July 2018 Portfolio Manager Review
In July, the AdvisorShares Pacific Asset Enhanced Floating Rate ETF (NYSE Arca: FLRT) returned 0.78% (NAV), versus the S&P/LSTA U.S. Leveraged Loan 100 Index (“benchmark”) return of 0.88%.
In July the S&P/LSTA U.S. Leveraged Loan 100 Index (which tracks the 100 largest loans in the broader Index) returned 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 remain in favor given its historical performance in a rising rate environment, minimal correlation to most other major asset classes, and low duration. Strong technicals remain in place providing further support to the asset class. Loans outperformed the investment grade bond market during the month, but not their high yield fixed rate counterparts. The Bloomberg Barclays US Aggregate Index and the Bloomberg Barclays US Corporate High Yield Index returned 0.02% and 1.09%, respectively. Monthly credit quality performance was mixed with BB-rated credits returning 0.72%, B-rated credits returning 0.70%, and CCC-rated credits returning 1.31%.
According to JP Morgan, institutional gross new loan volume totaled $20.5 billion (bn) in July, which was the lightest in the past 2 years. On a year-to-date basis, net issuance is approximately $183bn (excluding refinancing/re-pricings) and gross issuance is roughly $520bn. Net new issuance continues to track ahead of 2017’s post crisis highs by approximately 20%. According to Thomson Reuters, new issue CLO activity increased by $10bn in July, resulting in approximately $78bn year to date. Volume remains robust and is approximately 29% of the levels experienced in 2017. According to the most recently available data, loan flows recorded $1.4bn of inflows in July, and roughly $14bn thus far in 2018. High yield funds reversed the outflow trend during July by posting a positive inflow of nearly $1.4bn. This results in a year to date outflow of approximately $22.5bn.
The market continues to drive forward on the back of corporate tax reform, healthy underlying credit conditions, and robust corporate earnings while seeking to offset the headwinds of increased volatility, rising rates, and unknown trade and tariff implications. With the further increase in London Interbank Offered Rate (LIBOR) as well as other short-term rates, driven by Fed rate hikes, investors are receiving reasonable yields for holding shorter-maturity high-yield bonds. This is an opportunity we continue to take advantage of. While the high-yield market still trades at relatively tight levels on a historic basis, upside potential has returned. During July, the portfolio’s security selection within both its bond and loan allocations were accretive to positive 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||1.77|
|Caesars Resort Collection, LLC||1.69|
|ProAmpac PG Borrower LLC||1.68|
|Nexeo Solutions LLC||1.67|
|Uber Technologies, Inc.||1.67|
|DTZ U.S. Borrower, LLC||1.67|
|Vistra Operations Company LLC||1.66|
|Quikrete Holdings, Inc||1.66|
|ClubCorp Holdings, Inc.||1.66|