June 2018 Portfolio Manager Review
In June, the AdvisorShares Pacific Asset Enhanced Floating Rate ETF (NYSE Arca: FLRT) returned -0.01% (NAV), versus the S&P/LSTA U.S. Leveraged Loan 100 Index (“benchmark”) return of -0.01%.
In June the S&P/LSTA U.S. Leveraged Loan 100 Index (which tracks the 100 largest loans in the broader Index) was flat returning 0.00%. The loan asset class remains in favor given its insulation to broader market volatility and a strong fundamental outlook. The asset class continues to receive support via higher rates, as demonstrated by an 3-month LIBOR rate which at month end at 2.34%. Strong technicals and a low correlation factor relative to the investment grade bond market led loans to outperform investment grade bonds, but not high yield bonds during June. The Bloomberg Barclays US Aggregate Index and the Bloomberg Barclays US Corporate High Yield Index returned -0.12% and 0.40%, respectively. In a continued theme, lower credit quality loans outperformed higher-quality credits with BB-rated credits returning 0.02%, B-rated credits returning 0.14%, and CCC-rated credits returning 0.77%. According to JP Morgan, institutional gross new loan volume totaled $88.5 billion (bn) in June ($45bn net). The repricing volume of approximately $24bn represented the lowest monthly total since January. On a year-to-date basis, net issuance is approximately $166.9bn (excluding refinancing/re-pricings) and gross issuance is roughly $501bn. Net new issuance continues to tread ahead of 2017’s post crisis highs. According to Thomson Reuters, new issue CLO activity increased to $13.6bn in June and is at $66.7bn year to date. Volume remains robust and is approximately 27% of the levels experienced in 2017. According to the most recently available data, loan flows recorded $1.4bn of inflows in June, and roughly $12bn thus far in 2018. Conversely, high yield funds recorded and outflow in June of nearly $3.5bn, adding to the year to date outflow amounting to nearly $24bn. The strong results of 1Q18 corporate earnings, robust 2Q18 corporate earnings expectations, the positive waterfall effect of tax reform, and consumer sentiment look to paint a favorable economic picture for the second half of 2018.
The market continues to balance quite healthy underlying credit conditions coupled with relatively low yields, as compared to historical averages. Economic growth continues to be positive, monetary policy remains accommodative (although gradually less so), and overall leverage among high-yield companies remains, for the most part, reasonable. With volatility finally making a return to the equity markets, high-yield spreads have retreated from very tight levels earlier in the year, and market opportunities have modestly improved. For the first time in many years, investors are receiving reasonable yields for holding shorter-maturity high-yield bonds. The key driver here is the increase in the London Interbank Offered Rate (LIBOR) as well as other short-term rates, driven by Fed rate hikes. This is an opportunity we are looking to take advantage of. While the high-yield market still trades at relatively tight levels on a historic basis, upside potential has returned. However, there remains no lack of potentially negative market drivers, including increasing inflation driving interest rates higher, a lack of workers negatively impacting corporate margins, geopolitical risks, and overall volatility from Washington D.C., to mention a few. During June, the portfolio’s allocation to fixed rate bonds coupled with positive security selection within loans were accretive to monthly performance. Balancing risks in the portfolio remains important in looking ahead and we continue to believe flexibility and liquidity are critical at this juncture.
Managing Director, Pacific Asset Management Portfolio Manager of FLRT
Top 10 Holdings:
|Portfolio Holdings||Portfolio Weight (%)|
|Chesapeake Energy Corporation||1.79|
|Caesars Resort Collection, LLC||1.69|
|Uber Technologies, Inc.||1.69|
|Nexeo Solutions LLC||1.68|
|DTZ U.S. Borrower, LLC||1.68|
|ProAmpac PG Borrower LLC||1.68|
|Vistra Operations Company LLC||1.67|
|Quikrete Holdings, Inc||1.67|
|Spin Holdco Inc||1.66|
|ClubCorp Holdings, Inc.||1.65|