MINC: July 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

Policy support from monetary and fiscal authorities and attractive valuations proved a powerful mix during the second quarter with the trend continuing in July as most risk assets rallied. The Federal Reserve maintained its dovish stance and reinforced its commitment to monetary policy support. Fiscal policy is likely to follow suit although politics make the process cumbersome. Risk tone remained firm as high yield was the top performing sector for the month and the sector’s return turned positive for the year. Parts of the economy have reopened, however, spikes in new COVID-19 cases, particularly in the South, have resulted in some delays and setbacks to broader efforts to that process.  We expect this pause will be temporary but are monitoring closely.       

During the month of July, the U.S. Treasury curve modestly flattened as the 10-year Treasury yield declined 13 basis points and the 30-year Treasury yield was 22 basis points(0.22%) lower. 

Portfolio Review

Positive Contributors

The underweight to U.S. Treasuries was a positive contributor to performance as U.S. Treasuries underperformed relative to most spread sectors during the month of July.

Issue selection and allocation within corporate high yield bonds contributed to the positive performance for the fund during the month. During the last week in July, the high yield market hit a fresh post-crisis high with strong performance. The index is now back to a positive total return for the year, with quality continuing to outperform.

Issue selection within asset backed securities and non-agency residential mortgage backed securities were positive contributors to performance during the month. Stimulus programs have kept consumers in better shape than initially feared as furloughed employees returned to work. For many, stay-at-home orders have dramatically increased the intrinsic value of residential real estate. In addition, subscription levels have far exceeded pre-COVID-19 levels as investors have cash that needs to get to work.

Performance Detractors

The Fund’s underweight to investment grade corporates relative to the benchmark slightly detracted from performance as investment grade corporate bonds performed well the month of July.

Fund Positioning

During the month, we reduced exposure to investment grade corporate bonds and cash. Sale proceeds were primarily invested in asset backed securities and U.S. Treasuries.

Top Holdings

Security Description Portfolio Weight %
US TREASURY N/B 1.75 6/15/2022 3.28%
JP MORGAN USD GOVT MONEY MARKET INSTL 2.84%
US TREASURY N/B 0.125 5/31/2022 1.90%
US TREASURY N/B 2.25 3/31/2021 1.53%
ISHARES IBOXX HIGH YLD CORP 1.20%
BX 2018-GW B FRN 5/15/2035 1.13%
SOFI 2017-C A2B 2.63 7/25/2040 0.82%
US TREASURY N/B 0.5 3/31/2025 0.79%
FN MA3692 3.5 7/1/2049 0.79%
MORGAN STANLEY FRN 10/24/2023 0.78%

As of 7.31.2020. Cash not included.

Outlook

As always, we believe it is important to stay diversified, have granular positions, and emphasize liquid investments. The coronavirus, like other events that trigger volatility in the market, can affect valuations and create opportunities that we can take advantage of in the course of implementing our multi-sector relative value approach. We highlight the importance of credit selection and positioning in the current environment. Given the widening in spreads late in the first quarter of 2020, valuations had cheapened substantially and we continue to identify opportunities in spread sectors, including those within non-investment grade sectors that we have added to and may continue to add to in the portfolios. Even with the recovery since the end of March, valuations look attractive in many spread sectors that we believe offer some of the best total return and yield opportunities in fixed income. Some of the specific sectors where we are finding the best relative value opportunities are corporate high yield, investment grade corporates, EM debt, out-of-index/off-the-run ABS, and non-agency RMBS.

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.