August 2018 Portfolio Manager Review
The strategy uses relative strength to allocate towards the strongest performing American Depositary Receipts (ADRs) in the Developed and Emerging Markets. The strategy starts with a top-down approach, first ranking each sector based on its relative strength scores and then setting the weighting of each sector. Holdings are scored daily based on an in-house momentum score which compares each security to the peers in the universe. If a security’s rank falls below our sell threshold then it is removed. The strategy is not constrained to holding a set allocation to Emerging or Developed Markets, rather the process identifies areas of strength across the globe regardless of geographical location. This allows the portfolio to overweight or underweight regions and markets to concentrate on areas of strength, often pushing the portfolio to vary dramatically from international benchmarks.
August 2018 Overview
The strategy closed the month on a negative note as AADR was down -1.15% (NAV) in the month of August, bringing the trailing 1-year return to +0.79% (NAV). Though the strategy was down for the month as leadership continues adjusts to new trends, it continues to outperform the benchmark over longer periods.
The portfolio continues to be allocated to securities that we believe display favorable relative strength characteristics. At any given time, the portfolio will be comprised of 30-40 US-traded ADRs from our universe of 300-450 ADRs. Over the past several months, we have continued to see the portfolio adapt to new global leadership as trade and geopolitical tensions have continued to change the face of global markets. While we continued to see several names at the top of our holdings over the past year, our ranks have continued to adjust to new leadership trends across the globe, causing the top holdings to alter dramatically from this time last year. One of the noticeable changes is the removal of Sociedad Quimica (Ticker: SQM), which had been held in the portfolio for multiple years and was consistently one of the top holdings.
Top 10 Holdings by Size
|Huazu Group Ltd.||5.45%|
|TAL Education Group Sponsored ADR Class A||4.58%|
|New Oriental Education & Technology Group Inc. Sponsored ADR||4.02%|
|Ecopetrol SA Sponsored ADR||3.83%|
|NICE Ltd Sponsored ADR||3.51%|
|Stora Enso Oyj Sponsored ADR Class R||3.31%|
|CNOOC Limited Sponsored ADR||3.20%|
|Talend SA Sponsored ADR||3.03%|
|STMicroelectronics NV ADR RegS||2.93%|
As of 08/31/2018. Holdings subject to change.
The portfolio experienced a loss this month, again led by the portfolios allocation to Emerging Markets, which has historically been the strongest performing allocation. This year Emerging Markets has been under continued pressure led my deteriorating conditions in Latin America and increased Chinese-US tensions. Huazu Group (Ticker: HTHT) posted the largest losses this month, as the company saw negative effects from a rising dollar in addition to troubles at the company level. Intelsat was a top performer for the second month along with Soda Stream; both companies are in developed markets. The top four positive contributions to the portfolio came from developed markets, which have become a larger focus of the portfolio.
The largest positive contribution to performance this month came from Developed Markets, which saw a positive gain for the month, helping to balance out the less than favorable return from Emerging Markets. Emerging Markets represents 30% of the portfolio, which is a significant difference from the index (MSCI ACWI ex US TR) which currently has roughly 17% in Emerging Markets. The allocation to Emerging Markets has continued to drop over the past six months from roughly 60% to the current 30% allocation. The majority of underperformance this month was caused by the fund’s holdings in China, due largely to the headline risk that has hit the region over the last few months. Historically China is one of the largest sources of return for the portfolio. For the second month, France was one of the largest positive country contributions to the portfolio, led by Intelsat.
The portfolio’s allocation to Latin America, which has historically been significantly larger than the index, has shrank over the past few months as the leadership has favored more developed countries. The exposure difference between the index and AADR is now only 5.95%. Asian holdings which accounts for 21.14% of the portfolio caused a drag as trade war fears continue to grip the market, AADR’s allocation is still below the index’s 35.74% allocation. This may further change with the continued pressure in the markets.
The buy/sell process of the strategy starts with a look at the strongest sectors within the universe, overweighting strength and underweighting or eliminating relative weakness. The portfolio continued to adjust this month as new leadership trends have continued to refine within the portfolio. Net exposure to technology decreased this month while Energy and Health Care both saw net increases. Consumer Non-Cyclicals posted the largest positive contribution to the portfolio this month. Consumer Cyclicals, mostly driven by the poor performance of Huazu Group, caused the largest drag this month.
Looking at AADR’s sector holdings versus the index also provides another view of the differentiation the strategy provides. The largest allocation in the index continues to be Financials, while AADR currently has an allocation that favors Technology, Consumer Non-Cyclicals and Healthcare.
John G. Lewis
AdvisorShares Dorsey Wright ADR ETF (AADR) Portfolio Manager