DBLV: 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/dblv.
The AdvisorShares DoubleLine Value Equity ETF (DBLV) posted a negative return of -9.75% in December 2018, lagging by 15 basis points its benchmark, the Russell 1000 Value Index.
The broader large-cap equity universe posted negative returns in December of historical proportions. Moreover, value stocks underperformed their growth counterparts. The S&P 500 Index posted a negative return of -9.03% during the month, which was its worst December performance since 1931. Meanwhile, the Russell 1000 Value Index registered a negative return of -9.60%, and the Russell 1000 Growth Index posted -8.60%. Despite the relative underperformance of value stocks in the month, we continue to expect value stocks to display better relative performance vis-à-vis growth names over the medium to long term.
In terms of attribution, monthly performance for DBLV was boosted by portfolio exposures within the consumer discretionary, real estate, utilities, information technology, health care, communication services, and energy sectors, offset by negative contribution within the consumer staples, industrials, financials, and materials sectors. Cash had a positive impact in a down market.
as of 12.31.2018
The top three contributors to performance in December were Dollar Tree (DLTR), Ericsson (ERIC) and Dollar General (DG):
- DLTR (consumer discretionary) is a leading discount retailer. The stock represents a defensive play and acts more like a consumer staples name, given the relatively high percentage of consumable sales occurring in its stores. Market expectations around the stock remain low due to ongoing challenges in improving the operations of acquired Family Dollar operations, which has depressed the valuation multiple and, therefore, added to the margin of safety embedded in this portfolio holding. Because legacy Dollar Tree stores are best-in-class, and since we expect management to turn around the Family Dollar operations in the medium term, we see material upside from currently depressed consensus projections.
- ERIC (technology) is a leading vendor of wireless telecommunications equipment and related services. Competing with only two other significant global players, ERIC benefited during the month from the negative stories surrounding competitor Huawei, including the arrest of a senior executive in Canada and vocal calls by the US Government for domestic and allied customers to drop the Chinese firm as a supplier. We think the latter news helps Ericsson’s positioning ahead of the anticipated 5G wireless buildout that starts in 2019. Having rationalized its business during the last downturn, ERIC should continue to post improving earnings and positive sales momentum going forward.
- DG (consumer discretionary) operates the largest chain of discount stores. Most of its stores are located in rural locations where it is the primary store for daily consumable goods. The stock represents a defensive play and acts more like a consumer staples name, given this relatively high percentage of consumable sales occurring in its stores. The company is an efficient operator consistently with attractive earnings growth opportunities, which have been enhanced by the recent expansion into metro urban markets.
The top three detractors from monthly performance were Philip Morris International (PM), Federal Express (FDX) and AerCap Holdings (AER):
- PM (consumer staples) is a leading supplier of cigarettes and related tobacco and reduced-risk tobacco products, operating in markets outside the U.S. The stock declined meaningfully following a sell-side analyst’s downgrade that was prompted by fears over future prospects for the company’s reduced risk IQOS heated cigarette product given rising use of vaping products. Despite the well-known success of start-up vaping vendor Juul in the US, we believe that these concerns around IQOS are overdone given the fact that vaping is more strictly regulated in foreign markets, and because PM has its own competing products for those markets. At current levels, the stock appears attractive, and we like its defensive characteristics in the current market.
- FDX (industrials) is the leading package delivery provider, providing express, ground and freight transportation services, as well as related business service solutions. The company’s stock was adversely impacted by management’s reduction in forward earnings guidance by 8%, which was the result of both weakening international economic conditions—likely exacerbated by the escalating trade tensions between the U.S. and China—as well as the delayed realization of anticipated benefits from the TNT Express acquisition. While there could be additional downside in the near term, because of the highly volatile situation surrounding global trade, we continue to like the name on a longer-term basis, given its dominant positioning in what is essentially a duopoly, and because we continue to see durable growth opportunities for a high quality company now trading at an attractive valuation.
- AER (industrials) is the largest aircraft leasing company in the world. The twin concerns over access to funding for new plane purchases and emerging market volatility, in part associated with rising global trade tensions, have weighed on the stock. While we still see value in this name on a longer term basis, we expect the current headwinds to linger a while longer and recognize the prospects for rising credit risk in that environment. Accordingly, we took advantage of the recent stock market volatility to adjust the relative risk-reward profile of the portfolio by putting our capital to work in alternative investment opportunities.
Note that we responded to lower equity prices by upgrading our holdings in multiple areas, thereby positioning the portfolio more defensively. We added the following new holdings to the portfolio: 3M (MMM), Alibaba Group Holding (BABA), Anthem (ANTM) and Dollar General (DG). We also added to our positions in the following portfolio holdings: American Tower (AMT), Fidelity National Information Services (FIS), PayPal (PYPL), Alphabet (GOOGL), Dollar Tree (DLTR), Visa (V), Philip Morris (PM) and Ericsson (ERIC). We reduced our positions in Laboratory Corporation (LH), Bank of America (BAC), Citigroup (C), Citizens Financial (CFG) and Prudential (PRU). We eliminated our holdings in AerCap Holdings (AER), E*TRADE Financial (ETFC), eBay (EBAY), Equifax (EFX), Lam Research (LRCX) and MSC Industrial (MSM).
Top 10 Holdings
The top ten portfolio holdings, by weight and active weight, can be seen in the following tables:
As of 12.31.2018
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 its benchmark, the Russell 1000 Value Index, the portfolio is overweight the healthcare, consumer discretionary, information technology and communication services sectors. It is approximately equal-weight the energy and industrial sectors, and it remains underweight the bond-proxy sectors (i.e., utilities, REITs and consumer staples), as well as financials and materials. We continue to hold opportunistically excess cash at the moment. The portfolio holdings by sector in terms of both absolute and relative weights can be seen in the accompanying charts:
as of 12.31.2018
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 secondarily inform 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 rising uncertainties related to the ongoing trade dispute with China and the prospects for higher rates and tighter monetary conditions; these factors together raise the risk of slower—but still respectable—earnings growth and downward pressure on valuation multiples. In this environment, we continue to believe that value stocks should begin to post better relative performance after having lagged growth stocks for nearly a decade. Indeed, compared to the broader S&P 500, the relative earnings multiples of value stocks in general and of the DBLV holdings in particular appear attractive at current levels. At month’s end, the price-to-earnings multiple on 2019 consensus estimates for DBLV was 13.0x, the Russell 1000 Value Index 12.5x, and the S&P 500 14.4x. In conclusion, we regard the current environment 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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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.