HDGE: May 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.
For the month of May, the AdvisorShares Ranger Equity Bear ETF (NYSE Arca: HDGE) rose 7.99% while the S&P 500 lost -6.35%.
|Performance History (05.31.2019)||HDGE NAV (%)||HDGE Market (%)|
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
Huge Margin Debt Hangs Over the Stock Market Like the Sword of Damocles
Investors have levered up in bullish hopes of magnifying stock market gains. The large overhang of debt boosts returns on the upside, but magnifies them on the way down. Aggregate margin debt is just lower than peak levels reached in late 2018 and multiples of debt levels seen at the peak of the tech bubble and in mid-2007, before the subprime crash. The heavy use of margin not only magnifies losses, but it also accelerates the decline. Investors are forced to meet margin calls, resulting in forced selling of stock and further price declines.
The recent sell-off did not produce enough bearish sentiment to mark an intermediate term stock market bottom.
Investor sentiment is a contrarian indicator that suggest future stock market direction. One of our favorite indicators is the Investors Intelligence Bulls/Bears poll of market newsletter writers. Bullish sentiment, as measured by this indicator, dropped to 47.2% from 49% the previous week, sparked by the recent correction. However bearish sentiment barely moved, rising only from 17.3% to 18.5%. Bearish and bullish sentiment historically tend towards parity before a market bottom can be predicted.
Looking more closely at market returns, it is clear that speculation lives on. One very unusual coincidence is that last month a down market coincided with positive value-add to momentum. This is not to say that momentum stocks gained ground, but those high fliers barely dipped, whereas the weakest momentum stocks fell by as much as 10%. Momentum performance is highly correlated with speculative sentiment.
Further, we note that the most expensive stocks got more expensive in May. Value investing has been turned on its head. In this case, the highest EV/S stocks actually gained nearly a percent, whereas the cheapest stocks lost 7.8%.
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.
For May 2019, the largest realized and unrealized gains were Brunswick Corporation (BC), Greenbrier Companies, Inc. (GBX), and Goodyear Tire & Rubber Company (GT). Brunswick Corporation fell -19.00% in May. Brunswick suffers from low quality of earnings and is highly susceptible to an economic slowdown. Greenbrier Companies stock slumped -23.42%. This deeply cyclical producer of railroad freight car equipment faces falling margins and cash flows, coupled with declining quality of earnings. Goodyear Tire & Rubber Company fell steadily to -30.19%. The company faces ongoing margin pressures and very high pension liabilities.
The largest realized and unrealized losses for May were CarMax, Inc. (KMX) , MasTec, Inc. (MTZ) and Cerner Corporation (CERN). CarMax stock rose 0.54%. Auto loans are suffering increases in default rates, although the company is using more technology to try to stabilize the business. MasTec stock fell -8.21% over the course of the month. They have well-defined revenue recognition issues, but the promise of 5G wireless is overwhelming the stock’s flaws for now. The short was covered during May. Cerner Corporation rose 5.30%, steadily over the month. The company suffers from revenue recognition issues. The fund covered the short mid-month.
Top 10 Holdings
|Ticker||Security Description||Portfolio Weight %|
|MKC||MCCORMICK & CO-NON VTG SHRS||-3.01%|
|DLB||DOLBY LABORATORIES INC-CL A||-2.37%|
|MDRX||ALLSCRIPTS HEALTHCARE SOLUTI||-2.19%|
|UPS||UNITED PARCEL SERVICE-CL B||-2.15%|
|PBH||PRESTIGE CONSUMER HEALTHCARE||-2.06%|
As of 05.31.2019. Holdings subject to change. Cash holdings not included.
Ranger Alternative Management
AdvisorShares Ranger Equity Bear ETF (HDGE) Portfolio Manager
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.
A 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.
A 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.
A 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.