DBLV: March 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 positive return of 0.37% in March 2019, lagging its benchmark, the Russell 1000 Value Index, by 27 basis points. For the month, the S&P 500 Index posted a return of 1.94%, versus the Russell 1000 Value Index at 0.64%, and the Russell 1000 Growth Index at 2.85%.
The market rebounded during the first quarter of 2019 nearly as sharply as it declined in the fourth quarter of 2018. After declining 14.0% in Q4 2018, the S&P 500 rallied about 13.1% in the first quarter of this year and, at quarter end, stood at only about 3.3% below its prior peak of 2,930 on September 21, 2018. Early in the quarter, Fed Chairman Jerome Powell abruptly pivoted to a more accommodative stance in reaction to the market downdraft, after the Fed hiked interest rates controversially at their December meeting. In a dramatic reversal, the Fed at their January meeting removed any expectation for a 2019 rate hike, cut its growth forecast for the U.S. economy, and signaled an end to their balance sheet run-off by September 2019—thus leaving the Fed’s balance sheet at more than $3.5tn. Market fears that the Fed would over-tighten into a recession promptly subsided on this news, triggering a relief rally on the notion that the “Fed put” is still in place. This return to monetary easing benefited growth stocks more than value names, sending the premium of growth over value nearly back to 50-year highs. Historically, such a sizeable valuation disparity has not persisted for long; however, the current level of central bank influence on equity markets has no historical precedent.
In terms of sector attribution, monthly performance for DBLV was helped by exposures in communication services, consumer discretionary, consumer staples, energy, information technology, and real estate, offset by negative impacts from financials, health care, industrials, materials, and utilities. Cash had a negative impact in a rising market.
Source: Bloomberg. As of 03.31.2019.
The top three positive contributors to performance in March were American Tower (AMT), Novartis (NVS), and Sanofi (SNY):
- AMT (REITs) is one of the largest global REITs and a leading independent owner, operator and developer of multi-tenant communications real estate. The company posted strong share price gains during the month of March, driven by a solid earnings report and lower interest rates. The REIT posted quarterly funds from operations (FFO) of $2.40 per share, beating consensus estimates by a dime. Meanwhile, the decline in interest rates, following continued dovish signals from Fed Chairman Jerome Powell, likely benefited AMT stock, as the US 10-year Treasury declined about 0.4% over the month of March. AMT is well-positioned for the continued growth of wireless data usage around the world, especially with the upcoming roll-out of 5-G networks.
- NVS (health care) is a Swiss pharmaceutical manufacturer with leading franchises in oncology, neuroscience, ophthalmology, and cardiology. NVS also owns Sandoz, one of the largest generic drug manufacturers, and Alcon, the global leader in eye care devices. During the month, NVS stock outperformed in anticipation of the 100% tax free spin off of Alcon in early April, as well as the FDA approval for a novel multiple sclerosis drug that is expected to be 1 of 8 potential blockbuster launches within the next 18 months. Following the Alcon spin off and the potential divestment or spin-out of Sandoz, NVS will be one of the fastest growing and largest biotech firms with leading technology platforms, such as gene and cell therapy, and we expect the stock will re-rate higher.
- SNY (health care) is a French pharmaceutical manufacturer with therapeutic focus areas within rare diseases, oncology, diabetes, immunology and hematology, as well as vaccines and consumer health. SNY remains one of the cheapest pharmaceutical stocks, with limited downside given industry low exposure to loss of exclusivities and pipeline and margin improvement opportunities to drive faster than expected earnings growth over time. We continue to expect SNY to transition from a “value” to a “GARP” story, with R&D productivity improvements replenishing the pipeline, thereby driving higher longer term growth over time.
The top three detractors from monthly performance were Bayer (BAYRY), Anthem (ANTM) and Cigna Corp. (CI):
- BAYRY (health care) is a German conglomerate with leading businesses in pharmaceuticals, consumer health, animal health, and crop sciences. BAYRY acquired Monsanto last year and assumed ongoing liabilities related to multiple lawsuits claiming that Roundup, a glyphosate-based herbicide, was a primary cause of cancer. During the month, the stock pulled back after a multi-district litigation case, decided by a jury in San Francisco, went against Monsanto. We expect BAYRY to appeal the verdict, as four decades of extensive science and regulator investigations support Roundup’s safety profile. At current valuation, BAYRY stock is pricing >$30bn of liabilities for Roundup versus a more realistic ~$5bn settlement amount. As the legal process plays out over time, we expect the market to price in a significantly lower liabilities, driving a higher stock price for BAYRY.
- ANTM (health care) is a leading managed care organization and a licensee of the Blue Cross Blue Shield brand in 14 states. During the month, the stock suffered as rising political rhetoric and calls to change the current health care insurance system added regulatory uncertainty, thus compressing valuation multiples for all health care services stocks. While we expect the health care debate to continue into the 2020 elections, it is highly unlikely that we will see a wholesale dismantling of the current system, in which half the U.S. population receives health insurance from their employers, given that any material changes to the Affordable Care Act must go through a regular legislative process within a gridlocked Congress. As fears subside, we expect ANTM to work as the company leverages its leading brand and lowest cost position to drive market share gains and industry leading growth going forward.
- CI (health care) is an integrated managed care provider and pharmacy benefit manager (PBM). The company’s stock also declined during the month with the rest of the health care services subsector, for the reasons described earlier. Additionally, there continues to be concerns among investors about regulatory changes the could adversely impact the ability of the PBM industry to employ drug rebates; however, we believe these concerns are overdone given the relatively small percentage of CI’s revenue that employs such rebates. We continue to expect CI to meet or exceed its financial targets following the recent Express Scripts (ESRX) acquisition, thus causing the stock to re-rate higher from current historically low valuation levels.
During the month, we introduced Boeing (BA), American Electric Power (AEP) and Xcel Energy (XEL) as new holdings. We added to our positions in the following: 3M (MMM), Anthem (ANTM), Chubb (CB), Chevron (CVX), Cigna (CI), Dollar General (DG), Fidelity National Info (FIS), Intercontinental (ICE), IHS Markit (INFO), Northrop Grumman (NOC), Pioneer (PXD), and TJX Companies (TJX). We reduced our positions in the following companies: Alibaba Group (BABA), Amazon.com (AMZN), Astrazeneca (AZN), Comcast (CMCSA), Alphabet Inc. (GOOGL), JPMorgan (JPM), Microsoft (MSFT), Phillip Morris (PM), PayPal (PYPL), and Ericsson (ERIC). We eliminated our holdings in Citigroup (C), Citizens Financial Group (CFG), and International Paper (IP). We also reduced our cash position modestly during the quarter.
Top 10 Holdings
The top ten portfolio holdings, by weight and active weight, can be seen in the following tables:
|Top 10 Portfolio Weights||Top 10 Portfolio Active Weights|
|VERIZON COMMUNICATIONS INC||3.87%||AMERICAN TOWER CORP||3.86%|
|AMERICAN TOWER CORP||3.86%||DOLLAR GENERAL CORP||3.13%|
|CHEVRON CORP||3.82%||US FOODS HOLDING CORP||2.83%|
|DOLLAR GENERAL CORP||3.14%||ASTRAZENECA PLC||2.82%|
|ANTHEM INC||3.01%||NOVARTIS AG||2.80%|
|PHILIP MORRIS INTERNATIONAL||2.94%||SANOFI||2.61%|
|US FOODS HOLDING CORP||2.89%||ANTHEM INC||2.43%|
|COMCAST CORP||2.83%||FIDELITY NATIONAL INFO SVCS||2.42%|
|ASTRAZENECA PLC||2.82%||VISA INC||2.37%|
|NOVARTIS AG||2.80%||PAYPAL HOLDINGS INC||2.26%|
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.As of 03.31.2019
Relative to its benchmark, the Russell 1000 Value Index, the portfolio is overweight consumer discretionary, information technology, health care, industrials, energy, and communication services. It is underweight financials, utilities, materials, consumer staples and real estate. The portfolio holdings by sector in terms of both absolute and relative weights can be seen in the accompanying charts:
As of 03.31.2019
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 LP do inform secondarily these sector weightings.
The current economic expansion is on track to meet or even exceed the longest such period over the last 100 years. By May 2019, the present period of sustained economic growth will match the record expansion from 1991 to 2001, which lasted about 120 months. Central bank intervention and accommodative tax and fiscal policies have almost certainly prolonged the current cycle. Despite the extraordinary measures, economic growth has been relatively weak throughout this period. Furthermore, persistently low interest rates and a flat yield curve, driven by central bank’s accommodative monetary policy, have led to substantial asset price appreciation, historically low volatility and the near-record stock market price level.
We are likely in the late innings of the current cycle, and we believe a more cautious stance on the equity market is warranted. The ability of the Fed to extend the economic and market cycles further will be more challenged, given the late stage of the economic cycle and especially considering the apparent tightness in the labor market, as well as the more limited effectiveness of policy tools in the current environment. First, there is less room to reduce interest rates from current levels versus prior economic cycles—to wit, since 1989, the average Fed rate-cutting program started at about 6.9% and carried approximately a 5.5% reduction in rates from peak to trough. Second, we continue to expect that chronic fiscal deficits will put upward pressure on the supply of Treasuries and thus similar pressure on rates, which will likely make it harder for the Fed to reduce rates versus historical experience without resort to more quantitative easing on an already expanded balance sheet. More fundamentally, the last decade or more of accommodative monetary policy has elevated asset prices more than it has bolstered real economic growth, calling into question the effectiveness of quantitative easing as a stimulus tool. Given this, we believe that there likely are limits to further expansion of central banks’ balance sheets.
While we remain constructive on the long-term outlook for a subset of the U.S. equity market, we are cautious in the near-term, because of our location within the overall economic cycle, and given the high expectations priced into what we see as stretched equity valuations relative to corporate fundamentals. In particular, we are increasingly concerned that corporate earnings growth is decelerating and corporate profit margins are peaking, thus increasing the risk of downward pressure on valuation multiples and, by extension, on stock prices.
As we have noted in previous commentaries, the accommodative monetary policies maintained by the Fed and other central banks globally, which have supported the current and lengthy economic expansion, have benefited growth stocks more than value stocks, causing the latter to lag the former for nearly a decade. With valuation disparities between growth and value again near all-time highs, we believe this trend is vulnerable to a reversal. Compared to the broader S&P 500, the relative earnings multiples of value stocks in general and of DBLV’s holdings in particular appear attractive on a relative basis at current levels. At month’s end, the price-to-earnings multiple on 2019 consensus estimates for DBLV was 16.2x, the Russell 1000 Value Index 14.5x, and the S&P 500 17.2x. In light of this, we continue to regard the current environment as supportive of the value-based strategy behind DBLV—particularly over a long-term investment horizon.
AdvisorShares DoubleLine Value Equity ETF (DBLV) Co-Portfolio Manager
AdvisorShares DoubleLine Value Equity ETF (DBLV) Co-Portfolio Manager
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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.