Copa benefitted from strong growth in Latin America as well as expansion into North American flight routes. The Fund’s Energy holdings yielded a positive return versus a negative one for the benchmark sector with Patterson UTI rising strongly along with the continued performance of the previously mentioned refining holdings. Double-digit returns from Gilead Sciences and Health Management Associates led the gains in the Healthcare sector.

Portfolio Positioning

Stocks eliminated due to sector adjustments and/or valuation/fundamental issues were Express Scripts, Kronos, and Superior Energy. These changes were primarily driven by the dynamic interrelationships between sectors as we positioned the portfolio to exploit value creating opportunities. As we share regarding our investment philosophy, “We have a core process but no core holdings.” The higher level of stocks eliminated led to new positions in Ultra Petroleum, Southern Copper, Baxter International, and United Therapeutics.

The result of this and related activity during the quarter was that we increased the portfolio’s exposure to Consumer Discretionary and Materials, and decreased weightings to Energy, Consumer Staples, and Industrials. As a result, the portfolio ended the quarter overweight Energy, Consumer Discretionary, Consumer Staples, Technology, Industrials and Materials, and significantly underweight Utilities, Financials, Telecom, and Healthcare.
First Quarter OutlookThe Fund was fortunate to finish the year only moderately behind the benchmark. It was fortunate not because of the portfolio structure but because of the frantic nature of the market. Sound business fundamentals did not seem to matter as much as a Chicken Little approach to looking at the macroeconomic and political issues that dominated the headlines during the year, compressing valuations in some sectors as well as inflating valuations in others.

Thus, we enter 2013 with an eye towards where opportunity might lie if we are willing to invest courageously instead of cowardly. Courageous investing does not mean a foolhardy, cavalier approach with a disregard to prudence. Courageous investing is looking at the Chicken Little perspective and simply deciding whether this is the correct conclusion. To some degree, I believe that this is what shareholders actually pay us to do. We are expected to use our collective education, experience, and exposure to do the difficult things that might overwhelm the average investor, resulting in sub-optimal decisions. Instead, despite the difficulty of moving ahead and/or how uncomfortable we may feel, we are expected to press on to optimize the return opportunity for shareholders of the Fund.

In pressing forward for 2013, we have come off a solid year of absolute returns. The challenge exists in determining appropriate positions as we move forward. The portfolio is currently positioned for continued growth in the U.S. economy, the resumption of growth in Europe, and a continuation of growth in other geographic regions. We are not making a market call. We are making a valuation call based on appropriately pricing company fundamentals.

Fear kept some investors partially or fully out of a robust market in 2012. We stayed the course and shareholderswere rewarded with absolute returns. We will do the same in 2013 and hope for similar, if not better, results.

Randell A. Cain, CFA
Principal and Portfolio Manager
Herndon Capital Management
January 3, 2013

As of December 31, 2012, Cliffs Natural Resources comprised 1.80% of the portfolio's assets, Herbalife – 1.53%, Endo Health Solutions – 1.65%, Apple – 2.16%, Western Digital – 2.40%, Gilead Sciences – 2.72%, Express Scripts – 0.00%, HollyFrontier – 2.75%, TJX companies – 2.83%, Ross Stores – 1.51%, Apollo Group – 1.82%, Copa Holdings – 2.29%, Patterson UTI – 2.25%, Health Management Associates – 2.47%, Ultra Petroleum – 0.78%, Southern Copper – 1.08%, Baxter International – 0.97%, and United Therapeutics – 1.03%.

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, consider the Fund’s investment objectives, risks, charges, and expenses. Contact 800 992-8151 for a prospectus or summary prospectus containing this and other information. Please, read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC.