DBLV: June 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/fund/dblv.
The AdvisorShares DoubleLine Value Equity ETF (DBLV) posted a return of 5.94% in June 2019, behind its benchmark, the Russell 1000 Value Index, by 124 basis points.
As of the beginning of July, the current expansion is officially the longest in recorded U.S. economic history, which has seen the duration of economic expansions lengthening in recent decades. Yet, despite the extraordinary monetary measures taken during this cycle to drive the economy, the cumulative GDP growth to date has been far lower than in past cycles. Furthermore, the Fed’s attempt to normalize monetary conditions has been short-lived, as an increase in the Fed funds rate to a meager 2.5% was enough to trigger market anxiety of a pending economic slowdown. This has prompted some Fed members to view quantitative easing (QE) as a normal policy tool. Hence, it is our view that the U.S. economy remains in a less-than-copacetic state notwithstanding a currently record-low unemployment rate of 3.9% and a solid real GDP growth rate of 3.1%, both posted in the first quarter of 2019.
The equity markets currently do not share our more guarded view. The Dow Jones Industrial Average posted its best monthly performance since 1938, while the Russell 1000 Value Index nearly rebounded to its prior peak and the S&P 500 achieved new highs. Specifically, the DJIA rallied 7.2% and the S&P 500 returned 7.05%, while the Russell 1000 Value Index gained 7.18% and the Russell 1000 Growth Index increased 6.87%. We believe these strong results were driven by investor expectations that the Fed would shift back to an outright accommodative monetary policy, with multiple rate cuts over the next two years, and by renewed optimism of a positive break-through in the ongoing trade conflict between China and the U.S. Indeed, trade sensitive stocks also bounced as the U.S. suspended planned tariffs against Mexico and President Trump and President Xi agreed to avoid the implementation of another round of trade tariffs. While the U.S. did make some concessions on the supply of critical chipsets to Huawei and China did agree to purchase a slew of U.S. agricultural products, the apparent truce had no impact on existing trade barriers consisting of 25% tariffs on $200B worth of Chinese imports, so that tax on consumers will continue to be a headwind for U.S. economic growth, and thus for corporate earnings growth, which had already begun to slow on the anniversary of the Trump tax cuts. Even as the markets are near peaks or making new all-time highs, the U.S economy remains as dependent as ever on government support to grow, which is far from ideal for equities.
In our view, this backdrop of a still-vulnerable, late-cycle economy doesn’t merit the current level of investor confidence reflected in rallying equity indices that would normally come with strong U.S. economic fundamentals. Because DBLV is more defensively positioned, which we view as appropriate this late in the market cycle, and amidst an economic backdrop with so many structural issues, the portfolio underperformed its benchmark during the heady month of June. Notwithstanding the disappointing short-term results, we continue to view a cautious and defensive stance as prudent in the current environment. If anything, we become still more circumspect as the broader market grows more exultant.
In terms of the portfolio’s sector attribution, monthly performance for DBLV was helped by exposures in communication services, consumer discretionary, consumer staples, energy, financials, health care, industrials, information technology, and utilities, offset by negative attribution from holdings within the real estate area. On a relative basis, DBLV was helped by consumer discretionary and industrials, offset by adverse results within communication services, consumer staples, energy, financials, health care, information technology, materials, real estate, and utilities. Cash had a negative impact on performance in a rising market.
Source: Bloomberg. As of 06.30.2019.
The top positive contributors to performance in June were Bayer AG (BAYRY), Alibaba Group Holdings (BABA), and Astrazeneca PLC. (AZN):
- BAYRY (health care) is a German conglomerate with leading businesses in pharmaceuticals, consumer health, animal health, and crop sciences. The stock rallied after management took incremental steps to address the ongoing litigation with Monsanto’s Roundup, creating a special supervisory board committee that will make recommendations on litigation strategy, including potential settlement talks. We continue to believe the stock is pricing in significantly greater liabilities for Roundup than likely settlement amounts, and as the litigation process plays out over time, we expect the stock to re-rate higher to our independent assessment of fair value.
- BABA (consumer discretionary) is the leading online and mobile commerce company in China, with dominant franchises in e-commerce, cloud computing, digital media and entertainment, and other innovative initiatives. The company enjoys strong entry barriers, related to scale and scope economies and network effects that also support and sustain other leading internet platform companies operating globally in winner-take-most markets. As a Chinese company, BABA is seen as threatened amidst the escalating trade tensions between the P.R.C. and the U.S.; however, its stock bounced during June as hopes for a resolution of Chinese-American trade tensions brightened. More importantly, we view BABA as the key beneficiary of the long-term rise in Chinese consumers’ incomes and the displacement of inefficient traditional retail. The company has an enviable runway of growth that will continue to expand despite the ongoing trade conflict between the world’s two largest economies.
- AZN (health care) is a UK-based pharmaceutical manufacturer with leading franchises in oncology, respiratory, and cardiology. During the month, AZN continued to demonstrate its scientific leadership position in oncology with several cancer presentations at a key medical conference. Additionally, AZN reported two separate positive Phase 3 results for a recently launched leukemia drug, as well as its key immuno-oncology drug, which should continue to drive growth with approvals in new treatment indications. We continue to expect AZN to post the best revenue and earnings growth in the space over the next five years.
The top detractors from monthly performance were Alphabet Inc. (GOOGL), Telefonaktiebolaget LM Ericsson (ERIC), and Fidelity National Information Services (FIS):
- GOOGL (communication services) is a dominant global supplier of online advertising services and related technology in digital content, cloud services, enabling hardware devices and other products and services; the company offers a wide array of products through its core Google segment, including Ads, Android, Chrome, Google Cloud, Google Maps, Google Play, Hardware, Search and YouTube. Alphabet stock underperformed in June, following a strong of bad news flow: a disappointing 1Q19 earnings report—including a surprising revenue miss—in late April, revelations in late May of heightened regulatory scrutiny by the U.S. Department of Justice, and growing calls from Democratic politicians to consider a break-up of the company. We expect antitrust scrutiny to remain an overhang, but would note that the stock actually rose meaningfully during the 2011-13 investigation by the Federal Trade Commission that ultimately exonerated the company. Moreover, do not anticipate any severely adverse outcomes that would permanently impair the company’s franchises. With GOOGL stock down more than 15% from its late April peak, we view the market’s heightened fears over regulatory risk as overdone, and we prefer holding such a high quality business in what we see as an increasingly uncertain market environment.
- ERIC (information technology) is a Sweden-based communications technology solutions supplier to telecom service providers. The company’s core Networks segment offers mobile radio access networks, transport solutions and related network and support services. ERIC also supplies digital products and services, as well as managed network services and emerging technologies to communications carriers globally. The company continues to benefit from the ongoing growth of mobile data usage and the anticipated roll-out of fifth-generation (5G) wireless networks. The company’s stock underperformed during the month of June, apparently on lower market expectations of disproportionate 5G contract wins, which was itself a function of seemingly wavering US pressure to undermine competitor Huawei’s 5G business. We expect ERIC to continue benefitting from solid 5G demand, and from the unappreciated margin expansion opportunity available in 4G capacity expansions that are expected to continue between now and a global 5G ramp late in 2020 and beyond.
- FIS (information technology) is a financial services technology company offering an array of transaction and account processing services and related payment, risk and compliance solutions, as well as related digital and consulting services. FIS has a high quality business model considering the high recurring revenue, long term contracts, high entry barriers and solid free cash flow generation. Moreover, the company continues to benefit from the ongoing trend of outsourcing such solutions by its clients in banking, payments, and asset and wealth management. FIS stock underperformed during the month of June, following solid outperformance in the prior month. The technology sector witnessed a rotation out of safer, software-intensive names, such as FIS, and into more volatile and cyclical hardware names (e.g., semiconductors and tech hardware), as hopes for a return by the US and China to the negotiating table prompted more investor risk-taking. We continue to expect that FIS will benefit from solid demand and margin expansion going forward, and we prefer holding a core position in such a high quality business in what we expect will be an increasingly volatile market environment.
During the month, we added to our existing position in Philip Morris International (PM), and we reduced the size of our position in Dollar General Corporation (DG).
The top ten portfolio holdings, by weight and active weight, can be seen in the following tables:
As of 06.30.2019
Active weight refers to the difference in allocation of an individual security or portfolio segment between a portfolio and its benchmark. For example, if a portfolio allocates 15% within the energy sector, and the benchmark’s allocation in energy is 10%, then the active weight of the energy segment of the portfolio is +5%. Active weight can also be referred to as relative weight.
Relative to the Russell 1000 Value Index, DBLV is overweight consumer discretionary, energy, health care, industrials, information technology, and communication services. It is underweight consumer staples, financials, materials, real estate, and utilities. Note that the RLV will be rebalanced at the start of July and this will impact the portfolios relative weights. The portfolio holdings by absolute and relative sector weights are found in the accompanying charts:
As of 06.30.2019
The DBLV portfolio’s sector exposures primarily reflect the DoubleLine Equities team’s bottom-up investment process, which places an emphasis on individual stock selection. However, the macroeconomic views of DoubleLine Capital L.P. do inform secondarily these sector weightings.
DBLV’s portfolio sector exposures primarily reflect the DoubleLine Equities team’s bottom-up investment process, which places an emphasis on individual stock selection. However, the macroeconomic views of DoubleLine Capital L.P. do inform secondarily these sector weightings.
We are constructive on the long-term outlook for the U.S. equity market, but remain cautious in the near-term, because of continued uncertainties related to the ongoing trade dispute with China and the wider threats to global free trade, the growing U.S. debt balance driven by chronic deficit spending, and the economy’s continued dependence on support from the Fed. We are increasingly concerned about how these ominous economic developments will impact the sustainability of high corporate profit margins, the risk of slower earnings growth and the prospect of downward pressure on valuation multiples. All of these constitute substantial near-term headwinds.
In the present environment, we continue to believe that lower-multiple value stocks should post better relative performance after having lagged growth stocks for nearly a decade. At month’s end, the price-to-earnings multiple on 2019 consensus estimates for DBLV was 16.4x, the Russell 1000 Value Index 15.0x, and the S&P 500 17.9x. In light of this, we still regard the presence of elevated risks as supportive of the value-based strategy behind DBLV—particularly over a long-term investment horizon.
We thank you for your continued interest in DBLV.
AdvisorShares DoubleLine Value Equity ETF (DBLV) Co-Portfolio Manager
AdvisorShares DoubleLine Value Equity ETF (DBLV) Co-Portfolio Manager
Past Manager Commentary
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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.