CWS: August 2019 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/etfs/cws.

On the final day of July 2019, the Federal Reserve decided to cut interest rates. This was the Fed’s first cut in over a decade.

Fed Chairman Jerome Powell listed three reasons for the decision: “to insure against downside risks from weak global growth and trade policy uncertainty; to help offset the effects these factors are currently having on the economy; and to promote a faster return of inflation to our symmetric two percent objective.”

Only a few months ago, the Fed was aggressively raising rates. The most recent hike came in December. Since then, the Fed has changed course and is now cutting rates. Expect more rate cuts to come.

The Fed’s new stance has helped Wall Street as stock prices rallied during much of the spring and into the summer. In August, however, the rally started to age. It was also not helped by increasing talk of a trade war between the United States and China.

Also in August, the yield curve finally inverted. What does that mean? In plain language, the yield on the two-year Treasury was above that of the ten-year Treasury.

Gotcha, but what does that mean?

In still plainer talk, investors aren’t being paid to take on more risk. Lending your money to Uncle Sam for two years pays you the same as lending for ten. You’re not getting anything for taking on the risk of eight more years. Well, if people aren’t being paid to take on risk, guess what: they won’t.

Not taking on risk is not a good thing for the economy. That’s the why the 2/10 Spread has a pretty good track record of predicting recessions. It’s not so much the inversion that’s bad; it’s what it means.

With the 2/10, we gain a rare example of a forward indicator with a decent track record, but it comes at the expense of timing. Simply put, the world doesn’t automatically explode once the 2/10 gets inverted. It’s more of a dimmer switch than a toggle.

For example, during the last recession, the 2/10 spread first inverted in December 2005, but the recession didn’t begin for another two years.

Still, that track record beats a lot of humans. Remember that all metrics have downsides. That’s not a reason to dismiss them. It means we have to be aware of the limitations of our analytical tools.

The bottom line is that the yield curve inversion is a big deal, but it’s no reason to run for the exits. The Federal Reserve will probably lower rates a few more times. That could revert the curve. The outlook is still quite good for our portfolio.

Now let’s look at some numbers. For the month of August, the S&P 500 lost 1.81%. Add in dividends and the index lost 1.58%. Our AdvisorShares Focused Equity ETF (NYSE Arca: CWS) had a decent month. The traded shares fell just 0.28%, while the net asset value gained a tiny 0.03%. At least we made money while the rest of the market was losing ground.

Let’s run down some of the stocks that drove our performance during August.

Intercontinental Exchange (ICE) was our top performer in August. The exchange operator reported Q2 earnings of 94 cents per share, which was two cents better than estimates.

Revenues rose 4% to $1.3 billion. Adjusted operating margin came in at 58%. ICE said that through June 30, it has returned over $1 billion to shareholders.

ICE didn’t offer EPS guidance, but it did for a few other metrics. What stood out to me was the ranges for data revenue. ICE said Q3 data revenues are expected to be in a range of $550 million to $555 million. For all of 2019, they see data revenues in a range of $2.19 billion to $2.24 billion. This is a very strong company. ICE gained 6.4% for us during August.

Coming in second was Church & Dwight (CHD). In August, CHD reported Q2 earnings of 57 cents per share. That was five cents better than Wall Street’s forecast. That was also up 16.3% over last year. Gross margins rose to 44.6%, and organic sales rose by 4.9% (9.1% internationally).

The CEO said it was CHD’s fifth quarter in a row of organic sales growth in excess of 4%. The company now sees full-year earnings of $2.47 per share and 60 cents per share for Q3. The previous EPS guidance was for $2.43 to $2.47. CHD made 5.75% for us in August.

Hormel Foods (HRL) also did nicely for us. The company reported fiscal Q3 earnings of 37 cents per share. That was one penny better than expectations.

In many ways, this earnings report was a big sigh of relief. Hormel’s numbers weren’t outstanding, but they were good enough. I think some investors had pretty low expectations, so Hormel proved that things are mostly okay.

In May, the Spam folks lowered their full-year guidance due to African swine fever and other issues. I think that rattled investors. Fortunately, there was no lower guidance this time. Instead, Hormel stood by its full-year forecast for earnings of $1.71 to $1.85 per share.

Since Hormel has already earned $1.33 through the first three quarters, the guidance implies a range for fiscal Q4 of 38 to 52 cents per share. Wall Street had been expecting 45 cents per share. Hormel also sees full-year sales of $9.5 billion to $10 billion.

Hormel gained 3.95% during August.

Our biggest loser in August was Signature Bank (SBNY). That’s not a big surprise since banks are hurt in lower interest rate environments. The bank dropped about 8.5% in August, but I think the fundamentals are solid.

I also wanted to mention another laggard for us in August, which was Cognizant Technology Solutions (CTSH). This is interesting because in August, the company reported Q2 earnings of 94 cents per share. That was two cents above estimates.

Quarterly revenue rose 3.4% to $4.14 billion. In constant currency, that’s up 4.7%. Cognizant said they expect full-year earnings between $3.92 and $3.98 per share. That’s an increase from the previous range, which was $3.87 to $3.95 per share. However, that was a big cut from the initial guidance of at least $4.40 per share.

Even though the shares lost about 6% in August, I think the recent news is very encouraging. I wouldn’t be surprised to see CTSH rally for us later this year.

Here’s how all 25 positions performed during the month of August:

Source: Yahoo Finance

The philosophy of the AdvisorShares Focused Equity ETF is to make portfolio changes just once a year. At the end of the year, we add five stocks and delete five. We made our changes in December 2018, so there were no changes to make this month.

Here are the ETF’s top ten holdings as of August 31, 2019:

In a first for the ETF industry, the portfolio manager of CWS has “skin in the game.” The manager’s compensation is directly tied to portfolio’s performance. Using the trailing 12-month returns of CWS vs. its S&P 500 Index benchmark, stronger outperformance is rewarded with a larger management fee while weaker underperformance is penalized with a smaller management fee. The CWS fulcrum fee was 0.83% during August 2019. After the Fund’s August performance, the CWS fulcrum fee will adjust to 0.85% in September 2019.

July 2019 Manager Commentary