AADR: December 2018 Portfolio Manager Review
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 standardized and month-end performance, please click www.advisorshares.com/fund/aadr.
The strategy uses relative strength to allocate towards the strongest performing ADRs in the Developed and Emerging Markets. The strategy starts with a top down approach, first ranking each sector based on its relative strength scores and then setting the weighting of each sector. Holdings are scored daily based on an in-house momentum score which compares each security to the peers in the universe. If a security’s rank falls below our sell threshold it is removed. The strategy is not constrained to holding a set allocation to Emerging or Developed Markets, rather the process identifies areas of strength across the globe regardless of geographical location. This allows the portfolio to overweight or underweight regions and markets to concentrate on areas of strength, often pushing the portfolio to vary dramatically from international benchmarks.
The markets were not kind to International equities this year after a great 2017. Emerging and Developed markets both closed lower driven down by increased concern over trade policies, a strengthening USD and geopolitical changes across the globe. AADR was hit especially hard as Emerging Markets, which led the performance for the strategy in 2017, turned down quickly at the end of the first quarter causing the strategy to lag through the second quarter as it reallocated holdings. The third quarter was a bright spot as global trends started to stabilize and our new allocations began to provide alpha. The fourth quarter, however, dashed hopes of a full recovery as global markets sold off, causing December to be one of the worst month on record for our strategy. We closed the year below the benchmark; however, we continue to perform well over longer periods 5+ years.
|AADR (NAV)||MSCI ACWI ex US NR USD|
|Since Inception (7.20.2010)||6.41%||4.37%|
As of 12/31/2018.
The portfolio continues to be allocated to securities that we believe display favorable relative strength characteristics. At any given time, the portfolio will be comprised of 30-40 US traded ADR’s from our universe of 300-450 ADR’s. 2018 saw a large number of portfolio changes, with our portfolio turning over fully, causing legacy holdings to exit the portfolio. Currently the portfolio has one holding that was purchased over one year ago – the rest of the portfolio having been purchased in 2018 – and consists of 36 securities with weights ranging from ~2% to ~6%. The top 10 holdings comprise roughly 34% of the portfolio. Intelstat is currently the largest weight in the portfolio at 5.34%. Instelstat has held the top position for several months as the security has continued to perform well even in the negative trending market of 2018.
Top 10 Holdings
|Ticker||Security Description||Portfolio Weight %|
|CEO||CNOOC LTD-SPON ADR||3.61%|
|EC||ECOPETROL SA-SPONSORED ADR||3.45%|
|ERIC||ERICSSON (LM) TEL-SP ADR||3.21%|
|GLPG||GALAPAGOS NV-SPON ADR||3.11%|
|ARGX||ARGENX SE – ADR||3.08%|
|INFY||INFOSYS LTD-SP ADR||2.99%|
|EADSY||AIRBUS SE – UNSP ADR||2.91%|
As of 12.31.2018.
Developed and Emerging markets both had significant negative contributions to the portfolio this year, Emerging however was the largest source of negative return in the portfolio. This was largely cause during the first half of the year, as Emerging Markets (EM) declined at a faster rate compared to more developed countries around the globe. This shift caused the portfolio to shift from an EM dominated portfolio to a portfolio that favored Developed Markets (DM). While the portfolio is still “overweight” EM compared to MSCI ACWI ex US, the difference is dramatically lower than this time last year. In fact, we are at the highest allocation of DM in the portfolio since taking it over in 2016.
As of 12.31.2018.
Regional allocation has also changed significantly over the past year, as Latin American holdings were liquidated in favor of more developed economies. At its high, Latin America was 50%+ of the portfolio and was the main source of return for the portfolio for several years. Currently that allocation represents only 11% of the portfolio, which is less than the historical average but higher than the benchmark. Europe has also seen an equally substantial change over the past year, moving from 5% at the start of the year to the largest regional allocation over the course of the year.
As of 12.31.2018.
The changes in the portfolio helped during the third quarter, however, the fourth quarter sell off hit our new holdings especially hard as high momentum names took the brunt of the market drawdown. Europe was hit especially hard later in the year, driven by Brexit, trade issues and growing fears of a slowdown. The Middle East was the bright spot for the year, posting positive returns for the year thanks to SodaStream, which was also the largest single return for the year during its short time in the portfolio.
The buy/sell process of the strategy starts with a look at the strongest sectors within the universe, overweighting strength and underweighting or eliminating relative weakness. The sector strength varied greatly over the year as multiple trends formed and reverted shortly after forming. This caused the portfolio to shift between sectors throughout the year. The portfolio continued to favor Technology through the year, keeping it as one of the higher allocations, while maintaining a serial underweight in Financials. This trend continued through the end of the year, as the portfolio still has a very different sector allocation than the benchmark. This has been one of the sources of Alpha over the years and we believe will become a significant source of positive contribution going forward.
As of 12.31.2018.
John G. Lewis
Nasdaq Dorsey Wright
AdvisorShares Dorsey Wright ADR ETF (AADR) Portfolio Manager
Past Manager Commentary
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.
The MSCI All Country World Ex-U.S. Index is a free float adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets.
Before investing you should carefully consider the Fund’s investment objectives, risks, charges and expenses. This and other information is in the prospectus, a copy of which may be obtained by visiting www.advisorshares.com. Please read the 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. Emerging Markets, which consist of countries or markets with low to middle income economics can be subject to greater social, economic, regulatory and political uncertainties and can be extremely volatile. Other Fund risks include concentration risk, foreign securities and currency risk, ADRs which may be less liquid, large-cap risk, early closing risk, counterparty risk and trading risk, which can increase Fund expenses and may decrease Fund performance. The Fund is, also, subject to the same risks associated with the underlying ETFs, which can result in higher volatility. This Fund may not be suitable for all investors. See prospectus for detail 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. These views are intended to assist shareholders in understanding their investments and do not constitute investment advice.