FLRT: December 2018 Portfolio Manager Review
Performance data quoted represents past performance and is no guarantee of future results. Current performance may be lower or higher than the performance data quoted. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than original cost. Returns less than one year are not annualized. For the fund’s most recent standardized and month-end performance, please click www.advisorshares.com/fund/flrt.
In November, the AdvisorShares Pacific Asset Enhanced Floating Rate ETF (NYSE Arca: FLRT) returned -2.42% (NAV), versus the S&P/LSTA U.S. Leveraged Loan 100 Index (“benchmark”) return of -3.24%.
In December, the S&P/LSTA U.S. Leveraged Loan 100 Index (which tracks the 100 largest loans in the broader Index) returned -3.24%. For the year of 2018, the index returned -0.57% versus -0.65% for the AdvisorShares Pacific Asset Enhanced Floating Rate ETF. Following the widespread selloff in November, risk continued to sell off in dramatic fashion in December 2018. For the loan asset class, December represented the worst monthly performance since August 2011. Numerous pressures, such as global capital market instability, aggressive central bank policy, negative headline rhetoric, and withdrawals from retail loan funds, continued to pressure the asset class resulting in a material decrease of the index market value. In addition to the market value decline, liquidity was challenged at year end and primary supply dried up with just $9.5bn of loans allocating in December, its lowest print since January 2016. However, even in light of the negative period, the asset class continues to be supported by economic and corporate fundamentals and a low default environment. Loans failed to outperform both the investment grade bond market and their high yield fixed rate counterparts. The Bloomberg Barclays US Aggregate Index and the Bloomberg Barclays US Corporate High Yield Index returned 1.84% and -2.14%, respectively. However, the loan asset class outperformed both high grade and high yield bonds on a year-to-date basis.
The average bid of the S&P/LSTA U.S. Leveraged Loan 100 Index decreased multiple points throughout the month ending at $93.72. According to JP Morgan, loan new-issue activity decreased to a four-year low in December. Specifically, gross institutional loan volume totaled $8.3bn during the month, the lowest total since $6.4bn priced in January 2015. In full-year 2018, gross loan issuance totaled $704bn, good for the second highest total on record.
Additionally, gross US CLO volume totaled $8.4bn in December, the lowest monthly total since August 2016. However, in the full-year 2018, gross US CLO volume totaled $277.6bn and net issuance (ex-refi/reprice/re-issue) totaled $130.6bn which is +12% y/y over FY17. Default activity remains low for loans, as the par-weighted default rate ended 2018 at 1.63% (1.02% excluding iHeart), which is down 21bp from 1.84% at the end of 2017.The default rate including distressed exchanges is 1.65%.
The market faced significant headwinds as negative rhetoric, aggressive central bank action, uncertain trade and tariff implications, and flight to safety from risk based assets took place within the broader market. The resulting effect were a further reduction in prices and a widening of spread levels across asset classes. Balancing risks in the portfolio remains important in looking ahead and we continue to believe flexibility, credit selection, and liquidity are critical at this juncture. We continue to have higher than normal liquidity levels until market spreads become more attractive.
Top 10 Holdings
|Security Description||Portfolio Weight %|
|HCA 3/18 B10 03/13/25 Term Loan||1.74%|
|INTELSAT B3 11/30/23 Term Loan||1.73%|
|First Data Corporation 04/26/24 Term Loan||1.70%|
|CAESERS RESORTS 12/23/2024 Term Loan||1.70%|
|Kronos Incorporated 11/01/23 Term Loan||1.69%|
|Level 3 Financing Inc 02/22/24 Term Loan||1.69%|
|Brand Energy and Infrastructure 06/21/24 Term Loan||1.69%|
|CABLEVISION TLB L+225 07/17/2025||1.69%|
|Telesat Canada 2/17 Cov-Lite Term Loan||1.69%|
|Vistra 12/14/23 Term Loan||1.68%|
Subject to change. As of 12.31.2018.
Managing Director, Pacific Asset Management
AdvisorShares Pacific Asset Enhanced Floating Rate ETF (FLRT) Portfolio Manager
Past Manager Commentary
A basis point (bps) is a unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument.
A collateralized loan obligation (CLO) is a security backed by a pool of debt, often low-rated corporate loans.
Downside risk is the likelihood that a security will decline in price, or the amount of loss that could result from that potential decline. Liquidity is the degree to which an asset or security can be bought or sold in the market without affecting the asset’s price. Leverage is the amount of debt used to finance a firm’s assets.
The S&P/LSTA U.S. Leveraged Loan 100 Index is designed to track the market-weighted performance of the largest institutional leveraged loans based on market weightings, spreads and interest payments. One cannot invest directly in an index.
The Bloomberg Barclays Capital Aggregate Bond Index measures the performance of the U.S. investment grade bond market. One cannot invest directly in an index.
Before investing you should carefully consider the Fund’s investment objectives, risks, charges and expenses. This and other information is in the prospectus, a copy of which may be obtained by visiting www.advisorshares.com. Please read the prospectus carefully before you invest. Foreside Fund Services, LLC, distributor.
There is no guarantee that the Fund will achieve its investment objective. An investment in the Fund is subject to risk, including the possible loss of principal amount invested. Investing in derivatives may be riskier than other types of investments because they are more sensitive to change in economic or marketing conditions that could result in losses that significantly exceed the Fund’s original investment. The Fund primarily invests in floating rate loans and floating rate debt securities. The market for floating rate loans may be subject to irregular trading activity, wide bid/ask spreads, and extended trade settlement periods. The floating rate feature of loans means that floating rate loans will not generally experience capital appreciation in a declining interest rate environment. Declines in interest rates may also increase prepayments of debt obligations and require the Fund to invest assets at lower yields. Other Fund risks include market risk, leverage risk, foreign investment risk, liquidity risk, income and interest rate risk, liquidity risk, management risk, high yield securities risk, loan participation risk, prepayment risk, and trading risk. Please see the prospectus for details regarding risk.
Shares are bought and sold at market price (closing price) not NAV and are not individually redeemed from the Fund. Market price returns are based on the midpoint of the bid/ask spread at 4:00 pm Eastern Time (when NAV is normally determined), and do not represent the return you would receive if you traded at other times.
Holdings and allocations are subject to risks and to change.
The credit ratings referenced in this commentary are published rankings by Moody’s and are based on detailed financial analyses by a credit bureau specifically as it relates the bond issue’s ability to meet debt obligations. The highest rating is AAA, and the lowest is D. Securities with credit ratings of BBB and above are considered investment grade. The views in this material were those of the Portfolio Manager and may not reflect his views on the date this material is distributed or anytime thereafter.
The views in this commentary are those of the portfolio manager and may not reflect his views on the date this material is distributed or anytime thereafter. These views are intended to assist shareholders in understanding their investments and do not constitute investment