July 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 that compares each security to the peers in the universe. If a security’s rank falls below its 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.
July 2018 Overview
The strategy closed the month on a negative note as AADR was down -0.70% (NAV) in the month of July, bringing the trailing 1-year return to +7.78% (NAV). Though the strategy was down for the month as leadership adjusts to new trends, it continues to outperform the benchmark over longer periods.
The portfolio continues to be allocated to securities that we believe to 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 Edenor (Ticker: EDN), which had been held in the portfolio for several years and was consistently one of the top holdings.
Top 10 Holdings by Size
|Huazu Group Ltd.||6.31%|
|TAL Education Group Sponsored ADR Class A||4.93%|
|New Oriental Education & Technology Group Inc. Sponsored ADR||4.38%|
|Sociedad Quimica Y Minera De Chile S.A. Sponsored ADR Pfd Class B||3.89%|
|Ecopetrol SA Sponsored ADR||3.60%|
|SodaStream International Ltd.||3.50%|
|NICE Ltd Sponsored ADR||3.31%|
|Ternium S.A. Sponsored ADR||3.29%|
|Noah Holdings Ltd. Sponsored ADR Class A||3.08%|
As of 07/31/2018. Holdings subject to change.
The portfolio experienced a small loss this month, mostly led by the portfolio’s allocation to Emerging Markets, which has historically been the strongest performing allocation. TAL Education 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 and Galapagos NV, both European companies, saw the largest returns for the month helping to reduce the total portfolio drawdowns.
The largest positive contribution to performance this month came from Developed Markets, which saw a small positive gain for the month, helping to balance out the less than favorable return from Emerging Markets. Emerging Markets represents 34% of the portfolio, which is a significant difference from the index (MSCI ACWI ex-US TR) which currently has roughly 18% in Emerging Markets. The allocation to Emerging Markets has continued to drop over the past six months from roughly 60% to the current 34% 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 the largest positive country contributor 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 5.36%. This difference decreased this month as the portfolio has removed exposure to Argentina and Brazil in favor of other regions. Asian holdings, which account for 26.64% of the portfolio, caused a drag as trade war fears continue to grip the market; AADR’s Asian allocation is still below the index’s 37.69% allocation. This may further change with the continued inclusion of Chinese A shares into the index and a continually shifting global market place.
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 Energy and Financials decreased this month while Industrials and Health Care both saw net increases. Healthcare and Energy posted the largest positive contribution to the portfolio this month. Consumer Cyclicals, mostly driven by the poor performance of TAL Education, caused the largest drag this month.
Looking at AADR’s sector holdings versus the index also provides another view of the differentiation that the strategy provides. The largest allocation in the index has continued 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