MINC: May 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 strong rebound in fixed income markets in April extended into May. Drawn in by attractive valuations, investors became optimistic that the worst fallout from the pandemic was behind us as global economies began to reopen. While the U.S. unemployment rate reached its highest level since the Great Depression in April, continuing claims began to decline in May. Global central banks including the Federal Reserve (Fed), remain extremely accommodative. The Fed has launched numerous programs since the crisis began including a program to buy ETFs that invest in corporate debt. These programs were vital to the restoration of market confidence. Despite an ongoing barrage of supply, the investment grade market has experienced high levels of demand with mutual fund flows returning to positive territory. U.S. gross domestic product (GDP) was revised down to -5.0% for the first quarter with expectations that second quarter numbers will be much worse, however, a strong rebound is anticipated for the third quarter. The month ended as social unrest erupted, resulting from the tragedy in Minneapolis. Protests and riots will likely impact the reopening of many businesses and it is still unknown if virus cases will spike due to the lack of social distancing.
During the month of May, fixed income credit spreads continued to tighten as the U.S. and much of the rest of the world continued to reopen. Valuations are getting closer to five- and ten-year averages. The U.S. Treasury curve steepened modestly as the 10-year Treasury rose 1 basis point (0.01%) and the 30-year Treasury yield was 12 basis points higher (0.12%). Investor appetite was high as the 20-year Treasury was reintroduced during the month.
The underweight to U.S. Treasuries was a positive contributor to performance as U.S. Treasuries underperformed relative to spread sectors during the month of May.
Issue selection and allocation 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 expected and servicers have worked with borrowers in terms of payment extensions. Unemployment is trending lower as furloughed employees are starting to go back to work. In addition, subscription levels have far exceeded pre-covid levels as investors have cash that needs to get to work.
The Fund’s underweight to investment grade corporates relative to the benchmark slightly detracted from performance as investment grade corporate spreads continued to tighten during the month of May.
The higher quality bias within high yield corporate bonds detracted from performance as lower quality outperformed during the month.
|Security Description||Portfolio Weight %|
|US TREASURY N/B 2.25 3/31/2021||3.04%|
|US TREASURY N/B 1.75 6/15/2022||2.98%|
|JP MORGAN USD GOVT MONEY MARKET INSTL||2.47%|
|US TREASURY N/B 0.5 3/31/2025||1.48%|
|SBA TOWER TRUST 2.877 7/9/2021||1.32%|
|ISHARES IBOXX HIGH YLD CORP||1.28%|
|FIAOT 2017-2A B 2.65 11/15/2022||1.10%|
|BX 2018-GW B FRN 5/15/2035||1.06%|
|FN MA3692 3.5 7/1/2049||0.91%|
|TMCAT 2018-AA B 3.45 11/15/2024||0.89%|
As of 05.31.2020. 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.
Newfleet Asset Management
AdvisorShares Newfleet Multi-Sector Income ETF (MINC) Portfolio Manager
Past Manager Commentary