September 2018 Portfolio Manager Review
In September, The AdvisorShares Pacific Asset Enhanced Floating Rate ETF (NYSE Arca: FLRT) returned 0.69% (NAV), versus the S&P/LSTA U.S. Leveraged Loan 100 Index (“benchmark”) return of 0.67%.
IIn September the S&P/LSTA U.S. Leveraged Loan 100 Index (which tracks the 100 largest loans in the broader Index) returned 0.67%. The asset class remains favorable given its strong historical performance in rising rate environments, minimal correlation to most other major asset classes, and low duration. Strong fundamentals and technicals remain in place providing further support to the asset class including robust corporate balance sheets, CLO origination, retail demand, and a low default environment. In a reversal from the prior month, loans outperformed 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 -0.64% and 0.56%, respectively. However, the loan asset class is outperforming both previously mentioned indices on a year-to-date basis. Monthly credit quality performance was led by lower rated credits with BB-rated credits returning 0.49%, B-rated credits returning 0.74%, and CCC-rated credits returning 1.26%.
The average price of the S&P/LSTA U.S. Leveraged Loan 100 Index increased throughout the month ending at $98.97. According to JP Morgan, institutional gross new loan volume totaled $35 billion (bn) in September, bringing the year-to-date gross issuance to $594bn. This lower monthly volume is likely attributable to reduced re-pricing and refinancing activity. However, net issuance is approximately $238bn (excluding refinancing/re-pricings) year-to-date which is roughly 23% ahead of last year’s pace. CLO issuance activity remains quite robust at nearly $101bn year-to-date. For context, 2017 CLO origination ended 2017 at approximately $115bn. Default activity remains low, with the par-weighted loan default rate ending September at 1.77% (including distressed exchanges increases the par-weighted default rate to 1.82%).
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. During September, the portfolio increased its benefited from strong performance from both the loan and high yield bond exposure. In particular, the retail sector loan exposure and the construction/machinery sector bond exposures were additive to performance during the month. 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 (%)|
|Caesars Resort Collection, LLC||1.68|
|ProAmpac PG Borrower LLC||1.67|
|Nexeo Solutions LLC||1.66|
|Uber Technologies, Inc.||1.66|
|Quikrete Holdings, Inc||1.66|
|Vistra Operations Company LLC||1.66|
|Spin Holdco Inc||1.65|
|ClubCorp Holdings, Inc.||1.64|
|US Foods, Inc.||1.63|