HDGE: June 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/hdge.

Performance

For the month of June, the AdvisorShares Ranger Equity Bear ETF (NYSE Arca: HDGE) lost 6.91% while the S&P 500 gained 1.99%.

Performance History (06.30.2020) HDGE NAV (%) HDGE Market (%)
1 Month -6.61 -6.91
3 Month -29.60 -29.81
Year-to-Date -9.64 -9.52
1 Year -23.79 -23.94
3 Years -17.18 -17.16
5 Years -14.87 -14.88

As stated in the Prospectus, the total annual operating expenses are 3.12% (includes 0.18% acquired fund fees). 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 month-end performance please visit  www.advisorshares.com/etfs/hdge.

Markets Review

The Q Ratio Indicates that the Stock Market Value Is Historically Overpriced

 We use many indicators to analyze stock market value and future trends. One of our favorites is the Q Ratio. It was developed by Nobel Laureate James Tobin to estimate the fair market value of the stock market for the long term. The ratio is the total price of the market divided by the replacement cost of the physical assets of all of its component companies. As you can see from the chart below, the ratio sits at a quite high level of 1.79. This means the market is trading at 129% above the mean historic replacement cost ratio of 0.79, says Jill Mislinski of Advisor Perspectives. Note that the all-time Q Ratio high at the peak of the Tech Bubble was 2.17, about 180% above the historic average of replacement cost. The all-time lows in 1921, 1932 and 1982 were around 0.28, which is approximately 63% below replacement cost. Mislinski cautions this is not a short-term indicator. “Periods of over- and under-valuation can last for many years at a time,” she says. That means the Q Ratio is “ more appropriate for formulating expectations for long-term market performance”. The Q Ratio, among other indicators, tells us to be cautious at these market level.

It should not be surprising, then, that equity investors are once again becoming complacent. While stocks of companies with high sales growth were strong in June, investors did not care whether the growth was profitable growth. This indicates that their “risk-on” preference has manifested itself in a low-quality rally.

Investors did not care if the stocks they were buying were profitable or not. In fact, unprofitable company stocks out-gained profitable company stocks by 270bps last month. Much of the rally was focused on cyclical stocks, also suggesting pro-bullish sentiment.

   

Stocks were grouped and ranked by the relevant factor as of the end of the prior month and the returns computed for the month just ended. Stocks chosen were based on Two Rivers Analytics’ universe of stocks. © Copyright 2019. All Rights Reserved Two Rivers Analytics. Further Distribution Prohibited without prior permission.

 

Portfolio Review

For the month of June 2020, the largest realized and unrealized gains were Cinemark Holdings, Inc. (CNK), Capri Holdings Limited (CPRI), Golar LNG Limited (GLNG) and Weibo Corp Sponsored ADR Class A (WB). Cinemark Holdings (CNK) stock sank -23.15%. This motion picture exhibition company is suffering deeply from the Covid-19 crisis. Even before Covid, they were losing business to streaming services. It is unlikely that they can ever recover to prior volumes. In addition, the movie pipeline is weak for the next one to two years. Capri Holdings (CPRI) stock bounced 3.92%. This luxury fashion group saw sales decline 11.3% and margins drop 500 basis points in the fourth quarter. Guidance is poor and estimates are declining as the company’s brands lose traction. Golar LNG (GLNG) stock eased -8.70%. The natural gas shipping company saw an increase in revenues in the first quarter, partly from seasonal rises in shipping and the introduction of its latest FLNG unit. Analysts are cutting their estimates. Weibo Corp (WB) stock rose 9.20%. The company had become embroiled in the conflict between India and China. We covered the short.

The largest realized and unrealized losses for June were Credit Acceptance Corporation (CACC), Dycom Industries, Inc. (DY) and Genuine Parts Company (GPC). Credit Acceptance Corp (CACC) stock rose 13.30%. New loan originations are slowing and the credit quality is deteriorating. Last quarter brought a much higher provision for loan losses than the prior year. Dycom Industries (DY) stock tumbled -2.87%. The engineering and specialty contracting services company pulled its guidance after earnings fell 32% from the prior year. Dycom is having problems with a large customer program and another problem at a specific customer rollout. Genuine Parts Co (GPC) stock lifted 4.26%. The company’s sales and earnings declined dramatically from last year and missed consensus estimates. We covered the short.

Top Holdings

Ticker Security Description Portfolio Weight %
HSBC HSBC HOLDINGS PLC-SPONS ADR -2.88%
MSI MOTOROLA SOLUTIONS INC -2.59%
SNA SNAP-ON INC -2.56%
WFC WELLS FARGO & CO -2.37%
CPT CAMDEN PROPERTY TRUST -2.25%
CAJ CANON INC-SPONS ADR -2.25%
T AT&T INC -2.24%
QSR RESTAURANT BRANDS INTERN -2.19%
FL FOOT LOCKER INC -1.98%
LB L BRANDS INC -1.89%

As of 06.30.2020. Cash not included.

Respectfully,

Brad Lamensdorf
Ranger Alternative Management
AdvisorShares Ranger Equity Bear ETF (HDGE) Portfolio Manager

 

Past Manager Commentary

Definitions:

The S&P 500 Index is a free-float capitalization-weighted index based on the common stock prices of 500 American companies. It is one of the most commonly followed equity indices and many consider it the best representation of the market and a bellwether for the U.S. economy.

A Bear Market (Bearish) is a market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment to be self-sustaining. As investors anticipate losses in a bear market and selling continues, pessimism only grows. Although figures can vary, for many, a downturn of 20% or more in multiple broad market indexes, such as the Dow Jones Industrial Average (DJIA) or Standard & Poor’s 500 Index (S&P 500), over at least a two-month period, is considered an entry into a bear market.

A Bull Market (Bullish) is a financial market of a group of securities in which prices are rising or are expected to rise. The term “bull market” is most often used to refer to the stock market, but can be applied to anything that is traded, such as bonds, currencies and commodities.

A short position is the sale of a borrowed investment with the expectation that it will decline in value.

Volatility is a statistical measure of the dispersion of returns for a given security or market index. Volatility can either be measured by using the standard deviation or variance between returns from that same security or market index. Commonly, the higher the volatility, the riskier the security.

Implied Volatility is the estimated volatility of a security’s price. In general, implied volatility increases when the market is bearish and decreases when the market is bullish. This is due to the common belief that bearish markets are more risky than bullish markets.

The Volatility Index (VIX) is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant
to be forward looking and is calculated from both calls and puts. The VIX is a widely used measure of market risk and is often referred to as the “investor fear gauge”. The VIX is a contrarian sentiment indicator that helps to determine when there is too much optimism or fear in the market.


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. The Fund may invest in (or short) ETFs, ETNs and ETPs. In addition to the risks associated with such vehicles, investments, or reference assets in the case of ETNs, lack of liquidity can result in its value being more volatile than the underlying portfolio investment. Other Fund risks include market risk, equity risk, short sales and leverage risk, large cap risk, early closing risk, liquidity risk and trading risk. Short sales involve leverage because the Fund borrows securities and then sells them, effectively leveraging its assets. The use of leverage may magnify gains or losses for the Fund. See prospectus for specific risks and details.

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.