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MINC: Q4 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

Market Overview

The final quarter of 2018 witnessed a meaningful dislocation in risk assets.  Fixed income investors and all market participants continued to wrestle with the volatility associated with geopolitical developments, trade rhetoric, mixed global economic signals, and central bankers’ desire to normalize monetary policy via policy rate increases and balance sheet adjustment. During the quarter, oil prices corrected driven by fears of slowing global growth and signs of excess supply. U.S. economic data stayed on a positive trend, which contrasted with other global economies. Primary inflation readings remained in check but pressure in key components (i.e. wages) has started to build.

U.S. Treasuries performed well, while spread sector performance was mixed during the quarter. Sectors within the securitized products universe generally outperformed, whereas corporate and emerging markets related sectors lagged. Within most spread sectors, assets with short and intermediate duration and those with higher credit ratings outperformed on a total return basis. The high yield sector was the largest underperformer during the period.  Following the fourth quarter adjustment, we see value in spread sectors and continue to invest accordingly.

As expected, the Federal Open Market Committee increased its target rate at the December meeting to a range of 2.25-2.50%, its ninth hike in the current tightening cycle. The pace of the Federal Reserve’s balance sheet adjustment remains as originally deployed, however, recent rhetoric has suggested that greater flexibility may be deployed if deemed necessary. The European Central Bank ended its monthly bond purchases in December as forecast. Maturities will be reinvested for a considerable period and key policy rates are expected to be maintained well into 2019 and beyond depending on incoming economic data. The Bank of Japan continues to make minor adjustments to its program but there are no substantial changes expected for the next 12-18 months.

During the quarter, the yield curve flattened as yields on shorter maturities rose and yields on longer maturities declined.

Contributors / Detractors


  • Issue selection within the asset-backed security (ABS) sector contributed positively to performance during the quarter. The sector remains attractive as it generally offers lower volatility, a diversified collateral base, and attractive valuations relative to many other areas of the fixed income markets. Supply in the sector ran at a similar pace as last year and continues to be met with demand as investors seek short duration and spread. Our thesis on the U.S. consumer’s ability to lift the economy remains intact.
  • Issue selection within the non-agency residential mortgage-backed (RMBS) sector also helped performance. Similar to ABS, RMBS generally offers lower volatility and a diversified collateral base. We see value in the sector versus the agency mortgage-backed (MBS) sector on the basis of incremental yield, shorter duration, and high levels of credit support within the deal structures. Home prices continue to produce 5% year-over-year gains, benefiting the sector.


  • The underweight to U.S. Treasuries detracted from performance.
  • Exposure to the bank loan sector detracted from performance as the risk-off environment and subsequent repricing of risk assets negatively impacted the sector. The possibility of slower growth, a significant drop in energy markets, and prolonged trade talks also reset rate expectations lower into 2019 (with fewer or no increases) resulting in accelerated retail outflows into year end.
  • Many of the same market drivers (growth, trade and commodity prices) that hurt the loan sector also affected the corporate high yield sector during the quarter. Positive issuer fundamentals are expected to continue and issuance continues to be light, providing a positive technical, despite outflows from the sector.
  • The Fund’s allocation to the corporate high quality sector also had a negative impact. The risk-off environment brought on by trade war fears, falling oil, and cyclicality concerns affected the asset class. In addition, the technical picture was strained by persistent outflows and an unfavorable hedging environment for foreign investors.

Current Fund Strategy

Sector Changes: We reduced our exposure to high yield bank loans and U.S. Treasuries. We redeployed the sale proceeds primarily into ABS and corporate high quality securities. 

Securitized Product: Our allocation to the securitized product sectors (RMBS and ABS) continues to play an important role. In addition to a diversified collateral base and attractive valuations relative to many other areas of the fixed income markets, they also offer diversification to the corporate credit allocation within the portfolio. Our consumer focus within the ABS sector has been beneficial as the U.S. consumer continues to show the ability to lift the U.S. economy. RMBS benefits from steady income growth, full employment, good underwriting, and investor demand for mortgage credit.

The Fund maintains its higher quality focus and short duration to limit both spread and interest rate volatility.


 As always, we believe it is important to stay diversified, have granular positions, and emphasize liquid investments. We continue to look for opportunities in all sectors of the bond market, striving to uncover any out-of-favor or undervalued sectors and securities. We favor spread sectors based on improved valuations and sound fundamentals, and highlight the importance of credit selection and positioning in the current environment. We believe some of the best total return and yield opportunities in fixed income can be found in spread sectors. Some of the specific sectors where we see opportunity are out-of-index/off-the-run ABS, RMBS, investment grade corporates, bank loans, and select emerging markets.


Newfleet Asset Management
AdvisorShares Newfleet Multi-Sector Income ETF (MINC) Portfolio Manager


Volatility is a statistical measure of the dispersion of returns for a given security or market index. Volatility can either be measured by using the standard deviation or variance between returns from that same security or market index. Commonly, the higher the volatility, the riskier the security.

Yield is the income return on an investment. This refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment’s cost, its current market value or its face value.

10-Year Treasury Note is a debt obligation issued by the United States government that matures in 10 years. A 10-year Treasury note pays interest at a fixed rate once every six months and pays the face value to the holder at maturity. An advantage of investing in 10-year Treasury notes, and other federal government securities, is that the interest payments are exempt from state and local income tax. However, they are still taxable at the federal level.

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.

Fundamentals are the qualitative and quantitative information that contributes to the economic well-being and the subsequent financial valuation of a company, security or currency. Analysts and investors analyze these fundamentals to develop an estimate as to whether the underlying asset is considered a worthwhile investment.

Residential Mortgage-Backed Security is a type of mortgage-backed debt obligation whose cash flows come from residential debt, such as mortgages, home-equity loans and subprime mortgages. A residential mortgage-backed security is comprised of a pool of mortgage loans created by banks and other financial institutions. The cash flows from each of the pooled mortgages is packaged by a special purpose entity into classes and tranches, which then issues securities and can be purchased by investors.

Commercial Mortgage Backed Security is a type of mortgage-backed security that is secured by the loan on a commercial property. A CMBS can provide liquidity to real estate investors and to commercial lenders. As with other types of MBS, the increased use of CMBS can be attributable to the rapid rise in real estate prices over the years.

An Asset Backed Security is a financial security backed by a loan, lease or receivables against assets other than real estate and mortgage-backed securities. For investors, asset-backed securities are an alternative to investing in corporate debt.

Correlation is a statistical measure of how two securities move in relation to each other.

Coupon is the interest rate stated on a bond when it’s issued. The coupon is typically paid semi-annually.

Spread sectors include all non-Treasury investment grade sectors including federal agency securities, corporate bonds, asset-backed securities, mortgage-backed securities and commercial mortgage-backed securities.

Spread is the difference between the bid and the ask price of a security or asset.

Investment Grade is a rating that indicates that a municipal or corporate bond has a relatively low risk of default. Bond rating firms, such as Standard & Poor’s, use different designations consisting of upper- and lower-case letters ‘A’ and ‘B’ to identify a bond’s credit quality rating. For example, ‘AAA’ and ‘AA’ (high credit quality) and ‘A’ and ‘BBB’ (medium credit quality) are considered investment grade. Credit ratings for bonds below these designations (‘BB’, ‘B’, ‘CCC’, etc.) are considered low credit quality (speculative), and are commonly referred to as “junk bonds.”

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 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’s investment in fixed income securities will change in value in response to interest rate changes and other factors, such as the perception of the issuer’s creditworthiness. Fixed income securities with longer maturities are subject to greater price shifts as a result of interest rate changes than fixed income securities with shorter maturities. The Fund’s investments in high-yield securities or “junk bonds” are subject to a greater risk of loss of income and principal than higher grade debt securities. Emerging and foreign market investments can be more volatile than U.S. securities and will expose the Fund to adverse changes in foreign economic, political, regulatory and currency exchange rates. See prospectus for details regarding specific risks.

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.