SENT: 1st Quarter 2022 Portfolio Review

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Portfolio Review

In Q1 2022 , the U.S. equity broad market indices delivered the worst quarterly performance since 2020. The markets were led downward by growth stocks as that category materially underperformed the value space. Q1 marked the first time that value stocks have materially out-performed growth by more than 8% in the large-cap space (ie, the S&P 500 stocks) in several years. However, the value to growth separation in the U.S. equity mid-cap and small-cap space started in the first half of 2021 and this is the continuation of the trend.

The AdvisorShares Alpha DNA Equity Sentiment ETF (SENT) delivered its worst period of returns since its inception – the fund was down -13.24% for the quarter. SENT is biased towards stocks that are delivering growth in EPS (earnings per share) and revenue and those tend to fit into the growth style category. That bias towards growth stocks was not constructive to the portfolio during the quarter.

In the broader equity markets, the spread in returns between growth and value stocks in Q1 2022 was over -10% in the Russell 2000 and over -8% in both the S&P 500 and the S&P 400 (mid-cap index). Our equity returns were worse in Q1 than these spreads and would indicate we were unable to find the best stock performers within the growth categories.

Our overall equity portfolio contributed around -15% to the ETF’s overall performance. The underperformance can mostly be traced to a significant overweight exposure to Software and Semiconductor stocks as these two industries alone were just under 50% of the overall negative contribution in the equity portfolio for the quarter. The portfolio’s mid- and small-cap exposure delivered -17% returns while the large-cap exposure delivered -10% returns. Both represent material underperformance to their S&P and Russell benchmarks.

The negative returns occurred despite the successful earnings surprise calls delivered by the stocks in SENT’s portfolio during the quarter. While we achieved the same higher than average surprise rates in EPS (just under 90%) and in revenue (just over 90%), the portfolio’s stocks were not rewarded for their earnings success. Instead, the markets continued to sell down growth stocks during the earnings season. As we head into another earnings season, we expect SENT’s portfolio to deliver sound earnings outcomes in Q2 2022 – however, we don’t know yet if the markets will reward earnings outcomes like it does historically.

SENT’s hedges delivered positive results in the quarter which makes sense given the downward nature of the markets. The S&P 500 was down over -4% for the quarter and our hedges on the S&P 500 were just above break-even for the quarter. The Russell 2000 hedges were more successful as they delivered around +2.5% returns relative to the size of the mid-small cap portfolio holdings. The Russell 2000 index was down -7.5% for the quarter so with a -30 delta* target on our hedges, the return of around +2.5% is right in range of expectation. The Russell 2000 is the larger hedge in the ETF and the overall hedges delivered a +1.5% contribution to the portfolio for the quarter.

The biggest stock winners for the quarter came from idiosyncratic stock stories that were involved in corporate actions or strategic reviews that sent the stocks up – Krogers, Albertsons, Vocera Communications, and Kohls. The biggest losers tended to come from semiconductors and software – Calix, Monday Com, Synaptics, and Ambarella. Immunogen was also a large loser in the portfolio as it announced poor results for a drug trial.

Overall, we are disappointed in the equity performance for the quarter. We will need markets to begin rewarding the stocks that surprise on earnings outcomes for our portfolio to turn around. We are not unhappy with our hedges as they performed as expected given the indices they were built to hedge. However, we are disappointed that our equity portfolios diverged in performance so materially from the indices we use to build the hedges. Over the long run, we are confident that the markets will reward the companies that grow EPS and revenue faster than Wall Street expectations. We expect that trend to re-emerge and provide better backdrop for our portfolio.

 

* Delta is defined as the change in the value of an option relative to the change in movement in the market price of an underlying asset.

 

Top Holdings

Ticker Security Description Portfolio Weight %
IWM US 06/17/22 P192 1.66%
LTHM LIVENT CORP 1.00%
EGLE EAGLE BULK SHIPPING INC 0.99%
WGO WINNEBAGO INDUSTRIES 0.99%
GTLB GITLAB INC-CL A 0.99%
PTEN PATTERSON-UTI ENERGY INC 0.99%
COST COSTCO WHOLESALE CORP 0.99%
FAST FASTENAL CO 0.98%
WEX WEX INC 0.98%
CRWD CROWDSTRIKE HOLDINGS INC – A 0.98%

As of 03.31.2022. Cash is not included.

 


Respectfully,

Wayne Ferbert
Alpha DNA
AdvisorShares Alpha DNA Equity Sentiment ETF (SENT) Portfolio Manager

 

Past Commentary

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