HOLD: 4th Quarter 2022 Portfolio Review
The Advisor Shares North Square McKee Core Reserves ETF returned 0.85% (market) and 0.89% (NAV) in the fourth quarter while the Bloomberg 3-Month Treasury Bill Index returned 0.89%.
Short term market interest rates continued their march higher in the fourth quarter, paralleling the continued rise in the Federal Funds (Funds) rate. The pace of rate hikes faded during the quarter as the Federal Reserve (Fed) downshifted to a 50 basis point increase in December, following four consecutive 75 basis point moves earlier in the year. The market expects 25 basis point increases in February and late March, bringing the target Funds rate to between 4.75% and 5.00%.
From there, the outlook for the Funds rate from the Federal Open Market Committee diverges from market expectations. Fed governors have stated consistently that they expect to hold the Funds rate steady once the peak of just over 5% is attained. The market, on the other hand, has fully priced in a total of 50 basis points in rate cuts by the last meeting of the year.
Coincident with the slowing pace of actual and expected central bank interest rate increases is the rate of change on year-over-year consumer inflation readings. Peaking at a reading of 9.1% in June, the most recent annual rate update shows a fifth consecutive month of deceleration, now reading 7.1%. Slower growth in service prices joins the downtrend in goods pricing and is soon to be joined by an ameliorated pace in shelter costs. We expect the year-over-year rate to reach the mid-3% area by summertime.
The portfolio maintained an average maturity of 1.09 years during the most recent quarter, yielding 5.29% (gross of fees) on December 31, 2022. The portfolio was comprised of 32.95% Government securities, 15.0% in Corporate, and 47.9% in Securitized (asset-backed, commercial mortgage backed, and CMOs), with the balance in cash. We expect to maintain duration near the current target until such time as the peak in short term interest rates is attained and continued progress on the inflation front is confirmed.
|Security Description||Price $||Portfolio Weight %|
|FEDERAL HOME LOAN BANK 4.3 9/26/2023||99.63||4.72%|
|FEDERAL FARM CREDIT BANK 4.89 10/3/2025||99.65||3.31%|
|FREDDIE MAC 4.75 9/30/2025||99.41||3.14%|
|ATHENE GLOBAL FUNDING FRN 1/7/2025||97.33||2.54%|
|FEDERAL FARM CREDIT BANK 3.94 7/27/2026||98.41||2.33%|
|FEDERAL HOME LOAN BANK 3.64 7/28/2025||97.13||2.30%|
|SCLP 2022-1S A 6.21 4/15/2031||100.03||2.21%|
|US TREASURY N/B 4.25 9/30/2024||99.54||2.20%|
|VZOT 2020-A B 1.98 7/22/2024||99.06||2.19%|
|US TREASURY N/B 3.5 9/15/2025||98.09||2.17%|
As of 12.31.2022. Cash is excluded.
- A basis point is one hundredth of a percentage point (0.01%).
- A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates. The most frequently reported yield curve compares the three-month, two-year, five-year and 30-year U.S. Treasury debt. This yield curve is used as a benchmark for other debt in the market, such as mortgage rates or bank lending rates. The curve is also used to predict changes in economic output and growth.
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.
Fixed Income Securities Risk. The market value of fixed income investments in which the Fund may invest may change in response to interest rate changes and other factors. During periods of falling interest rates, the value of outstanding fixed income securities generally rise. Conversely, during periods of rising interest rates, the value of fixed income securities generally decline. Mortgage-Backed and Asset-Backed Securities Risk. The Fund could lose money if the issuer or guarantor of a debt instrument in which the Fund invests becomes unwilling or unable to make timely principal and/or interest payments, or to otherwise meet its obligations.
The impairment of the value of collateral underlying a mortgage-backed or asset-backed security (for example, due to non-payment of loans) may result in a reduction in the value of such security. In addition, early payoffs in the loans may result in the Fund receiving less income than originally anticipated.
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 to change.
The views in this material were those of the Portfolio Manager and may not reflect his views on the date this material is distributed or anytime thereafter. These views are intended to assist shareholders in understanding their investments and do not constitute investment advice.