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.
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
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.
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
Top 10 Equity Positions by Weight:
|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%|
|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%|