SENT: 1st Quarter 2021 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/sent.
Our AdvisorShares Alpha DNA Equity Sentiment ETF (ticker: SENT) launched in mid-quarter on February 3rd and our management team at Alpha DNA is excited to be working with the exceptional team at AdvisorShares. We look forward to a long and prosperous partnership by delivering on our value proposition for our investors.
Since we did just launch, let’s kick off this quarterly review with a reminder of our approach. SENT is a Hedged Equity strategy that strives to deliver capital appreciation and downside protection. We combine an all-cap US equity portfolio based on proprietary research that strives to outperform the market while complementing it with a delta hedging program that is intended to protect the portfolio during market downturns.
Our equity portfolio is designed to identify companies growing faster than Wall Street expectations. Our belief is that this approach will reliably produce excess returns over short and long time periods. The delta hedging portfolio utilizes index put options to protect the downside of the portfolio in the event of a material market decline. The hedges are reset regularly to ensure they are providing sufficient protection. It is important to note that the hedges are meant to help offset losses in a material market decline and not a ‘garden variety’ small market decline.
In the following, we will provide specific commentary on our research performance, our equity performance contributions, and our hedging program.
Our core research function is built to identify Revenue and Earnings per Share (EPS) performance that is greater than Wall Street expectations. We refer to this as hidden demand. We measure our success in finding hidden demand by analyzing two key metrics: Earnings Surprises and Analyst upgrades. We had a strong quarter in both of these categories.
In February, we had 38 companies in SENT’s portfolio report Q4 2020 earnings. Of those 38 companies, we had 35 surprise to the upside on EPS expectations, 2 companies met expectations, and only one company missed (as compared to FactSet expectations on earnings day). This is a 92% beat rate on EPS which is very strong and better than the S&P 500 average for the quarter by more than 10 points (0.10%) (source: FactSet).
For Revenue expectations, we had 95% of our reporting companies either beat or meet expectations on Revenue. This result is also much better than the market results and stronger than we have typical seen in our experience running this strategy prior to the ETF launch.
Lastly, at the earnings event, these companies also provide forward guidance to investors on EPS and/or Revenue. Of the 38 companies, we had 21 provide upward guidance and only 5 provide downward guidance in the earnings announcement. A 4:1 ratio of upward-to-downward guidance is a very strong outcome that we hope to continue.
While earnings in February were strong, as we transition to March, we are nearing the end of the quarter and the analysts begin the cycle all over again. We expect the analysts to begin to ‘catch-up’ to our view of the prospects for our portfolio companies. This will typically manifest itself in Analyst upgrades to EPS and Revenue expectations. In March, we had over 900 analyst changes to their Revenue and/or EPS projections reported to FactSet. For our portfolio companies in March, over 90% of the analyst changes were upgrades to EPS or Revenue expectations. Again, this is well over the average of 50% for the entire population of stocks that we track across the Russell 3000 Index.
With analyst upgrades this strong, we believe SENT’s portfolio is well positioned in the buildup to quarter end and the beginning of earnings season. In fact, if you have been tracking the performance of the ETF here in April, you already see some of the benefits of this positioning.
For the quarter that finished on March 31st, we were only live for less than two months but the results were not a surprise. The equity portfolio was led by the small and mid-cap population with a +6% return for the period from launch to quarter end. The large cap equity portfolio delivered around +2% returns for the same period. This compares to +4% and +3% from the S&P 500 Index and the Russell 2000 Index over the same window. In summary, we produced modest out-performance in the mid and small cap portfolios and modest under-performance in the large cap portfolio.
The market experienced a significant rotation to value from growth stocks and this rotation would not typically be kind to our portfolio exposures. This is especially true given the magnitude of the rotation and the very short time frames involved. We are very happy to have delivered market like returns for the broad market (i.e., Russell 3000) in a window where this rotation was a headwind to our portfolio approach.
The over-weight exposure to small and mid-caps has also proven beneficial given our relative out-performance in those market caps. Small caps has had a strong 2021 in aggregate and we were able to find strong winners in that market cap despite the unfriendly market rotation to value.
The portfolio’s five highest stock performers in Q1 were: Magnite (MGNI +47%), Williams-Sonoma (WSM +43%), Ultra Clean Holdings (UCTT +40%), L Brands (LB +35%), Ichor Holdings (ICHR +34%)
While the five largest equity detractors to the portfolio returns were: Sitime Corp (SITM -26%), RingCentral (RNG -25%), Q2 Holdings (QTWO -24%), Liveramp Holdings (RAMP -24%), HubSpot (HUBS -21%)
HEDGE PORTFOLIO COMMENTARY
While there was some equity volatility mid-quarter, it was only modest in decline and the markets eventually continued their climb back upward. As a result, our hedges were a drag on the overall portfolio returns – as would be expected in that type of quarter.
Hedges will typically produce a drag on returns when markets are up and as we showed earlier, from our launch on Feb 3rd to March 31st, the S&P 500 and the Russell 2000 were up +4% and +3%, respectively. Given the 30 delta hedging approach, we would expect a drag on our hedge of around 1%. We experienced a drag closer to 2% for the hedges in the quarter. This was driven by an increase in volatility that increased the cost of hedging mid-quarter. While we prefer our hedging costs to track as close to the 30% delta expectation, divergences of this size are well within the expected range of outcomes in a one quarter window.
|Ticker||Security Description||Portfolio Weight %|
|SPT||SPROUT SOCIAL INC – CLASS A||1.13%|
|TWLO||TWILIO INC – A||1.12%|
|ONTO||ONTO INNOVATION INC||1.11%|
|AMAT||APPLIED MATERIALS INC||1.10%|
|CMBM||CAMBIUM NETWORKS CORP||1.10%|
|ICHR||ICHOR HOLDINGS LTD||1.09%|
As of 03.31.2021.