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SCAP: April 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

Performance Review

If last fall’s correction was “A Feast For Crows,” this year’s performance has so far felt like “A Dream of Spring.” (Apologies for those of you who are not as excited as we are for the final season of Game of Thrones and may not immediately understand the references to A Song of Ice and Fire book titles). At this point, December feels a distant memory, as the small cap asset class continues to be quite strong this year, with the Russell 2000 Index increasing 3.4% in April. With three of four months positive, small caps are now up the most through April since the late President George H.W. Bush was in office, in yet another example of recent V-shaped market recoveries. On a total return basis, small caps are up 18.5% year-to-date, and up 4.6% for the last twelve months.

However successful small caps have been so far this year, large caps have actually been stronger behind the mega cap rally. For the month, the Russell 2000 missed the Russell 1000 index by 65 basis points, and is now slightly behind large caps YTD. On a style basis, value was a winner for the first time in six months, with the Russell 2000 Growth underperforming the Russell 2000 Value by approximately 75 basis points in April, but Growth is still up 455 basis points YTD. At the sector level, all but one sector (Health Care, down 3.6% as “A Storm of Swords” of concerns related to government policy around drug pricing and presidential candidates’ insurance proposals hit the stocks) were up for the month, with economy-linked stocks in the Industrials (+7.0%) and Financials (+6.6%) sectors outperforming the market, and Energy (+0.1%) and Utilities (+0.7%) relative underperformers.

Valuations drove the price action this month, with the Russell 2000 adding half a multiple point and now trading at a 12.7x EV/EBITDA multiple, compared to 11.0x at the end of the year. While up, valuations generally remain in line with the five year median of 12.6x, and well below highs we saw last year before small caps fell. With continued underperformance versus large caps, small caps are now cheaper than large caps (-0.7% discount), a rare situation. For example, December’s discount was the first time since the tech bubble, and the long-term median premium is over 14%. While small cap companies slowed buybacks, they remain up over 35% compared to last year and leverage continues to be near post-crisis peak levels.

As expected, earnings growth is decelerating as companies report 1st quarter numbers, with the year-over-year EBITDA growth of Russell 2000 constituents moving to 6% from 9% on both top-line and margins. While a material deceleration from recent peaks (12.1% in January) may seem like “The Winds of Winter,” it remains significantly above levels from a few years ago. For 2019, estimated earnings still suggest that profits continue to decelerate, but the evidence, such as the first quarter’s strong GDP growth number of 3.2%, still does not suggest we are at the cusp of a major recession.

While it always feels good to be in a positive-trending equity environment, we recognize that exogenous factors can easily cause volatility and shifting sentiment. For example, we are writing this after the Trump administration surprisingly announced new tariffs on China after reports had suggested a deal was imminent, our own “Dance with Dragons.” The Federal Reserve faces “A Clash of Kings,” as it continues to be pressured by the administration and both equity and fixed income markets that quickly react to any sense of a shift away from its recently dovish approach.

The one thing we know is that we don’t know what’s going to happen next, but we think SCAP’s approach, which places a premium on discipline, remains well-positioned. In the end, we consider ourselves more like the Iron Bank, shifting our investments among opportunities, rather than Westerosi lords playing “The Game of Thrones” to win or die. To us, it brings us back to our core investment philosophy, “stock prices are more volatile than fundamentals.” Particularly in a more volatile environment, companies that demonstrate fundamental performance improvement supported by quality balance sheets and cash flows should continue to provide attractive opportunities for the portfolio.

We look forward to the opportunity to discuss SCAP and our firm with any interested investors. Please reach out to our team or AdvisorShares if you have any questions.

Portfolio Attribution

In April, the NAV and market prices of the AdvisorShares Cornerstone Small Cap ETF was up 3.0% and 3.2% ,respectively, moderately underperforming the Russell 2000 Index, which was up 3.4%. Over the last twelve months, the AdvisorShares Cornerstone Small Cap ETF has increased 7.4%, significantly outperforming the Russell 2000 Index return of 4.6%.

Monthly Performance By Sector

Past performance is not indicative of future results. Source: Factset; as of 04.30.2019.

Contributors and Detractors

Health Care, Energy, and Consumer Staples were the biggest outperforming sectors versus the benchmark during the month. At a component level, the largest positive contributors to performance included our overweight position to Information Technology (the 3rd best-performing sector), as well as our stock selection in Energy and Consumer Staples. SkyWest (SKYW), Manhattan Associates (MANH), and Brooks Automation (BRKS) were three of the largest individual contributors.

  • SkyWest (Industrials) is a regional airline. The stock moved up consistently during the month, on strong earnings, a contract extension with American Airlines, and a sell-side analyst who initiated coverage with a Buy rating. The company also made a strategic investment into junior regional airline Southern Airways, which will provide a path for new pilots to gain experience before moving into regional and mainline airlines.
  • Manhattan Associates (Information Technology) is a software firm focused on supply chain management. Quarterly earnings came in strong behind sales execution, and the company also drove an increase in guidance for the year. Additionally, Wall Street analysts suggested that the key retail end market could be stabilizing and providing a base into the future.
  • Brooks Automation (Information Technology) is a provider of semiconductor and life science equipment. The company reported strong quarterly earnings, with both revenue and earnings per share well ahead of consensus expectations. While near-term guidance was weak, strength both of the company’s business lines increased investor sentiment and drove the stock up on the day.

Performance in the portfolio was offset by the Information Technology, Financials, and Industrials sectors. At a component level, the largest negative contributors to performance included our stock selection in Information Technology and Industrials, as well as our underweight position to Financials. PCM Inc. (PCMI), Arcus Biosciences (RCUS), and Merit Medical Systems (MMSI) were three of the largest individual detractors.

  • PCM (Information Technology) is a technology distributor. Most of the stock’s weakness during the quarter occurred during a period of little news, and may have been driven by shifting investor sentiment after a strong run over the last year in advance of quarterly earnings. While quarterly earnings were strong compared to consensus expectations and forward guidance was held consistent, the company faced top-line pressure from the federal government shutdown and pulled back from a few less profitable relationships.
  • Arcus Biosciences (Health Care) is developing immunotherapies for cancer treatment. Health care companies were generally weak during the month, and Arcus also announced it would issue $75mm of additional stock.
  • Merit Medical Systems (Health Care) is a medical device provider. Health care companies were generally weak during the month, and while quarterly earnings were generally strong, FCF usage on higher working capital needs may have tempered investor sentiment.

Portfolio Changes

We did not purchase or exit any securities during the month.

Portfolio Weights by Sector

The process underlying SCAP is bottom-up, and driven by the attractiveness of individual companies with the goal of providing actual stock diversification, rather than by just a few top-down sector or industry bets. As such, our sector exposures can vary significantly versus the benchmark as a whole. As of the end of April, our largest exposures compared to the benchmark remained the same, with the Information Technology and Industrials sectors the largest overweights, and the Financials and Utilities sectors the largest underweights.

Source: Factset. Weights as of 04.30.2019. Excludes cash and unassigned.

Top 10 Holdings

One name changed within the top 10 holdings. Medical device company Tactile Systems Technology (TCMD) underperformed the broader market, and in its place, food and transportation equipment supplier John Bean Technologies (JBT) moved up. The top 10 holdings continue to represent 8.4% of the portfolio.

Ticker Security Description Sector Portfolio Weight %
SKYW SKYWEST INC Industrials 1.27%
GLUU GLU MOBILE INC Information Technology 1.01%
FOXF FOX FACTORY HOLDING CORP Consumer Discretionary 0.94%
ALRM ALARM.COM HOLDINGS INC Information Technology 0.71%
LHCG LHC GROUP INC Health Care 0.70%
FIVN FIVE9 INC Information Technology 0.68%

Note: Cash (including accrued dividends) represents a 0.69% weight in the portfolio. As of 04.30.2019.

Very Truly Yours,

Cornerstone Investment Partners
AdvisorShares Cornerstone Small Cap ETF (SCAP) Portfolio Manager


Past Manager Commentary

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. Emerging Markets, which consist of countries or markets with low to middle income economics can be subject to greater social, economic, regulatory and political uncertainties and can be extremely volatile. Other Fund risks include concentration risk, foreign securities and currency risk, ADRs which may be less liquid, large-cap risk, early closing risk, counterparty risk and trading risk, which can increase Fund expenses and may decrease Fund performance. The Fund is, also, subject to the same risks associated with the underlying ETFs, which can result in higher volatility. This Fund may not be suitable for all investors. See prospectus for detail 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 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.