3rd Quarter 2011

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

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

Steady Staples

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

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

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

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

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

New Purchases—Monsanto and Visa

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

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

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

Sells

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

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

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

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

Outlook

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

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

Montag & Caldwell Investment Counsel

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

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

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

3rd Quarter 2011

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

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

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

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

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

Robin Geffen, Fund Manager & CEO
Neptune Investment Management

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

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

3rd Quarter 2011

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

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

Solid Stock Selection

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

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

Portfolio Highlights

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

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

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

Outlook

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

The Cardinal Capital Team

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

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

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

3rd Quarter 2011

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

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

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

Smart Portfolios
Seattle, WA

Note: The Fund invests in exchange-traded funds (ETFs) which are securities of other investment companies.  An ETF seeks to track the performance of an index by holding all or a sampling of the securities on that index.  An ETF may not be able to replicate an index exactly since returns may be reduced by transaction costs, expenses and other factors while the index has none.  The Fund invests in many different areas of the market, each of which may involve its own element of risk. Use of aggressive ETF investment techniques such as futures contracts, options on futures contracts and forward contracts may expose an underlying fund to potentially dramatic changes (losses) in the value of its portfolio. Credit risk or default risk could negatively affect the Fund’s share price.  Inverse or ‘short’ ETFs seek to profit from falling market prices and will lose money if the market benchmark index goes up in value. Leveraged ETFs seek to provide returns that are a multiple of a benchmark and can increase risk exposure relative to the amount invested and can lead to significantly greater losses than a comparable unleveraged portfolio.

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

3rd Quarter 2011

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

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

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

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

August Revisited

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

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

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

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

Portfolio Positioning

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

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

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

Outlook

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

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

Lake Partners, Inc.
Greenwich, Connecticut

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

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

3rd Quarter Commentary

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

Winners and Losers

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

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

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

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

Portfolio Changes

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

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

Outlook

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

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

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

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

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

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

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

3rd Quarter Commentary

TGIF!

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

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

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

Solid Consumer Picks

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

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

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

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

Portfolio Positioning

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

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

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

Outlook

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

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

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

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

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

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

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

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

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

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

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

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

3rd Quarter 2011 

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

Defensive Strategies Dominate

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

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

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

Strong Staples Picks

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

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

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

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

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

Tough Transport

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

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

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

Portfolio Positioning

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

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

Outlook

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

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

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

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

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

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

River Road Asset Management
14 October 2011

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

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

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

3rd Quarter 2011 

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

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

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

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

Ron Altman                                                   
Senior Portfolio Manager                            

Note: By selling covered call options, the Fund limits its opportunity to profit from an increase in the price of the underlying stock above the exercise price, but continues to bear the risk of a decline in the stock. A liquid market may not exist for options held by the Fund. If the Fund is not able to close out an options transaction, it will not be able to sell the underlying security until the option expires or is exercised. While the Fund receives premiums for writing the call options, the price it realizes from the exercise of an option could be substantially below a stock’s current market price. Premiums from the Fund’s sale of call options typically will result in short-term capital gain taxes, making it ill suited for investors seeking a tax efficient investment. The use of derivatives by the Fund to hedge risk may reduce the opportunity for gain by offsetting the positive effect of favorable price movements. There is no guarantee that derivatives, to the extent employed, will have the intended effect, and their use could cause lower returns or even losses to the Fund.

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

3rd Quarter 2011 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Cornerstone Investment Partners

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

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

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

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

By Kerry O'Boyle, Aston Asset Management

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

The Industry 

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

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

Perverse Investor Behavior 

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

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

Nanny-State Investing

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

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

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

Simple, But Not Easy

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

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

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

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

3rd Quarter 2011

Stocks Plunge as Macro Risks Intensify

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

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

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

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

Avoiding the Risk Bandwagon

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

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

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

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

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

Underweight Stakes Lag

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

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

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

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

Positioning and Outlook

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

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

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

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

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

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

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

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

River Road Asset Management
10 October 2011

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

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

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

3rd Quarter 2011

Stocks Plunge as Macro Risks Intensify

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

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

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

Avoiding the Risk Bandwagon

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

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

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

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

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

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

What Didn't Work

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

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

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

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

Positioning and Outlook

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

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

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

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

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

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

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

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

River Road Asset Management
10 October 2011 

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

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

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

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

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

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

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

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

Aston Asset Management, LP

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

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

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

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

3rd Quarter 2011

Stocks Plunge as Macro Risks Intensify

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

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

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

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

Cash Cushion

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

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

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

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

Laggards

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

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

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

Portfolio Positioning

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

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

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

Outlook

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

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

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

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

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

River Road Asset Management
5 October 2011

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

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

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

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

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

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

U.S. Economic Outlook: Cloudy

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

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

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

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

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

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

European Outlook: Stormy

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

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

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

Corporate Confidence

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

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

What This Means For Equities

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

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

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

The World Is Not Coming to an End

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

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

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

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

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

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

2nd Quarter 2011 Commentary 

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

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

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

Winners and Losers

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

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

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

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

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

New Additions

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

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

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

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

Outlook

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

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

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

Montag & Caldwell Investment Counsel

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

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

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

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

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

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

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

Unrecognized Growth

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

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

Disciplined Process

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

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

Andrew Morey
Crosswind Investments, LLC

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

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

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

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

Ever Hopeful

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

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

Weakness in Technology

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

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

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

Buys and Sells

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

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

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

Positioning and Outlook

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

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

TAMRO Capital Partners

Alexandria, Virginia

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

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

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

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

Stocks Flat as Economy Weakens

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

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

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

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

Consumer Staples Stands Out

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

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

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

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

Insurance Struggles

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

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

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

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

Russell Rebalancing

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

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

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

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

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

Outlook

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

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

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

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

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

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

River Road Asset Management

15 July 2011

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

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

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

2nd Quarter 2011 Commentary - ASTON/Neptune International Fund

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

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

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

Robin Geffen, Fund Manager & CEO
Neptune Investment Management

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

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

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

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

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

Value Lags Growth

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

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

Portfolio Highlights

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

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

Outlook

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

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

The Cardinal Capital Team

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

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

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

2nd Quarter 2011 Commentary

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

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

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

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

Macroeconomic Outlook

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

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

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

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

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

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

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

Ron Altman                                                   
Senior Portfolio Manager                            

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

Note: By selling covered call options, the Fund limits its opportunity to profit from an increase in the price of the underlying stock above the exercise price, but continues to bear the risk of a decline in the stock. A liquid market may not exist for options held by the Fund. If the Fund is not able to close out an options transaction, it will not be able to sell the underlying security until the option expires or is exercised. While the Fund receives premiums for writing the call options, the price it realizes from the exercise of an option could be substantially below a stock’s current market price. Premiums from the Fund’s sale of call options typically will result in short-term capital gain taxes, making it ill suited for investors seeking a tax efficient investment. The use of derivatives by the Fund to hedge risk may reduce the opportunity for gain by offsetting the positive effect of favorable price movements. There is no guarantee that derivatives, to the extent employed, will have the intended effect, and their use could cause lower returns or even losses to the Fund.

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

2nd Quarter 2011 Commentary

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

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

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

Winners and Losers

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

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

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

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

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

New Additions

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

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

Elsewhere, we established positions in General Electric and Bed Bath & Beyond. We viewed GE as attractively valued at purchase and like its 3% dividend yield. In addition, we think conditions have improved at its financial arm GE Capital, the company has cyclical leverage to late cycle industries, and we believe that the fourth quarter of last year marked an inflection point in its industrial businesses. Home furnishings retailer Bed Bath & Beyond has attractive square footage growth and is a well-managed, conservatively run company with a decentralized, entrepreneurial culture which we think allow it to continue to gain share in a fragmented market.

Notable increases to current positions included PepsiCo, Omnicom, and Apple. We increased PepsiCo as the stock was attractively valued and management reiterated its full year earnings outlook of approximately 10% earnings growth, which implies better near-term earnings momentum after a sluggish first quarter. We built up the position in Omnicom established during the first quarter on general market weakness and further added to the stock on slower than expected reported organic revenue growth. We also added to Apple on market weakness given the stock’s attractive valuation and the company’s strong earnings momentum.

Pruning Disney

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

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

Outlook

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

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

Montag & Caldwell Investment Counsel

As of June 30, 2011, Kraft  comprised 3.18% of the portfolio's assets, Costco – 2.23%, PepsiCo – 4.18%, Nike – 3.06 %, McDonald’s – 4.21%, TJX – 2.45%, Allergan  – 3.67%, Abbott Laboratories  – 3.25%, Accenture – 3.71%, Qualcomm – 4.49%, Google – 3.56%, Halliburton – 3.01%, Occidental Petroleum – 3.62%, Cameron International  – 1.30%, Schlumberger – 3.13%, Fluor – 2.72%, JPMorgan Chase – 1.89%, Walgreen – 2.40%, AmerisourceBergen – 1.07%, Medco Health Solutions – 1.45%, General Electric – 1.95%, Bed Bath & Beyond – 2.06%, Omnicom Group – 1.75%, Apple – 4.89%, Walt Disney Co. – 2.12%, UPS – 3.44%, and Apache – 2.25%.

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

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

2nd Quarter 2011 Commentary

Ever Hopeful

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

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

Treading Water

The Fund declined slightly during the second quarter compared with a fall of 1.61% for its Russell 2000 Index benchmark. The outperformance relative to the benchmark can be attributed to stock selection, with the largest benefit coming from picks in the Industrials, Energy, Materials, and Consumer Discretionary sectors. The overall sector allocation effect was neutral, with the small negative impact of an overweight to Energy largely offset by an overweight in Telecommunication services.

Top individual contributors to performance included NETGEAR, BJ's Restaurants, NuVasive, and Bill Barrett. Tech networking firm NETGEAR reported strong revenue and earnings growth during the period, and management raised its guidance as contributions from new products increased to 40% of sales. Same-store sales at BJ's rose solidly within Consumer Discretionary despite an environment of lackluster consumer spending. The firm's good cost management practices also helped to boost the stock. NuVasive delivered earnings and revenues above consensus estimates, and raised guidance, as the firm continues to gain market share within the less invasive spinal procedure market. Natural gas producer Bill Barrett benefitted from the premium prices for natural gas liquids and recently received approval to drill in a potentially lucrative natural gas field.

Despite the performance of NETGEAR, overall stock selection within Technology detracted from performance, as did picks within Consumer Staples. Smith Micro Software lowered revenue and earnings guidance owing to a product transition by a major customer. Tech equipment supplier Ixia reported strong growth for their testing equipment, but uncertainty about their exposure to Japan led to profit-taking in the stock. Elsewhere, soft revenues and earnings hurt the stock of Winnebago Industries as consumer demand for recreational vehicles hit a soft patch. Stifel Financial dropped as quarterly results were shy of expectations.

Buys and Sells

Four stocks became full positions during the second quarter either through direct purchases, market appreciation, or a combination of the two. AeroVironment is the sole provider of small unmanned aerial systems (UAS) and electric vehicle charging stations to the US Department of Defense. A clean balance sheet—no debt, more than 20% of its market cap in cash—and a proven management team provide confidence in the company’s future prospects despite the typical ups and downs of being associated with being a supplier to the government. We think global engineering firm Chicago Bridge & Iron is poised for a revenue growth recovery after being hard hit, with the rest of its industry, during the recession. Recent evidence points to the continuation of energy infrastructure investment in emerging economies, and we anticipate margin expansion followed by multiple expansion as in previous economic cycles.

Rounding out the group of new full positions are two Financials stocks—IBERIABANK and UMB Financial. IBERIABANK is a multi-bank financial holding company centered in the southeastern U.S. led by a tenured management team that has grown the bank through both acquisitions and organic efforts and navigated the firm through the downturn much better than most regional banks. We expect several FDIC-assisted acquisitions and better-than-average economic conditions in the company’s key markets of Louisiana, Arkansas and Texas to support further growth in earnings and book value. UMB's high capital levels and conservative underwriting criteria are appealing attributes, but more attractive are the company’s meaningful and growing fee-based businesses, which include asset management and corporate trust services.  These operations benefit from scale and we think UMB is well positioned to grow the businesses and improve profitability in the years ahead.

Two full positions were sold from the portfolio during the period, Acme Packet and Raymond James Financial. As we like to joke, Acme Packet was the “gift that kept on giving.”  It delivered incredible returns for investors in the Fund since its initial purchase in June 2009. We trimmed the holding as the valuation climbed and bid a final fond farewell as its market-capitalization approached $5 billion. We took profits in Raymond James, a long-time portfolio holding, as the market-cap ascended toward $5 billion and its valuation became stretched.

Positioning and Outlook

Although we expect a continuation of modest domestic growth, TAMRO’s investment process focuses on individual, bottom-up stock selection to identify companies that we believe are best able to execute given their specific competitive advantage. Our approach to portfolio management is opportunistic and broadly diversified, with sector weights determined by where we see opportunities at the stock level rather than macroeconomic calls. At quarter-end, Industrials, Technology, and Financials were the top-three sectors in the portfolio by percentage of assets, with Industrials the only one that was overweight relative to the Russell 2000. Energy is another sector where we find more opportunities relative to the benchmark, with the portfolio ending the quarter with a 50% overweight. Financials, Materials, and Utilities are the sectors with the largest underweight positions in the Fund relative to the index. Changes from the first quarter were modest given the flattish trend of the markets. Industrials rose to become the largest sector, bypassing Technology, mainly due to relative price movements and the sale of Acme Packet.

Within certain sectors we have identified trends that have helped to focus our stock-picking efforts. Within Industrials, we see energy and water infrastructure as a major trend as emerging markets continue to develop. Efficient administration is a dominant trend in Healthcare, with the need for cost containment a priority as the demand for healthcare services continues to grow. In Technology, mobility, cloud computing, and security are the major areas where companies are investing for greater competitive efficiencies. Lastly, in the Energy sector we think we have identified companies that can unlock sources of energy that heretofore have been unreachable through the advent of new technology. 

TAMRO Capital Partners
Alexandria, Virginia

As of June 30, 2011, NETGEAR comprised 2.56% of the portfolio's assets, BJ's Restaurants – 1.98%, NuVasive – 1.53%, Bill Barrett – 2.29%, Smith Micro Software – 0.62%, Ixia – 1.60%, Winnebago Industries – 1.02%, Stifel Financial – 1.93%, AeroVironment –1.76%, Chicago Bridge & Iron – 1.98%, IBERIABANK – 2.00%, and UMB Financial – 1.63%.

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

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

2nd Quarter 2011 Commentary

The headlines have been quite negative on many global economic and political issues. However, recent discussions with several companies in the portfolio indicate that the outlook from a bottom-up perspective looks better than previously expected.  Many of the companies in the Fund have emerged from the recent downturn with stronger balance sheets and streamlined cost structures, which has the potential to improve their profitability regardless of the pace of the recovery. 

During the second quarter of 2011, the Fund underperformed its benchmark the S&P MidCap 400 Index.  The underperformance was attributable to disappointing first quarter reports by several of the Fund’s holdings. Stocks that were down in April, declined further in May and June, and in some cases became quite undervalued, providing us the opportunity to add to positions. 

Winners and Losers

For the quarter, the three best performing stocks were Forest Laboratories, Sigma-Aldrich, and Nuance. U.S.-based pharmaceutical company Forest Laboratories specializes in acquiring, licensing, developing and marketing products across a wide range of therapeutic areas, including central nervous system, cardiovascular, gastrointestinal, anti-infective, respiratory, rheumatology and endocrinology. The stock reacted positively to clarity in pipeline growth, an accelerated share repurchase plan and restructuring efforts, as well as financier Carl Icahn’s recent accumulation of Forest’s stock and the nomination of four directors to their board.  Sigma-Aldrich is a specialty chemicals company providing a broad range of essential products and kits used in scientific research, biotechnology, pharmaceutical development, disease diagnosis, and as key components in high technology manufacturing.  Sigma reported an increase in revenues along with strong organic growth in their first quarter earnings call.  Nuance is the leading provider of speech recognition and PDF imaging technologies.  The company has automated speech solutions that are sold into the healthcare, travel, automotive design (navigation systems) and telecommunication industries, including free dictation-to-text capabilities for the iPhone and iPad.  Nuance reported strong results across all industries with healthcare leading the way.

The three worst stocks were Technology-related stocks, Akamai Technologies, Lexmark International, and Unisys.  Akamai is a leading provider of infrastructure and software, which accelerates high volume website access. The company beat first quarter earnings estimates and reported strong revenue growth.  However, the near-term outlook is softer than previously expected, due to a weak pricing environment.  We added to the position as we consider this pullback temporary, given the company’s ability to benefit from internet traffic growth through streaming video. Akamai was our top performer in 2010.  Lexmark, a manufacturer of printing and imaging products and supplies, reported weak results and lowered guidance due to soft inkjet demand along with secular challenges in the printer industry.  Gross margin pressures due to restructuring charges in the March quarter also affected sentiment.  Lexmark continues to focus on high-end multi-function printers and they could benefit from an enhanced footprint in Best Buy stores.  We feel Lexmark is attractively valued.  Unisys, a technology company specializing in outsourcing and information security, reported difficult comparisons and weakness in their U.S. Federal Government business, which represents approximately 20% of the company’s revenue.  We believe Unisys is positioned to benefit from a growing focus on “cloud computing” (outsourced, network-based IT solutions) and related data security issues.  They also have improved operating margins due to reduced costs and a stronger balance sheet (having reduced debt by half since September 2010). Both Lexmark and Unisys were among our top performers in the prior quarter.

Portfolio Transactions

Beckman Coulter was eliminated from the portfolio, after its acquisition by Danaher Corporation in late June.  During the quarter, we took advantage of short-term price fluctuations to rebalance positions, trimming stocks with higher valuations and adding to what we feel were more attractively valued stocks.

Outlook

The Fund’s 2012 price-to-earnings (P/E) ratio is below that of the mid cap indices and significantly below the small cap and large cap indices.  Our portfolio’s debt-to-capitalization ratio is also better than the mid and large cap indices. Strong balance sheets present our companies with opportunities to increase shareholder value – via acquisitions, higher research and development (R&D) spending, increased dividend potential and share buybacks.  We believe our portfolio is attractively valued and well positioned for a rebound. 

Fairpointe Capital

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

As of June 30, 2011, Forest Laboratories comprised 2.78% of the portfolio’s assets, Sigma-Aldrich – 2.66%, Nuance – 2.85%, Akamai Technologies – 3.58%, Lexmark International – 2.77% and Unisys – 2.58%. 

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

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

2nd Quarter 2011 Commentary 

The second quarter of 2011 can be summarized as a period of moderate to high volatility in a relatively narrow range. While the Fund sought to control volatility, it also fell prey to the market’s swings during the quarter and underperformed the benchmark (35% Russell 3000 Index/35% MSCI World ex-US Index/30% the Barclays Capital Aggregate Bond Index).

The Fund seeks the best risk adjusted returns currently available.  It is noteworthy that we started the quarter with a moderately conservative allocation posture; the subsequent allocations consistently tended to reduce riskier asset class exposures.  This was reflected, for example, in commodity allocations being taken from 13.5% on April 1st down to an 8% weight by June 30.  Domestic small capitalization stocks started the quarter with a 12% weight, only to become a zero weight by quarter end.  Correspondingly, short term, high credit quality instruments were a 15% weight on April 1^st, while by June 30 they were allocated 43% of the portfolio mix.

It is obvious to many that the global conditions are not optimal for sustained, robust economic growth.  After witnessing the greatest monetary stimulus of modern times many market indices are only near the levels seen just prior to the 2007-08 financial panic.  One could argue that a conditioned complacency has developed with many investors, hoping that someone with bigger, deeper pockets will save the day.  We are reminded that “Hope” is not a viable investment vehicle.

The Fund’s proprietary investment model encompasses the range of factors that affect security prices.  We believe security prices are moved by the sum of these factors, such as: fundamental, technical, and behavioral, and econometrics.  It is this more holistic view that currently has us in a more conservative position than traditional asset allocation models with a focus upon preserving investor assets. 

Smart Portfolios
Seattle, WA

As of June 30, 2011, commodity weighting was 8.02% and domestic fixed income was 46.75%.

Note: The Fund invests in exchange-traded funds (ETFs) which are securities of other investment companies.  An ETF seeks to track the performance of an index by holding all or a sampling of the securities on that index.  An ETF may not be able to replicate an index exactly since returns may be reduced by transaction costs, expenses and other factors while the index has none.  The Fund invests in many different areas of the market, each of which may involve its own element of risk. Use of aggressive ETF investment techniques such as futures contracts, options on futures contracts and forward contracts may expose an underlying fund to potentially dramatic changes (losses) in the value of its portfolio. Credit risk or default risk could negatively affect the Fund’s share price.  Inverse or ‘short’ ETFs seek to profit from falling market prices and will lose money if the market benchmark index goes up in value. Leveraged ETFs seek to provide returns that are a multiple of a benchmark and can increase risk exposure relative to the amount invested and can lead to significantly greater losses than a comparable unleveraged portfolio.

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

2nd Quarter 2011 Commentary

Overview
The Fund slightly outperformed the Russell 1000 Value Index in the second quarter of 2011. 

Contributors

The Fund's overweight position in United Technologies aided relative returns. The company reported strong first quarter results led by high single digit organic growth, which bested expectations. Additionally, the company estimates that its 2011 sales will be at the high end of projections.  The portfolio's position in Accenture contributed to relative returns.  The company’s stock rose after Standard & Poor's announced that Accenture will be added to the S&P 500 Index.  Holdings of IBM aided relative performance as the company reported first quarter earnings that beat consensus estimates. Market share gains across most businesses, particularly the hardware business which benefited from new production introductions and margin expansion drove revenue increases.

An underweight position in Energy, the quarter's worst performing sector contributed positively to relative performance as energy stocks traded lower amid falling crude prices. Stock selection in the Energy sector detracted from relative performance. 

Additionally, McDonald's shares contributed to relative performance during the reporting period. New product innovation, brand reimaging, and continued sales momentum drove earnings.  Holdings of MasterCard contributed to relative returns. Shares of MasterCard rose as the company reported better-than-expected earnings driven by momentum in cross boarder demand, increased emerging market opportunities, and strong volume trends.  The portfolio's holdings of Abbott Laboratories contributed to relative performance. The stock outperformed after reporting stronger-than-expected quarterly sales.  Holdings of Nestlé, contributed to relative performance as the company reported strong earnings for the quarter. Organic sales growth in emerging markets and price increases were key drivers to outperformance. Relative performance of the Fund was benefited by not owning the poor-performing insurance and investment firm Berkshire Hathaway. Shares depreciated as the company reported quarterly net income that was down compared to a year ago. The large decrease in profits was driven by reinsurance losses due to the large earthquake that took place in Japan in March. Shares of Philip Morris International benefited the Fund due to the portfolio's overweight in the stock which outperformed during the quarter.  The portfolio's holdings of Becton Dickinson contributed to relative performance.  Shares appreciated as the company reported better-than-expected sales for the quarter driven primarily by their medical and diagnostic segments.

Detractors

For the quarter, relative performance of the Fund was hurt by not owning shares of Merck, Biogen Idec, UnitedHealth Group and  Bristol-Myers Squibb.  An underweight position in the Utilities and Communications sector, which outperformed the broad market during the quarter, detracted from relative performance. The Fund’s underweight position in the sector has been driven by bottom-up stock selection decisions rather than macroeconomic forecasts. Stock selection in the Utilities & Communications sector also detracted from relative performance.

Additionally, holdings of Goldman Sachs hampered relative performance. Shares of the company

underperformed the broad market due to uncertainties surrounding the on-going debate about the implementation of the financial services reform legislation. The portfolio's position in JPMorgan Chase hurt relative performance during the quarter. Concern over uncertain regulatory rules and capital requirements, higher litigation and foreclosure costs, sluggish macro data and general concern over the revenue outlook at banks held back relative returns.  The Fund’s relative performance was impeded by not owning shares of Kraft Foods.  The portfolio's holdings of Hess dampened relative results. Shares of Hess traded lower as energy commodity prices declined during the reporting period.

Positioning

The biggest change in the Fund over the last quarter was our increased exposure to the Leisure sector and our decreased exposure to the Financial Services and Health Care sectors. In the Leisure sector, we increased the exposure to toy companies by adding a new position and opportunistically adding to a current holding. Also, we added to existing positions in a broadcaster and a fast food restaurant.

While we added selectively to several Financial Services holdings, the absolute and relative exposure to the sector declined this quarter. The biggest reason for the decline in the absolute exposure to the sector can be directly tied to the underperformance of a number of the large banks owned within the Fund. We have steadily been increasing the exposure to the banking sector over the last two-and-a-half years as valuations have reached historically inexpensive levels. Ongoing discussions regarding the future regulatory framework – in particular the calculation of Risk Weighed Assets and the level of additional capital the Strategically Important Financial Institutions will be required to hold – weighed heavily on the largest banks owned in our portfolio. Additionally, weaker economic data in the US was also cause for concern as the future growth outlook for these companies. In our opinion, valuations around or below book value, more than account for these fundamental headwinds and we continue to be patient, as is our typical style, taking a longer-term view than the market. We also reduced the portfolio's exposure to insurance companies, significantly trimming a couple of positions. Within Health Care, we reduced our exposure to a current medical equipment holding and a health maintenance organization position.

Each year at this time, Russell Investments rebalances its style indices. This year, there were a number of changes that affected our relative positions within several sectors, albeit not nearly to the same extent as years past.  The biggest change in the Russell 1000 Value index was its increased exposure to the Information Technology sector, significantly decreasing our overweight exposure to the sector. The Index's exposure to Consumer Staples companies decreased significantly, magnifying the portfolio's overweight position to the sector. The index weight in Health Care also decreased, moving the portfolio's relative position from an overweight position to an underweight position. And finally, the Financial Services exposure continues to march higher, magnifying the portfolio's underweight position to the sector.

MFS Investment Management

Please note:  Effective July 15, 2011 Cornerstone Investment Partners was appointed as the new Subadviser for the ASTON Value Fund.

As of June 30, 2011, United Technologies comprised 2.62% on the portfolio’s assets, Accenture – 2.78%,  IBM  – 2.52%, McDonald’s – 1.75%, MasterCard -0.97% , Abbott Labs  - 1.97% ,  Nestlé – 1.39%, Philip Morris International  - 3.85% , Becton Dickinson – 1.25%, , Goldman Sachs – 3.08%, JPMorgan Chase – 3.83%, Hess – 0.23%.

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

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

2nd Quarter 2011 Commentary

Steady as She Goes

International equity markets had another positive quarter, as the Fund’s MSCI EAFE Index benchmark rose by 1.6%.  This was, again, another good result for international equities in the face of headwinds. The Health Care sector was the best performing sector for the second quarter of 2011, rising by 8.9% in the quarter. This was followed by Consumer Staples which rose by 7.6% and the consumer discretionary sector which rose by 6.8%.  The best performing region was Europe ex UK which rose by 3.4%.  This was followed by the UK up by 1.7%.

The Energy sector was the worst performing sector in the quarter falling by 2.9%.  This was followed by Information Technology which fell by 0.9%.  Emerging markets also declined, falling by 1.0% in the quarter and underperforming the MSCI EAFE index.  The Pacific ex Japan region was also down in the quarter falling by 0.2%.  

Stock Selection

The Fund outperformed the benchmark during the quarter mostly due to good stock selection in Japan and Europe ex UK. The strong performance in Japan was broad based with personal products company Uni-Charm leading the way. In Europe our holding in car manufacturer BMW was a good performer.  Offsetting this was somewhat weak stock selection in the UK. Gold miner Petropavlosk was the Fund’s weakest performer in this region, despite good performance from the underlying price of gold.  Allocation by region was negative for the Fund. This was mostly due to weak performance from a number of our emerging markets stocks. Niko Resources had another weak quarter of performance as investors were disappointed about production growth from its Indian assets. 

Stock selection by sector was slightly positive in the second quarter.  Leading the way was stock selection in the Consumer Discretionary and Information Technology sectors.  Macau gaming stock SJM Holdings was our biggest positive contributor in Consumer Discretionary.

We also saw a positive contribution from our overweight in Health Care. This was offset to some extent by weak stock selection in Energy and Consumer Staples. In Consumer Staples our holding in salmon farmer Marine Harvest underperformed following a decline in salmon prices.

Positioning

There were a number of changes made to the portfolio in the second quarter.  After a disappointing meeting with Hypermarcas, that suggested we might see margin pressure for the rest of 2011, we decided to sell this investment. We also sold our position in Chinese internet stock Tencent. Tencent has been a good investment for the Fund, but it was felt that  there was more return potential from Chinese internet stock, Baidu, that had underperformed Tencent in recent months. Baidu was a recent addition to our best ideas list. The company is the leading search engine in China with greater than 80% market share. We see potential for growth from rising search activity and growth in online advertising.

We added to our Japanese holdings in the quarter. Chugai Pharmaceutical has a reasonably strong product pipeline in the oncology area and benefits from having the distribution rights to Roche products in the Japanese market. The stock was a recent addition to our best ideas list.  We also purchased Japanese insurance company Tokio Marine Holdings. Tokio Marine is a well-capitalized insurance company that has a strong position in the domestic Japanese market where we feel pricing trends are likely to be strong.

Finally, we purchased Latin American telecommunications company America Movil. The stock is on our best ideas list and recent weakness in the share price gave us an attractive entry point. America Movil has a number of interesting growth businesses spanning much of Latin America, but is largely focused on Mexico and Brazil.

Outlook

This quarter we saw an escalation of the European debt problem with a crisis in Greece only just averted at the end of the quarter. But, in our view, this was a problem postponed, not resolved, because while the proposed solution provides Greece the liquidity to rollover maturing debt, it does little to improve Greece’s solvency other than to impose greater austerity on an already weak economy.  Middle Eastern and North African political tensions continued in the quarter. Not surprisingly we remain negative on the Financial sector and we remain comfortable with our zero weighting to European commercial banks in our portfolios. 

In the quarter, we also saw a string of weaker economic data coming out of a number of areas, including the US, China, parts of Europe and Japan. For now, it is difficult to say how much of this is underlying economic weakness and how much is merely the after effects of the supply chain disruptions caused by the disastrous earthquake/tsunami in Japan. Our view is that the underlying global economy is stronger than recent data has suggested, and that an economic recovery is continuing but that it is continuing at a weak pace.

The weak pace of the economic recovery is a problem for policy makers because it has been accompanied by inflation in several important areas such as food and energy. This inflation threatens the economic recovery because it acts as a tax on consumer spending. Extra dollars spent on food and energy are dollars not spent on other consumer goods.  Where the economic recovery is stronger, like in China and India, this inflation is being tackled with tighter monetary policy. But in the West, where the economic recovery is fragile, tighter monetary policy is not an option and the authorities have opted for unconventional measures.

Despite these interventions we continue to find investments in the Energy, Agriculture and Precious Metals areas attractive and we remain overweight to these areas. The reason is that the supply-demand picture in these areas remains fundamentally attractive; demand has been steady and supply has only been able to respond slowly to higher prices.

Finally, we remain cautious on equities in the short term. The two main reasons are a concern that now that the US Federal Reserve's second round of quantitative easing (QE2) has ended we might see renewed weakness in equity markets, and that we have event risk from the ongoing European debt crisis. It is why our focus remains on finding growth stocks for our portfolios. When economic growth is scarce, growth stocks tend to rise to a premium to the market.

Baring Asset Management
London, UK 

As of June 30,  2011, Uni-Charm comprised 1.52% of the portfolio's assets, BM W – 1.73%, Petropavlosk - , Niko Resources – 1.06%,  SJM Holdings – 0.97%, Marine Harvest – 0.93%, Baidu – 1.04%, Chugai Pharmaceutical – 1.49%, Tokio Marine Holdings – 1.54%,  America Movil – 1.55%. 

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

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

2nd Quarter 2011 Commentary

The Fund outperformed its benchmark the MSCI US REIT Index over the quarter.  Both sector allocation and stock selection contributed positively to the outperformance. The main contributor to the excess return was stock selection within the Office sector followed by our overweight position in Malls. Within the former sector, Boston Properties rose strongly over the period as did Douglas Emmett. Stock picks among Shopping Centers and Multifamily companies also benefited relative performance as did our underweight to Lodging. While our underweight to the Health Care sector was positive, our stock selection within it detracted from relative returns, with Brookdale Senior Living in particular falling over the quarter.

Portfolio Highlights

Portfolio activity was relatively light in the second quarter. We sold down our stake in the US industrial REIT, Prologis, which merged with fellow industrial AMB Property Corp., as well as our holding in the office REIT, Liberty Property Trust.

At the end of the quarter, the Fund was slightly overweight in Office/Industrial and modestly overweight in Malls and Shopping Centers, and Self Storage.  In the Apartments sector the Fund was overweight apartments.  The Fund reduced its exposure to Canada.  Although macroeconomic and operating fundamentals remain healthy, modest earnings growth prospects combined with current valuation levels, have lessened its attractiveness vs. the US.  The Fund remains underweight in Healthcare.

Outlook

The increased attendance at NAREIT’s Investor Forum in June 2011 indicated an increased optimism in the real estate investment market. A common theme in the industry right now is the concept of moving from recession to recovery to growth. Although it is too early to label the current environment a full-on “growth phase”, it is believed to be getting closer. One surprise in the market so far this year has been the relative lack of initial public offerings (IPOs) in the REIT space, although existing REITs increasingly have “at the market” (ATM) programs in place.  We have however seen significant multiple expansion in the REIT space, while we have not really seen the earnings growth that the market would like to see. That is all connected back to seeing some better broad economic indicators.

Overall, we believe we will see positive total return on REITs over the next 6-12 months given modest fundamental improvements and the significant levels of equity and debt chasing the REIT space.

Fortis Investment Management

Please note Harrison Street, LLC was appointed as the new Subadviser to the Fund as of June 30, 2011.  

As of June 30, 2011, Boston Properties comprised 7.86% of the portfolio's assets, Douglas Emmett – 3.12%, Brookdale Senior Living  – 1.65%, Prologis – 4.18%.

Note: Real estate funds are non-diversified and may be more susceptible to risk than funds that invest more broadly. Risks include declines from deteriorating economic conditions, changes in the value of the underlying property, and defaults by borrowers. Investing in foreign markets also entails the risk of social and political instability, market illiquidity, and currency volatility.

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

2nd Quarter 2011 Commentary

Amid a period of renewed volatility that saw the broader equity market (as represented by the S&P 500 Index) eke out a 0.1% gain, the Fund slipped 1.1% during the second quarter.  This still easily bested the more than 5% decline in its HFRX Equity Hedge Index benchmark, however. Since the Fund’s inception on April 1, 2009, it has generated a cumulative gain of 27.3%, well above the 11.3% of the benchmark. Year-to-date, the Fund has outperformed both its benchmark and its peer group, the Morningstar Multialternative Category.

Note that Morningstar recently redefined its categories for alternative mutual funds. Previously the peer group for the Fund was the Morningstar Long-Short Category, which Morningstar has divided into three new groups: Managed Futures, Multialternative, and Long-Short Equity, having previously separated out categories for Market Neutral and Currency. The Multialternative Category includes “funds that offer investors exposure to several different alternative asset classes and investment tactics,” according to Morningstar.

As an asset allocation solution for alternative strategies, the Fund has provided returns with less volatility than conventional markets using a liquid format. For example, since the Fund’s inception, its annualized standard deviation (a measure of volatility) has been 6.5%, which is about one-third of the annualized standard deviation of 18.2% for the S&P 500.

Mixed Results

Long-biased and long/short managers exhibited a wide dispersion of results during the quarter, reflecting their divergent exposures. Managers who were more hedged or defensive, or who had an emphasis on eclectic stock picks in their portfolios, were up or flat for the period. In contrast, managers lagged to the extent they were exposed to higher-volatility small-cap growth stocks, Energy, or non-US markets.

Credit-related and strategic fixed-income strategies also had mixed results, but with less dispersion and a greater degree of stability. Some of the portfolio’s global fixed-income managers finished the quarter with solid gains, partly due to Emerging Market exposures. High-yield and opportunistic fixed-income managers with substantial corporate exposure did well early in the quarter but then came under pressure in June as spreads widened in response to concerns about the economy. Sovereign default hedges tended to help portfolios. The Fund’s small hedge on interest rates (short US Treasuries) eroded during the period, though we have maintained the position due to ongoing concerns associated with massive government debt issuance and deficits.

Merger arbitrage-related managers were positive for the quarter, though returns were modest. Increased M&A activity helped improve the opportunity set, but modest spreads continued to limit the upside.

Results for the managed futures and global macro allocations were disappointing. Quantitative models tended to get whipsawed by the erratic reversals in currencies and fixed-income. Furthermore, commodity markets were disrupted by unexpected factors—notably the intervention by the International Energy Agency to release oil reserves.

Positioning

Throughout the quarter we continued to position the Fund to dampen the risk of traditional asset classes while maintaining the potential for relatively stable returns via less conventional strategies. Equity-oriented strategies continued to represent a core allocation within the portfolio, accounting for nearly 48% of assets at the end of June. It is important to note, however, that this category encompasses a diverse mix of long-biased, hedged, multi-asset and global strategies. The general rationale behind this broad strategy allocation has been that as the economic recovery matures, the equity markets are more clearly differentiating between winners and laggards. The emphasis has been on utilizing managers who tend to be bottom-up stock pickers or who follow a fundamental, thematic investment approach. Value and growth disciplines are represented within this mix. Given the increased volatility of the equity markets, we have emphasized managers that have been more hedged or defensive.

Hedged-credit and strategic fixed-income funds have been another important component of the Fund’s blend of strategies. While the hedged credit funds have been focused on US high-yield and corporate credit, strategic fixed-income funds tend to take a global approach, long and short, to a broad range of opportunities, ranging from US mortgage-backed securities to emerging market debt. Underlying these allocations is a view that 1) while corporate credit in the US continues to benefit from improved balance sheets and low default rates, narrower spreads warrant a certain degree of selectivity and caution, and 2) macro trends continue to create opportunities in fixed-income globally, especially as policy changes unfold in the US, Europe and emerging economies. During June, we reduced exposure to high-yield strategies as spreads widened. Nearly 22% of the portfolio was in hedged-credit and strategic fixed-income by the end of the quarter.

Allocations to hedged futures and commodities provide access to trend following, quantitative, and fundamental trading-oriented strategies, encompassing equity indices, fixed-income, interest-rates, currencies, metals, energy, and industrial and agricultural commodities. Historically, such strategies have tended to be less correlated to other strategies. However, in recent months this has been less apparent, as markets have become increasingly erratic. Consequently, we trimmed this strategy allocation from 10% at the beginning of the quarter to approximately 7% at the end of the period.

Normally cash is a residual reflecting asset flows rather than a strategic allocation. We built a reserve of 15% in the Fund in June, however, as a temporary defensive measure. We intend to put this reserve back to work as opportunities arise.

As indicated above, we have been proactive in adjusting the overall mix of strategies, though using an incremental approach. Changes to the portfolio during the second quarter tended to be defensive in nature, partly due to our assessment of the relative effectiveness of specific strategies, such as high-yield and managed futures, and partly to dampen overall volatility, as with the temporary increase in cash.

Outlook

In our commentary at the end of the first quarter of 2011, we noted the following: “If investor sentiment has been buoyed by liquidity, then the prospect of the end of the Fed’s quantitative easing program, which is scheduled for the end of June, may lead to a real change in the tide.” Because the picture remained unclear, we took a “cautiously constructive” stance, on the view that earnings would remain strong and that the global economy would continue to recover slowly but steadily, even as serious structural issues remain unresolved. As the quarter unfolded, however, we placed an increasing emphasis on caution. This shift was prompted by the growing risk of policy missteps overshadowing the potential opportunities associated with improving corporate fundamentals.

A spate of weak economic news weighed on the markets throughout much of the quarter, but Federal Reserve Board Chairman Ben Bernanke set the stage for investors to take a dimmer view when he said that the recovery was indeed “continuing,” but at an “uneven” rate that was “frustratingly slow.” With Greece constantly in the headlines, and the Democrats and Republicans playing a game of chicken over the federal debt ceiling, markets became much more sensitive to policy risk.

While our sense is that the recent soft patch in the global economy will be followed by a renewed but slow recovery, markets are likely to remain unsettled near term due to uncertainty about policy decisions in Europe and the US, as well as China’s continued steps towards tightening. We therefore continue to position the Fund to dampen the risk of traditional asset classes while maintaining the potential for relatively stable returns via less conventional strategies. Judicious risk management and strategic allocation, which are integral to the Fund’s process, will continue to be important. 

Lake Partners, Inc.
Greenwich, Connecticut

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

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

2nd Quarter 2011 Commentary

Flat Quarter Masks Substantial Volatility

Global equity markets faced the proverbial wall of worry during the second quarter. The fiscal crisis in Greece caused fear of a possible liquidity crisis, while rising oil and commodity prices stunted the economic recovery in the U.S.—leading to increased inflation within Emerging Markets. U.S. unemployment remained stubbornly high as the Federal Reserve’s second round of quantitative easing (QE2) came to an end. Despite these concerns, equity markets showed resilience, with the Fund’s Russell 3000 Index benchmark losing only a fraction of a percentage point during the quarter. Although the U.S. consumer continued to struggle, U.S. businesses reported historically high profit margins and solid balance sheets. The flat return, however, masked substantial volatility. From its peak on April 29, the Russell 3000 declined 7.5% to its quarterly low on June 15, erasing a 2.9% gain to start the quarter, before regaining its footing in mid-June to rally back to near its starting point.

Overall, higher-quality stocks led lower-quality stocks across the market-cap spectrum. Stocks in in the highest quintile of the S&P 500 Index in terms of return-on-equity (ROE) outperformed those in the lowest quintile by more than six percentage points. The volatile second quarter also rewarded lower-beta (volatility) stocks, as stocks in the lowest quintile for beta substantially outperformed the highest beta quintile. Conversely, price and earnings momentum strategies lagged during the quarter.

Net Equity Exposure

Performance of both the long and short portfolios contributed positively to results since the Fund’s May 4, 2011 inception. The short portfolio performance was especially gratifying since the lower price and earnings momentum stocks outperformed high momentum stocks during the period. We maintain a proprietary price and earnings momentum ranking on all of the stocks in our investment universe, and select short positions only from the bottom half.

We took advantage of the market correction during the period to increase long equity exposure to 80% by the end of June. Short exposure during the period since the Fund’s launch fluctuated modestly between -14% and -17% as periods of rising prices created new shorting opportunities. The Fund’s expected range of net long equity exposure is 50% to 70%, and all net market exposure movements were driven by market opportunity.

If market valuations become extreme, we will move net long market exposure outside that expected 50% to 70% range. Valuations remained reasonable throughout the period, however. Under our Drawdown Plan, we will also move the net long market exposure below the normal range if the portfolio declines significantly from its high water mark. By seeking to reduce net long market exposure quickly during market declines, we hope to preserve capital during bear markets. 

Long Portfolio

A top holding for the long portfolio since inception through the end of the second quarter was property and casualty insurer White Mountains Insurance Group. The company announced that it had signed a deal to sell its car insurance subsidiary Esurance to Allstate for a price in excess of our own valuation. Our overall assessed Absolute Value and conviction increased following the Esurance transaction and we added to the Fund’s position at what we think was an attractive discount during the period.

Another contributor on the long side of the portfolio was Allegiant Travel, a niche airline providing non-stop flights from smaller cities to large vacation destinations such as Las Vegas and Orlando. Unlike most air carriers with their massive debt and underfunded pension obligations, Allegiant has demonstrated both financial and operating discipline. The company relies on a common sense business model of concentrating on leisure customers in small markets with little or no concentration, using cheaper planes, and only flying where it is profitable. Further, we believe Founder, Chairman, and CEO Maurice Gallagher is a proven operator, and we appreciate his 22% stake in the company.

Following the bankruptcy of several major carriers, Wall Street turned positive on airlines as they returned to profitability, driven by higher utilization of reduced capacity. The industry reported a profit in 2010 for only the third time in a decade, however, and the irrational behavior that led to prior industry instability seems to be returning. The Fund is short two of the large airlines because historically they have squandered the benefits of emerging from bankruptcy by taking on more debt and increasing capacity. Ironically, it is Allegiant’s stock that is heavily sold short by the market while the bigger, legacy carriers have largely been ignored by short-sellers.

Ruddick, which operates the Harris Teeter supermarket chain in the eastern United States, also contributed positively to returns. The company reported second quarter results reflecting positive traffic trends and same-store sales gains, as Harris Teeter was able to pass through most of its food inflation costs on to customers. The company’s wholly-owned subsidiary American & Efird, the world’s second largest manufacturer of industrial threads, also reported solid sales growth and improved profitability. We reduced the Fund’s position in Ruddick as it approached our calculated Absolute Value.

Big Lots, Artio Global Investors, and Canadian Oil Sands detracted from performance on the long side. Disappointing first quarter results, a weaker 2011 outlook, and the termination of an auction process to possibly sell the company sparked a sell-off in closeout retailer Big Lots. In May, it was speculated that management terminated the auction process when the bids from several private equity players did not meet internal expectations. With the subsequent decline in share price, the Board of Directors authorized a large stock repurchase program. In addition, it announced the acquisition of distressed closeout retailer Liquidation World in Canada, which presents an attractive international growth opportunity. We took the opportunity to add to the portfolio’s holding after the reported termination of the auction process caused the stock to decline.

We owned Artio in the Fund even though we were aware that this asset manager was experiencing outflows in its two flagship funds—International Equity Fund I and International Equity Fund II. We were optimistic that improved performance and newer equity and fixed-income strategies would result in an improvement in its business prospects and stock valuation.  Although the stock was trading at a significant discount to its Absolute Value, it quickly developed into one of the portfolio’s largest unrealized losers. Although we continue to believe this is more likely a value opportunity than a value trap, we trimmed and ultimately eliminated the position in favor of ideas in which we had higher conviction.

Another poor performer was Canadian Oil Sands. The company owns a 37% stake in Syncrude, a joint venture in northern Alberta, which is located in one of the few politically stable areas with sizable oil reserves. The Fund established a position at a significant discount to our assessed Absolute Value, but our timing for the long position was relatively poor as oil prices peaked during the first quarter. To partially hedge the portfolio’s exposure to oil, we simultaneously established a short position in the exchange-traded fund United States Oil (USO). Fortunately, that short position had the highest contribution to relative return among the short positions and partially offset the losses in Canadian Oil Sands.

Short Portfolio

Shorting USO provided a good hedge because it has structural flaws when the futures market for oil is in contango (the price for near-term delivery of oil is less than the price for longer-term delivery). We think USO tracks declines in oil prices better than it tracks increases in such a situation, thus working well when shorted amid falling oil prices.

USG and Pitney Bowes were two other short positions that worked well for the Fund from inception through the end of the second quarter. Building materials company USG has a strong brand and is a market leader in wallboard, but demand for wallboard diminished in the wake of the housing crisis. USG also carries substantial debt which could put them at risk if the housing market does not recover in the near-term. Indeed, Wall Street analysts have revised down their estimates for most building materials. We covered a portion of the Fund’s position as the stock traded near our calculated Absolute Value. Mail-related product firm Pitney Bowes reported a weak first quarter with continuing declines in its core, high-margin business. We expect these trends to persist. The company pays a generous dividend that we think its cash flows cannot support. Dividend increases have slowed and we believe a dividend cut is a very real possibility, which would serve as a catalyst for another decline in the stock price. Although we have covered a portion of the position as the stock price has fallen, it remains among the Fund’s largest short positions.

Printing company R.R. Donnelley & Sons is an example of a short position that did not work out during the period. Our thesis was that more than half of Donnelley’s sales are attributable to magazines, catalogs, retail inserts, books, direct mail, and forms/labels, with digital alternatives not only replacing many of these printed materials but also competing for the same advertising dollars. Management has acknowledged they expect pricing to decline at a 1% annual rate. The firm recently announced a share repurchase authorization, however, that helped to prop up the stock. We don't think the firm generates sufficient cash flow to carry that authorization out without having to increase debt, which could negatively affect their credit. Given its short-term and long-term operational risks, we believe the increased financial risk will jeopardize the dividend and that the near-term boost of the buyback program will fade quickly.

Market Outlook & Portfolio Positioning

Although there are a number of macroeconomic risks that could alter the outcome, we believe that US equity markets look relatively attractive. Emerging Markets (EM) equities are relatively expensive and several EM central banks, including China and Brazil, have tightened fiscal policy to fight inflation. Developed equity markets in Europe carry material risk from the EU debt crisis. In addition, austerity measures like those enacted in Greece are likely to slow economic growth further and European banks may be forced to raise significant capital just to ensure their survival. Finally, the fixed-income market looks like a crowded trade, especially in the public and high-yield sectors.

Valuations in US equity markets are reasonable with profits and profit margins still recovering nicely from the recession lows. An uptick in merger and acquisition activity could provide a boost to multiples and further support domestic equity returns. Leadership in the market seems to have shifted from high-beta, low-quality and small-cap stocks to low-beta, high-quality and larger-cap stocks.

We believe we have entered a favorable environment for our Absolute Value style of investing. The Fund begins the third quarter above the midpoint of our normal net long equity exposure range at 64% (80% long/-16% short). The weighted median market-cap of the portfolio’s long positions is $3.6 billion, while the weighted median market-cap of the short positions is $1.7 billion. The opportunities we see available have led to greater long exposure to larger stocks and greater short exposure to small-cap stocks. Although optimistic that good results will continue if our outlook plays out as expected, our risk measures are designed to quickly alter exposures if we encounter unexpected changes along the way.

River Road Asset Management

20 July 2011

As of June 30, 2011, White Mountains Insurance Group comprised 3.62% of the portfolio's assets, Allegiant Travel – 2.16%, Ruddick – 1.67%, Big Lots – 3.00%, Artio Global Investors – 0.00%, Canadian Oil Sands – 1.59%, United States Oil – (0.70%), USG Corp. – (0.45%), Pitney Bowes – (0.88%), and R.R. Donnelley & Sons – (0.60%).

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.

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

2^nd Quarter 2011 Commentary 

Stocks Flat Following a Volatile Quarter

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

Despite the macroeconomic uncertainty, the broader equity market (as represented by the S&P 500 Index) eked out positive gains. The performance of small-cap stocks, however, reflected the market’s heightened volatility and investor risk aversion. After rallying to an all-time high in late April, the Russell 2000 Index plunged 10% through mid-June before rebounding in the final week of trading to end the quarter with a 1.61% loss. Growth outperformed value across all market-caps, with small-cap value trailing primarily due to smaller weightings in the Healthcare and Consumer Discretionary sectors and a larger relative weighting to lagging Financials.

The high-beta (volatility) theme that has dominated equity performance since the start of the recovery (and was refreshed by the launch of QE2) continued to subside during the second quarter, as investors flocked to higher-quality stocks. Investors tended to favor stocks with a high return-on-equity (ROE) and a high dividend yield, with high-beta stocks among the worst performers. This was especially true within the Fund's Russell 2000 Value Index benchmark, where stocks with the highest ROE (first quintile) outperformed stocks with the lowest ROE by an average of more than seven percentage points. Stocks with the lowest price-to-earnings (P/E) ratios also significantly outperformed stocks with the highest P/Es. The performance in beta was even more pronounced, with the lowest beta stocks outpacing the highest by nearly 10 percentage points.

Buy Discipline

The Fund substantially outperformed its Russell 2000 Value Index benchmark during the quarter, posting a modest gain versus an absolute loss of more than two percentage points by the index. The positive absolute performance achieved during the quarter resulted from strong stock selection and, more specifically, a favorable mix of winners and losers. Of the 40 stocks the portfolio held, only 12 posted a negative contribution to return. We believe that our strict buy discipline and willingness to hold cash to avoid overpaying for any stock contributed to that ratio. The Fund held an average cash position of 49% during the quarter. 

The top contributing holding during the quarter was energy exploration and production (E&P) company Bill Barrett. Focused in the Rockies region, Bill Barrett has reinvested much of its significant cash flows into the exploration and development of existing properties, with the firm expecting to continue to increase production growth by double-digits annually through 2012. Its first quarter results supported these expectations and the stock responded positively as a result.

High-end grocer Arden Group switched from a bottom contributor last quarter to a top contributor during the second quarter on the heels of several developments. Collective bargaining negotiations between competitor grocery stores in the Los Angeles area and their union labor deteriorated, a scenario similar to 2003 when Arden gained market share. In April, the company directly repurchased 2.8% of outstanding shares from an institutional investor at an attractive price. Finally, Arden’s CFO made a significant insider purchase, the first by a minority owner/executive officer in more than 10 years.

Avista, a natural gas and electric utility with six hydroelectric projects generating more than 50% of its production, benefitted from a cold and wet first quarter that led to increased power consumption. In addition, an increase in hydroelectric generation reduced power supply costs and Advantage IQ, a non-regulated subsidiary that provides utility expense management services, continues to perform well. As a result, earnings improved and management now believes 2011 earnings will be at the high end of their original expectations.         

Money Fund Woes

The largest negative contributor during the quarter was asset manager Federated Investors. A significant part of the firm’s assets under management come from money market funds, which  currently face challenges stemming from record low short-term interest rates. In fact, fee waivers that allow Federated to maintain a positive or zero net yield in its funds reduced operating income by 20% during the first quarter. Fee waivers are expected to continue as long as short-term interest rates remain near 0% and should increase in the second quarter of 2011, causing earnings to drop below 2010 levels. There is also concern regarding the money market fund industry’s exposure to European banks and the European debt crisis. Still, we believe we have appropriately adjusted for these well-known risks. We are well aware of the possibility of an extended 0% interest rate environment and will continue to monitor these risks and adjust our valuation assumptions as necessary.

Billing and customer relationship software provider CSG Systems International also declined during the quarter. CSG has historically maintained a concentrated customer base within the satellite and cable industry, with 64% of revenues coming from its top-four customers in 2010. The firm’s recent acquisition of Intec, whose focus is on telecommunication providers, lowered the concentration of its four largest customers to 45% of total revenues. The firm faces other integration risks plus the impact of price concessions on a recently renegotiated contract with DISH Network. We believe we have accounted for the uncertainty by using an above average discount rate of 14% in our valuation model, and remain attracted to the company’s high revenue visibility (80% of revenue under contract) and strong free cash flow attributes. 

Ambassadors Group, the market leader in providing international travel programs for students, was another poor performer. Ambassadors has a long history of more than 44 years operating the People to People travel program. Although the business remains highly profitable, operating results have suffered during the past two years due to declining enrollment and we expect cash flows to remain near trough levels in 2011. We have taken this environment into consideration when determining the normalized free cash flow assumption in our valuation model. Despite the headwinds, Ambassadors’ balance sheet remains strong with no debt outstanding and plenty of deployable cash. Although the firm has limited financial risk, the cyclical nature of its free cash flows makes it an investment with above-average risk for the portfolio. Thus, we expect it to remain a relatively small position.

Portfolio Positioning

Although the small-cap market declined slightly overall during the quarter, the pullback did not affect prices sufficiently to provide us with enough opportunities to reduce the Fund’s cash position. In fact, cash levels increased during the quarter as we sold several holdings, including large positions in Aaron’s and Ducommun, which had reached our valuation targets. Our focus on higher quality small-cap stocks remains unchanged and we think served investors well during the quarter. Until volatility increases and valuations allow for adequate absolute returns, we expect the portfolio to remain defensively positioned. 

The largest new position added during the quarter was UniFirst Corporation, the third largest provider of workplace uniforms and protective clothing in North America. The company weathered the most recent recession well by implementing a “back-to-basics” strategy that emphasized fiscal discipline and customer service. These steps, along with lower energy and merchandise costs, helped propel earnings to record levels in 2009—one of the most difficult operating environments in its history—giving us confidence in its ability to navigate a full economic cycle. With an average customer relationship of 12 years and a 92% retention rate, the company has historically generated consistent operating results and recurring revenue allowing us to estimate free cash flows with a high degree of conviction. Although the company is exposed to fluctuating commodity costs and remains economically sensitive, with net debt less than annual free cash flow generation we believe it has limited financial risk. UniFirst is a solid example of a business that we think has limited operating and financial risk—the ideal traits of a core Independent Value holding.

Outlook

We noticed several common themes among the approximately 300 small-cap businesses on our focus list throughout second quarter. Similar to the first quarter, many businesses continued to benefit from pent-up demand, stronger business spending, spending on productivity enhancements, and improved balance sheets. The economy appeared to be on a slightly upward trend even though the economic expansion appears uneven and there are increasing concerns about inflation and the sustainability of government spending. Most companies remain cautious about hiring and remain more committed to improving productivity and defending the margins of existing businesses. 

Operating margins generally remained healthy, but broad cost pressures increased relative to the previous quarter. Management teams commented frequently on the need and ability to pass on price increases originating from higher commodities, labor, and transportation costs. Toward the end of the second quarter, there was a slight shift in tone, as concern grew that recent price increases may impact demand. As gasoline approached $4/gallon in May, the negative impact on discretionary spending was noted by several businesses, especially those that cater to low-income consumers. With rising costs and the possibility of demand destruction, we continue to believe it is important to stay disciplined regarding our normalized margins and cash flow estimates. Although we believe rising costs and margin pressures have been well communicated by management, the valuations of many small-cap businesses do not yet reflect this risk. In summary, in a period where operating margins may be near peak levels, it is extremely important to minimize valuation error by avoiding extrapolating results that may be unsustainable. 

We are often asked why we hold cash given that the portfolio’s equity-only performance has outperformed the broader portfolio. Our use of cash is not an attempt to time the market, but is a direct result of the number of opportunities within our focused universe of mature, high-quality small-cap businesses. While cash, currently yielding 0%, does have short-term opportunity costs, as absolute investors we are more concerned about the risk of permanent loss of capital than the risk of underperforming a benchmark. Holding cash may reduce relative performance in the short-term, but it can also enhance long-term absolute and relative performance by allowing the Fund to act opportunistically without the need to sell existing holdings. In essence, cash allows the portfolio to invest decisively when it is being appropriately compensated to take risk and  to limit mistakes when small-cap prices are extended and risks are elevated. Without these benefits, we do not believe the equity returns in the Fund would have been achievable.

River Road Asset Management

15 July 2011

As of June 30, 2011, Bill Barrett comprised 2.40% of the portfolio's assets, Arden Group – 0.72%, Avista – 2.54%, Federated Investors – 2.52%, CSG Systems International – 2.66%, Ambassadors Group – 0.71%, Aaron’s – 0.00%, Ducommun – 0.00%, and UniFirst – 2.66%.

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

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

2nd Quarter 2011 Commentary

2nd Quarter 2011 Commentary

Stocks Flat Following a Volatile Quarter

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

Despite the macroeconomic uncertainty, the broader equity market (as represented by the S&P 500 Index) eked out positive gains. The performance of small-cap stocks, however, reflected the market’s heightened volatility and investor risk aversion. After rallying to an all-time high in late April, the Russell 2000 Index plunged 10% through mid-June before rebounding in the final week of trading to end the quarter with a 1.61% loss. Growth outperformed value across all market-caps, with small-cap value trailing primarily due to smaller weightings in the Healthcare and Consumer Discretionary sectors and a larger relative weighting to lagging Financials.

The high-beta (volatility) theme that has dominated equity performance since the start of the recovery (and was refreshed by the launch of QE2) continued to subside during the second quarter, as investors flocked to higher-quality stocks. Investors tended to favor stocks with a high return-on-equity (ROE) and a high dividend yield, with high-beta stocks among the worst performers. This was especially true within the Fund's Russell 2000 Value Index benchmark, where stocks with the highest ROE (first quintile) outperformed stocks with the lowest ROE by an average of more than seven percentage points. Stocks with the lowest price-to-earnings (P/E) ratios also significantly outperformed stocks with the highest P/Es. The performance in beta was even more pronounced, with the lowest beta stocks outpacing the highest by nearly 10 percentage points.

M&A Activity Increases

Over the years, merger and acquisition activity has been a powerful driver of performance in the Fund. We believe this is because our Absolute Value style of investing centers on many of the same characteristics that private equity and strategic investors find attractive—discounted valuations, strong free cash flow, talented management teams with high insider ownership, etc. Earlier in the year, we were surprised more transactions were not occurring given the easy access to credit, healthy corporate balance sheets, limited organic growth opportunities in many industries, and large cash balances at many private equity firms. We were also surprised when several companies reportedly being shopped (Big Lots, Regis) were unable to complete a transaction. In most cases, it appeared buyer and seller could not agree on price.

More recently, M&A activity has improved as five transactions have occurred in the Fund in the past 60 days. This is a highly unusual (and very encouraging) level of activity in such a short period of time. We are seeing increased activity in industries such as Healthcare and Insurance, but relatively few deals in the consumer space. This is a different trend than what we observed during the 2006-2007 M&A boom, when consumer stocks were more expensive but the consumer was much healthier. We are very excited about this developing M&A theme and believe it could continue to have a positive impact on the portfolio’s absolute and relative performance.

Elsewhere, Russell conducted the annual rebalancing of its indices on June 24. As noted in our commentary last quarter, one of the more important changes this year involved the methodology surrounding the style factors.  In an effort to reduce turnover among the style indices, Russell implemented a band on its overall composite value scores. Russell believes this will effectively reduce the number of names that switch between the Russell 2000 Value and Growth indices on an annual basis. Russell introduced banding a few years ago for its market-capitalization indices, which substantially reduced turnover.

This year’s rebalancing of the Russell 2000 Value Index resulted in a lower overall market-cap and more growth in the benchmark. The largest holding declined from $4.6 billion in market-cap to just $3.1 billion. Similarly, the weighted average market cap for the index fell as well. The largest sector weight increases as a result of the rebalancing were in Technology (+2.8%) and Consumer Discretionary (+2.4%). The largest weight decreases were in Financials (-2.7%) and Energy (-2.6%).  Interestingly, these changes largely reflect our own observations about the valuation of these sector groups.

Staples Rebound

The Fund slightly outperformed the benchmark during the second quarter in posting a loss of a couple of percentage points. Since late February, performance has benefited from the market trend favoring lower risk stocks. Although not readily apparent from the full quarter's results, the portfolio has posted a nearly four percentage point improvement in relative performance during the past two months. The Consumer Staples and Materials sectors delivered the highest contribution to relative performance during the full period. A significant overweight position and positive stock selection in Consumer Staples helped returns, while the portfolio’s Materials holdings benefited primarily from positive stock-picking driven by limited exposure to falling commodity prices.

Top individual contributors included supermarket-related holdings in Ruddick and Winn-Dixie Stores. Ruddick operates the Harris Teeter supermarket chain in the eastern U.S., which was able to pass most of its food inflation costs on to customers. The company’s wholly-owned subsidiary American & Efird, the world’s second largest manufacturer of industrial threads, also reported solid sales growth and improved profitability. Given the firm’s solid operating results, capable management team, and strong balance sheet, Ruddick continues to be the largest holding in the Fund. Pure supermarket play Winn-Dixie reported results that were ahead of both Wall Street and River Road expectations and noted that Florida (where roughly 70% of its store base is located) was showing signs of improvement with tourism rebounding, more new construction starts, and higher personal income levels. 

Another notable contributor, property and casualty insurer White Mountains Insurance Group, was one of the beneficiaries of the previously noted M&A activity. The company signed a deal to sell its car insurance subsidiary Esurance to Allstate for a price in excess of our own valuation for that part of the business. Our assessed Absolute Value and conviction increased following the transaction, and we subsequently added to the Fund’s position at an attractive discount.

Discretionary Weakness

Consumer Discretionary and Healthcare turned in the lowest contributions to relative returns during the quarter. Big Lots within Consumer Discretionary was the worst performer.  Shares of the closeout retailer rallied sharply during the first quarter on rumors that it had hired Goldman Sachs to pursue a possible sale of the company. In May, it was reported that Big Lots terminated the auction process when bids from several private equity firms did not meet internal expectations. The company also reported disappointing earnings results and gave a weaker than expected 2011 outlook.

After the reported termination of the auction process and decline in share price, the Board of Directors authorized a sizeable increase in its share repurchase program that if fully exercised at today’s prices would represent 18% of the company’s outstanding shares. In addition, Big Lots announced the acquisition of distressed Canadian closeout retailer Liquidation World, a potentially attractive international growth opportunity. Since we had trimmed roughly 20% of the Fund’s investment on the deal rumors, we seized the opportunity to increase the position after the decline.

Another poor performer was OfficeMax. The office supply retailer reported disappointing results as heightened promotional activity in its Retail Segment and the loss of key government customers in its Contract Segment led to lower sales and profitability. New CEO Ravi Saligram introduced a business plan designed to improve traffic and reverse the secular declines facing the Retail Segment. Negative industry sentiment and skepticism surrounding the changes in strategic direction led to Wall Street analysts slashing their revenue and earnings estimates. We lowered our estimates and cash flow multiple and, given its accumulated losses and revised risk/reward, eliminated the remaining shares from the portfolio.

Finally, Rent-A-Center, the largest retail chain in the U.S. that offers branded rent-to-own merchandise fell when the company announced revenue and earnings results below Wall Street expectations. Fewer tax-refund anticipation loans for consumers appeared to have a larger negative impact on Rent-A-Center than on main competitor Aaron’s. After nine consecutive quarters of exceeding estimates the shortfall was a surprise, but the modest earnings miss was not large enough to cause management to adjust their full year guidance. We viewed the quarter as a temporary setback that did not impact our level of conviction. In May, the firm increased its annual dividend, demonstrating strong free cash flow generation and a shareholder-friendly orientation.

During the quarter, the Fund purchased seven new holdings and sold eight stocks. Among the companies sold, four achieved our Absolute Value price targets and four were sold due to either accumulated losses and/or a negative change in our fundamental outlook for the firm. Among the new positions added, three were Financials-related investments, while the others represented a diversified group among the Energy, Industrial, and Consumer Staples sectors. All of the new investments were also smaller in size, a trend that has been evident with our purchases during the past several quarters.

The largest new position added during the quarter was Wyoming coal producer, and former Rio Tinto subsidiary, Cloud Peak Energy. Due to federal regulations that limit sulfur emissions, the coal produced in the Powder River Basin where the firm operates is desirable because of its low sulfur content. Cloud Peak supplies coal mostly to the Midwestern U.S., but recently started exporting coal to Asia through Canadian ports at prices well above the US market (though transportation costs are also significantly higher). Due to limited port capacity, exports are still less than 5% of the firm’s sales, but as port capacity expands it will improve pricing for Powder River Basin coal. The largest risk to the company is its relatively short reserve life of 10 years. The entire reserve acquisition process can take four to 10 years and requires significant capital investment before production can begin. Cloud Peak, however, recently won bids for two federal leases that will add roughly five years to its reserve life.

Outlook

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

Looking back at the first half of 2011, investors have been de-risking their portfolios since late February and the small-cap market experienced a -10% correction between late April and mid-June. Earnings growth began to moderate and higher oil prices contributed to a slowdown. The end of QE2, however, appears to have been more coincident than a major catalyst to these events.   

We further anticipated that large-cap stocks would begin to outperform small-caps when the transition to lower risk occurred. In reality, small-cap stocks underperformed large-caps by a modest amount during the correction and rallied back to near parity by the end of the quarter.  This was surprising to us and suggests that investors are not yet as risk averse as relative small-cap valuations suggest they should be. Of course, many aspects of the current environment are favorable for small-caps—credit spreads remain relatively tight, credit is available for publicly traded companies, and M&A is picking up.  Investors may also be expecting another round of quantitative easing, which would likely boost small-cap relative performance. Either way, as fundamental investors we would be surprised if large-cap stocks did not begin to outperform as the market moves further into the mid-cycle stage of this recovery. 

Specific to the portfolio, the recent uptick in market volatility was a positive event. It both enhanced the Fund’s relative performance and increased its opportunity set. Our discount-to-value indicator declined from a peak of about 85% in April to 75% in mid-June. This is only slightly above where the indicator troughed in the August 2010 correction. Barring a second recession, we believe this 75% figure is an excellent indicator of value in the portfolio in both absolute and relative terms. If recent volatility is indicating a more dramatic slowdown ahead and the economy falls back into recession, we believe the portfolio is well positioned.

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

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

River Road Asset Management

12 July 2011

As of June 30, 2011, Big Lots comprised 2.86% of the portfolio’s assets, Regis – 0.00%, Ruddick – 5.01%, Winn-Dixie Stores – 1.20%, White Mountain Insurance Group – 2.95%, OfficeMax – 0.00%, Rent-A-Center – 2.60%, Aaron's – 0.00%, 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, carefully consider the fund’s investment objectives, risks, charges and expenses. Contact 800 992-8151 for a prospectus containing this and other information. Read it carefully. Aston Funds are distributed by BNY Mellon Distributors Inc.

2nd Quarter 2011 Commentary - ASTON/River Road Select Value Fund

Stocks Flat Following a Volatile Quarter

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

Despite the macroeconomic uncertainty, the broader equity market (as represented by the S&P 500 Index) eked out positive gains. The performance of small-cap stocks, however, reflected the market’s heightened volatility and investor risk aversion. After rallying to an all-time high in late April, the Russell 2000 Index plunged 10% through mid-June before rebounding in the final week of trading to end the quarter with a 1.61% loss. Growth outperformed value across all market-caps, with small-cap value trailing primarily due to smaller weightings in the Healthcare and Consumer Discretionary sectors and a larger relative weighting to lagging Financials.

The high-beta (volatility) theme that has dominated equity performance since the start of the recovery (and was refreshed by the launch of QE2) continued to subside during the second quarter, as investors flocked to higher-quality stocks. Investors tended to favor stocks with a high return-on-equity (ROE) and a high dividend yield, with high-beta stocks among the worst performers. This was true within the Fund's Russell 2500 Value Index benchmark, where stocks with the highest ROE (first quintile) outperformed stocks with the lowest ROE by an average of nearly six percentage points. Stocks with the lowest price-to-earnings (P/E) ratios also significantly outperformed stocks with the highest P/Es. The performance in beta was even more pronounced, with the lowest beta stocks outpacing the highest by nine percentage points.

M&A Activity Increases

Over the years, merger and acquisition activity has been a powerful driver of performance in the Fund. We believe this is because our Absolute Value style of investing centers on many of the same characteristics that private equity and strategic investors find attractive—discounted valuations, strong free cash flow, talented management teams with high insider ownership, etc. Earlier in the year, we were surprised more transactions were not occurring given the easy access to credit, healthy corporate balance sheets, limited organic growth opportunities in many industries, and large cash balances at many private equity firms. We were also surprised when several companies reportedly being shopped (Big Lots, Regis) were unable to complete a transaction. In most cases, it appeared buyer and seller could not agree on price.

More recently, M&A activity has improved as three transactions have occurred in the Fund in the past 60 days. This is an unusual and very encouraging level of activity in such a short period of time. We are seeing increased activity in industries such as Healthcare and Insurance, but relatively few deals in the consumer space. This is a different trend than what we observed during the 2006-2007 M&A boom, when consumer stocks were more expensive but the consumer was much healthier. We are very excited about this developing M&A theme and believe it could continue to have a positive impact on the portfolio’s absolute and relative performance.

Elsewhere, Russell conducted the annual rebalancing of its indices on June 24. As noted in our commentary last quarter, one of the more important changes this year involved the methodology surrounding the style factors.  In an effort to reduce turnover among the style indices, Russell implemented a band on its overall composite value scores. Russell believes this will effectively reduce the number of names that switch between the Russell 2000 Value and Growth indices on an annual basis. Russell introduced banding a few years ago for its market-capitalization indices, which substantially reduced turnover.

This year’s rebalancing of the Russell 2500 Value Index resulted in a lower overall market-cap and more growth in the benchmark. The largest holding declined from $19.5 billion in market-cap to just $7.2 billion. Similarly, the weighted average market cap for the index fell by $500 million as well. The largest sector weight increases as a result of the rebalancing were in Consumer Discretionary (+3.2%) and Industrials (+2.8%). The largest weight decreases were in Energy (-4.2%) and Materials (-1.6%).

Discretionary Weakness

The Fund lagged the benchmark by less than a percentage point in posting a small loss for the quarter. Consumer Discretionary and Industrials turned in the lowest contributions to relative returns during the quarter. Big Lots within Consumer Discretionary was the worst performer.  Shares of the closeout retailer rallied sharply during the first quarter on rumors that it had hired Goldman Sachs to pursue a possible sale of the company. In May, it was reported that Big Lots terminated the auction process when bids from several private equity firms did not meet internal expectations. The company also reported disappointing earnings results and gave a weaker than expected 2011 outlook.

After the reported termination of the auction process and decline in share price, the Board of Directors authorized a sizeable increase in its share repurchase program that if fully exercised at today’s prices would represent 18% of the company’s outstanding shares. In addition, Big Lots announced the acquisition of distressed Canadian closeout retailer Liquidation World, a potentially attractive international growth opportunity. Since we had trimmed roughly 20% of the Fund’s investment on the deal rumors, we seized the opportunity to increase the position after the decline.

Another poor performer was OfficeMax. The office supply retailer reported disappointing results as heightened promotional activity in its Retail Segment and the loss of key government customers in its Contract Segment led to lower sales and profitability. New CEO Ravi Saligram introduced a business plan designed to improve traffic and reverse the secular declines facing the Retail Segment. Negative industry sentiment and skepticism surrounding the changes in strategic direction led to Wall Street analysts slashing their revenue and earnings estimates. We lowered our estimates and cash flow multiple and, given its accumulated losses and revised risk/reward, eliminated the remaining shares from the portfolio.

A severe business disruption in Australia caused by a poorly executed implementation of enterprise resource planning (ERP) software aided a drop in Ingram Micro. The firm is in the process of rolling out the ERP system globally on a country-by-country basis over the next three years and Australia was the first large market to be transitioned. The disruption in Australia will have a material financial impact this year and heightens future implementation risk in other countries. In response, we lowered the multiple and estimates used in our valuation. We held the position as Ingram Micro remains a dominant industry leader trading at an attractive discount to our calculation of Absolute Value.

Staples Rebound

Since late February, performance has benefited from the market trend favoring lower risk stocks. Although not readily apparent from the full quarter's results, the portfolio has posted a nearly three percentage point improvement in relative performance since late April. A significant overweight position and positive stock selection in Consumer Staples helped returns, while the portfolio’s Energy holdings benefited from an underweight allocation.

Top individual contributors included supermarket-related holdings in Ruddick and Winn-Dixie Stores. Ruddick operates the Harris Teeter supermarket chain in the eastern U.S., which was able to pass most of its food inflation costs on to customers. The company’s wholly-owned subsidiary American & Efird, the world’s second largest manufacturer of industrial threads, also reported solid sales growth and improved profitability. Given the firm’s solid operating results, capable management team, and strong balance sheet, Ruddick continues to be the largest holding in the Fund. Pure supermarket play Winn-Dixie reported results that were ahead of both Wall Street and River Road expectations and noted that Florida (where roughly 70% of its store base is located) was showing signs of improvement with tourism rebounding, more new construction starts, and higher personal income levels. 

Another notable contributor, property and casualty insurer White Mountains Insurance Group, was one of the beneficiaries of the previously noted M&A activity. The company signed a deal to sell its car insurance subsidiary Esurance to Allstate for a price in excess of our own valuation for that part of the business. Our assessed Absolute Value and conviction increased following the transaction, and we subsequently added to the Fund’s position at an attractive discount.

True Religion Apparel, which sells high-end denim jeans and other apparel products, delivered a standout first quarter driven by better than expected results from its branded retail stores. The business unit benefited from new store openings and increasing same-store sales. Strong growth in retail and international offset a -13.6% decline in U.S. wholesale due to continued weakness at major department stores and a planned reduction to off-price channels.

During the quarter, the Fund purchased five new holdings and sold seven stocks. Among the companies sold, three achieved our Absolute Value price targets and four were sold due to either accumulated losses and/or a negative change in our fundamental outlook for the firm. Among the new positions added, two were Energy-related investments, while the others represented a diversified group among the Consumer, Industrial, and Financials sectors. The new investments tended to be smaller in market-cap, reflecting the scarcity of value in the mid-cap universe.

The largest new position added during the quarter was Wyoming coal producer, and former Rio Tinto subsidiary, Cloud Peak Energy. Due to federal regulations that limit sulfur emissions, the coal produced in the Powder River Basin where the firm operates is desirable because of its low sulfur content. Cloud Peak supplies coal mostly to the Midwestern U.S., but recently started exporting coal to Asia through Canadian ports at prices well above the US market (though transportation costs are also significantly higher). Due to limited port capacity, exports are still less than 5% of the firm’s sales, but as port capacity expands it will improve pricing for Powder River Basin coal. The largest risk to the company is its relatively short reserve life of 10 years. The entire reserve acquisition process can take four to 10 years and requires significant capital investment before production can begin. Cloud Peak, however, recently won bids for two federal leases that will add roughly five years to its reserve life.

Outlook

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

Looking back at the first half of 2011, investors have been de-risking their portfolios since late February and the small-cap market experienced a -10% correction between late April and mid-June. Earnings growth began to moderate and higher oil prices contributed to a slowdown. The end of QE2, however, appears to have been more coincident than a major catalyst to these events.   

We further anticipated that large-cap stocks would begin to outperform small-caps when the transition to lower risk occurred. In reality, small-cap stocks underperformed large-caps by a modest amount during the correction and rallied back to near parity by the end of the quarter.  This was surprising to us and suggests that investors are not yet as risk averse as relative small-cap valuations suggest they should be. Of course, many aspects of the current environment are favorable for small-caps—credit spreads remain relatively tight, credit is available for publicly traded companies, and M&A is picking up.  Investors may also be expecting another round of quantitative easing, which would likely boost small-cap relative performance. Either way, as fundamental investors we would be surprised if large-cap stocks did not begin to outperform as the market moves further into the mid-cycle stage of this recovery. 

Specific to the portfolio, the recent uptick in market volatility was a positive event. It both enhanced the Fund’s relative performance and increased its opportunity set. Our discount-to-value indicator declined from a peak of about 86% in April to 76% in mid-June. This is only slightly above where the indicator troughed in the August 2010 correction. Barring a second recession, we believe this 76% figure is an excellent indicator of value in the portfolio in both absolute and relative terms. If recent volatility is indicating a more dramatic slowdown ahead and the economy falls back into recession, we believe the portfolio is well positioned.

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

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

River Road Asset Management

12 July 2011

As of June 30, 2011, Big Lots comprised 2.80% of the portfolio’s assets, Regis – 0.00%, OfficeMax – 0.00%, Ingram Micro – 2.13%,  Ruddick – 5.08%, Winn-Dixie Stores – 1.24%, White Mountains Insurance Group – 2.92%, True Religion Apparel – 1.02%, 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, carefully consider the fund’s investment objectives, risks, charges and expenses. Contact 800 992-8151 for a prospectus containing this and other information. Read it carefully. Aston Funds are distributed by BNY Mellon Distributors Inc.

2nd Quarter 2011 Commentary - ASTON/Veredus Select Growth Fund

Similar to the summer of 2010, a growth scare struck the market during the second quarter of 2011 fueled by the Greek drama II, the supply chain disruptions within the electronics and auto industries from the Japanese earthquake/tsunami, plus the end of QE2 (the Fed's second quantitative easing ) and the debt ceiling debate in Washington. We tend to compare these scares to aftershocks—with the Fall 2008 financial crisis serving as the primary earthquake and recent events just another among many aftershocks. This most recent aftershock has been smaller, as it should be, but the wall of worry that this market is climbing has been immense and quite frankly very impressive. We have already experienced eight 5% corrections to this bull market which is the most in 73 years, and yet the bull market is but half the age of the typical bull market.

After falling for seven straight weeks, the last four days of the quarter and the first trading day in July saw the market have its best weekly move in more than two years. We feel that the pluses currently far outweigh the negatives as corporate cash has never been so high, gasoline prices have declined by more than 10% (during the height of the driving season), falling food prices are pressuring core inflation, loan demand is picking up and, most importantly, improved earnings. In addition, the credit markets are not even close to signaling any stress in the system as credit spreads are well below last year's levels and historic means, and remain highly stimulative.

The Fund has been positioned for the mid cycle of the economic expansion and that has certainly not worked as defensive areas such as Healthcare, Staples, Utilities, and Telecom have led the market this year. The portfolio coughed up roughly 800 bps relative to its Russell 1000 Growth Index benchmark last year from May to September and we have seen a similar number evaporate this year. Still, we believe that the Fund is positioned in those companies that are primed to take advantage of the mid-cycle phase once the supply chain issues of Japan abate in the auto and technology food chains. There was some evidence of this in the quarterly earnings report of FedEx, a name held in the portfolio, which was 5% above expectations and more importantly drove earnings estimates higher for this year and next.

The portfolio's stake in Energy was hit hard during the quarter despite the fact that it consists primarily of service companies. McDermott International, the construction and engineering firm serving the sector, dropped sharply on what we thought was an overreaction to flooding at its Morgan City fabrication plant. We trimmed the sector back early in May to a slightly overweight position relative to the benchmark, and will look to take it back up again as we think the service industry can continue to do well when the price of oil is above $75 a barrel.

Technology was another problem area, with JDS Uniphase the hardest hit as worries over capital expenditures from the big carriers and a sloppy quarter from Ciena pushed its stock down. Google also tumbled as the firm missed its earnings target as operating expenses have been ramped up in several areas of the company, including the Droid phone segment, in an effort to diversify revenue.

Elsewhere, Consumer and Materials holdings also lagged the index. US Steel, Mosaic, and Freeport McMoran all suffered within Materials. We would look to most likely expand in this area of the portfolio over the back half of the year. Ford and Disney hurt on the consumer side. Disney reported a rare miss to its earnings and Ford gave what we thought was conservative guidance in the aftermath of the Japanese earthquake, thus lowering its forecasted numbers a bit causing the stock to drop. On the positive side, an overweight stake in Healthcare and positive stock selection aided relative returns as Humana and UnitedHealth Group each had a solid quarter.

This was a disappointing quarter despite the fact that the portfolio experienced an upward earnings surprise averaging 9%, which led to upwards earnings revisions of 3.3% for 2011 and 2.3% for 2012. We are very bullish looking out as we feel expectations have been set lower on Wall Street due to macroeconomic concerns much like what happened last year. We anticipate that the earnings season will be solid as the scarcity of growth will be the theme and those companies that can provide the numbers will attract the capital. We are also excited about a lot of companies in expanding markets, such as social media, digital video, and the smartphone supply chain within Technology; fluid management and fracking within the North American Energy markets; and nano-technology equipment—for example, labs on a chip—within the Healthcare industry. We are not having any problem finding new and dynamic ideas. Now we just need the market to agree with us.

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

July 12, 2011 

As of June  30, 2011, FedEx comprised 2.69% of the portfolio's assets, McDermott International – 1.77%, JDS Uniphase – 2.49%, Ciena – 0.00%, Google – 0.00%, US Steel – 0.00%, Mosaic – 0.00%, Freeport McMoran – 0.00%, Ford – 1.80%, Walt Disney Co. – 0.00%, Humana – 3.01%, and UnitedHealth Group – 2.46%.

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

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

2nd Quarter 2011 Commentary - ASTON/Veredus Aggressive Growth Fund

Similar to the summer of 2010, a growth scare struck the market during the second quarter of 2011 fueled by the Greek drama II, the supply chain disruptions within the electronics and auto industries from the Japanese earthquake/tsunami, plus the end of QE2 (the Fed's second quantitative easing ) and the debt ceiling debate in Washington. We tend to compare these scares to aftershocks—with the Fall 2008 financial crisis serving as the primary earthquake and recent events just another among many aftershocks. This most recent aftershock has been smaller, as it should be, but the wall of worry that this market is climbing has been immense and quite frankly very impressive.

After falling for seven straight weeks, the last four days of the quarter and the first trading day in July saw the market have its best weekly move in more than two years. We feel that the pluses currently far outweigh the negatives as corporate cash has never been so high, gasoline prices have declined by more than 10% (during the height of the driving season), falling food prices are pressuring core inflation, loan demand is picking up and, most importantly, improved earnings. In addition, the credit markets are not even close to signaling any stress in the system as credit spreads are well below last year's levels and historic means, and remain highly stimulative.

As for the Fund, it has done a much better job during this drawdown period versus its Russell 2000 Growth Index benchmark (losing 12% versus 10% for the index) compared with its struggles last year from the end of April to the end of August (when the portfolio was down 23% compared with 16% for the benchmark). We attribute this to an enhancement that we put in place at the beginning of the year—paying much closer attention and putting more weight into the sector weightings within the universe that our earnings revision model (ERM) produces as opposed to just investing in those firms with the greatest upward revisions with little regard to sector weightings.

Positions in the Materials, Consumer Discretionary, and Healthcare sectors all aided relative performance during the quarter. The best performing sector was Materials, owing almost entirely to Zagg, a protective shield manufacturer for consumer electronic products such as smartphones and tablets. The firm had a great quarter and made an accretive acquisition that mitigated any concerns about it being a one product company. Consumer Discretionary was led by Crocs and Ulta Salon, as both companies reported stellar quarters that drove their stocks up significantly.

Molecular diagnostic test company Cepheid and robotic orthopedic company Mako Surgical both reported tremendous quarters as well within Healthcare.

Technology continued to give the portfolio problems due to its economic sensitivity and questions arising about the strength of capital spending on some projects, particularly within the Telecom space. The worst performing holding was Finisar, a maker of optical networking components that experienced lingering inventory issues emanating out of Asia. On-demand email marketing firm Constant Contact reported a solid quarter but the stock suffered as Wall Street was focused on net new subscriber growth.

Elsewhere, Industrials lagged as Tutor Perini, a construction and engineering firm, reported a somewhat sloppy quarter even though its order backlog grew more than expected—which to us is what drives future earnings. Energy was down on an absolute basis, though the portfolio's holdings far outperformed the benchmark exposure. Holdings within Financials also suffered, notably Calamos Asset Management which dropped more than 10%.

All in all, we were not disappointed with the quarter, primarily because the Fund made up ground lost during the period during the first three days of trading of the third quarter. Thus, we held our own on the downside given the new investment enhancement of placing more weight on what the sector percentages’ that our ERM model are producing without losing any octane on the upside. We remain bullish looking ahead as we feel expectations have been set lower on Wall Street due to macroeconomic concerns much like what happened in 2010. We anticipate that the earnings season will be solid as the scarcity of growth will be the theme and those companies that can provide the numbers will attract the capital. We are also excited about a lot of companies in expanding markets, such as social media, digital video, and the smartphone supply chain within Technology; fluid management and fracking within the North American Energy markets; and nano-technology equipment—for example, labs on a chip—within the Healthcare industry. We are not having any problem finding new and dynamic ideas.

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

July 12, 2011

As of June 30, 2011, Zagg comprised 1.28% of the portfolio's assets, Crocs– 1.34%, Ulta Salon – 1.47%, Cepheid – 1.57%, Mako Surgical – 1.14%, Finisar  – 1.14%, Constant Contract  – 0.92%, Tutor Perini– 1.41%, and Calamos Asset Managment – 1.62%.

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

Before investing, carefully consider the fund’s investment objectives, risks, charges and expenses. Contact 800 992-8151 for a prospectus containing this and other information.

Read it carefully. Aston Funds are distributed by BNY Mellon Distributors Inc.

2nd Quarter 2011 Commentary - ASTON/Herndon Large Cap Value

The Fund outperformed its Russell 1000 Value Index benchmark during the second quarter. Stock selection and sector allocation were both positive with stock selection contributing 66% of the outperformance and sector allocation 34%. Holdings in eight of 10 sectors in the portfolio bested their respective sector and/or the overall index during the period. The two areas of the portfolio that lagged were Materials and Utilities.

Performance for the index itself was fairly broad with five sectors—Healthcare, Utilities, Consumer Staples, Telecom, and Consumer Discretionary—outperforming the overall index. Unlike the first quarter, which had more of a cyclical tilt, the second quarter saw the outperformance of more defensive sectors and the index finishing with a negative return as asset and capital preservation became clearly paramount.

Defensive Boost

The three sectors with the highest contribution to relative returns for the quarter were Consumer Staples, Consumer Discretionary, and Financials. The first two sectors benefitted from the defensive orientation of the market. Solid performances from multinational companies such as Herbalife, Pepsico, and Colgate-Palmolive aided returns within Consumer Staples. Consumer Discretionary rose with a wide variety of price point demographics represented by companies such as Coach, YUM Brands, and TJX Companies. Financials continued to help returns on a relative basis due to the Fund’s underweight exposure and a focus on specific industry groups. These groups included asset management, consumer credit, and capital market players, with the avoidance of most major banks.

The three top individual contributors to performance were Herbalife, Copa Holdings, and Coach. It should be noted that Copa Holdings and Coach were two of the worst performers in the Fund last quarter. The reversal in performance illustrates one of the key principles to our investment philosophy, “We cannot predict the timing, magnitude, or duration of returns. All we can do is fill the portfolio with what we think are the best value creating opportunities available.”

The lack of value creating opportunities led to underweight stakes in the Utilities and Telecom sectors, which were two of the lowest contributing sectors in the portfolio. In addition, a poor perception of the outlook for Owens-Illinois resulted in that stock declining, which contributed to the lagging performance within Materials. Other individual holdings with the greatest negative contribution to returns were Babcock & Wilcox and Waddell & Reed. All three stocks remain holdings in the portfolio.

Portfolio Positioning

At the end of the quarter, the Fund was overweight Consumer Staples, Materials, Consumer Discretionary, Energy, and Health Care, having increased exposure to both consumer areas and Energy during the period. Within this exposure are some defensive oriented sectors as well as those with a correlation to economic growth. We added to the portfolio’s stake in Industrials in bringing it up to close to neutral with the benchmark. Financials, Utilities, Telecom, and Technology remain underweight relative to the index despite the addition of new names in Financials and Telecom. We decreased our exposure to Utilities. Sector over- and underweights should not be taken as signaling a certain perspective on the market, but as a reflection of where we are finding the most value creating opportunities through our bottom-up analysis.

We eliminated 15 stocks from the portfolio during the quarter due to sector adjustments and/or valuation or fundamental issues. These sales included Goldman Sachs, SLM Corporation, Marathon Oil, Johnson & Johnson, AES Corporation, Garmin, and Energizer. The level of turnover was higher than usual as stock fundamentals appear to have eclipsed what we deemed to be relatively attractive valuation levels. Once again, as part of our investment philosophy, “We have a core process but no core holdings.” If a stock no longer appears to be a value creating opportunity, we sell.

With the increased number of stocks sold, we initiated positions in YUM Brands, Coca-Cola Enterprises, Frontier Oil, Kimberly-Clark, Lockheed Martin, Ross Stores, and Best Buy among others. These stocks were added to increase exposure in the areas noted above after first being identified as a value creating opportunity followed by fundamental analysis to vet out each company's potential as a portfolio holding.

Outlook

From an economic and political perspective, it appears that as one storm subsides, another begins. Japan’s tumultuous natural disaster proved to be the short-lived disaster du jour as the European debt crisis continues to gain headlines. As if the debt across the Atlantic Ocean was not enough to take center stage, the United States appears to be playing a political game of chicken with its own debt as a budget has yet to be passed. The partisan gamesmanship may be a ploy to position one political party against the other as the presidential election begins to gain steam. The market appears more sanguine in expecting a resolution at some point. This balanced perspective is likely a pragmatic and prudent one.

The economic landscape seems to be on a slow boat to China, pun intended. China, along with the other BRIC (Brazil, Russia, India, and China) countries, is gradually becoming the dog that appears to be wagging the U.S. tail. Unlike the U.S., which continues to persist with historically low interest-rates and bond yields (which may actually be negative when adjusted for inflation), China and some of the more forward-looking developed economies are starting to raise interest rates to head off inflation.

Without much evidence that the Federal Reserve is prepared to follow in lock-step, the bond and cash markets continue to look unattractive compared with equity markets. Some investors may seek attractive returns outside of the U.S. For those with more of a domestic orientation, we think stocks appear to be a better place to be.

For the Fund, we are struggling to find as many value creating opportunities as we have in the past. The market is bidding up valuations beyond where we view their fair values should be. We have still been able to stay fully invested, but the number of opportunities allowing us to do so has diminished significantly.

The portfolio is currently most overweight in Consumer Staples, traditionally a defensive sector. We have not waved the proverbial white flag of surrender to the market. We are overweight Consumer Staples because it is an area where we have an above average representation of value creating opportunities. As this sector represents a disproportionate amount of the opportunities that we are finding, it does call into question what might be in store for the rest of the market. Beyond its defensive characteristics, Consumer Staples also offers products which have some of the broadest geographic reach collectively as a sector. Thus, although it has defensive appeal, there are other solid reasons to have exposure to the sector.

In contrast, Financials continue to be the area where we are most challenged to find opportunities. We think that the domestic focus limits a major fundamental catalyst. We also think that the market’s fixation on book value has temporarily limited the stocks correcting to where the fundamentals are leading them, which we believe is lower. The catalyst for the correction may be the day when the Federal Reserve finally decides to raise interest rates. 

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

July 6, 2011

As of June 30, 2011, Herbalife comprised 2.31% of the portfolio's assets, PepsiCo – 2.00%, Colgate-Palmolive – 1.31%, Coach – 2.36%, YUM Brands – 1.74%, TJX Companies – 2.64%, Copa Holdings – 2.62%, Owens-Illinois – 0.92%, Babcock & Wilcox – 1.75%, Waddell & Reed – 1.84%,  Coca-Cola Enterprises – 1.65%, Frontier Oil – 1.88%, Kimberly-Clark – 1.60%, Lockheed Martin – 1.68%, Ross Stores – 0.81%, and Best Buy – 0.87%.

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

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

2nd Quarter 2011 Commentary - ASTON/Montag & Caldwell Mid Cap Growth Fund

The second quarter was another volatile one for equity markets. After reaching new highs in April propelled by generally positive first quarter earnings reports, the market embarked on a steady descent from early May to the middle of June as renewed concerns about the economy, the end of the Fed’s second round of quantitative easing, and a possible Greek default emerged. The market then rallied late to bring the major indices back to around the break-even level for the quarter. Not surprisingly, given all of the macroeconomic issues, investors sought the perceived safety of higher-quality, more-defensive areas of the market. Factors such as larger market-cap size, higher return-on-equity (ROE), and lower beta (a measure of statistical volatility) generally outperformed. Defensive-oriented sectors such as Healthcare, Consumer Staples, Telecom, and Utilities delivered positive returns while cyclical sectors generally lost ground. 

Mid- and large-cap stocks led the way during the quarter in delivering modest positive returns, while small-caps suffered a setback as represented by the 1.6% loss to the Russell 2000 Index. Growth outperformed value across the market-cap spectrum with the Fund's Russell Mid Cap Growth Index benchmark comfortably exceeding its Russell Mid Cap Value Index counterpart by more than two percentage points, adding to its advantage for the year-to-date through the end of June.

Winners and Losers

The Fund kept pace with the benchmark during the quarter, finishing in a virtual dead heat with the index. In general, stock selection within Technology, Materials, and to a lesser extent Energy aided relative performance. Communications equipment firm Polycom was the Fund’s best performer as it continues to execute well and gain market share in the video conferencing space. We trimmed the position since it was the portfolio’s largest holding at the time and the stock was trading in excess of our estimated present value. Within Materials, Ecolab enjoyed strong gains on solid first quarter earnings. There are signs of encouraging progress on European profit improvement following a restructuring, which gives management confidence that the company can deliver even better earnings growth in 2012 and 2013.

Other standout individual holdings of note included O’Reilly Automotive and Mead Johnson Nutrition, a leader in pediatric nutrition products. O’Reilly reported a solid quarter with modest top- and bottom-line beats relative to expectations, leading us to add to the position. The story slowly is morphing from improving productivity and growth from acquisitions to one of organic growth and cash flow.

Sector allocation and stock picks within Healthcare, Consumer Discretionary, and Consumer Staples weighed on performance. Weakness in St. Jude Medical followed its strong gains during the first quarter, thus its decline may have been due to some profit taking. Harman International, Panera, and Dick’s Sporting Goods all dropped during the period in contributing to the missed results within Consumer Discretionary. Baking soda manufacturer Church & Dwight and spice-maker McCormick lagged among Staples.

Elsewhere, NVIDIA and Oceaneering International were among the biggest individual detractors from performance. NVIDIA was one of the weakest performers during the quarter and we continued to add to the position, averaging down the portfolio’s cost basis, on weakness as we expect strong earnings in the second half of the year driven by share gains in supplying chips to the smartphone and tablet markets. We harvested some gains in Oceaneering early in the quarter ahead of the downdraft in Energy. We view the recent pullback in oil prices as healthy as it helps sustain the cycle.  

Positioning and Outlook

Continuing on the Energy theme, we sold one position from the portfolio during the quarter, Southwestern Energy, based on our concerns about the company’s heavy dependence on natural gas. It was replaced by a new position in Newfield Exploration, which is quickly diversifying its asset mix to include more oil and less natural gas. Although Southwestern continues to perform well, growing its production profile faster than the rest of the industry, we have become more cautious on the near-to-intermediate term outlook for natural gas prices. Conversely, the prospects for oil appear to be on more solid ground, and Newfield is rapidly growing its production in the Uinta Basin of Utah and the Bakken formation in North Dakota. We also added a new position in Sapient, a leading independent digital marketing and IT services firm. We believe the firm is well-positioned to benefit from the ongoing secular shift of ad spending from traditional media to the Internet. Unlike its competition, Sapient is uniquely capable of delivering both the front-end creative campaign and the back-end technology implementation to clients.

Looking towards the second half of the year, we think the market can continue to march higher from current levels, driven by sustained economic growth in the U.S. and abroad. We expect volatility to continue in the near-term, however, due to the uncertainty associated with the end of quantitative easing as well as the highly contentious negotiations on raising the federal debt ceiling. We hold out hope that the politicians will eventually do the right thing and reach a favorable resolution that brings forth a credible plan to significantly reduce our federal deficits and debt over the intermediate-to-long term without significantly imperiling the current fragile recovery. We believe that without the benefits of additional fiscal or monetary stimulus, the economy may have a tough time sustaining growth much above 2.0% to 2.5% because of the ongoing effects of deleveraging. Furthermore, corporate profit growth will likely downshift as companies face tougher comparisons and as rising input and labor costs affect historically high profit margins. It is under this framework, though, that we believe the period ahead continues to favor the higher-quality growth stocks that comprise the portfolio. 

M. Scott Thompson, CFA                  Andrew W. Jung, CFA
July 1, 2011

As of June 30, 2011, Polycom comprised 3.27% of the portfolio’s assets, Ecolab – 3.23%, O’Reilly Automotive – 2.27%, Mead Johnson Nutrition – 1.36%, St. Jude Medical – 2.12%, Harman International – 1.10%, Panera Bread – 1.01%, Dick’s Sporting Goods – 1.04%, Church & Dwight – 1.87%, McCormick Company – 1.90%, NVIDIA – 1.80%, Oceaneering International – 1.69%, Newfield Exploration – 1.44%, and Sapient – 0.75%.

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

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

1st Quarter 2011 SMA Commentary

The first quarter of 2011 was characterized by increasing concerns about U.S. fiscal and monetary policy, especially the effect of the pending conclusion of the Federal Reserve’s second quantitative easing program (QE2) and a declining US Dollar. Hence, anything related to a declining dollar “hedge” performed relatively well. This held true for oil, precious metals, basic materials, and agricultural commodities, as well as those countries which are heavily commodity-oriented like Canada and Russia.

The stategy underperformed its composite benchmark (35% Russell 3000 Index/35% MSCI World ex-US Index/30% the Barclays Capital Aggregate Bond Index) during the period despite significant weights in the above mentioned areas of the market through a variety of ETFs. Overall performance was dampened as our risk model sought to lower exposure to “dollar hedge” investments as they surged as the quarter progressed. The proceeds from those investments were used to increase the portfolio’s weighting to government-backed, lower volatility ETFs. As a result, approximately 25% of the portfolio was in short-term, high credit-quality bonds and cash instruments by the end of the period, versus roughly 15% at the beginning of the quarter. This had the effect of detracting from performance, but it also controlled and reduced the strategy’s risk profile. In addition, some individual holdings were a relative impediment to performance, such as REIT-related ETFs, and a risk hedge through a volatility index exchange-traded note.

Global markets have generally ratcheted irregularly higher, assisted by massive central bank liquidity efforts. Markets have been behaving in an anxious, “twitchy” fashion. This market behavior is reflective of continued concerns about uneven economic growth, weak job growth, excessive debt, currency devaluations, latent inflation, and sovereign debt defaults. As both Warren Buffet and Ben Bernanke have commented, “We are in uncharted waters.” These concerns continue to be reflected in our risk model, resulting in what we consider to be a relatively risk averse investment posture for the portfolio. 

Smart Portfolios
Seattle, WA

1st Quarter 2011 SMA Commentary

The first quarter of 2011 saw the best performance by the S&P 500 Index for the beginning quarter of a year since 1998. This occurred despite a myriad of bad global news—more Middle East strife, a horrific earthquake and tsunami in Japan, and more debt problems surfacing in southern Europe, specifically in Portugal. The only two sectors within the S&P 500 that beat that overall index, however, were Energy and Industrials. Within the strategy's Russell 1000 Growth Index benchmark, Financials and Healthcare could be added to that list, but only barely. Thus, it was a narrow performance and, unfortunately for the portfolio, the bulk of the outsized Energy returns came from exploration and production companies, which the portfolio was light in because of the commodity risk.

Energy Drag

The strategy lagged the benchmark by a fair amount during the quarter, weighed down by the underperformance in Energy. That sector, which had been huge for returns across the back half of 2010, lagged as service names did not keep pace with the major oil producers of the world. It also didn’t help that one oil services firm that was a top-10 holding had to book a nonrecurring tax charge of $500 million. That stock was down 2.2% for the quarter while the rest of the sector gained 16.5%. We added to the portfolio’s Energy exposure during the period through a couple of coal-mining stocks in the wake of the tragedy in Japan, which will have to bring back those power sources with other alternatives.

Technology had a tepid quarter, and the strategy’s picks lagged the benchmark in that area as well. One name that did stand out was a Chinese online media portal, whose stock soared during the period. Financials were also weak as holdings in two major investment banks were big disappointments. Finally, a major domestic steel producer lost ground, leading to underperformance in the Materials sector.

Some things that did go well for the strategy were new positions in Healthcare and stock selection in Consumer Discretionary. We had avoided Healthcare for the better part of two years, but that changed during the first quarter as we added an HMO and pharmaceutical company to the portfolio, which provided a boost from an area that generated solid returns overall. Although we are still currently underweight Healthcare, we think that may change as this is an area bubbling up in our fundamental work that can also serve as a defensive hedge against potential inflation. Consumer stocks delivered strong returns in what was a weak area for the benchmark.

Outlook

We have been quite bullish since Labor Day and the strategy has done extremely well against the benchmark since then. We think it’s going to get a little trickier going into the second quarter and beyond, however, given the price of gasoline. March saw the lowest consumption of gasoline in more than five years, an indication that the price is starting to bite the consumer.

The whole world is complaining about inflation. But forgive us for thinking that that was the whole idea behind the Federal Reserve's policy of quantitative easing (QE). We had better hope it produces some inflation, unlike what happened in Japan during the 1990s. The strategy is now within 5% of recapturing the entire drawdown of 2008. This didn’t happen in Japan when that country instituted its own form of quantitative easing. The trick will come when it is time to take the foot off the liquidity gas. When that is we don’t know, but ultimately we still view stocks as dirt cheap relative to bonds. 

While the U.S. has its fair share of problems, we do like the rhetoric coming out of Washington with regards to spending cuts. Additionally, the U.S. needs an energy plan to cut our current account deficit. We have more natural gas than the Saudi’s have oil, so there exists the possibility of some distinct positives that could occur. In the meantime, we are focused on earnings season and trying to identify those names that can execute a business model and drive estimates higher as it seems we may be back to some sense of economic normalcy. We will be monitoring credit spreads closely to see if that is the case.

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

January 10, 2011

1st Quarter 2011 SMA Commentary

The strategy outperformed its Russell 1000 Value Index benchmark during the first quarter of 2011. Stock selection and sector allocation were both positive with stock selection contributing roughly 74% of the outperformance and sector allocation 26%. Seven of 10 sectors in the portfolio bested their respective sector and/or the overall benchmark during the period.

Performance for the benchmark was fairly narrow, with only four sectors—Energy, Industrials, Consumer Discretionary, and Materials—outperforming the overall index. A more cyclical tilt was clearly evident in the market's direction during the quarter. Economic statistics continue to improve, which has given the market reason to embrace sectors and stocks with more economic sensitivity.

Underweight Financials

The three sectors in the portfolio with the highest contribution to performance for the quarter were Financials, Energy, and Healthcare. This fairly eclectic mix demonstrates how our approach to bottom-up investing runs contrary to a more top-down approaches trying to chase broader trends. The portfolio’s position in Financials more than doubled the benchmark’s sector returns, despite a significant underweight, as a concentration on asset managers benefitted from the market’s upward momentum. Holdings in Energy were fairly diversified and rose along with commodity prices as unrest in the Middle East moved to center stage. Two major oil producers were among the top-three individual contributors to returns. Within Healthcare, an emphasis on specialty pharmaceuticals that are finding creative ways of navigating the dreaded patent expiration cliff helped as investors reassess the sector’s prospects.

Areas with the lowest level of contribution were Industrials, Consumer Discretionary, and Telecom. The portfolio’s Industrial holdings lacked the cyclical leverage that made the sector the second best performer in the Russell 1000 Value. As a result, the sector generated a modest decline with one stock negatively affected by higher energy prices. Consumer Discretionary performed relatively well with the exception of one retailer which declined owing to its 20% revenue exposure to Japan. We have a great deal of sympathy for those affected by the disaster that has struck Japan. Despite this event, we are still confident in the long-term prospects for the retailer and it remains a holding. The strategy’s one holding in Telecom does not have the transformative business prospects of other major telecommunications firms, yet we believe that it is quite competitive in their rural niche areas where it provides services.

Portfolio Positioning

As of the end of the first quarter, the strategy was overweight Energy, Consumer Staples, Materials, Technology, and Healthcare. It remains significantly underweight Financials, Industrials, Utilities, and Telecom. The sector over- and under-weights should not be taken as a signal of a certain perspective on the market. Our investment philosophy simply dictates that our prized value creating opportunities, derived from our bottom-up analytical work, are currently most pronounced in those sectors that are overweight, and lacking in those that are underweight.

Stocks eliminated due to sector adjustments and/or valuation or fundamental issues included three Energy companies and one Consumer Staples firm. Energy holdings in the portfolio have been rapidly approaching our upside potential targets, hastened we believe by the rise in the commodity prices associated with the unrest in the Middle East. In addition, one stock was sold due to fundamental concerns.

The result of this and related activity during the quarter was that the strategy increased its exposure to Healthcare, Financials, Consumer Discretionary, and Industrials. Exposure was decreased in Energy and Materials. All other sectors essentially remained the same with the exception of market appreciation or depreciation.

Outlook

We are moving towards another proverbial wall of worry scenario. It appears that a historic movement of revolution and reform is underway in the Middle East. The violence and unrest has clearly become a point of interest for the world as a rather crude form of democracy appears to be spreading. The result has been concern over precious oil reserves that the world depends upon.

Japan has had a disaster of historic proportions with the ramifications and consequences still unclear. It is expected that the resiliency and ingenuity of the people along with the support of world-wide relationships will find them victorious over the situation. The question is how and when. Economic growth is still tepid within developed markets across the globe, and these exogenous shocks to the economic system are hindering rejuvenation even though they have not completely derailed the progress.

Domestically, the run for President of the United States has just begun. President Obama has launched his campaign against a field of Republican competitors. Will the changing tides of economics and stock market performance result in a second term? We will see.

Are there things to think about? Yes. Are there things to worry about? Yes. Are there always things to think and worry about? Yes. So, is this time really different? No.

Problems and issues are always lurking around the economy and equity markets. When we see them face to face, we are frequently more concerned with them than what the passing of time suggest they warrant. In these uncertain times, which I posit are more the reality and the norm than many might suggest, we also see some rays of hope.

Fundamentals are definitely improving. Unemployment is moving down. Interest-rates, viewed as a sign of better fundamentals and associated potential inflation, are moving up. The stock market after an initial decline has risen quite significantly since President Obama was inaugurated on January 20, 2009.

We do have a concern as to whether the stock market has risen too far too fast and possibly has eclipsed the level of fundamental improvement. If the prospects in the future justify it, the market has been correct. But, we do not know if that will be the case. Instead of hoping and guessing, we seek value creating opportunities at the individual stock level, which also drive the portfolio’s sector allocations. By doing so, we tend to find ourselves moving contrary to the market’s enthusiasm, as well as its pessimism.

Would we be surprised to see the market pull back? No. Are we predicting it will? No. But, we think that the current environment of optimism should give investors a reason to step back and reassess.

Our process has led to a portfolio overweight in Energy, Consumer Staples, Materials, Technology, and Healthcare. Similarly, we have lowered its exposure to some of the areas that have been recent darlings of the market, such as Energy and Materials, while increasing exposure to other areas mentioned above. We cannot predict whether these recent changes will result in immediate outperformance. We can confidently share that we believe we are moving in the right direction long-term, even if we may be out of step with the market in the short run. 

Randell A. Cain, CFA
Portfolio Manager

April 4, 2011

1st Quarter 2011 SMA Commentary

Equity markets showed remarkable resilience during the first quarter of 2011, rallying in the face of sharply rising oil prices and a devastating earthquake and tsunami in Japan. Even the release of weak economic data in early March failed to have a lasting impact on stocks. Small-cap stocks performed especially well, with the Russell 2000 Index gaining nearly 8% versus a little more than 6% for the larger-cap Russell 1000 Index. Style performance was mixed across the market-cap spectrum, with no clear leadership between value and growth stocks among mid- and large-cap stocks.

High dividend stocks continued to lag the broader market. Since the beginning of the year, 117 companies in the S&P 500 Index initiated or raised their dividend by a record $16.6 billion. Financials accounted for 42% of the increase following the completion of another round of stress tests by the Federal Reserve. Despite the year-over-year increase in S&P 500 dividends, however, the highest yielding companies in the index continued to underperform the lowest yielding according to Ned Davis Research. The performance gap has been substantially in favor of the lowest yielders as high-dividend stocks have lagged the broader market since the Federal Reserve announced a second round of quantitative easing in August 2010.

The dominant performance theme for stocks during 2010 was volatility (as measured by beta). Although the outperformance of high-beta stocks is common in the early stages of a market recovery, the current trend is unusually elongated. As discussed in last quarter’s commentary, we believe the primary factor driving this trend is the extraordinary liquidity being provided to markets by the Federal Reserve. As the market looks ahead to the end of the Fed’s latest round of quantitative easing (QE2) in June, however, there are signs that the beta theme is beginning to fade. High-quality stocks regained their leadership position, modestly outperforming low-quality stocks during the first quarter. According to Bank of America/Merrill Lynch, fundamental-driven strategies substantially outperformed as low price/earnings to growth ratio (PEG) and high earnings-yield strategies led more risky high-beta and small-size strategies. Interestingly, the dividend-yield strategy was the worst performing during both the first quarter and the previous six months.

Lagging Financials

The strategy underperformed its Russell 3000 Value Index benchmark during the first quarter as both sector allocation and stock selection had a negative effect on relative results. The portfolio also underperformed in all three market-capitalization groups. Four of the five lowest contributors to performance were small-cap stocks, resulting in the portfolio’s small-cap holdings lagging its benchmark peers by nearly six percentage points. Although the strategy’s underweight in large-caps and overweight in mid-caps was positive, it was insufficent to offset the negative impact of stock selection in both groups.

Holdings in the Financials and Materials sectors contributed the least to the portfolio’s absolute returns, while stock selection within Financials and an overweight position in Consumer Staples were the biggest detractors versus the index. Consumer Staples, largest overweight position in the portfolio, was the worst performing sector in the benchmark due to concerns about rising input costs. The adverse stock selection in Financials was primarily the result of two positions, a trust company that acquires and develops middle-market businesses and a REIT.

Other notable detractors from performance during the quarter included a restaurant chain and a technology company. The restaurant operator reported soft second quarter revenues as snow storms in the Southeast negatively affected store traffic. Margins came in slightly lower due to higher food costs, a trend that was anticipated by the market and is expected to continue for the rest of the fiscal year. The company maintained its revenue and earnings guidance for fiscal 2011, however. In anticipation that Wall Street would grow increasingly concerned about the firm’s prospects in the face of rising gasoline and input prices, we substantially reduced the position in the portfolio during the period.

The tech company drifted lower despite reporting earnings that exceeded consensus estimates in late January. The adverse impact of tablet and smart phone growth on PC shipments remains an overhang. Technology market research firm, Gartner, again lowered its forecast for PC growth in 2011 and 2012, and many Wall Street analysts are forecasting even greater declines. Despite significant effort, the firm has yet to gain meaningful market share on either the rapidly growing tablet or smart phone platforms. That said, we think the firm’s dominant position in the PC segment drives a very attractive risk-reward scenario.

Energy Stands Out

Holdings in Energy and Industrials were the biggest contributors to performance on an absolute basis, as they were also the best performing areas of the benchmark. The largest positive contributors to relative performance were from an underweight in Financials and stock selection in Telecommunications. Strong results from one of Brazil’s largest wireless company drove much of the outperformance in the Telecom space.

A sizeable number of holdings increased their dividend payments during the period. As expected, one major bank announced a large dividend increase following the completion of a stress test by the U.S. Federal Reserve. In addition, two defense contractors already announced increases in dividends payable during the second quarter.

Three Energy-related stocks stood out on the upside during the quarter. One oil major in particular completed a $15 billion divestiture plan in 2010 which supported a substantial dividend increase, debt reduction, and a share buyback. In March, management announced plans to increase non-core asset sales in 2011 and return the proceeds to shareholders via additional dividend increases and share repurchases. As oil prices surged and the stock began trading at a significant premium to our calculated Absolute Value, we trimmed the position within the portfolio. Rising oil prices and turmoil in North Africa provided a tailwind for many energy stocks during the period, but strong international production growth from overseas properties boosted another of the portfolio’s holdings. The portfolio’s lone remaining Master Limited Partnership (MLP) rose during the quarter after the company reported solid reserve and production growth. Despite the partnership’s conservative hedging policy, rising energy prices also had a positive impact as the hedges employed allow some upside participation. 

Elsewhere, shares of an HR outsourcing provider reacted positively after reporting strong fiscal second quarter results. Improving employment and marginal increases in business spending led to strong top-line growth and an upbeat outlook. The company also raised its dividend, marking its 36th consecutive annual increase.  A railroad company capped off an exceptional year by reporting solid results, with revenue increases driven by higher volumes and pricing. In January, the firm announced it had won an exclusive contract for a major mail delivery carrier’s eastern intermodal business. This contract marks the first time in more than 40 years the carrier has regularly employed rail, demonstrating the great strides the railroad has made in improving the reliability of rail transport. In addition, the firm repurchased stock and raised its dividend during the quarter, and market weakness in February gave us an opportunity to add to the portfolio’s position.

Portfolio Positioning

Turnover during the quarter was relatively low, with only modest changes in the relative positioning of the portfolio. An overweight position in Consumer Discretionary was reduced noticeably, primarily as a result of the elimination of two positions and the reduction to holdings in two others.

Conversely, the weighting in Telecommunication and Industrials rose during the period.  Additions to current positions in Telecomm boosted the portfolio from underweight to slightly overweight the sector versus the benchmark. The purchase of a storage company and additions to current stakes in a railroad and two defense contractors offset the reduction to a waste disposal firm after that stock reached our Absolute Value, nearly doubling the overweight in Industrials by quarter end.

Outlook

During the first quarter of 2011, equity markets continued to advance even in the face of sharply higher oil prices and a devastating natural disaster. We have seen the operating environment for many of the portfolio’s companies continue to improve over the past six months. Thanks to healthy balance sheets, easy credit, and a host of fresh tax incentives, there has been a rebound in capital spending, especially in areas focused on improving productivity and reducing labor costs.  Our calculated discount-to-value for the portfolio continues to reflect that stocks are fully valued, but also supports the conclusion that the market performance during the period generally reflects the improving fundamentals. In such an environment, earnings will be a primary focus as any moderation in expected growth is likely to prompt a corresponding correction.

But risks are increasing and momentum is fading. During the past six weeks, the trend in markets, economic data, and management commentary has become more uneven. In March, more Wall Street analyst estimates were revised down than up. Company management teams are increasingly focusing their comments on inflationary pressures, margin compression and, in some cases, weakening sales as a result of higher energy costs. Many are also clearly concerned about the strength of the recovery—the second weakest economic expansion in the post-war period thus far. With the recovery in stocks one of the strongest on record, investors face the enormous risk of extrapolating recent corporate and market performance into the future. Not only have margins likely peaked for this stage of the cycle, valuations are full. Additionally, the stimulus that has fueled the market rally during the past seven months is winding down. Unemployment remains high and housing has yet to show any signs of a material rebound. In other words, we are likely transitioning into a period of modest earnings growth and heightened market volatility.

Still, the fundamental outlook for dividend-focused strategies continues to improve. Not only did we see robust dividend increases in the portfolio’s holdings during the quarter, but the aggregate dividends for the S&P 500 Index increased substantially year-over-year. Despite their rapid growth, dividends are still lagging earnings. This has contributed to a surge in cash on corporate balance sheets, which should support further dividend increases even as earnings growth slows in the coming year. Mounting concerns about rising inflation and interest-rates have highlighted the relative attractiveness of high-yielding stocks for income-oriented investors.

Regardless of what happens in the broader market we are pleased with the quality and positioning of the strategy. We remain steadfastly focused on stocks with high and growing dividends, healthy balance sheets, attractive valuations, and stable growth. The market advance has allowed us to reduce or eliminate positions at substantial premiums to our assessed Absolute Values. At the same time, heightened volatility presented us with new value opportunities. We believe that as earnings growth slows, the high-correlation, high-beta trend that has dominated the market during the past two years will fade, creating excellent opportunities for our Absolute Value style of investing. 

River Road Asset Management
20 April 2011

1st Quarter 2011 SMA Commentary

The market continued to rise during the first quarter of 2011 on the back of modest improvement in the economy and a pickup in mergers and acquisitions activity. The U.S. economy showed further signs of recovery as employment growth picked up, though it remained modest despite a tick up in consumer expectations. The Federal Reserve’s quantitative easing program is likely to continue through June as policymakers consider the economic recovery fragile and not yet self-sustaining. A brief, mid-quarter correction in reaction to the political turmoil in the Middle East that caused a spike in oil prices and the potential economic disruption associated with the earthquake and tsunami in Japan reversed itself once investors quickly concluded that these events were unlikely to derail the global recovery. Overall, money flows into equities from fixed-income continued as US equities remain attractively valued on a relative basis, while long-term government bonds posted losses during the quarter.

The value component of the Russell Midcap Index slightly trailed its growth counterpart owing once again to its higher weighting in financial services stocks (banks in particular) that lagged the overall index as well as better performing Consumer Staples stocks on the growth side. High-quality stocks, larger market-cap stocks along with those with higher volatility (beta), were the best performers—which is not completely unexpected as the economy begins to normalize.

Strong Quarter

The strategy delivered solid absolute and relative performance during the quarter. Stock selection within Industrials, Consumer Discretionary, and Financials plus an underweight position in the poorly performing Financials sector were key contributors. Industrials were one of the largest weightings in the portfolio, and those holdings produced double-digit returns. In the latter sector, an international airfreight services provider saw robust volumes and firm pricing due to strong secular trends and supply constraints. Also, an electronic and communication systems provider for space, defense and industrial applications announced the sale of its legacy piston airplane engine business for a healthy price and the acquisition of a higher margin and growing niche electronics business. The two deals are accretive to earnings and facilitate the company’s shift toward higher margin commercial businesses.

Two stocks boosted returns within Consumer Discretionary. One emerged from bankruptcy last summer, announced better than expected results and reacted positively to insider buying and its first investor day following the reorganization. The other announced better than expected earnings and increased its guidance for 2011.

Stock selection in Healthcare and an underweight stake in surging Energy stocks modestly detracted from relative performance. In addition, holding residual cash amid a strong equity market served as a minor headwind.

Portfolio Highlights

At Cardinal, we focus on finding companies with solid fundamentals at opportunistic valuations. One example of that process is a vehicle redistribution business that operates in the U.S. and Canada. Company operations include whole car auctions, salvage auto auctions, and a used car dealer floor-plan finance operation. The company also provides value added services that add to profits. As the businesses are oligopolies with pricing power, the firm generates substantial free cash flow. In 2007, the company went private in a leveraged buyout which permitted it to make needed management, operational, and structural changes. A poorly handled IPO in late 2009 provided an opportunity to invest at an attractive price in a business we have followed for a long time. We think management’s current focus on reducing debt should benefit shareholders in the next few years as they are able to focus on growth opportunities and whole car industry volumes turn up.

Outlook

We remain constructive on the economy and equity market as fiscal and monetary policy continues to be accommodative and economic and credit conditions continue to improve. Equity valuations remain attractive and mergers and acquisition activity is increasing. The cyclical rotation of fund flows from fixed-income into equities is only likely to gain momentum if the positive relative return trend for equities persists. Cardinal’s lower weighting in bank stocks, which has been a major contributor to the strategy’s strong relative performance remains in place. With recent adverse regulatory changes like the Dodd-Frank bill, we believe that the banking business is not as attractive as it once was, with the result that historical valuation metrics are no longer relevant. Assuming a normal economic recovery, we find very few banks which offer us the high rates of return or visibility that we seek in an investment opportunity. Our approach of opportunistically buying sound free cash-flow producing businesses at inexpensive valuations has generated attractive long-term returns, and we believe that it will continue do so. The management teams of the companies in the portfolio have become much more active in redeploying their cash flow in accretive ways, including acquisitions and share repurchases. We think these actions bode well for the future.

The Cardinal Capital Team

1st Quarter 2011 SMA Commentary

Ouch, What a Great Quarter

With investors focused on unsettling world events, equity markets shone brightly during the first quarter of 2011, as small-cap stocks paced the broader market higher. This was the strongest first quarter in the stock market in 13 years, as measured by the S&P 500 Index. News on the domestic economy reflected a continuation of modest economic growth with stubbornly high unemployment. This backdrop increased the probability that monetary policy will continue to remain liquid while we wait for that liquidity to find its way more firmly into the real economy and not just into financial assets and commodities.

Global news was disconcerting, given the unrest in North Africa and the earthquake/tsunami in Japan. Fears of shortages and bottlenecks further raised the specter of inflation, with strong gains in commodity prices during the quarter, particularly food and energy. These are areas that touch all consumers, and increases could very well crimp consumer demand. We will be ever watchful for its potential impact.

The strategy delivered solid absolute returns during the quarter, but lagged its Russell 1000 Index benchmark. All sectors of the portfolio and the benchmark delivered positive absolute returns. On a relative basis, the underperformance versus the index came from weak stock selection in the Consumer Discretionary, Financials, and Materials sectors, while sector allocation was neutral overall. One long-term profitable holding in a retailer dropped on concerns about peak margins and increased competition. We had been taking profits in the position owing to its rich valuation and ultimately exited it for better relative opportunities. Within Financials, a major investment bank detracted from relative returns as concerns about the revenue outlook at the firm weighed on the stock.

Holdings in Technology made a positive contribution to relative return, but it was a bit of a round trip with strong gains in January and February largely offset by weakness in March. One tech company rose on optimism for its new mobile products, while another reported revenue and earnings that exceeded expectations. We decided to sell the latter position due to the increased valuation on the stock. Stock selection and an overweight to the Industrials sector benefitted the portfolio as well.

Although the Energy sector was by far the best performing area on an absolute basis, it was a mixed bag for the portfolio in relative terms. Strong returns from two top-10 holdings were offset somewhat by a disappointing position in an oil services firm. We initiated the oil services position during the fourth quarter because we believed that the management team had made good progress in the past few years in expanding its offerings to increase its global footprint and increase its presence in the more lucrative foreign markets. We further added to the holding during the first quarter. When the company announced that accounting issues caused the delay of their SEC filings, however, we sold the stock—realizing the accounting issues that we thought had been sufficiently corrected are still a problem.

Portfolio Positioning

The portfolio remains broadly diversified and continues to be driven by our bottom-up fundamental analysis. This past quarter, we reduced the portfolio’s emphasis on Consumer Discretionary, mainly due to valuation and opportunities we identified in the Energy sector. Many leading energy companies were trading at what we consider depressed valuations as those with a focus on natural gas have been ignored by investors.

Natural gas is one of the few commodities that has not participated in the major upswing in the energy complex and we believe those companies focused on domestic exploration and production of natural gas provide attractive opportunities. The price of natural gas is well below the historic average and the spread relative to the price of oil is the widest in more than 20 years. If we could fill our cars up with either gasoline or natural gas, we would pay only $2.40 a gallon for compressed natural gas versus nearly $4.00 a gallon for gasoline as of quarter end in the Washington D.C. market.

Of the three stocks that became full positions during the quarter were two energy companies focused on natural gas exploration and production—EOG Resources and Southwestern Energy.

Concerns about EOG’s natural gas weighting and its ability to fund its capital spending budget have caused the stock price to underperform its peers. Given its history of funding new development ideas—such as unconventional liquid plays in oil and condensate—with the most efficient sources of capital available, we view this as an opportunity to buy a leading energy producer at a low valuation. Southwestern’s management team has a history of shrewd capital allocation, with a preference for adding reserves organically. This disciplined approach has led to positive returns on capital throughout the energy cycle. Still, returns are currently at trough levels reflecting lower natural gas prices. Trading at a price-to-book value near its historic lows, the stock has plenty of room to rise with any kind of appreciation in natural gas prices. 

Overall, we remain optimistic about opportunities for stocks this year. Although world events could interrupt the advance temporarily, we believe global growth will be resilient. To be sure, getting a reign on domestic government spending would improve investor sentiment. While we currently believe large-cap stocks have a valuation advantage over small-cap stocks, much innovation and execution continues in the small-cap universe.

TAMRO Capital Partners
Alexandria, Virginia

1st Quarter 2011 SMA Commentary

It was a surprisingly strong quarter for equity markets given the numerous disruptions to the world economy. The ongoing devastation in Japan and the turmoil in Africa and the Middle East are creating widespread dislocations in global supply chains and energy markets. Japan plays a critical role in the production of various components and finished products—including electronics and automobiles. The catastrophe in Japan had an impact as far away as Sweden and North America as production halted in both regions at automobile plants due to component shortages. The full scale of complex supply chain problems are only now beginning to surface.  Separately, compromised oil supplies resulting from events in Libya have led to a spike in energy prices. The combination of all of these factors may affect the speed of the economic recovery worldwide by dampening demand, raising raw material costs, and causing inflationary pressures. We have been in contact with several of the companies held in the portfolio regarding their exposure to these events, and continue to assess the evolving implications. 

Mid-cap stocks posted solid advances in aggregate during the first quarter, despite a sharp mid-quarter correction. The portfolio participated in that advance, though it trailed its S&P 400 Midcap Index benchmark by a fair amount. Nine stocks in the portfolio had negative returns, including three holdings that detracted significantly from relative returns.

Winners and Losers

An Internet optimization company dropped sharply after reporting a weaker than expected outlook, citing seasonal factors. We believe this pullback is temporary given the company’s key position as a firm ready to take advantage of the Internet traffic growth expected from streaming video and mobile devices. The stock was the strategy’s top performing holding in 2010, and remains up more than 20% for the trailing 12-months through March 31, 2011. Another holding declined after reporting fourth quarter results short of expectations and revealing both a weak pricing environment and continued poor consumer trends. The company generates impressive cash flows and has continued to capture synergies from a previous merger, and we think should benefit as the economy (and unemployment) improves.

A medical device company that specializes in cardiovascular products such as defibrillators and coronary stents suffered after the company reported lower than expected 2011 guidance. The firm is in the midst of a multi-year transition that will likely reduce near-term earnings, but which we think will provide a platform for future growth. The stock is currently trading well above the portfolio’s original purchase price from August 2010, and we believe remains attractively valued at a price-to-sales ratio 40% below that of its five-year historical average.

The best performing stocks during the quarter were an eclectic mix. A tax preparation company jumped sharply after reporting a strong start to the tax season. The company has made strategic divestitures and acquisitions under new management, restructuring the company to benefit from an improving employment outlook. A global engineering and construction company specializing in energy infrastructure, rose after reporting better than expected revenue growth, strong margins, and an increasing backlog. The firm is experiencing strong global demand for its highly engineered, steel-plate storage tanks (for oil and natural gas). Finally, a tech company rebounded from last quarter’s weakness after reporting improved operating margins and a stronger balance sheet due to reduced costs and greater cash generation.

Portfolio Highlights

Despite the woes on the international front, business and consumer confidence is improving in the U.S. and capital markets are recovering. Merger and acquisition activity has picked up pace and the portfolio has benefited from the pending takeover of one holding. In February, the Board of Directors of the firm agreed to merge with another company at an impressive 45% premium over its December 9, 2010 closing price, when acquisition rumors started. During the portfolio's five-year holding period of the stock, it gained more than double that of the benchmark and more than fivefold the returns of the S&P 500 Index. As part of our investment process, we continue to look for companies with characteristics similar to this holding—a focus on one main business, leading market share, a strong balance sheet, and trading at an attractive valuation.

Regarding buys and sells, the strategy sold its remaining stake in one financial software firm and initiated a position in another tech company during the quarter. We sold the software stock based on valuation. The stock had appreciated substantially in the roughly three and a half years that the strategy had owned it, a time when the overall market declined. The new technology purchase was in a global utility metering company that offers smart grid, distribution, and payment solutions that is expected to benefit from increasing requirements to monitor and conserve the use of electricity, gas and water. As always, we took advantage of short-term price fluctuations to rebalance the portfolio during the period, trimming stocks with higher valuations and adding to more attractively valued stocks. 

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

1st Quarter 2011 Commentary

The Fund strongly outperformed its MSCI US REIT Index benchmark during the quarter. Both sector allocation and stock selection contributed to the relative performance, with the lion’s share of the outperformance the result of superior stock selection. The absence of any Net Lease holdings accounted for the bulk of the sector contribution, with an underweight position in Lodging and overweight stakes in Self-Storage and Canada also aiding returns.

The two biggest individual stock contributors were Brookdale Senior Living and Douglas Emmett. Brookdale benefitted from a positive fourth quarter 2010 earnings release and 2011 guidance provided by management. The acquisition frenzy that has transpired of late in the Healthcare sector undoubtedly helped the stock as well, as capitalization rates compress.

Portfolio Highlights

The Fund's largest overweight position continues to be in Malls, as it has been for a while now.  We think valuations continue to look attractive, especially for the big players in the sector—Simon Property Group and Taubman Centers—which the portfolio is overweight relative to the benchmark as well. Operating metrics are trending very well for the group as a whole. A holding in Tanger Factory Outlet also continues to witness solid operating fundamentals. Sales for off-price, factory outlets should continue to perform well for the foreseeable future as bargain shopping may endure for quite some time as the slow recovery unfolds and consumers continue to stretch their spending dollars.

We are maintaining a more modest overweight position to Shopping Centers, where operating fundamentals have been more difficult due to meaningful vacancy levels that are only slowly easing. We think the fundamentals have troughed, however, given sequential improvement for the past few quarters. During the quarter, we added Regency Centers and sold Kimco from the portfolio. Regency possesses one of the highest quality shopping center portfolios among public companies, and its valuation appears more appealing than that of Kimco's.  We expect better leasing prospects for Regency with their higher level of newer and bigger-box spaces and the demand for such space in the market today. The Fund also participated in the initial public offering (IPO) of American Assets Trust early in the year. The company possesses an attractive, high quality portfolio of primarily retail shopping centers, office, and apartment assets in California, Hawaii and Texas. Beyond the high quality of the assets, the pricing of the IPO was attractive, with shares being offered at a compelling discount to net asset value.

The continued strong relative performance of Canadian property has lessened its attractiveness in our eyes. We have been reducing the portfolio's stake to this area since last year. Macroeconomic and operating fundamentals remain healthy, but modest earnings growth prospects combined with current valuation levels, have lessened its appeal versus the U.S. As a result, Riocan was sold during the quarter. The valuation of this large Canadian shopping center company became too rich after the strong recent performance from its shares and the Canadian REIT universe overall. 

Finally, Healthcare remains a large underweight position in the Fund. The sector is deemed defensive in nature and performance tends to lag those areas with more leverage to an improving economy. Long lease terms make it difficult to push rate, even as fundamentals improve.  Overall, we think the relative valuation for the sector is unappealing and that companies must rely too heavily on acquisitions for meaningful earnings growth. In fact, we have witnessed a tremendous level of acquisition/merger activity so far this year, with more expected to follow.

Outlook

Consumer confidence fell a bit during the quarter on the back of continued geopolitical risk in the Mideast and Libya, the earthquakes/tsunami/nuclear fears in Japan, a continued slow jobs recovery here in the U.S., and meaningful rise in the price of gasoline. Despite this backdrop, the positive tone we have been espousing for the past few months continues. The recovery is progressing, and while it has been slower than anyone would like, the employment picture continues to look progressively better. This is the key, given that as jobs go, so goes the recovery. Furthermore, signs seem to point to a recovery that is beginning to be self-sustaining, as opposed to merely being stimulus driven.

From a property perspective, improvement in operating fundamentals continues virtually unabated across all property sectors. Thus, we continue to have a favorable outlook on the North American listed property sector. As the economy moves from recovery mode to one of expansion, US REITs are expected to see cash earnings growth of close to 10% in both 2011 and 2012. As always, dividends add to the attractiveness of the sector. With meaningful yield levels today, and many companies at or near their statutory minimum payout requirements, we expect dividend rate hikes to be healthy going forward as well.  

Fortis Investment Management

As of March 31, 2011, Brookdale Senior Living comprised 1.14% of the portfolio's assets, Douglas Emmett – 4.17%, Simon Property Group – 12.59%, Taubman Centers – 4.39%, Tanger Factory Outlet – 1.66%, Regency Centers – 2.20%, and American Assets Trust – 0.42%.

Note: Real estate funds are non-diversified and may be more susceptible to risk than funds that invest more broadly. Risks include declines from deteriorating economic conditions, changes in the value of the underlying property, and defaults by borrowers. Investing in foreign markets also entails the risk of social and political instability, market illiquidity, and currency volatility.

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

1st Quarter 2011 Commentary

The first quarter of 2011 was characterized by increasing concerns about U.S. fiscal and monetary policy, especially the effect of the pending conclusion of the Federal Reserve’s second quantitative easing program (QE2) and a declining US Dollar. Hence, anything related to a declining dollar “hedge” performed relatively well. This held true for oil, precious metals, basic materials, and agricultural commodities, as well as those countries which are heavily commodity-oriented like Canada and Russia.

The Fund underperformed its composite benchmark (35% Russell 3000 Index/35% MSCI World ex-US Index/30% the Barclays Capital Aggregate Bond Index) during the period despite significant weights in the above mentioned areas of the market through a variety of ETFs. Overall performance was dampened as our risk model sought to lower exposure to “dollar hedge” investments as they surged as the quarter progressed. The proceeds from those investments were used to increase the Fund’s weighting to government-backed, lower volatility ETFs. As a result, approximately 25% of the portfolio was in short-term, high credit-quality bonds and cash instruments by the end of the period, versus roughly 15% at the beginning of the quarter. This had the effect of detracting from performance, but it also controlled and reduced the Fund’s risk profile. In addition, some individual holdings were a relative impediment to performance, such as REIT-related ETFs, and a risk hedge through the volatility index exchange traded note iPath S&P 500 VIX Short-Term Futures ETN (VXX).

Global markets have generally ratcheted irregularly higher, assisted by massive central bank liquidity efforts. Markets have been behaving in an anxious, “twitchy” fashion. This market behavior is reflective of continued concerns about uneven economic growth, weak job growth, excessive debt, currency devaluations, latent inflation, and sovereign debt defaults. As both Warren Buffet and Ben Bernanke have commented, “We are in uncharted waters.” These concerns continue to be reflected in our risk model, resulting in what we consider to be a relatively risk averse investment posture for the portfolio. 

Smart Portfolios
Seattle, WA

As of March 31, 2011, the iPath S&P 500 VIX Short-Term Futures ETN comprised 2.34% of the portfolio's assets.

Note: The Fund invests in exchange-traded funds (ETFs) which are securities of other investment companies.  An ETF seeks to track the performance of an index by holding all or a sampling of the securities on that index.  An ETF may not be able to replicate an index exactly since returns may be reduced by transaction costs, expenses and other factors while the index has none.  The Fund invests in many different areas of the market, each of which may involve its own element of risk.Use of aggressive ETF investment techniques such as futures contracts, options on futures contracts and forward contracts may expose an underlying fund to potentially dramatic changes (losses) in the value of its portfolio. Credit risk or default risk could negatively affect the Fund’s share price.  Inverse or ‘short’ ETFs seek to profit from falling market prices and will lose money if the market benchmark index goes up in value. Leveraged ETFs seek to provide returns that are a multiple of a benchmark and can increase risk exposure relative to the amount invested and can lead to significantly greater losses than a comparable unleveraged portfolio.

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

1st Quarter 2011 Commentary

Despite the revolutionary fervor sweeping the Middle East and the devastating Japanese earthquake, tsunami, and resulting nuclear crisis, the stock market (as measured by the S&P 500 Index) posted gains of nearly 6% during the first quarter of 2011. Fixed-income markets were generally more subdued in delivering only nominal gains. Unfortunately, the Fund underperformed its composite index benchmark comprised of 60% S&P 500 Index/40% Barclays US Government Credit Index.

During the past year, a combination of style and market-cap headwinds plus some stock selection issues have detracted from relative results. Our stock-picking process emphasizes long-term growth, valuation, quality, and near-term earnings momentum, and currently leads us toward larger names with more sustainable earnings growth—attributes that have been largely shunned in favor of smaller, more-cyclical, and lesser quality issues since the stock market bottom in March of 2009. We remain confident in our disciplines, and expect them to continue to add value over full market cycles. Despite the recent underperformance, the Fund’s five-year return remains solidly ahead of the benchmark.

Stifled Staples

Although the Fund’s Consumer Staples holdings have benefited from their global footprints over the long haul, they were adversely impacted during the quarter as many of them conduct meaningful business in Japan. The virtually unprecedented increase in commodity prices in the wake of the Federal Reserve’s launching a second round of quantitative easing (QE2) also caused unexpected margin pressure. Consequently, the forecasted improvement in the rate of earnings growth and relative momentum for these holdings was pushed out and Staples stocks as a group underperformed the broader market. The portfolio’s overweight position in Consumer Staples thus detracted from performance during the period.

The resulting underperformance of Staples has produced relative valuations that look very attractive on a historical basis, and consumer companies have begun to implement price increases which will benefit their relative earnings growth during the second half of 2011. We added to the Fund’s position in Kraft ahead of its earnings report. While commodities will put pressure on margins, we expect the company to still be able to generate earnings growth in the low-to-mid teens in 2011. Combined with a 4% dividend yield, we find the total return potential attractive.

Conversely, we trimmed PepsiCo after management lowered earnings growth guidance for 2011 primarily due to higher than expected commodity costs. Procter and Gamble was reduced as broad-based commodity inflation and disruptions in Japan are expected to temper near-term earnings growth. Although we believe Wal-Mart is heading back on the right track after some missteps in the past year or so, their core customer remains challenged from a macroeconomic standpoint, which is likely to continue to present a headwind. We thus eliminated the stock position from the portfolio. 

Other consumer-related holdings negatively affected by the rise of commodity prices and the events in Japan were Carnival Cruise Lines and Coach. Carnival hurt relative performance due to the spike in oil prices caused by the turmoil in the Middle East. Energy prices are a significant input into the company’s cost structure, and because the near- and intermediate-term oil price direction is uncertain due to ongoing geopolitical risks, we sold the portfolio’s position.

The Fund purchased Coach, a leading designer and marketer of premium handbags and accessories, towards the beginning of the quarter. Following the global economic recession, the domestic handbag category appeared to be recovering and Coach’s re-pricing and rebalancing of its product mix seemed to be gaining traction, allowing the full-price U.S. business to return to positive comparisons. Coach derives about 20% of its sales from Japan, however, and we reduced the position following the devastating earthquake and tsunami that struck the country. While we view management as highly capable even when operating in an environment of considerable uncertainty, we believe Japanese demand for luxury items could be weak for a prolonged period.

Within Industrials, Fluor was up more than the sector for the quarter, but the Fund’s other holdings in the sector lagged and detracted from relative performance overall. We trimmed Fluor given its strong absolute and relative performance during the second half of 2010 and as the position size approached 4% of assets. We also reduced Emerson Electric despite the company’s solid order momentum because comparisons will get more difficult as 2011 progresses. Strong order momentum may not translate fully into upside earnings surprises given rising cost pressures. Emerson is one of the industrial companies most exposed to China, where officials are likely to attempt to slow growth over the next several years and refocus the economy on consumption over fixed asset investment. Thus, a reduction in the position seemed prudent.

Tech Leaders

Strong gains in Accenture, Apple, Oracle and Qualcomm led to positive stock selection within the Technology sector. The Fund’s underweight position in Technology contributed positively to relative performance as the sector trailed the broader benchmark. We added to Accenture after competitor IBM’s results confirmed a strengthening demand environment for information technology and consulting services. We believe that the shares of Apple are undervalued relative to the growth potential in iPhones and iPads, as well as the Mac. We expect growth to be driven by continued international expansion. We continue to see indications of improving demand at Oracle, including the strong positive reception for Exadata, evidence that an enterprise software upgrade cycle is now underway, and the fact that the firm is about to roll out a new, next-generation Fusion application suite that further complements existing new product cycles already under way in database and middleware.

An overweight position to the Energy sector aided performance as the sector posted double-digit gains within the Russell 1000 Growth Index. Halliburton was the Fund’s best performer during the quarter, though stock selection overall underperformed the benchmark owing to the absence of the index's largest position, Exxon Mobil. We continue to favor Halliburton and increased the portfolio’s position given the stock’s attractive valuation and above-average earnings growth. We added to Apache following weakness in the stock due to a cyclone in Australia and civil unrest in Egypt. Although Egypt accounts for roughly 20% of the firm's production, there had not been any reports of operations being affected in any way and the country is dependent upon Apache for its oil production. 

Elsewhere, individual standouts included Disney, Stryker, and JP Morgan Chase. Disney was up strongly during the quarter. We had increased the position following robust December quarter results that demonstrated strong momentum across all business units. Disney is currently benefitting from a strong ad cycle, a renewed creative cycle, and a recovery at its theme parks. Stryker enjoyed strong gains due to good momentum in its orthopedics business. The Fund’s sole financial firm, JP Morgan Chase, increased more than the sector during the period modestly contributing to relative performance. We increased the position as we believed that dividend payments were likely to be implemented by the end of the first quarter, which subsequently occurred. In addition, the stock was attractively valued on both current and normalized earnings, the yield curve is steeper, and the macro environment has improved—which helps both credit-quality and loan demand.

Equity Buys and Sells

During the quarter, the Fund established one new position in Omnicom Group, a global leader in advertising, marketing and corporate communications services. We believe a cyclical recovery in demand for advertising and marketing services is driving accelerating organic revenue growth. The company should improve margins over the next two years and is a beneficiary of the secular shift from traditional advertising to digital and other non-traditional marketing services.

We added to positions in UPS, Nike, and Google. UPS offered a compelling combination of attractive valuation and above average earnings growth. In addition, we believe two issues are probably not well-known or understood by analysts and could contribute to upward earnings revisions during the second quarter: (1) the change in the surcharge structure that reduces the incentive for the "trade down" effect in the face of rising oil prices and better protects UPS to the extent it does occur; and (2) the easier second quarter earnings comparison created by the incurrence of charges for retraining/relocation as part of the North American reorganization last year that will not be present this year.

Nike was increased after weakness in the stock due to the company missing analyst expectations for their fiscal third quarter earnings. Although the company faces near-term margin pressures, we believe that strong demand for the company’s products will permit it to successfully raise prices in the period ahead. Google was increased on weakness due to our confidence in the company’s relative earnings strength.

Along with the previously mentioned Wal-Mart and Carnival, Merck and Juniper Networks were sold during the quarter. Merck suffered from the failure of one of their pipeline products and fears that an arbitration case involving Remicade may go against the company. An accumulation of factors has changed the long-term growth profile of the company, including the health care reform fee/excise tax, a 7% excise tax in Puerto Rico, and continued high unemployment having led to depressed prescription utilization and growth. Juniper traded above our estimated present value and we were concerned about the firm's end market after networking company F5 missed earnings in part to weakness in the Telecommunications sector—Juniper's largest customer segment.

Broadcom was trimmed following an earnings report that revealed greater than expected increases in operating expenses related to legal expenses, employee merit pay, and acquisitions. We continue to be optimistic about the company’s long-term prospects because of its exposure to the wireless, broadband, and networking markets, but the reduction in near-term earnings momentum warranted a smaller position. Costco was also trimmed as the stock traded at a relatively high P/E ratio and approached our estimated present value.

Outlook

We believe the stock market will continue to grind higher along with sustained economic and profit growth. The market is still in what stock market commentators often refer to as its “sweet spot” with a growing economy, generally well-contained inflation and the Federal Reserve providing ample liquidity to support share prices.

After unusually strong gains in corporate profitability since the end of the recession, corporate profit growth should moderate as cost containment and productivity benefits begin to subside.  We expect this downshift in corporate profit growth during the second half of 2011, to coincide with a rotation from lesser quality, more-speculative stocks to the shares of higher quality issues such as those held in the Fund. The shares of the latter are attractively valued and their earnings growth rates are more assured owing to their financial strength and global diversification.

The Fund’s Energy and Technology holdings should benefit from the growth of Emerging Markets and the improvement in the U.S. economy. Multinational holdings with strong global brands that the Fund owns also stand to gain from robust growth in consumer spending in Emerging Markets. This will be reinforced by the eventual and inevitable shift in the mix of the Chinese economy toward consumption and away from fixed asset investment. Emerging Market consumer spending now represen