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.
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.
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.
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.
|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.