FLRT: September 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/flrt.

Fund Performance

In September, The AdvisorShares Pacific Asset Enhanced Floating Rate ETF (NYSE Arca: FLRT) returned 0.51% (NAV), versus the S&P/LSTA U.S. Leveraged Loan 100 Index (“benchmark”) return of 0.71%.

Market Review

In September, the S&P/LSTA U.S. Leveraged Loan 100 Index (which tracks the 100 largest loans in the broader Index) returned 0.71%. September was faced with an increasingly bifurcated market in terms of risk. The month largely favored a risk-off sentiment and the outperformance of higher quality credits demonstrated this. Concerns surrounding trade, global economic slowing, and retail demand remain investor related headwinds. Nevertheless, the S&P/LSTA U.S. 100 has returned 8.27% year to date representing the best performance for the comparable period since 2016.

Regarding demand, retail flows remain negative with the current 45-week withdrawal total (aside from a tiny $24 million inflow the week of Sept. 18) to $37.3 billion. However, for the month of September, Leveraged Commentary & Data (LCD) estimates $1.3 billion of outflows from retail loan funds, down from the $3.9 billion outflow estimate for August. That’s the slightest outflow in 11 months. Also, the technical support of the collateralized loan obligation (CLO) buyer base remains present. CLO issuance in September was $8.1bn, up from $7.3bn in the prior month. YTD CLO issuance stands at ~$90bn (lagging the 2018 record CLO issuance of $100bn at this time last year). Remember that 2018 represents the record year CLO issuance at $130bn, so this technical can be a tough act to follow. Further capital market volatility combined with an accommodative central bank continue to act as obstacles for retail demand for the loan asset class.

The loan asset class continues to see a stark difference in the performance of credit quality. September’s performance was carried by higher quality names over lower quality names with BB credits returning 0.62%, single B credits returning 0.55%, and CCCs returning -1.36%. For greater context, thus far in 2019, BB credits have returned 7.82%, single B credits 6.73%, and CCC rated credits have returned 1.99%. Loans outperformed both the investment grade bond market and their high yield fixed rate counterparts with the Bloomberg Barclays US Aggregate Index and the Bloomberg Barclays US Corporate High Yield Index returning -0.53% and 0.36%, respectively. According to J.P. Morgan, the par-weighted US loan default rate ended September at 1.42%.

Portfolio Review

During a period of continued trade tensions, slowing global growth, and an accommodative Fed, we maintained the view that being aware of what you own, as well as what not to own, in the portfolio remains key. The portfolio’s underweight to Oil Field Services and avoiding specific names in the Pharma and Energy sectors were additive to performance. The portfolio’s underweight to the Healthcare and Technology sectors detracted from performance. Given dovish global central bank policy, slowing global growth, and waning domestic consumer sentiment, we continue to believe in a balanced risk approach favor investing in stable names. We prefer strong credits possessing a sound investment thesis and hold the view that credit selection, liquidity, flexibility, and diligence remain paramount to performance in a challenging market.

 

Top Holdings

Security Description Portfolio Weight %
Dun and Bradsteet 02/06/26 Term Loan 1.72%
CHARTER COMMUNICATIONS TLB  04/30/25 TERM LOAN 1.72%
FINANCIAL & RISK 10/01/25 TERM LOAN 1.72%
BERRY GLOBAL, INC 10/03/22 TERM LOAN 1.71%
INTELSAT B3 11/27/23 TERM LOAN 1.71%
ZAYO GROUP TLB-2  01/19/24 Term Loan 1.71%
Level 3 Financing Inc 02/22/24 Term Loan 1.71%
ABC SUPPLY TLB  10/31/23 Term Loan 1.71%
NVA Holdings, Inc. 02/02/25 Term Loan 1.70%
PPDI (Jaguar Holding) 08/18/22 Term Loan 1.70%

As of 09.30.2019. Excludes cash holdings.

Respectfully,

Bob Boyd,
Managing Director, Pacific Asset Management
AdvisorShares Pacific Asset Enhanced Floating Rate ETF (FLRT) Portfolio Manager

 

Past Manager Commentary

Definitions:

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.

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