FLRT: February 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/flrt.
In Febreuary, The AdvisorShares Pacific Asset Enhanced Floating Rate ETF (NYSE Arca: FLRT) returned 1.62% (NAV), versus the S&P/LSTA U.S. Leveraged Loan 100 Index (“benchmark”) return of 2.01%.
In February, the S&P/LSTA U.S. Leveraged Loan 100 Index (which tracks the 100 largest loans in the broader Index) returned 2.00%. This monthly return represents the second-best performance since April 2016 for the index as well as the second positive monthly return after three consecutive negative monthly returns. Given the index represents the largest and most liquid loans, it tends to be more volatile as these issues react more quickly to market dynamics. A more dovish Federal Reserve, possible resolution to trade and tariff conflicts, and a slowing of retail outflows helped the asset class perform strongly in the beginning of 2019. The asset class continues to be supported by
economic and corporate fundamentals, a low default environment, and a supportive technical via the CLO market. The CLO technical support continued to improve in February, as the market saw an increase in demand vs prior months. Loans outperformed both the investment grade bond market and their high yield fixed rate counterparts during February. The Bloomberg Barclays US Aggregate Index and the Bloomberg Barclays US Corporate High Yield Index returned -0.06% and 1.66%, respectively. February’s return was led via lower rated credit quality loans with BB credits returning 1.44%, single B credits returning 1.72%. For context, BB credits now account for roughly 30% of the index, whereas, single B rated credits account for approximately 53%.
The strong rally experienced thus far in 2019 has resulted with the S&P/LSTA U.S. Leveraged Loan 100 Index price rebounding to levels last seen before the November/December 2018 sell off. According to JP Morgan, CLO issuance ex-refi/resets totaled $12.9bn in February after reaching a 2 year low in January ($5.1bn) and December ($5.7bn). Additionally, net CLO issuance totaling $18.0bn year-to-date is now only down 16% year-over-year. The par-weighted default rate ended February at 0.95%, the lowest level since April 2012 (0.81%). The default rate declined 43 basis points from 1.38% at the end of January and is down 158 basis points from a year ago. For context, the long-term average for the loan default rate is 3.07%, based on annual default rates back to 1998.
The market supported a largely risk-on trade during the month as the headwinds of negative rhetoric, an overly aggressive central bank, and uncertain trade and tariff implications became rather muted beginning 2019. The resulting effect was a strong rebound in pricing and a tightening of spread levels across risk-based fixed income asset classes. Given this result, we believe a balanced risk approach in the portfolio remains important in looking ahead and we continue to view flexibility, credit selection, and liquidity as critical components of a sound investment thesis.
Top 10 Holdings
|Security Description||Portfolio Weight %|
|Dun and Bradsteet 01/30/26 Term Loan||1.71%|
|INTELSAT B3 11/30/23 Term Loan||1.71%|
|First Data Corporation 04/26/24 Term Loan||1.71%|
|Level 3 Financing Inc 02/22/24 Term Loan||1.70%|
|Telesat Canada 2/17 Cov-Lite Term Loan||1.70%|
|HCA 3/18 B10 03/13/25 Term Loan||1.70%|
|AKZ0 NOBLE TLB 10/01/25 TERM LOAN||1.70%|
|Scientific Games 2/18 B5 Term Loan||1.69%|
|CAESERS RESORTS 12/23/2024 Term Loan||1.69%|
|CABLEVISION TLB L+225 07/17/2025||1.69%|
As of 02.28.2019.
Managing Director, Pacific Asset Management
AdvisorShares Pacific Asset Enhanced Floating Rate ETF (FLRT) Portfolio Manager
Past Manager Commentary
A basis point (bps) is a unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument.
A collateralized loan obligation (CLO) is a security backed by a pool of debt, often low-rated corporate loans.
Downside risk is the likelihood that a security will decline in price, or the amount of loss that could result from that potential decline. Liquidity is the degree to which an asset or security can be bought or sold in the market without affecting the asset’s price. Leverage is the amount of debt used to finance a firm’s assets.
The S&P/LSTA U.S. Leveraged Loan 100 Index is designed to track the market-weighted performance of the largest institutional leveraged loans based on market weightings, spreads and interest payments. One cannot invest directly in an index.
The Bloomberg Barclays Capital Aggregate Bond Index measures the performance of the U.S. investment grade bond market. One cannot invest directly in an index.
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. Investing in derivatives may be riskier than other types of investments because they are more sensitive to change in economic or marketing conditions that could result in losses that significantly exceed the Fund’s original investment. The Fund primarily invests in floating rate loans and floating rate debt securities. The market for floating rate loans may be subject to irregular trading activity, wide bid/ask spreads, and extended trade settlement periods. The floating rate feature of loans means that floating rate loans will not generally experience capital appreciation in a declining interest rate environment. Declines in interest rates may also increase prepayments of debt obligations and require the Fund to invest assets at lower yields. Other Fund risks include market risk, leverage risk, foreign investment risk, liquidity risk, income and interest rate risk, liquidity risk, management risk, high yield securities risk, loan participation risk, prepayment risk, and trading risk. Please see the prospectus for details regarding risk.
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 credit ratings referenced in this commentary are published rankings by Moody’s and are based on detailed financial analyses by a credit bureau specifically as it relates the bond issue’s ability to meet debt obligations. The highest rating is AAA, and the lowest is D. Securities with credit ratings of BBB and above are considered investment grade. The views in this material were those of the Portfolio Manager and may not reflect his views on the date this material is distributed or anytime thereafter.
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