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HDGE: 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/hdge.

Performance Review

For the month of March, the AdvisorShares Ranger Equity Bear ETF (NYSE Arca: HDGE) lost 0.68% while the S&P 500 rose 1.94%.

Performance History (03.31.2019) HDGE NAV HDGE Market
1 Mth -0.68 -0.73
3 Mth -18.75 -18.76
YTD -18.75 -18.76
1 Yr -17.10 -17.09
3 Yrs -13.64 -13.72
5 Yrs -11.68 -11.70

As stated in the Prospectus, the total annual operating expenses are 2.72% (includes 0.17% acquired fund fees). 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 month end performance please visit www.advisorshares.com
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Markets Review

The American Association of Individual Investors (AAII) polls their membership to determine their average equity allocation as a percentage of their total account. This data is a strong contrarian indicator since these investors often operate with a herd mentality, which is often wrong about the direction of the market. They tend to buy near a top when the crowd is buying and sell near a bottom when the crowd is selling.  AAII’s current stock  allocation is at 67%, which is near the top of its range going back 30 years. Equity allocation is higher today than even in 2007, before big market declines. Note the other peaks in allocation also preceded large declines. Additionally, since these investors are already so heavily invested in equities, they have much less cash to buy more stocks to help fuel a higher market.

The yield curve, the difference between long-term and short-term interest rates, has inverted recently. Why is this important? When the curve is inverted (short term rates higher than long term rates), returns for the S&P 500 tend to be poor. An inverted curve has been in place only 11% of the time since 1962, and on average it has been followed by a slightly negative annualized return of -0.6% for the S&P. In contrast, when the curve is upward sloping, the S&P has produced a positive annualized return of +9.4% on average.  This study was produced by www.Sentimentrader.com.

Momentum stocks have started to perform well again, although not quite as well as in Q4 2018.  As momentum rises on investors’ wish lists, valuations tend to get stretched and fundamentals tend to become less important (at least in the short term).  This chart shows momentum adding value in March

Low multiple strategies are not working.  This is another indication that investors are not being cautious.  Here we see that the most expensive stocks, by PE ratio for the next twelve months, are gaining the fastest.  Expensive stocks are getting more expensive.

Lastly, this chart tells us that investors were willing to bid up shares of unprofitable companies and sell shares in unprofitable companies.  This is more evidence of speculation.

Stocks were grouped and ranked by the relevant factor as of the end of the prior month and the returns computed for the month just ended.  Stocks chosen were based on Two Rivers Analytics’ universe of stocks.  © Copyright 2019.  All Rights Reserved Two Rivers Analytics.  Further Distribution Prohibited without prior permission.

Portfolio Review

For the month of March 2019, the largest realized and unrealized gains were Visteon Corporation (VC), Cooper-Standard Holdings Inc. (CPS), Allscripts Healthcare Solutions, Inc. (MDRX) and United States Steel Corporation (X).

Visteon stock fell steadily during the month, falling  -21.38% in total. The automotive supplier of cockpit electronics is seeing weakness in automotive demand. Cooper-Standard Holdings Inc. (CPS)  fell  -21.88% in March. Cooper suffers from the same automotive demand weakness as Visteon. It reported weak earnings last quarter, and investors are recognizing that conditions in Europe and Asia are becoming increasingly difficult.  Commodity cost inflation is also weighing on the company and the stock. Allscripts stock fell -11.01% on relatively weak earnings.  Sales and EPS missed expectations. United States Steel fell sharply in early March, dropping -13.03% in the month and giving up its gains from the January/February rally. A renewed concern about trade wars may have been the catalyst.

The largest realized and unrealized losses for March were Wayfair, Inc. Class A (W), Alibaba Group Holding Ltd. Sponsored ADR (BABA) and MasTec, Inc. (MTZ).

Wayfair, the online furniture retailer, gave up some of February’s gains in March  to end the month down -10.40%.  Wayfair engages in a business model that has not proven itself to be viable yet.  The company burns cash despite leaning heavily on its suppliers for financing.  It will need to return to the capital markets later this year or early next in order to fund operating losses.  The stock is very expensive.  Alibaba barely budged during March, easing just  -0.32%. The company’s corporate structure (with 600 special purpose vehicles) makes it nearly impossible to analyze and provides many opportunities for manipulation.  However, Chinese government support for their financial markets led us to cover the position.  MasTec rose  11.39% on earnings.  Stronger energy markets boosted this construction company’s top and bottom lines.

Top 10 Holdings

Ticker Security Description Portfolio Weight %
DOV DOVER CORP -5.41%
PTC PTC INC -4.85%
SNA SNAP-ON INC -4.59%
MKC MCCORMICK & CO-NON VTG SHRS -4.36%
WSO WATSCO INC -3.50%
CTXS CITRIX SYSTEMS INC -3.04%
TWTR TWITTER INC -2.72%
MTZ MASTEC INC -2.71%
W WAYFAIR INC- CLASS A -2.68%
HOG HARLEY-DAVIDSON INC -2.68%

As of 03.31.2019. Holdings subject to change. Cash holdings not included.

 

Respectfully,

Brad Lamensdorf
Ranger Alternative Management
AdvisorShares Ranger Equity Bear ETF (HDGE) Portfolio Manager

 

Past Manager Commentary

Definitions:

The S&P 500 Index is a free-float capitalization-weighted index based on the common stock prices of 500 American companies. It is one of the most commonly followed equity indices and many consider it the best representation of the market and a bellwether for the U.S. economy.

Bear Market (Bearish) is a market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment to be self-sustaining. As investors anticipate losses in a bear market and selling continues, pessimism only grows. Although figures can vary, for many, a downturn of 20% or more in multiple broad market indexes, such as the Dow Jones Industrial Average (DJIA) or Standard & Poor’s 500 Index (S&P 500), over at least a two-month period, is considered an entry into a bear market.

Bull Market (Bullish) is a financial market of a group of securities in which prices are rising or are expected to rise. The term “bull market” is most often used to refer to the stock market, but can be applied to anything that is traded, such as bonds, currencies and commodities.

short position is the sale of a borrowed investment with the expectation that it will decline in value.


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. The Fund may invest in (or short) ETFs, ETNs and ETPs. In addition to the risks associated with such vehicles, investments, or reference assets in the case of ETNs, lack of liquidity can result in its value being more volatile than the underlying portfolio investment. Other Fund risks include market risk, equity risk, short sales and leverage risk, large cap risk, early closing risk, liquidity risk and trading risk. Short sales involve leverage because the Fund borrows securities and then sells them, effectively leveraging its assets. The use of leverage may magnify gains or losses for the Fund. See prospectus for specific risks and details.

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 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.