October 2018 Portfolio Manager Review
The strategy uses relative strength to allocate towards the strongest performing 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 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.
The strategy closed the month on a negative note as AADR was down -13.46% (NAV) in the month of October, bringing the trailing 1-year return to -18.25% (NAV). Though the strategy was down for the month and leadership continues to adjust to new trends, AADR continues to outperform the benchmark over longer periods. This puts AADR in the top decile in Morningstar’s peer rankings for the trailing five-year time frame.
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 ADR’s from our universe of 300-450 ADR’s. 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 continue 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. Two noticeable changes are the removal of Huazu Group Ltd (Ticker: HTHT) and STMicroelectronics (Ticker: STM), both of which had previously been held in the portfolio for multiple years as top holdings. Outside of two holding that came into the portfolio in 2017, the rest of the portfolio is now comprised of companies that were added in 2018. This amazing transition is an example of the rapid change that we have seen this year in international markets.
Top 10 Holdings
|Ticker||Security Description||Portfolio Weight %|
|EC||ECOPETROL SA-SPONSORED ADR||4.36%|
|CEO||CNOOC LTD-SPON ADR||3.46%|
|TLND||TALEND SA - ADR||3.38%|
|SEOAY||STORA ENSO OYJ-SPONS ADR||3.05%|
|GLPG||GALAPAGOS NV-SPON ADR||3.00%|
|EADSY||AIRBUS SE - UNSP ADR||2.92%|
|VNET||21VIANET GROUP INC-ADR||2.87%|
As of 10/31/2018.
The portfolio posted a large loss this month, reversing strong gains in September. Allocations across the board dropped this month as both developed and emerging markets could not escape the market wide sell off. The portfolios allocation to developed markets experienced the largest drop this month as Europe sold off. This year emerging markets have been under continued pressure led by deteriorating conditions in Latin America and increased Chinese U.S. tensions causing the portfolio to increase its allocation in developed markets. Adaptimmune Therapeutics (Ticker: ADAP) and Intelsat (Ticker: I) posted the largest losses this month as growth oriented companies took the brunt of the selling. 21Vianet Group Inc. (Ticker: VNET), one of the few remaining Chinese holdings, was a top performer for the month, followed by Argenx (Ticker: ARGX) a Belgium healthcare company.
Developed Markets saw the largest negative performance contribution this month, as broad based selling around the global markets hit developed and emerging market countries almost equally. Developed Markets have taken a large position in the portfolio over the course of the year, reducing Emerging Markets exposure to 21% of the portfolio, which has fallen into line with the MSCI ACWI exUS TR Index, which currently has roughly 17% in Emerging Markets. The allocation to Emerging Markets has continued to drop over the past 6 months from roughly 60% to the current 21% allocation. The majority of underperformance this month was caused by the fund’s holdings in the United Kingdom. France was close in line with the performance contribution this month, reversing a multi month trend of outperformance.
As of 10/31/2018.
The portfolio's allocation to Latin America, which has historically been significantly larger than the index, has shrank over the past few month as the leadership has favored more developed countries. The exposure difference between the index and AADR is now only 6.52%. Asian region holdings, which accounts for 10.67% of the portfolio, caused a drag as trade war fears continued to grip the market. AADR’s allocation to Asian holdings is still below the index's 35.85% allocation. This may further change with the continued pressure geopolitical issues are having on global markets.
As of 10/31/2018.
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 the portfolio – net exposure to Technology and Energy increased this month while Financials and Consumer Cyclicals both saw net decreases. Energy posted the largest negative contribution to the portfolio this month, closely followed by Healthcare and Technology. Consumer Non-Cyclicals had the best return for the month, posting a slightly negative return.
Looking at AADR’s sector holdings verse the index also provides another view of the differentiation the strategy provides. The largest allocation in the index has continues to be Financials, while AADR currently has an allocation that favors Technology, Energy and Healthcare.
As of 10/31/2018.
John G. Lewis
AdvisorShares Dorsey Wright ADR ETF (AADR) Portfolio Manager