September 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.
September 2018 Overview
The strategy closed the month on a positive note as AADR was up +2.69% (NAV) in the month of September, bringing the trailing 1-year return to -2.54% (NAV). Though the strategy was up for the month and 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 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 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 of the noticeable changes are the removal of TAL Education Group (Ticker: TAL) and New Oriental Education & Tech Group (Ticker: EDU), both of which had previously been held in the portfolio for multiple years at of the top the holdings. The oldest portfolio holding is now Huazu Group (Ticker: HTHT), which came into the portfolio in October 2016.
Top 10 Holdings by Size
|Huazu Group Ltd.||4.98%|
|Ecopetrol SA Sponsored ADR||4.44%|
|CNOOC Limited Sponsored ADR||3.47%|
|NICE Ltd Sponsored ADR||3.38%|
|Talend SA Sponsored ADR||3.34%|
|Stora Enso Oyj Sponsored ADR Class R||3.30%|
|Airbus SE Unsponsored ADR||2.77%|
|Galapagos NV Sponsored ADR||2.77%|
|Ubisoft Entertainment SA Unsponsored ADR||2.70%|
As of 09/30/2018. Holdings subject to change.
The portfolio posted a large gain this month reversing a stretch of underperformance relative to the benchmark. The portfolio was led again by the developed market holdings that have become the largest allocation of the portfolio since the start of the year. This year Emerging Markets have been under continued pressure led by deteriorating conditions in Latin America and increased Chinese-US tensions. TAL Education Group (Ticker: TAL) posted the largest losses this month as the company saw negative effects from a rising dollar in addition to troubles at the company level before it was removed from the portfolio. Intelsat was a top performer for the third month as the company continues to exhibit positive momentum. Four of the largest five positive contributions to the portfolio came from Developed Markets, which have become a larger focus of the portfolio since the start of the year.
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 23% of the portfolio, which has fallen into line with 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 23% 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 4.41%. Asian region holdings, which accounts for 14.02% of the portfolio, caused a drag as trade war fears continue to grip the market. AADR’s allocation is still below the index’s 36.04% allocation. This may further change with the continued pressure geopolitical issues are having on global 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 and Energy increased this month while Basic Materials and Consumer Non Cyclicals both saw net decreases. Consumer Non-Cyclicals posted the largest negative contribution to the portfolio this month, while Energy, Health Care and Technology all posted roughly equally positive contributions.
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, Energy and Healthcare.
John G. Lewis
AdvisorShares Dorsey Wright ADR ETF (AADR) Portfolio Manager