DBLV: 4th Quarter 2020 Portfolio Manager Review

Performance data quoted represents past performance and is no guarantee of future results. Current performance may be lower or higher than the performance data quoted. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than original cost. Returns less than one year are not annualized. For the fund’s most recent standardized and month-end performance, please click www.advisorshares.com/etfs/dblv.

Market Review

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to heaven, we were all going direct the other way — in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.”
— Charles Dickens, A Tale of Two Cities

“But human experience is usually paradoxical, that means incongruous with the phrases of current talk or even current philosophy.”
— George Eliot, Daniel Deronda   

Charles Dickens began his famous novel, A Tale of Two Cities, with the ponderous yet profound first sentence encapsulating the great contradictions arising in a late eighteenth-century Europe witnessing the death of the feudalist ancien régime and the emergence of the industrialist modern.  His tale of two cities references the surprising collapse of the French monarchy and resurrection of the social order in Paris in a less repressive, more democratic form, while serving as a warning to the unconcerned denizens of London of the fragility of the status quo, in light of the increasingly troubling consequences of neglecting the plight of the poor and oppressed for too long.  Dickens recognized, as did George Eliot, observing in her final novel, Daniel Deronda, less than two decades later, that we run great risk by disregarding the lessons of our lengthy human experience.  This sage insight would seem equally important in our own times, particularly following a year that presented its own set of rather stark contradictions.

Indeed, 2020 was nothing if not a tale of two markets.  We witnessed one of the fastest stock market collapses in the first quarter, as the S&P 500 and other U.S. equity indexes—seemingly tired and vulnerable after recording the longest bull-run in history—dropped dramatically as the pandemic hit our shores and government officials moved to shut down much of the economy.  To wit, the S&P 500 fell 34% from peak-to-trough.  Then, we saw a startling recovery, as the federal government stepped in and flooded the economy with fiscal and monetary stimulus on an unprecedented scale.  In response, the S&P 500 rallied a remarkable 68% off the trough, reaching successive new highs even as the lock downs continued, and posting a gain of 18.4% for the full year.

Value stocks again underperformed growth shares, with the Russell 1000 Value Index (RLV) lagging its growth counterpart (RLG) by more than thirty-five percentage points for the year, thereby pushing the value-to-growth discount to a new record.  Because the lock downs prompted work-from-home contingencies for roughly half of the workforce, many technology companies saw their prospects actually improve during the pandemic, thereby driving a remarkably fast recovery in growth stocks starting very early in the second quarter.  However, value stocks did stage somewhat of a comeback in the fourth quarter on the November news that researchers at Pfizer and BioNtech, as well as at Moderna had developed and won approval for two novel genetic vaccines for COVID-19 that were proven close to 95% effective, thereby lifting hopes that the economy might reopen in the middle of 2021.   With improved optimism of an economic recovery, the RLV index soared 16.3%, outpacing the RLG’s return of 11.4% during the fourth quarter.   Over the same period, the AdvisorShares DoubleLine Value Equity ETF (DBLV) posted a return of 17.7%, ahead its benchmark, the RLV, by about 1.5%.  Meanwhile, for the full year, the DBLV returned 8.9%, while the RLV was up 2.8%, thus outperforming its benchmark by 6.1% in 2020.

We ended 2020 with a seemingly never-greater disconnect between the financial markets and the underlying economic ones (e.g., markets for labor, consumer goods, industrial inputs, etc.), prompting famed investor and self-described market historian Jeremy Grantham to observe that the stock market’s valuation lies within the top-10% of its historical range while the economy is in the bottom-10%—and perhaps bottom-1%—of its history.  The stunning increase in wealth amongst the top one percent, a function of financial markets rebounding on government aid, even as food lines lengthened across the country for those whose state and federal support checks were running out, provided a sobering reminder of this disconnect, and likely was a driving force behind the rising social unrest and still greater political polarization we are now witnessing.  Despite the rising hope surrounding the advent of efficacious coronavirus vaccines and the justified prospective planning for a reopening of the economy, there remain multiple reasons to be cautious about how quickly we can return to a semblance of normalcy.

And yet, it would seem that most market participants are throwing caution to the wind, if current equity valuations are examined.  On most traditional valuation measures, the S&P 500 is now trading nearly as expensively as it did during the previous, all-time high observed during the technology bubble of the late 1990s.


          EV / EBITDA = enterprise value to earnings before interest, taxes, depreciation & amortization ratio
          P/E LTM = price to earnings ratio for the last 12 months
          P/E FY1 = price to earnings ratio for current fiscal year
          P/E FY2 = price to earnings ratio for the following fiscal year
          P/B = price to book value ratio
          P/Sales = price to revenue ratio

Because the market ascent over the past decade or longer has been predominantly led by growth stocks, the share of total market capitalization of these growth names has expanded even as the multiples for such shares have become even more elevated, thereby pulling up the overall valuation level for the broader market.  At present, growth stocks trade at record valuations by many measures.  On a price-to-book value basis, the top half of the S&P 500 companies now trades at 12.4x, about 4.5 multiple turns higher than it did during the prior peak that occurred amidst the technology bubble.   On a price-to-earnings (trailing) basis, the top half of the S&P 500 companies trades at 44.0x, exceeding the prior peak of 40.6x seen during that 1990s tech bubble as well.   As we have noted previously, whereas the rise in growth stock prices relative to value shares in prior years was accompanied by relatively stronger earnings and cash flow growth prospects, the outperformance seen in 2020 has been driven much more by differential multiple expansion than by any disparate expectations over the future performance of underlying fundamentals.  We believe that the average market participant is over-extrapolating the advantage growth names have enjoyed in an environment of lock downs too far into a future in which the pandemic will be behind us.  Such recency bias—which is a normal but irrational tendency to assign too much weight to recent, particularly negative events—might explain the disconnect between the relative value of growth stocks from value shares, on the one hand, and the long-term fundamentals of each, on the other.

As many experienced market observers have noted, there also have appeared growing signs of irrational behavior and excessive risk-taking by market participants.  In 2020, investors funded 248 special purpose acquisition companies (SPACs), which are so-called blank-check entities or shell companies into which investors commit capital ahead of still to-be-determined acquisitions, as opposed to traditional investment in a going concern with a history of financial performance and observable assets that can be studied and understood by the equity holder.  Relatedly, one should understand that by going public through a SPAC, managers circumvent the more rigorous audit and filing requirements that are part of a traditional initial public offering process, thereby making a SPAC generally riskier than a traditional IPO.  Despite these elevated risks, investor appetite for SPACs has hit levels beyond exuberance, with the number formed in 2020 reaching 3x the creations seen in any prior year over the last fifteen, and with the funds raised just in the last year exceeding the total raised over the preceding decade.

We have also witnessed other market oddities in 2020.  There was the spike in Hertz shares, driven by retail investors, and despite the salient fact that the company was in bankruptcy proceedings, that was so pronounced that lawyers incredibly suggested that an equity raise could be a part of the work-out plan.  There was the sharp increase in Eastman Kodak stock on the news that the company would assist in the production of COVID-19 treatments, even though management had already stated that they’d be giving away those chemicals at cost.  Perhaps driven by over-confident retail investors, there were more than 3x as many companies with a market cap over $250 million that tripled in value in 2020 than had been observed during any year over the previous decade.  Meanwhile, Tesla stock increased more than seven-fold during 2020, making the company more valuable than the nine largest global auto manufacturers combined, even though its annual unit sales constitute only about 1% of the total number of vehicles sold by those ten automakers collectively.  We view this disconnect between price and underlying fundamentals as a sign of a potential bubble in growth assets, so we would approach growth stocks with great caution in the present environment.

While it has been the best of times for quite some time for growth investors, it has been the worst of times for what seems like forever for value investors.  The so-called value spread, which is the valuation discount of value stocks versus their growth counterparts, was already at record levels at the end of 2019.  That the RLG outperformed the RLV by 35.7% in 2020 has only pushed that value spread to new extreme levels.  On a price-to-book-value basis, the bottom half of S&P 500 companies now trade at a 10.8 multiple point discount to the top half; and this differential exceeds the historical average by more than 2 standard deviations, and is also much greater than the 4.7 point discount experienced during the height of the tech bubble.  On a trailing price-to-earnings basis, the bottom half of the S&P 500 companies now trade at a 30.0 multiple point discount to the top half, also more than 2 standard deviations above the historical average, and greater than the discount experienced during the height of the 2000 tech bubble.  We have previously noted that consensus expectations for earnings growth are actually higher for value companies than for growth firms, both in 2021 and in 2022 (i.e., RLV component company growth of 27.5% in 2021 and 18.0% in 2022 versus RLG component growth of 18.4% in 2021 and 14.7% in 2022).  Moreover, it appears that through-the-cycle profit margins and asset returns for both value and growth companies have remained fairly stable through time (i.e., value stocks have shown a stable discount over the last half-century of -14% in terms of gross profit margin and -5% in terms of ROA versus their growth counterparts).  This suggests that the vastly widened valuation discount for value stocks we are observing exiting 2020 is explained less by fundamentals and more by the ongoing euphoria for growth stories.

We think the growth-to-value rotation seen in the fourth quarter of 2020 could extend into 2021 and beyond for multiple reasons.  First, we believe the vaccine clears a path for the economy to fully re-open, and this should disproportionately advantage value stocks.  The vaccine addresses the health concerns related to COVID-19 by reducing COVID-19 symptoms, likely lowering the incidence of hospitalization and death.  This in turn will allow governments to end the lock downs that have had a disproportionate impact on the earnings of value stocks, which tend to be more economically sensitive.  While more favorable secular tailwinds have advantaged growth stocks over the last several years, the expected cyclical upswing this year and next occurring with the economic re-opening will see higher earnings growth, as reflected in current consensus estimates, and likely greater positive earnings surprises among value shares.  Undoubtedly, restarting an economy—much less one as fragile as the current one—is not analogous to flipping on a light switch.  It likely will take a while for activity to rebound fully, as the task of vaccinating entire populations amidst a current case-demic is certainly not a trivial one, and vaccinated people may still maintain some level of social distancing or choose to cautiously spend to rebuild savings.  Also, the lockdowns undoubtedly caused a great deal of damage to the financial positions of small businesses and local governments.  The sober reality is that the economy continues to be reliant on fiscal and monetary stimulus, as well as other government actions, such as forbearance and deferrals.  Furthermore, the recovery may be rather uneven, given potentially permanent damage done to some businesses and due to potentially lasting changes in consumer behavior in the aftermath of the pandemic.  Yet even considering these difficulties, we would expect economic activity to improve meaningfully from here, thereby boosting on a relative basis the prospects of value companies versus their growth counterparts since the former were more adversely impacted during the pandemic.

Second, with the recent elections, the Democrats now control the White House and both houses of Congress for the first time since 2009.  In the near-term, the focus will continue to be on resolving the COVID-19 crisis and supporting the fragile economy; however, the Democrats will seek to deploy much larger amounts of stimulus towards those goals.  Specifically, they seek a multi-trillion-dollar fiscal stimulus, in addition to the $900M recently approved, and one that likely includes assistance for state and local governments, infrastructure spending, additional unemployment insurance and direct support for vaccine distribution.  Such a large stimulus should provide a temporary boost to GDP, thereby mitigating the risk of a double dip recession, but it would also drive the budget deficit much higher, creating adverse economic consequences longer term.  Moreover, the Democratic agenda also includes corporate and individual tax increases, as well as heightened regulatory oversight, which together could pose a headwind to corporate profitability and economic growth down the road.  So far, the market has taken the changed political landscape in stride, likely under the assumption that the Democrats will have great difficulties making any sweeping policy changes with only a slim lead via Vice President elect Kamala Harris’ tie-breaking vote.  As we have noted, however, the risks associated with uncontrolled government spending create the potential for higher inflation and interest rates that could adversely impact a high-multiple equity market banking on low rates forever; and in such an environment, lower-multiple value stocks might carry lower risks in this regard.

Third, the Fed has indicated it will be patient about withdrawing monetary accommodations as the economy strengthens, allowing inflation to rise.  For the moment, monetary policy remains loose while credit, operating through a banking system well-regulated since the global financial crisis, remains healthy.  Despite elevated unemployment, credit overall has deteriorated only modestly largely due to government support.  The banking system continues to function properly as banks remains sufficiently capitalized and have been able to provide credit to healthy businesses.  Meanwhile, the Federal Reserve and Treasury have together provided access to funding for those businesses impacted most by the pandemic, thus ensuring that credit has continued to flow even to some of the most vulnerable industries.  As a result, the tail risks of a major collapse in the financial system have been sharply reduced.  Given recent commentary from its leadership, we expect the Fed to remain supportive of credit and allow these loose monetary policies to persist for a while longer even in the face of rising inflation.  As such, the prospects of lower near-term rates, a steepening yield curve and higher inflation—if driven by an improving economy—would be favorable for the earnings prospects of (cyclical) value companies.

Finally, value stocks have been under-owned by long-only fund managers.  According to Bank of America’s study of stock ownership data, among many active managers, growth stocks are over-owned while value stocks are widely neglected.  Long-only mutual fund positioning in growth sectors is above benchmark weights (i.e., positive active weights), while positions in value sectors are below those weights (i.e., negative active weights).  Continued relative outperformance by value stocks, which started episodically in the fourth quarter of 2020 and has continued at the start of 2021, could prompt fund managers to rebalance their portfolios by taking up their value exposures.

In summary, we believe that aggregate US equity valuations are significantly elevated even as the economy remains very weak, and such a mismatch between prices and fundamentals demands caution.  Yet we also recognize that the elevated (and perhaps bubbly) valuation of the broader equity market represents the best of times in growth and the worst of times in value, as seen in the epic valuation spread between growth and value shares.  Given the stark valuation difference, we believe that a rotation to value stocks from growth stocks will be rewarded as the better earnings prospects and superior valuation set-up for the former names become more apparent.  Separately, as we’ve noted in the past, we also expect that active management will show its importance in the present investing environment, as the differences in relative company positioning begin to emerge through the crisis and into the changed, post-COVID-19 world.  We will continue to seek sound, long-term investment ideas and strike reasonable balances within our portfolio among those investment ideas offering safety in uncertain times and those holdings representing compelling long-term value once a broader recovery is underway.  Our differentiated fundamental value investment philosophy allows us to capture both of these opportunity sets, in our ongoing effort to seek out solid relative returns.

Portfolio

In terms of the current portfolio positioning, relative to the Russell 1000 Value Index, DBLV is overweight consumer staples, financials, health care, and information technology, and underweight consumer discretionary, industrials, materials, real estate, communication services, and utilities.  DBLV is about equal weight energy.

The portfolio’s sector weights, both in absolute terms and also relative to the benchmark, are found in the following charts:

As of 12.31.2020.

In information technology, we have trimmed our positions and taken profits following strong momentum in a number of our holdings, and now we are only modestly overweight the sector.  While we believe the technology disruptors will be able to sustain idiosyncratic growth via value-creating innovation and through an ability to automate and reduce costs, we believe many such names have become more than appropriately priced by the market.  Thus, we have shifted our exposures towards underappreciated quality technology companies that are more cyclical in nature, and which trade at more modest valuation multiples (e.g. KBR Inc., Lam Research).  Moreover, we view recently-added Vontier Corp. as an industrial company, making our unofficial weighting in the IT sector modestly light relative to the RLV benchmark excluding this name.

In financials, we have continued to take up our exposure, bringing it to an overweight versus the benchmark.  Even with the recent episodic rallies following the positive news of the development of highly effective vaccines, the financials still trade at a discount to the overall market.  However, their earnings outlook is improving with the prospect of additional stimulus and the potential of multiple COVID-19 vaccines to enable a sustainable economic recovery.  We took advantage of the valuation discount to add to our bank (e.g. Fifth Third), consumer finance (e.g. Capital One) and life insurance positions (e.g. Prudential Financial).    Currently, our portfolio carries a higher mix of asset-sensitive financials (i.e., those stocks that should outperform in a rising rate environment) relative to that of the benchmark.  Despite initial investor fears concerning substantial credit losses as a result of the recession, to date, actual credit delinquencies, defaults and charge-offs have actually been relatively low.   With loan loss reserves more than adequate, loan loss provisions will likely recede from elevated levels, giving a boost to earnings.   Meanwhile, banks have accumulated considerable excess capital.  Earnings could get a lift from a ramp in buybacks once capital return restrictions are fully lifted by the Fed. Furthermore, inflation and interest rates could continue to rise if the economic recovery strengthens, providing a further tailwind to earnings.

In health care, we are moderately overweight the sector, with most of that exposure centered among healthcare service providers (e.g., Anthem) and pharmaceutical companies (e.g., Sanofi), which both carry more attractive valuations.   While the health care industry faces increasing regulatory risks under Democratic leadership, we believe that, ultimately, the likely regulatory impact upon the service providers’ business models will be less adverse than feared, given the slim majority in the U.S. Senate, and consequently, that private insurance will remain an option for many millions of Americans.   In light of this, we expect the stocks of health care service providers to rebound from currently depressed levels once it becomes more apparent that the strong earnings of these companies are indeed sustainable.  Meanwhile, our pharmaceutical holdings are in companies with superior mid- and long-term earnings prospects, given their advantaged development pipelines and benign loss-of-exclusivity patent portfolio profiles, that also carry valuations that are more attractive than more growth-challenged peers.

In the consumer discretionary sector, we retain a healthy exposure to defensive retailers, like Dollar General and Target, which are providing essential services during the pandemic while successfully competing with major e-commerce disruptors.  Meanwhile, within consumer staples we reduced our exposure modestly, but have remained overweight this defensive sector.  We continue to hold companies with strong established brands that are not overly rich in valuation, but which still provide exposure to companies with earnings that should prove more resilient to economic weakness, like Mondelez and PepsiCo.

We prefer consumer staples to other defensive sectors, namely utilities and REITs, where we are underweight, since we see greater value in branded consumer staples companies, since they possess more compelling and differentiated business models, more durable earnings and more resilient balance sheets, and which will likely emerge still stronger from the current crisis.  Within REITs, we tilted towards a more cyclical posture with the addition of Boston Properties, a company that we expect to benefit from the eventual withdrawal of the current shelter-in-place orders.

In communication services, we remain underweight, but we have balanced our exposure between defensive and cyclical positioning. Our Comcast holding should allow us to benefit from an upturn in advertising spending in the eventuality of a strengthening economic recovery.

While we are modestly underweight the industrials sector, we have shifted our exposure towards the more cyclical, lower multiple names within these sectors (e.g., Norfolk Southern), since we see such names thriving in an eventual recovery.  Moreover, because we view Vontier Corp., which spun out of an industrial company (Fortive Corp.), we actually view our positioning in the industrials sector as modestly overweight.

We are equal weight the energy sector, and we are modestly underweight the materials sector.

Finally, we continue to hold elevated levels of cash to maintain some dry powder for opportunities that we think will arise as we continue through what will likely be a very bumpy road to recovery.

As always, the DBLV portfolio’s sector exposures primarily reflect the DoubleLine Equities team’s bottom-up investment process, which places an emphasis on individual stock selection.  However, the macroeconomic views of DoubleLine Capital L.P. do inform secondarily these sector weightings.

Sector

In terms of the portfolio’s sector attribution, quarterly performance for DBLV was driven by positive contributions from communication services, consumer discretionary, consumer staples, energy, financials, health care, industrials, information technology, and materials, offset by adverse results within real estate and utilities.   On a relative basis, DBLV was helped by consumer staples, financials, health care, industrials, and information technology, offset by adverse results within communication services, consumer discretionary, energy, materials, real estate, and utilities.  Cash had a negative impact on relative performance in a rising market.

As of 12.31.2020.

 

Top Holdings

The top-three positive contributors to fourth quarter performance were Flex Ltd. (FLEX), US Foods Holding (USFD), and Lam Research (LRCX):

  • FLEX (information technology) is a leading electronics manufacturing services (EMS) supplier to a wide variety of companies in the technology, consumer discretionary, industrials, healthcare and other industry verticals.  The company has been in the midst of a multi-year transition to higher-margin, longer-lived business activity to enhance top-line growth, profitability and the predictability of returns.   While the pandemic created near-term challenges, FLEX stock has rebounded impressively in the fourth quarter of 2020 on an anticipated recovery.  Additionally, FLEX stock benefited as Nextracker, its leading solar tracking offering (i.e., products that improve the efficiency of solar farms), was highlighted as a valuable hidden asset following the fourth quarter IPO of competitor Array Technologies at an earnings multiple greater than 40x.  We continue to view FLEX favorably at current levels, given the prospects for further multiple rerating on the transformation of its core EMS business and continued growth of Nextracker.
  • USFD (consumer staples) is the nation’s second largest distributor of food products to restaurants, healthcare, and government facilities. Having stabilized their operations and their balance sheet during the depths of the COVID-19 crisis, the company’s stock returned nearly 50% in the final quarter of 2020 as positive vaccine developments were announced and optimism on reopening surged. On the day that Pfizer and BioNTech announced highly favorable efficacy data from their Phase 3 vaccine study, USFD rose nearly 29%. Despite surging case counts and reinstatement of some mobility and business restrictions in November and December, the emergence of an effective vaccine has allowed the market to look through the restaurant industry’s shorter term challenges. Throughout the crisis, USFD has managed expenses effectively and picked up market share from smaller competitors that have struggled to handle the disruptions of the pandemic. Its efforts have it positioned to eventually resume its pre-pandemic trend of accumulating market share in a consolidating industry and narrowing the profitability with industry leader Sysco.
  • LRCX (information technology) is a leading supplier of capital equipment (i.e., etch, deposition, and clean) to the semiconductor industry, with top market share overall within the etch market and somewhat disproportionate exposure to memory markets. We have remained positive on Lam Research, along with other semiconductor equipment suppliers, as growing complexity in semiconductor design have supported increasing capital intensity for etch and deposition; moreover, the company’s strong exposure to rebounding memory spending, which was a laggard relative to logic and foundry capital spending, is expected to continue on demand for memory and storage solutions.  The pace of the recovery, which is amplified by strong operating leverage and healthy cash flow, has surprised many investors, leading to strong stock price performance in the quarter.  We continue to see Lam Research as a long-term winner in the semi-cap space.

 

The top-three detractors from quarterly performance were American Tower Corp. (AMT), Willis Towers Watson (WLTW), and Sanofi (SNY):

  • AMT (real estate), one of the largest real estate investment trusts (REITs), is a leading independent owner, operator and developer of wireless-communications-related real estate and the holder of a global portfolio of more than 170,000 cell tower sites. During the quarter, news that a COVID-19 vaccine jointly developed by Pfizer and BioNTech was found highly effective drove a short-covering-led rally in those REITs that were hardest hit by the pandemic (i.e., retail and hotel) and those carrying excessive debt.   As the vaccine brought hope of a recovery for such hard-hit REITs, funds shifted away from the prior leadership group, consisting of high quality industrial and specialty REITS with secular growth, including AMT, thus driving the stock’s underperformance during the quarter.  AMT’s strong macro tower franchise with high recurring revenue, long term contracts, high entry barriers and solid free cash flow generation remains intact.  Moreover, the company continues to benefit from higher levels of wireless traffic, which the anticipated shift toward fifth generation cellular networks (i.e., 5G) will accelerate.  AMT remains a reasonably priced quality asset that provides diversification to our more economically sensitive positions.
  • WLTW (financials) is a leading insurance brokerage and benefits consulting business. The company is in the process of merging with AON, pending government approval.   Both WLTW and AON have highly complementary business so the merger is expected to enhance scale and accelerate growth.   During the quarter, insurance brokers, including WLTW, underperformed the broader financials sector due to a rotation to more pro-cyclical financials, such as banks and consumer finance companies, in reaction to the COVID-19 vaccine news.   Given the relative resiliency of their businesses, the insurance brokers had performed better than the overall financials sector amidst the pandemic earlier in the year.    Furthermore, during the quarter, WLTW stock lagged its peers on worries that it would be forced to divest key businesses or that its merger with AON could be delayed due to anti-trust concerns.   European Union regulators announced an investigation of the merger due to concerns that it may hurt competition in key markets.   Although WLTW may have to divest some businesses, such as its reinsurance brokerage business (Willis RE), to win regulatory approval, there are substantial cost savings that more than offset any lower profits resulting from potential divestitures.   Generally, we believe the deal makes strategic sense, strengthens its competitive position and is attractive financially.  At about 16.5x FY2022 EPS, WLTW continues to trade at a meaningful discount to peers even before considering all the potential synergies.
  • SNY (health care) is a French pharmaceutical manufacturer with a variety of therapeutic focus areas including immunology, rare diseases, oncology, and hematology, and with leading businesses in vaccines and consumer health. During the quarter, SNY modestly underperformed the pharmaceutical peer group as a Phase 3 clinical trial start for their COVID-19 vaccine was delayed and will not be available until late-2021 versus a mid-2021 prior expectation.  Profit and value generation from a successful coronavirus vaccine was never a part of the fundamental thesis of our SNY holdings and so this development, while unwelcomed, has no impact on our intrinsic value estimate for the stock, which remains significantly higher than its current stock price.  Indeed, SNY remains one of the cheapest pharmaceutical stocks in the market, at approximately 11x FY2022 EPS, even as it boasts the lowest exposure to branded patent expiries in the industry over the next decade, and also boasts a valuable embedded call option on its pipeline, which we believe remains under-appreciated by the market.  We expect these factors can drive significant stock upside over the next 12-18 months, as multiple later-stage pipeline datasets read out.

During the most recent quarter, we introduced Boston Properties (BXP), Fifth Third Bancorp (FITB), and Vontier Corp. (VNT) as new holdings.

We made net additions to our positions in Alcon Inc. (ALC), Astrazeneca PLC (AZN), Bank Of America Corp. (BAC), Boeing Co. (BA), Citizens Financial Group Inc. (CFG), Capital One Financial Corp. (COF), Honeywell International Inc. (HON), IHS Markit Ltd. (INFO), Philip Morris International (PM), PNC Financial Services Group Inc. (PNC), Prudential Financial Inc. (PRU), Reynolds Consumer Products (REYN), Raytheon Technologies Corp. (RTX), Sanofi (SNY), and Verizon Communications Inc. (VZ).

We made net reductions to our positions in American Tower Corp. (AMT), Amazon.com Inc. (AMZN), Comcast Corp. (CMCSA), Dupont De Nemours Inc. (DD), Dollar General Corp. (DG), Flex Ltd. (FLEX), Kbr Inc. (KBR), KLA Corp. (KLAC), Lam Research Corp. (LRCX), Microchip Technology Inc. (MCHP), Norfolk Southern Corp. (NSC), Parker-Hannifin Corp. (PH), Roche Holding AG (RHHBY), Target Corp. (TGT), Tjx Cos Inc. (The) (TJX), Taiwan Semiconductor Mfg. Co. (TSM), Us Foods Holding Corp. (USFD), and Valero Energy Corp. (VLO).

We eliminated our holdings in Goldman Sachs Group (GS) and Microsoft Corp (MSFT).

The top ten portfolio holdings, by weight and active weight, as of quarter’s end, can be seen in the following tables:

As of  12.31.2020. 

Active weight refers to the difference in allocation of an individual security or portfolio segment between a portfolio and its benchmark. For example, if a portfolio allocates 15% within the energy sector, and the benchmark’s allocation in energy is 10%, then the active weight of the energy segment of the portfolio is +5%. Active weight can also be referred to as relative weight.

Outlook

In summary, we believe continued caution is warranted on the equity market generally, given that the economic recovery remains fragile and valuations appear to have moved ahead of fundamentals.  Yet we believe that caution is particularly warranted for growth stocks, into which many investors have euphorically charged, thereby stretching the valuations of such names to unsustainable levels.  Meanwhile, the discount associated with value stocks has reached a new historic level that we believe is unjustified even after considering the historically lower growth rates, margins and returns of such names.  Given the extreme valuation differential, we believe that the current set-up and risk-reward for value stocks is compelling, especially given the improving future earnings prospects of such names, and we would expect the tentative growth-to-value rotation in US equities that occurred episodically in the fourth quarter of 2020 to gain strength in 2021 as the market outlook for an economic recovery improves over time.  We continue to shift our exposures within the DBLV portfolio towards more cyclical and value stocks to reflect this view.

As we have noted previously, we believe that the fundamental value strategy informing our management of DBLV is well suited to navigate through the current environment of evolving risks and opportunities, by allowing us to seek compelling investments both within low-multiple value names tied to rising expected returns in a cyclical upswing, as well as amongst high-quality, less economically sensitive stocks trading at reasonable prices, thereby facilitating the construction of a portfolio with potentially higher prospective risk-adjusted returns.  At quarter’s end, this balanced exposure carried a price-to-earnings multiple on 2021 consensus estimates for DBLV was 17.3x, versus the Russell 1000 Value Index at 18.6x, and the S&P 500 at 23.0x.

We thank you for your continued interest in DBLV.

 

Emidio Checcone
DoubleLine Capital
AdvisorShares DoubleLine Value Equity ETF (DBLV) Co-Portfolio Manager

 

Brian Ear
DoubleLine Capital
AdvisorShares DoubleLine Value Equity ETF (DBLV) Co-Portfolio Manager

 

Past Manager Commentary

DEFINITIONS:

  • CAPE ratio (cyclically adjusted price-to-earnings) is a valuation measure that uses real earnings per share over a 10-year period to smooth out fluctuations in corporate profits that occur over different periods of a business cycle.
  • Dividend yield is the amount of money a company pays shareholders for owning a share of its stock divided by its current stock price.
  • P/E is a ratio for valuing a company that measures its current share price relative to its per-share earnings.
  • PTBV (price to tangible book value) is a valuation ratio expressing the price of a security compared to its hard, or tangible, book value as reported in the company’s balance sheet.
  • SPAC (special purpose acquisition company) is a company with no commercial operations that is formed strictly to raise capital through an initial public offering for the purpose of acquiring an existing company.

Before investing you should carefully consider the Fund’s investment objectives, risks, charges and expenses. This and other information is in the prospectus, a copy of which may be obtained by visiting www.advisorshares.com. Please read the prospectus carefully before you invest. Foreside Fund Services, LLC, distributor.

There is no guarantee that the Fund will achieve its investment objective. An investment in the Fund is subject to risk, including the possible loss of principal amount invested. Investing in mid and small capitalization companies may be riskier and more volatile than large cap companies. Because it intends to invest in value stocks, the Fund could suffer losses or produce poor results relative to other funds, even in a rising market, if the Sub-Advisor’s assessment of a company’s value or prospects for exceeding earnings expectations or market conditions is incorrect. Other Fund risks include market risk, equity risk, large cap risk, liquidity risk and trading risk. Please see prospectus for details regarding risk.

Shares are bought and sold at market price (closing price) not NAV and are not individually redeemed from the Fund. Market price returns are based on the midpoint of the bid/ask spread at 4:00 pm Eastern Time (when NAV is normally determined), and do not represent the return you would receive if you traded at other times. 

Holdings and allocations are subject to risks and change.

The views in this commentary are those of the portfolio manager and many not reflect his views on the date this material is distributed or any time thereafter. These views are intended to assist shareholders in understanding their investments and do not constitute investment advice.