MINC: March 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.
The first quarter of 2020 has seen volatility spike to levels not seen since the financial crisis of 2008-2009 and will be remembered for the emergence of COVID-19 as the first global pandemic since the H1N1 “swine flu” of 2009-2010. The ultimate human and economic toll are not yet known as the event continues to unfold. Governments and central banks, however, are responding in unprecedented fashion to help brunt the effects of the virus. Our expectation remains that policymakers will fine-tune their response as warranted.
During the first quarter, U.S. Treasuries outperformed spread sectors, with underperformers led by higher beta sectors such as corporate high yield, bank loans, and emerging market (EM) debt. The spread of the coronavirus, the negative effect it has had on global economic growth, and the fear it has created in the market has caused fixed income spreads to widen significantly. Valuations have cheapened meaningfully and are now at levels comparable to the financial crisis.
We are 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.
In addition to the human toll, the Covid-19 pandemic has caused rapid and widespread disruption to economies and financial markets. Our portfolios were positioned for an environment of a modest upturn in global growth, moderate inflation, a strong consumer, and fixed income market valuations that we viewed as fair. This was reflected in the positioning of the Fund that had shifted toward a higher quality focus over the last 12-18 months. This included a meaningful reduction to total below investment grade exposure in the Fund and a higher quality positioning within most sectors. This benefited the Fund’s performance during the first quarter, and especially during the month of March, as spreads widened the most in lower-quality sectors and credit tiers. However, market conditions adversely impacted the portfolio as a whole during the period.
Issue selection and the higher quality positioning within high yield bank loans, which lessened the negative impact of the Fund’s allocation to the sector was a positive contributor to performance during the quarter.
- The underweight to U.S. Treasury and agency mortgage-backed securities (MBS), and overweight to spread sectors.
- The overweight to, and issue selection within, the asset-backed security (ABS) sector. The secondary market experienced liquidity constraints amid coronavirus concerns. Elevated fund outflows led to high volumes of ABS selling with little investor demand.
- Allocations to non-agency residential mortgage-backed securities (RMBS), high yield bank loans, and corporate high yield securities. Each of these sectors experienced heightened volatility and came under pressure as a result of the unknown economic impact of the coronavirus.
|Security Description||Portfolio Weight %|
|SBA TOWER TRUST 2.877 7/9/2021||1.35%|
|SBA TOWER TRUST 3.168 4/11/2022||1.34%|
|FIAOT 2017-2A B 2.65 11/15/2022||1.12%|
|FN MA3692 3.5 7/1/2049||1.11%|
|BX 2018-GW B FRN 5/15/2035||1.07%|
|US TREASURY N/B 1.75 6/15/2022||0.96%|
|TMCAT 2018-AA B 3.45 11/15/2024||0.91%|
|NRZT 2016-3A A1 FRN 9/25/2056||0.79%|
|EART 2018-2A C 3.69 3/15/2023||0.77%|
|FCRT 2018-1 C 3.68 8/15/2023||0.76%|
As of 03.31.2020. Cash not included.
Current Fund Strategy
Sector Changes: We reduced our exposure to non-agency residential mortgage-backed securities (RMBS), bank loans and U.S. Treasury securities. We redeployed the sale proceeds primarily into asset backed securities, commercial mortgage-backed securities (CMBS), corporate high yield bonds, and cash.
Non-U.S. Exposure: The overall non-U.S. and EM debt exposure within the Fund is relatively unchanged. Total non-U.S. and EM country exposure remains low for the Fund. We are using this volatile and uncertain time in the markets to look for names we believe are undervalued yet can sustain the current macro backdrop. We are cautiously looking to add to our EM position. We still favor sovereigns in larger capital structures. We continue to emphasize high grade over high yield, and hard currency over local market exposure.
Corporate High Quality: Crashing fundamentals, record outflows, and record new issue supply have combined to dramatically alter the investment grade landscape. With spreads having tripled from YTD lows, our strategy is shifting rapidly. One holdover feature from our prior strategy is to minimize fallen angel risk as a series of downgrades has made that risk a reality with over $100B of fallen angels YTD (Ford, Occidental, Kraft Heinz). While we previously favored BBB issuers, we are finding ratings to be less relevant amid the turmoil. Opportunities are materializing across the board and we are targeting names with strong liquidity, resilient earnings, and high free cash flows. While we are generally industry agnostic in this environment, the portfolio remains positioned with a heavy banking component and a quickly growing utility exposure.
Corporate High Yield: The corporate high yield market remains bifurcated between industries impacted by virus-related shutdowns and those that are not. Going into March, the Fund was positioned with significant exposure to the U.S. consumer given the expectation for the favorable economic backdrop to continue. While some of those positions remain unaffected – e.g., cable and healthcare credits – many are now challenged. We have been evaluating each of these affected positions to determine their ability to survive in this environment and whether the business will be permanently impacted through any potential shifts in consumer preferences. Generally, we feel the majority of our exposures have franchise values that will remain valuable post the shutdowns. Energy has significantly underperformed due to the combination of a supply surge from Saudi Arabia and massive demand destruction. The Fund’s energy exposure within corporate high yield remains near zero.
Securitized Product: Our allocation to the securitized product sectors (RMBS, ABS, and CMBS) had negative performance during the first quarter. Non-agency securitized sectors suffered to varying degrees as a result of the unprecedented and swift impact of the virus-induced economic downturn. We continue to monitor the portfolio and wait for the ever-changing news in regard to fiscal and monetary relief from the Federal Reserve. Over the last week of the quarter we saw renewed demand for many of our securities. We are using this period of volatility to take advantage of some of the dislocations that have occurred from a pricing perspective. Historically, volatility has also created a number of opportunities that we believe this current crisis has created. The federal stimulus package started to trickle down to bond prices and we recovered some of the lost ground from early March. Our securitized portfolio is diversified by asset type, obligor, and by geographic region. The portfolio is of higher quality and short term in nature. Many of our securities are first pay, meaning we receive all cash before other classes in the deals. This feature coupled with the diversified nature of the portfolio should allow us to recoup much of the first quarter underperformance over time.
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 over the last month of the quarter, valuations have cheapened up substantially and we are identifying 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. However, we are taking a conservative approach in regard to adding to these sectors given the uncertainty of the effects of the coronavirus on global growth and the overall financial markets. We believe some of the best total return and yield opportunities in fixed income can be found in spread sectors. Valuations look attractive across all spread sectors, some of the specific sectors where we finding the best relative value opportunities are in corporate high yield and high yield bank loans, investment grade corporates, and emerging market debt.
Newfleet Asset Management
AdvisorShares Newfleet Multi-Sector Income ETF (MINC) Portfolio Manager
Past Manager Commentary