*Effective January 1, 2008, the name of the Aston/TAMRO Large Cap Value Fund was changed to the Aston/TAMRO All Cap Fund. Please see the prospectus supplement for addtional information regarding the transition.
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Market Commentary as of 3/31/2008
This Storm Will Pass, It's Just a Matter of When
The broad US stock market fell three months in a row to start the year, making for a painful first quarter. Volatility returned with a vengeance as the credit crisis worsened, evident by the closing price of the Fund's Russell 3000 Index benchmark having single day swings of up 4.2% and down 3.1%. This unsettling roller-coaster ride is a result of flagging confidence in the credit markets and a lack of liquidity. To address the problem, US monetary and fiscal policies have shifted into aggressive mode in order to ease the liquidity strains. The situation should play itself out. We think that in hindsight, history will view this period as a buying opportunity. We expect to take advantage of the significant price swings to add to the investments in which we have the highest confidence, at attractive prices.
The Fund underperformed the benchmark by a wide margin during the quarter primarily due to stock selection in the Financials and Consumer Discretionary sectors. The credit crisis had a negative impact on a number of holdings, spreading deeper than expected and extending to areas we didn't envision—such as student lending and the market for auction-rate securities. For example, shares of for-profit education company Corinthian Colleges fell as the financing for student loans dried up, causing management to reduce guidance. While the current issues affect the entire industry, the company has done a good job of increasing enrollment, which typically translates to greater profitability over the long run. We added to the position on the weakness, believing it to be attractively valued.
Another big disappointment was Boston Private Financial Holdings, which announced quarterly results that missed expectations. A non-cash charge tied to the value of its Florida private bank subsidiary, and charges tied to the value of the real estate loan book at its Southern Californian private bank hurt performance. While Boston Private does business primarily with wealthy individuals, the firm has not been immune from the decline in real estate values. We sold the stock because we were growing increasingly concerned about what turned out to be the company’s ill-timed private bank acquisitions in Southern California and Florida, and feared that more write-downs and one-time charges were on the way. The Fund also sold Merrill Lynch and Wells Fargo in light of deteriorating fundamentals and mounting industry challenges.
Vytorin Woes
Among non-financial stocks, the Fund suffered a blow as a result of poor drug study results for Vytorin—a cholesterol-lowering joint venture product between pharmaceutical companies Merck and Schering-Plough. The bad news—announced on the last day of the quarter—hurt doubly since the portfolio holds both companies. In our opinion, investors overreacted. While a significant setback, especially for Schering-Plough, we think the current stock price discounts a lot of unpleasantness and does not account for the potential of that firm's fine management team or its recent purchase of Organon Biosciences, as the acquisition adds five final phase compounds to Schering's drug pipeline.
Although the majority of stocks fell during the quarter, there were some notable bright spots. XTO Energy rose on higher natural gas prices and a solid outlook for production. Biotechnology firm Genentech received a boost from news that the Federal Drug Administration would approve its Avastin cancer drug as a first-line treatment for metastatic breast cancer, which should increase its sales potential. Wal-Mart shares also moved higher as the firm demonstrated its strength during a difficult retail environment. In addition, overweight stakes in the Materials and Consumer Staples sectors, along with stock selection in Energy, Industrials, Materials and Consumer Staples aided performance relative to the benchmark.
A new, full position of note added to the portfolio during the first quarter was JPMorgan Chase. With assets of $1.6 trillion and operations in more than 50 countries, the firm ranks among the world's largest financial services companies. Led by highly regarded Wall Street veteran Jamie Dimon, JPMorgan Chase has navigated the credit crunch considerably better than many of its peers. So much so, that the Federal Reserve turned to the bank to rescue Bear Stearns earlier this year. We think the Bear Stearns acquisition will be one among many moves Mr. Dimon makes that takes advantage of the current weak market and economic environment to drive long-term shareholder value.
Planting Seeds For the Future
Whenever the broad market corrects we tend to focus and add capital to those areas with the best trends and the companies in which we have the highest conviction. Our quantitative model highlights specific stocks or sectors that may have sold-off unduly during the market downturn, thus presenting us with an opportunity. Stocks are scoring better on our quantitative model than they have in a long time, with large-caps appearing particularly attractive. We find the technology sector—now more than 20% of the portfolio's assets—especially compelling today, with a number of firms seeking to benefit from global clients still making investments to stay competitive.
We believe that how we position the portfolio during a market downturn and how it responds when the market recovers is the key to the Fund's long-term success. As the recent sell-off has become more broad-based, we have seen opportunities across the market spectrum. Thus, we like to use the analogy that when it's raining outside we are planting seeds so that when the sun shines again we hope to enjoy a bountiful harvest.
TAMRO Capital Partners, LLC
Note: Value investing involves buying company stocks that are out of favor and/or undervalued. Depending on market conditions, a fund's return may be adversely affected during market downturns.
The views expressed above are for informational purposes only and is not intended as investment advice. Since the date of the commentary, economic, market conditions and the portfolio manager's views may have changed.
As the fund is actively managed, the securities as presented do not represent the current or future composition of the portfolio.
Past performance does not guarantee future results. Investment return and principal value of mutual funds will vary with market conditions, so that shares, when redeemed, may be worth more or less than their original cost.