Commentary

Morningstar's analysis of mutual funds goes beyond the basics of performance and strategy to include in-depth looks at the corporate culture driving a family of funds. In recent months we have published columns highlighting the stewardship practices of funds run by Diamond Hill, AllianceBernstein, and American Century. Today we're looking at a less-well-known firm that has some notable examples of putting shareholders before profits: Aston Funds.

Unlike most mutual fund firms that directly employ the people who run its funds, Aston exclusively hires subadvisors as managers. The firm's connections to those subadvisors have been very close at times, but overall we've been pleased that the culture they've fostered is more investor-focused than most. We'll begin with a brief review of Aston's history, and then we'll focus on the current situation at the firm.

Family History
The fund family now known as the Aston funds was founded in December 1993 by Stuart Bilton and Kenneth Anderson. It originally was a mutual fund offshoot of the institutional money management arm of Chicago Title & Trust, then a subsidiary of Allegheny Asset Management. The fund family has gone through several changes of name and ownership since then, most notably in 2001, when ABN AMRO bought it and rebranded the funds. Then in late 2006, ABN AMRO sold the funds to Highbury Financial, essentially a shell corporation formed in order to buy a mutual fund shop, and the funds took on their current name.

Throughout all this, Bilton and Anderson have remained in charge, and now they are chief executive officer and president, respectively, of Aston Asset Management. For the most part, the firm has done a pretty good job of looking out for shareholders' interests, though now that Aston no longer has a big corporate parent, it faces both new opportunities and new challenges.

Favoring Free Agents
All of Aston's funds are subadvised, and in general the subadvisors are good ones, including some standouts such as Montag & Caldwell. Bilton and Anderson built up this stable of subadvisors over the years using a very hands-on approach. In 1994, they bought Montag & Caldwell, which had been subadvising the Enterprise Growth fund since 1980, and launched a no-load clone of that fund, now known as Aston/Montag & Caldwell Growth. (Enterprise Growth was merged away in 2007, and Montag & Caldwell is now owned by BNP Paribas after former parent ABN AMRO collapsed.) Later they helped capitalize TAMRO and Veredus, now subadvisors to four Aston funds, after having known and liked the manager-founders from elsewhere.

More recently, Aston helped capitalize River Road after Tony Weber of Veredus recommended manager Andrew Beck to them, having known Beck when he worked at the Longleaf funds. Now River Road subadvises three funds for Aston. One of those funds, Aston/River Road Small Cap Value, was one of the small-value category's standouts in 2006, its first full year of existence, and has continued to generate respectable returns.

When these funds operated under the ABN AMRO brand, most of the advisors and subadvisors were under the same corporate umbrella as the funds themselves, because Montag & Caldwell, TAMRO, Veredus, and River Road were majority-owned by ABN AMRO. Meanwhile, the Growth, Balanced, and Bond funds were run by ABN AMRO Asset Management. (TAMRO's employees later bought that firm back from ABN AMRO.)

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Separation of Powers
Now, under Highbury's ownership, there's more of an arm's-length relationship between the funds and their subadvisors. We think that's a positive development because it means that, at least in theory, Aston will be less tied to its subadvisors and freer to hire the most-qualified money managers. Already there's some evidence that this is the case: Immediately after the sale from ABN AMRO, Aston dropped ABN AMRO from its main bond fund and hired a new subadvisor, Taplin, Canida & Habacht, an institutional bond shop.

Aston's leaders are very familiar with regulatory and compliance issues, and its funds were not implicated in the fast-trading scandals that rocked the mutual fund industry in 2003 and 2004. Both president Ken Anderson and chief compliance officer Jerry Dillenburg, both of whom have been around since the shop's 1993 start, are former fund auditors for KPMG. Though this is a no-load shop, it mostly sells its funds through registered investment advisors and 401(k) plan advisors, who are especially sensitive to any hint of impropriety. Aston does have a sales force to sell its funds to these clients, but we haven't seen evidence that sales have taken precedence over the interests of current shareholders; in fact, things have arguably gotten better since the separation from ABN AMRO.

A Fumble and a Recovery
Under ABN AMRO, the shop's lineup remained static for years, but since becoming independent, Aston has made some significant changes. It rolled out a slew of new funds with new subadvisors in late 2007 and early 2008, including (among others) a foreign-stock fund, a global fund, and a global real estate fund. We expressed some skepticism about this plan, which was meant to correct the shop's lack of overseas exposure, and indeed the timing turned out to be terrible, coming right before the market crash and recession.

Aston ended up liquidating four of those new funds (Aston/Clarivest Mid Cap Growth, Aston/Fortis Global Real Estate, Aston/Resolution Global Equity, and Aston/SGA International Small-Mid Cap Growth) after they failed to gain enough traction amid the market turmoil. Around the same time they also liquidated four older funds (Aston/ABN AMRO High Yield Bond, Aston/McDonnell Municipal Bond, Aston/TCH Investment Grade Bond, and Aston/Veredus SciTech) that weren't creating enough value for shareholders. We're pleased that Aston liquidated all of these funds, rather than merge them into other funds that may be only vaguely similar--a too-common practice in the industry. The liquidations suggest a certain amount of respect for fund shareholders and also suggest that asset-gathering isn't always the biggest priority here. We think these funds are in the hands of good stewards of capital.
David Kathman, CFA does not own shares in any of the securities mentioned above.