MINC

AdvisorShares Newfleet Multi-Sector Income ETF

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 month end performance, please click www.advisorshares.com/fund/MINC.

Q2 2018 Portfolio Manager Review


Market Overview

During the second quarter, investors faced multiple challenges and bouts of elevated volatility that carried over from the first quarter.  Investors continued to grapple with the potential market implications of the emerging risks of a trade war among major economic powers, geopolitical tensions, the political climate in Washington, and the ongoing evolution of the quantitative easing (QE) programs initiated by the key global central banks in the aftermath of the Financial Crisis.  Oil prices moved higher during the three-month period, U.S. economic data modestly improved, the U.S. dollar climbed, and interest rate volatility remained elevated.

As expected, the Federal Reserve (Fed) increased its target rate during the quarter to a range of 1.75% - 2.0% at the June Federal Open Market Committee (FOMC) meeting.  The European Central Bank and Bank of Japan are expected to continue QE until late 2018 and early 2019, respectively.

During the quarter, yields were higher across the curve although more pronounced at the front end.  Overall, the curve flattened.

Most spread sectors underperformed for the quarter, with emerging market high yield bonds the largest underperformer. Long duration assets across sectors underperformed on a total return basis as interest rates rose. 

Contributors

  • Within the asset-backed security (ABS) sector, both allocation and issue selection positively impacted performance during the quarter. The sector generally offers lower volatility, a diversified collateral base, and attractive valuations relative to many other areas of the fixed income market. Expectations are for range-bound spreads with modest room for tightening.
  • Issue selection within the non-agency residential mortgage-backed securities (RMBS) sector versus the benchmark benefited performance.Similar to ABS, RMBS generally offers lower volatility and a diversified collateral base. In addition, the sector typically is less sensitive to global macro volatility.
  • Issue selection within the corporate high quality sector had a positive impact on performance.

 

Detractors

  • The Fund’s underweight to U.S. Treasuries was a detractor.

 

CURRENT FUND STRATEGY

Sector Changes: We reduced our exposure to corporate high quality securities, agency mortgage backed securities and U.S. Treasury securities. We redeployed the sale proceeds primarily into RMBS.

Non-U.S. Exposure: Over the quarter, we reduced the overall non-U.S. and emerging market debt exposure within the Fund based on our concerns of continued macro headwinds for the sectors.  Valuations in specific countries are attractive, and we expect fundamentals to remain positive.  Fundamentals, however, have peaked and are becoming a bit mixed near term.  The Fund’s non-U.S. exposure could receive uplift from improving global growth, stronger-than-anticipated Chinese growth, a weaker U.S. dollar, supportive commodity prices, and accommodative monetary policy from major global central banks. In this space, we favor sovereigns in larger capital structures. 

Securitized Product: Our allocation to the securitized product sectors (RMBS and ABS) continues to play an important role. These sectors of the market offer a diversified collateral base and attractive valuations relative to many other areas of the fixed income market. They also offer diversification to the portfolio’s corporate credit allocation. Our consumer focus within the ABS sector benefits from the U.S. consumer’s continued ability to drive the U.S. economy.  RMBS benefits from the continuing improvement in the housing market and investor demand for mortgage credit.

The Fund maintains its higher quality focus and short duration to limit both spread and interest rate volatility.

Outlook

We continue to see value in spread sectors and expect them to benefit from the projected improvement in global growth this year.   As favorable conditions for borrowers remains in place, the positive outlook for corporate and consumer fundamentals is on solid footing and the global demand for yield continues to support fixed income market technicals.

Valuations are fair to rich, given that yields and spreads are inside long-term averages in most areas of the fixed income market. Selection and positioning within sectors thus is critical.  Some of the specific sectors where we see value are out-of-index/off-the-run ABS, RMBS, investment grade corporates (BBB rated and financials), and bank loans. As always, we believe it is important to stay diversified, have granular positions, and emphasize liquid investments.

Respectfully,

Newfleet Asset Management
Portfolio Manager of MINC


Q1 2018 Commentary

Before investing you should carefully consider the Fund’s investment objectives, risks, charges and expenses. This and other information is in the prospectus and summary prospectus which can be obtained by visiting www.advisorshares.com. Please read the prospectus and summary prospectus carefully before you invest. Foreside Fund Services, LLC, distributor.

An investment in the Fund is subject to risk, including the possible loss of principal amount invested. The Fund’s investment in fixed income securities will change in value in response to interest rate changes and other factors, such as the perception of the issuer’s creditworthiness. Fixed income securities with longer maturities are subject to greater price shifts as a result of interest rate changes than fixed income securities with shorter maturities. The Fund’s investments in high-yield securities or “junk bonds” are subject to a greater risk of loss of income and principal than higher grade debt securities. Emerging and foreign market investments can be more volatile than U.S. securities and will expose the Fund to adverse changes in foreign economic, political, regulatory and currency exchange rates. See prospectus for details regarding specific risks.

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. These views are intended to assist shareholders in understanding their investments and do not constitute investment advice.

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.

Definitons:

Volatility is a statistical measure of the dispersion of returns for a given security or market index. Volatility can either be measured by using the standard deviation or variance between returns from that same security or market index. Commonly, the higher the volatility, the riskier the security.

Yield is the income return on an investment. This refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment’s cost, its current market value or its face value.

A 10-Year Treasury Note is a debt obligation issued by the United States government that matures in 10 years. A 10-year Treasury note pays interest at a fixed rate once every six months and pays the face value to the holder at maturity. An advantage of investing in 10-year Treasury notes, and other federal government securities, is that the interest payments are exempt from state and local income tax. However, they are still taxable at the federal level.

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.

Fundamentals are the qualitative and quantitative information that contributes to the economic well-being and the subsequent financial valuation of a company, security or currency. Analysts and investors analyze these fundamentals to develop an estimate as to whether the underlying asset is considered a worthwhile investment.

A Residential Mortgage-Backed Security is a type of mortgage-backed debt obligation whose cash flows come from residential debt, such as mortgages, home-equity loans and subprime mortgages. A residential mortgage-backed security is comprised of a pool of mortgage loans created by banks and other financial institutions. The cash flows from each of the pooled mortgages is packaged by a special purpose entity into classes and tranches, which then issues securities and can be purchased by investors.

A Commercial Mortgage Backed Security is a type of mortgage-backed security that is secured by the loan on a commercial property. A CMBS can provide liquidity to real estate investors and to commercial lenders. As with other types of MBS, the increased use of CMBS can be attributable to the rapid rise in real estate prices over the years.

An Asset Backed Security is a financial security backed by a loan, lease or receivables against assets other than real estate and mortgage-backed securities. For investors, asset-backed securities are an alternative to investing in corporate debt.

Correlation is a statistical measure of how two securities move in relation to each other.

Coupon is the interest rate stated on a bond when it’s issued. The coupon is typically paid semi-annually.

Spread sectors include all non-Treasury investment grade sectors including federal agency securities, corporate bonds, asset-backed securities, mortgage-backed securities and commercial mortgage-backed securities.

Spread is the difference between the bid and the ask price of a security or asset.

Investment Grade is a rating that indicates that a municipal or corporate bond has a relatively low risk of default. Bond rating firms, such as Standard & Poor’s, use different designations consisting of upper- and lower-case letters ‘A’ and ‘B’ to identify a bond’s credit quality rating. For example, ‘AAA’ and ‘AA’ (high credit quality) and ‘A’ and ‘BBB’ (medium credit quality) are considered investment grade. Credit ratings for bonds below these designations (‘BB’, ‘B’, ‘CCC’, etc.) are considered low credit quality (speculative), and are commonly referred to as “junk bonds.”