MINC: April 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/minc.

Market Review

After an incredibly volatile first quarter, fixed income markets experienced a strong rebound in the month of April. Despite the rebound, the global spread of COVID-19 continues to create uncertainty for the global economy. The ultimate human and economic toll is not yet known as the event continues to unfold. Governments and central banks, however, are responding in an unprecedented fashion to help blunt the effects of the virus. Examples from the U.S. include:

  • The Federal Reserve buying U.S Treasuries and agency mortgage-backed securities, and establishing programs to purchase investment grade corporates, high yield ETF’s, and help municipal issuers as well as the parts of the securitized market.
  • Additionally, the politicians have embarked on waves of fiscal stimulus including the $2 Trillion CARES Package. The fiscal programs are a bit more complicated to get approved given the politics involved, however, we are confident that needed stimulus will pass the appropriate legislative bodies over time.
  • We expect policy makers will continue to be aggressive in their response to this government imposed shutdown of the economy and will fine-tune their response as warranted. The massive fiscal and monetary government response has stabilized the credit markets, including improving liquidity and opening up the new issue markets in most sectors.

During the month of April, fixed income spreads have rallied from the year to date lows, but are still generally two times the year end 2019 levels. U.S. Treasuries underperformed relative to spread sectors. Within investment grade corporates, we saw record supply in March and April of $262 billion and $285 billion respectively. The issuance started with A rated industrials and then issuance expanded in more BBBs as the market opened up. Within the corporate high yield space, higher quality issuance resumed. Issuance has been geared towards the secured and 5-year part of the curve. Bank loan issuance has been slow to return absent rescue financing given the negative CLO technical and retail’s lack of involvement in the sector. Within the securitized space, performance has been slower to recover than corporate sectors.

Portfolio Review

Contributors
The underweight to U.S. Treasuries and overweight to spread product, particularly non-agency residential mortgage backed securities (RMBS), corporate high yield bonds and bank loans contributed to performance in the month of April. Spread sectors recovered about 50-60% of the spread widening seen in the first quarter of 2020.

Detractors
The allocation to asset backed securities (ABS) detracted from performance. As mentioned previously, performance has been slower to recover than corporate sectors making relative value more attractive. The higher quality and short term nature of the asset class coupled with the first pay structure of many of the securities should allow the Fund to recoup this year’s underperformance over time.

Allocation to investment grade corporates was a detractor from performance during the month. A collapse in earnings power, record new issue supply, and Federal Reserve intervention have combined to dramatically alter the investment grade landscape. Spreads have doubled year to date and remain at levels typical of a recessionary environment.

Top Holdings

Security Description Portfolio Weight %
US TREASURY N/B 0.5 3/31/2025 1.49%
SBA TOWER TRUST 3.168 4/11/2022 1.34%
SBA TOWER TRUST 2.877 7/9/2021 1.33%
FIAOT 2017-2A B 2.65 11/15/2022 1.10%
BX 2018-GW B FRN 5/15/2035 1.05%
FN MA3692 3.5 7/1/2049 1.01%
US TREASURY N/B 1.75 6/15/2022 0.94%
TMCAT 2018-AA B 3.45 11/15/2024 0.89%
SWH 2017-1 A FRN 1/17/2035 0.78%
FCRT 2018-1 C 3.68 8/15/2023 0.76%

As of 04.30.2020. Cash not included.

 

Current Fund Strategy

During the month, we reduced exposure to RMBS, ABS and cash. Sale proceeds were primarily invested in investment grade corporate bonds, corporate high yield securities, bank loans and U.S. Treasuries.

We are currently finding value in spread sectors. While there is no doubt that this event will prove disruptive to local, regional, and global economies in the near term, we have seen a robust response from policymakers and are confident that the crisis will be resolved in time. Our multi-sector approach to fixed income investing enables us to scan the bond market for the most attractive investment opportunities wherever they may be and is ideally suited for the current environment.

The credit markets are pricing in a recession in the U.S. for the first half of 2020, significant weakness in corporate earnings, huge job losses, and a pickup in defaults. It is also assuming a meaningful recovery in the second half of 2020 and into 2021. At current valuations the return outlook for fixed income credit looks attractive, however periods of volatility are likely to continue.

Respectfully,

Newfleet Asset Management
AdvisorShares Newfleet Multi-Sector Income ETF (MINC) Portfolio Manager

 

Past Manager Commentary

Definitions:

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.

Yield is the income return on an investment. This refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment’s cost, its current market value or its face value.

10-Year Treasury Note is a debt obligation issued by the United States government that matures in 10 years. A 10-year Treasury note pays interest at a fixed rate once every six months and pays the face value to the holder at maturity. An advantage of investing in 10-year Treasury notes, and other federal government securities, is that the interest payments are exempt from state and local income tax. However, they are still taxable at the federal level.

The Bloomberg Barclays Capital Aggregate Bond Index measures the performance of the U.S. investment grade bond market. One cannot invest directly in an index.

Fundamentals are the qualitative and quantitative information that contributes to the economic well-being and the subsequent financial valuation of a company, security or currency. Analysts and investors analyze these fundamentals to develop an estimate as to whether the underlying asset is considered a worthwhile investment.

Residential Mortgage-Backed Security is a type of mortgage-backed debt obligation whose cash flows come from residential debt, such as mortgages, home-equity loans and subprime mortgages. A residential mortgage-backed security is comprised of a pool of mortgage loans created by banks and other financial institutions. The cash flows from each of the pooled mortgages is packaged by a special purpose entity into classes and tranches, which then issues securities and can be purchased by investors.

Commercial Mortgage Backed Security is a type of mortgage-backed security that is secured by the loan on a commercial property. A CMBS can provide liquidity to real estate investors and to commercial lenders. As with other types of MBS, the increased use of CMBS can be attributable to the rapid rise in real estate prices over the years.

An Asset Backed Security is a financial security backed by a loan, lease or receivables against assets other than real estate and mortgage-backed securities. For investors, asset-backed securities are an alternative to investing in corporate debt.

Correlation is a statistical measure of how two securities move in relation to each other.

Coupon is the interest rate stated on a bond when it’s issued. The coupon is typically paid semi-annually.

Spread sectors include all non-Treasury investment grade sectors including federal agency securities, corporate bonds, asset-backed securities, mortgage-backed securities and commercial mortgage-backed securities.

Spread is the difference between the bid and the ask price of a security or asset.

Investment Grade is a rating that indicates that a municipal or corporate bond has a relatively low risk of default. Bond rating firms, such as Standard & Poor’s, use different designations consisting of upper- and lower-case letters ‘A’ and ‘B’ to identify a bond’s credit quality rating. For example, ‘AAA’ and ‘AA’ (high credit quality) and ‘A’ and ‘BBB’ (medium credit quality) are considered investment grade. Credit ratings for bonds below these designations (‘BB’, ‘B’, ‘CCC’, etc.) are considered low credit quality (speculative), and are commonly referred to as “junk bonds.”


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’s investment in fixed income securities will change in value in response to interest rate changes and other factors, such as the perception of the issuer’s creditworthiness. Fixed income securities with longer maturities are subject to greater price shifts as a result of interest rate changes than fixed income securities with shorter maturities. The Fund’s investments in high-yield securities or “junk bonds” are subject to a greater risk of loss of income and principal than higher grade debt securities. Emerging and foreign market investments can be more volatile than U.S. securities and will expose the Fund to adverse changes in foreign economic, political, regulatory and currency exchange rates. See prospectus for details regarding specific risks.

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.