SCAP

AdvisorShares Cornerstone Small Cap 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/SCAP.

June 2018 Portfolio Manager Review


The small cap universe, represented by the Russell 2000 Index, was up 0.72% in June. In a change from last month, lower-risk and domestic-oriented companies outperformed during the month in response to trade concerns, lower yields, and higher wages, with Consumer Staples (+4.7%), Consumer Discretionary (+4.0%), and Telecommunication Services (+3.7%) some of the top performing sectors. Weaker sectors included commodity-oriented Materials (-1.8%) and Energy (-1.4%) and yield curve-impacted Financials (-1.0%).

Unlike Large Cap, which had a wider outperformance out of Growth, with the Russell 1000 Growth outperforming the Russell 1000 Value by over 100 basis points, results between Growth and Value were effectively in-line. Small cap also slightly outperformed large cap this month, with the returns of the Russell 2000 Index approximately 20 basis points ahead of the Russell 1000 Index.

Russell reconstituted its indices during the month, which impacts broader trends, as the smallest and largest companies from the Russell 2000 were removed, and Russell added the smallest companies (i.e. those which have fallen) from the Russell 1000 and the largest companies from the Russell MicroCap Index. Not surprisingly, given the larger companies which exited the Index likely had run and had high valuations, the valuation of the Index fell in response, from 14.0x to 12.8x EV/LTM EBITDA, which is well below the recent peak level of 14.4x. With this, the small cap value premium to large caps fell significantly, to 1%, versus a 14% historical median, and other valuation metrics demonstrated similar trends.

Earnings growth also fell after an impressive run, dropping to 8.0% from 10.4%, but this remains well above recent levels. On a capital allocation basis, capital spending fell and leverage rose, and buybacks increased for the third straight month. Lastly, fund flows to small cap equities remained strong, more than doubling year-to-date inflows, and were continued to be distributed primarily between Growth and Core funds.

We think SCAP’s unique approach, which places a premium on discipline, remains well-positioned and companies that demonstrate fundamental performance improvement supported by quality balance sheets should continue to be attractive opportunities. We look forward to the opportunity to discuss SCAP and our firm with any interested investors. Please reach out to our team or AdvisorShares if you have any questions.

Portfolio Attribution

In June, the portfolio underlying the AdvisorShares Cornerstone Small Cap ETF outperformed the Russell 2000 Index, with stock selection the primary driver of outperformance during the month.

Monthly Performance By Sector


Source: Factset.

Contributors and Detractors

Health Care, Financials, and Information Technology were the largest outperformers versus the benchmark during the month. Specifically, our stock selection in Health Care, Energy, and Information Technology, as well as our underweight allocation to Financials, were the primary positive contributors to our performance. Enanta Pharmaceuticals (ENTA), Conn’s (CONN), and Denbury Resources (DNR) were three of the largest individual contributors.

  • Enanta Pharmaceuticals (Health Care) is a biotech company focused on therapies in the HCV space, with revenues focused on royalties from its relationship with AbbVie. The company delivered strong performance during the month behind two very positive Wall Street analyst initiations.
  • Conn’s (Consumer Discretionary) is a retailer of home-oriented durable goods, such as furniture and appliances, and electronics, with a large portion of revenue coming from goods sold on credit. The company reported strong first quarter earnings, with profits well ahead of Wall Street expectations from both its retail and credit operations, and set positive same-store-sales guidance.
  • Denbury Resources (Energy) is an energy company focused on enhanced oil recovery. Denbury has now been a top contributor for the last three months, and continued to improve as investor sentiment rose.

 

Performance in the portfolio was partly offset by the Industrials, Utilties, and Consumer Discretionary sectors. Our stock selection in Industrials, as well as our overweight position to Energy and Information Technology, were the primary negative contributors to performance. NuCana (NCNA), HighPoint Resources (HPR), and Carbonite (CARB) were three of the largest individual detractors.

  • NuCana (Health Care) is a biotechnology company focused on modifying cancer treatments to respond to drug resistance. The stock was down on weaker investor sentiment, while the company continues to execute on its early-stage trials.
  • HighPoint Resources (Energy) is a mineral exploration and production company focused on assets in the Rocky Mountains. Although oil prices were strong, Colorado-focused E&Ps were impacted by investor sentiment around the Colorado gubernatorial election, where a more liberal candidate won the Democratic primary.
  • Carbonite (Information Technology) is a developer of data protection and cloud backup solutions. The stock weakened with cloud storage peers during the month.

 

Portfolio Changes

We did not initiate or exit any securities during the month. The Russell 2000 reconstitution increased the benchmark’s exposure to Information Technology and decreased its exposure to Consumer Discretionary.

Portfolio Weight by Sector

Source: Factset. Weights as of 6/29/2018. Excludes cash and unassigned.

Very Truly Yours,

Cornerstone Investment Partners
Portfolio Manager of SCAP


May 2018 Commentary

Top 10 Equity Positions by Weight:

Rank Ticker Company Sector Weight
1 NSP Insperity, Inc. Industrials 1.41%
2 SKYW SkyWest Inc. Industrials 1.04%
3 INGN Inogen, Inc Health Care 0.96%
4 DNR Denbury Resources Inc. Energy 0.95%
5 ENTA Enanta Pharmaceuticals, Inc. Health Care 0.93%
6 MMSI Merit Medical Systems, Inc. Health Care 0.83%
7 RUN Sunrun Inc. Industrials 0.75%
8 CARB Carbonite, Inc. Information Technology 0.71%
9 GDOT Green Dot Corp cl A Financials 0.70%
10 EBIX Ebix Inc Information Technology 0.67%
Note: Cash (including accrued dividends) represents a 1.2% weight in the portfolio.

 

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.

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 small capitalization companies may be riskier and more volatile than large cap companies. Security prices of small-cap companies are generally more vulnerable than those of large-cap companies to adverse business and economic developments. Other Fund risks include market risk, equity risk, large cap risk, liquidity risk and trading risk. Please see 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 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.

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.

Definitions:

EBITDA is a company’s earnings before interest, taxes, depreciation, and amortization is an accounting measure calculated using a company’s net earnings, before interest expenses, taxes, depreciation, and amortization are subtracted, as a proxy for a company’s current operating profitability

EV/EBITDA is a valuation multiple used in the finance industry to measure the value of a company. It is the most widely used valuation multiple based on enterprise value. Enterprise value (EV) is calculated as the market capitalization plus debt, minority interest and preferred shares, minus total cash and cash equivalents.

An American Depositary Receipt (ADR) is a negotiable U.S. Security that generally represents a company’s publicly traded equity or debt. Depositary Receipts are created when a broker purchases a non-U.S. company’s shares on its home stock market and delivers the shares to the depositary’s local custodian bank, and then instructs the depositary bank to issue Depositary Receipts. A Real Estate Investment Trust (REIT) is a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate.

A Real Estate Investment Trust (REIT) is a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate.

ISM Index – The ISM Manufacturing Index is based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production, inventories, new orders and supplier deliveries. A composite diffusion index monitors conditions in national manufacturing and is based on the data from these surveys.