GK: 3rd Quarter 2023 Portfolio Review
Commentary
The third quarter of 2023 started off with a bang with the AdvisorShares Gerber Kawasaki ETF (GK) reaching a high for the year ($19 NAV) during the middle of July. This strong performance for the fund continued for the first seven months of the year, but then things changed. The Federal Reserve’s (Fed) continued assault on asset values accelerated with the long-term Treasury rate moving up more than 100 basis points (1%) in August and September – bringing the 10-year rates from below 4% to almost 5%. As one might expect, this created a lot of pressure on GK’s portfolio, as it did in 2022, as rapidly rising rates hurts growth companies and makes financial conditions much more challenging for small and mid-sized businesses. Even though inflation has declined substantially from the highs of 2022, the Fed continues to talk down asset values and talk up rates in, what we believe, is a misguided view that inflation is not under control. In fact, the markets have become quite fearful the Fed has gone too far and will drive the economy into a recession in early 2024. We heard this at the end of last year, causing investors to fear a recession in the second half of 2023 which never materialized. In fact, we just saw a period of growth on top of much lower inflation which drove higher consumer spending and, so far, solid earnings for Q3.
With the cross current of a stronger economy – despite higher rates and a Fed that will seemingly never go away – investors moved to the sidelines in droves in August and September. The other challenging part for GK’s portfolio is our thematic approach to investing which includes climate change investments like Tesla and others. These businesses are interest rate sensitive – the nature of buying electric vehicles, solar and battery systems are all used with borrowed money. Many construction projects, which would normally be investing to build housing, cannot afford to borrow at the in the current interest rate environment; therefore future construction is down substantially. We fear that the Fed doesn’t understand the long-term consequences of raising rates so rapidly as loans mature: businesses and individuals loans that must be refinanced at substantially higher costs cause financial distress to anybody caught in this situation, including the US government itself!
These conditions have forced us to lower or sell off positions in our climate portfolio because of the rapid declining values caused by higher rates. The consumer area of our portfolio has performed much better as it has been stronger. New additions like Lululemon continue to show strong sales. The technology portion of our portfolio has also been strong, led by companies like Microsoft and Netflix which performed very well despite the headwinds. We’ve had a lot of success with Novo Nordisk, thanks to its weight loss drugs like Ozempic, and Nvidia, our top chip holding which is a leader in AI. We’ve exited all commodity positions and have lowered the number of holdings in the fund to concentrate in our best positions. Also, because the high-rate environment is creating a very difficult environment for smaller businesses, we’ve lowered or exited positions that were more speculative.
At this point, until we get more certainty in our belief that the Fed is done raising interest rates, it is just a waiting game. As we move into 2024, we believe the economy will weaken and the Fed will be forced to lower rates to a much more accommodating level. We believe the economy will be stronger than what people expect and don’t expect a recession as the Fed will create lots of liquidity by ending their rate tightening cycle. Certainly, any signal that the Fed is done raising rates will cause investors to move from short term funds to longer term treasuries to lock in these higher rates. Then we believe a real rally in the types of assets the GK fund owns will truly begin. Year to date through September, we’ve had a decent year with the fund up over 9% (NAV and market) but certainly have given back a large amount of our gains as we were up about 24% in the middle of July. I am confident that we are close to the end of this extremely long rate hike cycle and GK’s assets will recover value very rapidly. Investors need to be patient and wait for the moment when we have more certainty. Thank you for your patience during these two long years of interest rate hikes and I have every confidence that our fund will recover value upon normalization of our economy and rates.
Top Holdings
| Ticker | Security Description | Portfolio Weight % |
| TSLA | TESLA INC | 8.09% |
| NVDA | NVIDIA CORP | 7.28% |
| MGM | MGM RESORTS INTERNATIONAL | 7.23% |
| MSFT | MICROSOFT CORP | 6.72% |
| AAPL | APPLE INC | 5.69% |
| GOOG | ALPHABET INC-CL C | 5.33% |
| LPLA | LPL FINANCIAL HOLDINGS INC | 4.64% |
| ON | ON SEMICONDUCTOR | 4.42% |
| NVO | NOVO-NORDISK A/S-SPONS ADR | 4.38% |
| DIS | WALT DISNEY CO/THE | 4.07% |
As of 09.30.2023. Cash is not included. Subject to change.
Regards,
Ross Gerber | Gerber Kawasaki | President and CEO
AdvisorShares Gerber Kawasaki ETF (GK) Portfolio Manager
Past Manager Commentary
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