HOLD: 3rd Quarter 2022 Portfolio Review
The Advisor Shares North Square McKee Core Reserves ETF returned 0.27% (27 basis points market, 17 basis points NAV) in the third quarter, underperforming the Bloomberg 3-month Treasury Bill index by 21 basis points. The year- to-date return for the strategy is -0.46%.
The expected seasonal lull in market volatility failed to materialize this summer, as inflation readings continued to surprise to the upside. The Fed, careful to reinforce their comments to the public regarding their near-singular focus on inflation, followed up June’s 75 basis point Funds rate increase with moves of equal size in August and again in September. The peak Funds rate expectations grew from approximately 3.50% at the end of Q2 to just over 4.50% in the third quarter. Evidence of the Fed’s attempt to slow the economy and the rate of inflation can be found in the commodities markets, but strength in shelter costs (representing nearly 30% of overall inflation) continue to boost consumer prices.
As was the case in the first two quarters of this year, defensive duration positioning and a focus on quality was a significant contributor to performance during Q3. Of even greater consequence was our decision to avoid residential mortgage holdings, in favor of short maturity corporate, asset backed and multi-family securities. Though we don’t envision a return to the low volatility levels seen over the past decade, we do expect a significant move lower as the Federal Open Market Committee approaches the end of its tightening cycle early next year.
As we grow ever nearer the peak in the Fed Funds rate, we join the majority of investors in looking for signs of a proximate top in the pace of inflation. With commodity prices, job growth and home sales well off their highest levels, we believe tighter Financial Conditions are moving the economy toward a mild recession in the next 12 months, setting the table for a rebound in risk asset performance.
The agency and asset-backed sectors once again represents our preferred method for generating alpha as we head into the final quarter of this year. Though higher yields and pension plan de-risking (reducing allocations to equities in favor of intermediate and long maturity corporate bonds) has supported credit performance, our concern for corporate earnings in a mild recessionary environment limits our enthusiasm for the sector. Agency mortgages are also becoming increasingly attractive in light of their current valuations.
|Security Description||Price $||Portfolio Weight %|
|FEDERAL HOME LOAN BANK 4.3 9/26/2023||100.12||4.61%|
|FEDERAL FARM CREDIT BANK 4.89 10/3/2025||100.00||3.22%|
|BANK OF AMERICA CORP 3.004 12/20/2023||99.48||3.05%|
|FREDDIE MAC 4.75 9/30/2025||99.29||3.05%|
|US TREASURY N/B 3.5 9/15/2025||97.98||3.01%|
|MORGAN STANLEY 4.875 11/1/2022||100.02||2.83%|
|ATHENE GLOBAL FUNDING FRN 1/7/2025||96.85||2.45%|
|FEDERAL HOME LOAN BANK 3.64 7/28/2025||98.17||2.26%|
|FEDERAL FARM CREDIT BANK 3.94 7/27/2026||97.55||2.25%|
|FHR 4614 PA 3 12/15/2043||99.00||2.14%|
As of 09.30.2022. 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.