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BKCH: January 2019 Inaugural 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/bkch.

Portfolio Review

Sabretooth Advisors has partnered with AdvisorShares to launch a new thematic actively managed ETF – AdvisorShares Sabretooth ETF (NASDAQ: BKCH).  Cloud computing and storage has been one of the fastest growing areas of technology, and while it has been dominated by larger players such as Amazon (NASDAQ: AMZN) and Microsoft (NASDAQ: MSFT), there are a number of other companies growing exponentially and adapting new products and revenue models that are showing significant gains in stock prices for those companies.

Digital ledger technology (“blockchain”) is also a new and fast-growing sub sector of technology, which is innovating and fast becoming a focus for companies over a wide range of sectors, but most specifically in FinTech and Healthcare sectors. It is important to note that we do not view blockchain from a cryptocurrency perspective and we will not be investing fund assets in crypto currencies or tokens. Because blockchain technology is a logistic tool to streamline businesses and minimize costs while increasing security, the value is harder to ascertain from a straight revenue model. There are very few “pure play” blockchain companies and the start-ups that are out there don’t necessarily meet our investment criteria.

BKCH will launch with an anticipated initial basket of 31 names split almost evenly between cloud and blockchain and with an equal weighting of 3.15% per holding. By combining best of breed cloud companies and best of breed blockchain companies we believe that we can offer investors the best possible thematic ETF with exposure to both spaces.

The cloud space has emerged as a leading industry spanning internet infrastructure, as well as, consumer and business services delivered over the web. This includes the supply side of the cloud sector with chips built into servers, fiber-optics, data storage, network switches and routers. Cloud services have been growing rapidly. Some revenue estimates for public cloud services are $206 bn in 2019, $240 bn in 2020, and $278 bn in 2021 – and that does not include private cloud or true private cloud revenue estimates. Salesforce.com (NYSE: CRM) has already seen a higher proportion of spending occurring in cloud services than in traditional software. As in any industry seeing hyperbolic growth, there are a number of secondary and tertiary companies involved in the space, and we do envision some level of consolidation as the larger players acquire smaller firms that complement their offerings.

The blockchain space is more opaque than the cloud space. The lack of transparency is primarily caused by the fact that blockchain technology doesn’t generate revenue in and of itself, rather it is a technology used to lower cost, streamline processes, increase security, etc. Because there are many potential uses for blockchain within almost every industry, we have to identify which companies are using the technology in a manner that will have significant impact on earnings and profitability. The dominant areas that that we favor in the Financial sector is payments and FinTech, not cryptocurrency. While there are a number of FinTech stocks, we focus more on the larger companies, such as Square and Paypal, and on consumer finance, such as Mastercard and Visa.  Healthcare companies digitizing and securing medical records, as well as, banks and exchanges are the companies that we believe could see the greatest impact to the bottom line from the adaption of the blockchain technology. Again, the blockchain space is so diverse and there are a number of companies that call themselves blockchain that are not viable investments, so we seek to identify only the best in breed companies seeing results from blockchain adaption.

Cryptocurrencies and Related Securities – BKCH will not own any cryptocurrencies or any product that holds cryptocurrency. We feel that investors can realize the benefits of the technology outside of the volatility and issues surrounding cryptocurrencies.

Blockchain Named Securities – BKCH screens for actual business uses of blockchain as well as profitability and growth.  The fact that a company changes their name to include the word “blockchain” is not a deciding factor for inclusion. We must feel that there is a viable business model that will generate revenue or cut costs substantially enough to impact both top and bottom line.

BKCH will rebalance quarterly, if necessary, and more frequently if warranted. While BKCH is anticipated to have low turnover in its portfolio, investors should be aware that because of the quickly evolving nature of the space, portfolio additions or deletions could occur at any time. It is the goal of the portfolio manager to have no less than 20 and no more than 40 names in the portfolio at any time. The focus is to offer a concentrated portfolio of best in breed securities in the cloud and blockchain spaces and changes to the portfolio will be made only with a strong rationale for inclusion or deletion.

While Sabretooth Advisors also sub-advises the AdvisorShares New Tech and Media ETF (FNG), which has had exposure to both the cloud and blockchain space, we anticipate minimal overlap between the two funds. And while certain companies, such as AMZN and MSFT, are core holdings in FNG and BKCH, FNG’s primary focus is on companies with the same underlying characteristics as the “FANG” names from 2015. BKCH’s portfolio focuses exclusively on companies in the cloud and blockchain space.

Top 10 Holdings

Ticker Security Description Portfolio Weight %
AMZN AMAZON.COM INC 4.21%
ZEN ZENDESK INC 3.31%
AXP AMERICAN EXPRESS CO 3.18%
TEAM ATLASSIAN CORP PLC 3.17%
FFIV F5 NETWORKS INC 3.15%
UNH UNITEDHEALTH GROUP INC 3.15%
NEWR NEW RELIC INC 3.15%
VMW VMWARE INC-CLASS A 3.15%
JPM JPMORGAN CHASE & CO 3.14%
MA MASTERCARD INC 3.14%

As of 2.7.2019.

Respectfully,

Scott Freeze, CIO
Sabretooth Advisors
AdvisorShares Sabretooth ETF (BKCH) Portfolio Manager

Definitions:

The S&P 500 Index is a broad-based, unmanaged measurement of changes in stock market conditions based on the average of 500 widely held common stocks. One cannot invest directly in an index.

The Nasdaq Composite Index is the market capitalization-weighted index of approximately 3,000 common equities listed on the Nasdaq stock exchange.


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. Computer software/services companies can be significantly affected by competitive pressures, aggressive pricing, technological developments, changing domestic demand, the ability to attract and retain skilled employees and availability and price of components. Many computer software/services companies rely on a combination of patents, copyrights, trademarks and trade secret laws to establish and protect their proprietary rights in their products and technologies. There can be no assurance that the steps taken by computer software/services companies to protect their proprietary rights will be adequate to prevent misappropriation of their technology or that competitors will not independently develop technologies that are substantially equivalent or superior to such companies’ technology. Stocks of technology companies and companies that rely heavily on technology, especially those of smaller, less-seasoned companies, tend to be more volatile than the overall market. Additionally, companies in the technology sector may face dramatic and often unpredictable changes in growth rates and competition for the services of qualified personnel. For other risks specific to the fund please read the prospectus.

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