ASTON/River Road Timely Quarterly Commentaries

Charles

One of things I just love about this shop is their consistently prompt and frank quarterly commentaries. August 1 today and ARIVX and ARLSX commentaries have been posted for 2Q13...along with all other ASTON/River Road funds.

As for AQR Funds? No update...still showing 1Q commentary.

As for Whitebox Funds? No update...still showing 1Q commentary.

As for Fairholme Funds? Well, actually, Mr. Berkowitz just posted 2Q2013 letter...bravo!

Now, don't get me wrong...I actually like all these shops, but hands-down, ASTON/River Road provides most timely communication to its shareholders.

And when things are not going well, like say recently with ARIVX, even more important to keep communication timely.

Small perhaps but I think an important attribute of "shareholder first" stewardship.

Charles

OK, so now some tough extracts:

From Mr. Cinnamond-

Cash levels increased from 57% at the beginning of the quarter to 60% by the end. Cash levels remain high as most high-quality small cap stocks continue to be expensive, in our opinion.

Ouch! And shareholders are paying 1.42% per year on that cash. Especially given that "Small-caps outperformed large-cap stocks for the third consecutive quarter..."

Precious metals miners AuRico Gold and Pan American Silver were the two largest negative contributors during the quarter. Gold miners remained under pressure as gold prices declined 23% during the period...AuRico continued to trade at a discount to our valuation and we increased the Fund’s position as its price declined.

Pan American’s stock remained under pressure along with the rest of the mining industry even though the company announced production and cash cost results that were in-line with expectations. The 31% decline in silver prices during the second quarter weighed on its share price. We think that Pan American possesses one of the strongest balance sheets in the mining industry, and though we expect further industry volatility we maintained the portfolio’s position as it remained at a discount to our valuation.

Given that stock prices and profits are highly correlated, we find our observations on profits are often confirmed by trends in stock prices. However, this is not currently the case as we are witnessing a divergence between the stock prices and profit trends of the businesses we follow and analyze. The small-cap market, measured by the Russell 2000 Index, is up 18% over the last three quarters. Meanwhile, most of the businesses we follow are not reporting commensurate gains in profits.

In conclusion, our views and positioning have changed little since last quarter. We remain disciplined and are willing to maintain current positioning until future opportunities justify change...We intend to remain committed to two of the most important principles of our value investing approach—patience and not overpaying.

From Mr. Moran and Mr. Johnson-

The Fund posted marginally positive returns during the quarter, but trailed its long-only Russell 3000 Index benchmark. The long portion of the portfolio performed well while the short portfolio struggled.

Commodity stocks weighed on the long portfolio’s performance during the quarter. Four of the top-five negative contributors for the long portfolio were smaller commodity positions. These stocks were down nearly 13% on average, and we trimmed them by more than a quarter, with commodity hedges in the short portfolio offsetting some of the damage.

Mining equipment manufacturer Joy Global and silver miner Pan American were among the commodity-related laggards.

Some collateral damage here, sounds like.

The largest individual detractor to returns during the quarter, however, was a short position in luxury retailer Saks. The firm generates more than 20% of its sales from its New York City flagship store and the brand has historically not resonated nationally, limiting both growth prospects and operational leverage opportunities. The stock rallied and hit our stop-loss after hiring Goldman Sachs to explore “strategic alternatives,” including a potential sale of the company.

Take-over is always a classic and scary threat to selling short.

We will utilize our Drawdown Plan to help protect capital if the portfolio starts to lose a material amount of money, as we understand the negative compounding consequences of deep drawdowns. As such, we feel the portfolio is well positioned to meet the goals of the Fund.

MikeM

Hi Charles. I read this also. Cinnamond's decisions have not panned out this time around, but...

My biggest regret about buying ARIVX is that in trying to consolidate funds I made it my only small cap fund. I figured this manager would be a great pick to hold for the long haul. I still believe that to be true even with the mis-steps over the last year. I have since split my small cap percentage between deep value ARIVX and global growth small cap, GPGOX.

Thanks for your terrific contributions.

Charles

Reply to @MikeM: Hey, despite my grousing about its high fee for cash (when its strategy has it boxed in), ARIVX has beaten money market and aggregate bonds since inception 1/11. That was a pleasant find when compiling all of David's profiles recently. See "Dashboard of MFO Profiled Funds" in the August commentary.

expatsp

I got out of ARIVX about six months ago, put half in a risky small cap value fund (HUSIX) and half in cash. That combination has done a lot better than ARIVX although, admittedly, six months is way too short to judge.

I have no problem with a manager holding cash because he finds stocks overpriced. I have problems with a manager who finds stocks overpriced because he does not believe in this economic recovery. He could be right--he's certainly got a better long term record than I do--but I disagree too strongly to invest money with him.

MikeM

Reply to @expatsp: He may have, but I don't ever remember him saying his reason for cash was that he did not believe in this economic recovery. I believe he has said he has not found the kind of value in stocks that he is looking for. By his measures, small caps are over priced so he has no place to put that cash. The only place he seems to have found value is the beatin down miners. Kind of reminds me of Berkowitz seeing great value in financials, a year to soon.

AndyJ

Reply to @Charles: Charles, did you see this little tidbit in the ARLSX report? They're saying shorting is getting to be a crowded trade and returns from it may be weakening. I don't get exactly how that works, but it sounds a little ominous for L/S approaches, unless I'm misconstruing something in the language.

"Crowded shorts (when a sizeable portion of public shares are sold short) have historically outperformed the market as short sellers faced little competition. With the massive growth of the hedge fund industry now looking at the same short opportunities, we wonder if this historical relationship will weaken. The portfolio’s crowded short positions did not work this quarter, and we speculate that it was a large negative contributor for the broader long-short equity universe. The average return of the underlying stock of the portfolio’s crowded individual shorts was 20% versus just 7% for average non-crowded individual shorts."

AJ

expatsp

Reply to @MikeM: Hi Mike. Thanks for this response. It was this line in his 4th quarter commentary that got me: "We continue to question the current cycle’s sustainability without the assistance of trillion dollar fiscal deficits." The link to the report is here: http://astonfunds.com/news/featured-commentaries?newsID=1049
But sure, I may have over-reacted, reading between the lines, but when I saw the manager saying the cycle is not sustainable without big deficits, which in this report he suggests cannot be continued for too long, and he talks up mining stocks, gold, silver etc. it set off alarm bells for me.

Of course, I wouldn't have been complaining if he'd made more money while I held it, so perhaps I have fallen victim to short-term thinking. As I said, he does have a much better record than I do. I sold it for about a 15% gain (I bought it on day 1) so I really should not complain too much.

I too think the miners have value now. So does Berkowitz, btw. Berkowitz's Fairholme funds and Montgomery's Bridgeway funds are my biggest holdings, and I added to them when they crashed, because I believed in how they are run. The above report made me lose confidence in Cinnamond.

But I hope and other ARIVX shareholders do very well. The historical record is certainly on your side, and I may live to regret getting out. Good luck!

MikeM

Reply to @expatsp: Thanks. I understand where you are coming from. I intend to stick with him. If he ends up being right on his assesments- just early, I can live with that. But I'm happy with my decision to 1/2 my ARIVX position and add GPGOX to my small cap sector.

Investor

Reply to @Charles: That sounds like you are finding an excuse for purchasing this fund. That argument is ok if you bought the fund as cash/bond alternative but I doubt it.

I did own this fund and gave up earlier this year and I am glad I did. I moved monies to VVPSX. I wanted a fund that captured most of the upside and had cautious durable stock picks so come a correction they may endure better. I am more comfortable with managers that keep their belief about macro/politics in check and do bottom up stock picking.

STB65

Deep value guys, like Cinnamond, aren't likely to do well in a rising market.
Investing with them requires a long time frame, and paying over 1% for cash is irritating. So far I've lost a few bucks in my TDA account with him and made some in my AIP account. Time will tell, but I'm in for the next 10 years. Small caps usually win in the long run and I'm not a dedicated timer. The real problem is that a significant portion of my funds will head south when conditions favor Cinnamond. I didn't really buy him for insurance. (The more I consider this dichotomy, I wonder if I shouldn't just buy a small cap index.)

HUSIX has done well and may be the eventual winner. I put in enough to allow further investment when the fund closed, and I plan to add to it.
My long term Bogle Small Cap has lost some M* stars, but that may reflect the value emphasis - but he is beating his category.