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SCAP: January 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

The market taketh, and the market giveth back. After the worst month for small caps since 2011, January was…the best month for small caps since 2011. The small cap universe, represented by the Russell 2000 Index, was up 11.2% on a total return basis, its 10th best month since inception. Over the last two months, small caps are down a total of 2.0%, so much ado over not much. Investors were encouraged by statements from the Federal Reserve suggesting they will be more “patient” with future rate hikes, large cap corporate earnings held up better than expected, the US government shutdown ended, and trade discussions with China appear to be moving forward.

Not surprisingly, with the return in positive market sentiment, small caps outperformed the Russell 1000 by almost 290 basis points in January, almost recovering the weakness in December, and the Russell 2000 Growth outperformed the Russell 2000 Value by approximately 100 basis points. Since this month was a mirror image of last month, there were no sectors that delivered less than a +4% return. Energy (oil prices were up 18%, but remain well below recent highs), Materials, and Real Estate were outperformers, and Utilities, Consumer Staples, and Financials were the relative underperformers.

Valuations increased in response to the rising stock price. The Russell 2000 trades at a 12.0x EV/EBITDA multiple, up a turn from 11.0x at the end of the year, but remains below its five year median of 12.6x and recent highs. While small caps have returned to trading at a premium to large caps (last month’s discount was the first time since the tech bubble), they continue to be inexpensive on a relative basis. Versus a long-term median premium of 14%, this divergence is visible.

Although there has been some fear in the market that earnings are risked, company performance has so far held up. Over the last year, the Russell 2000 EBITDAs have grown 12.1%, a slight deceleration from last month (12.4%), but significantly above only 2% in 2017. Margins have also remained consistent, providing evidence companies have been able to support their bottom lines in the face of well-discussed cost increases such as labor and freight. For 2019, estimated earnings still suggest that profits decelerate somewhat, but the evidence does not suggest we are at the cusp of a major recession. Companies used the weakness last month to increase their level of buybacks, implying management teams are acting opportunistically (or they want to prop up next quarter’s EPS, but perhaps we’re optimists).

We don’t know what’s going to happen next, as the last two months suggest that the market is struggling to respond to external factors including fixed income markets, economic data, geopolitical sentiment, and corporate earnings. Particularly in this type of market environment, we think SCAP’s approach, which places a premium on discipline, remains well-positioned. The longer-term evidence suggests that things are not as bad as feared, and over time, evidence outweighs fear. 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 January, the portfolio underlying the AdvisorShares Cornerstone Small Cap ETF underperformed the Russell 2000 Index. The AdvisorShares Cornerstone Small Cap ETF returned 11.1% (at NAV) during the month, while the Russell 2000 increased 11.3%, an underperformance of approximately 20 basis points. Including December, the ETF is down 1.0%, beating the Russell 2000 by approximately 100 basis points.

As a reminder, for 2018, the ETF was a strong outperformer, declining only (6.4)%, versus a Russell 2000 nearly twice as bad at (11.0)%, for an outperformance of approximately 490 basis points.

Monthly Performance By Sector

Past performance is not indicative of future results. Source: Factset; as of 01.31.20198.

Contributors and Detractors

Financials and Utilities were the two biggest outperformers versus the benchmark during the month. Specifically, our stock selection in Financials and Communication Services, as well as our underweight position to Utilities and overweight position to Information Technology, were the primary positive contributors to our performance. eHealth (EHTH), Tactile Systems Technology (TCMD), and QEP Resources (QEP) were three of the largest individual contributors.

  • eHealth (Financials) is an online insurance agent focused primarily on helping users compare and purchase Medicare plans. The company was a strong performer during the month as it released preliminary 2018 results and set 2019 guidance that was well above analyst expectations, driven by growth of private Medicare enrollment.
  • Tactile Systems Technology (Health Care) is a provider of medical devices used to treat lymphedema, a disease where fluid collects in the limbs. The company announced preliminary results for the fourth quarter, with revenues well above consensus expectations behind strong in-network demand for its products.
  • QEP Resources (Energy) is an oil and gas E&P company now focused on assets in the Permian basin. In addition to the general strength in the energy sector during the month from higher commodity prices, QEP received an unsolicited offer to buy the company from activist investor Elliott Management, and media reports suggest that QEP has hired an investment bank to advise it. While the offer represented a significant premium to the price at the time, the offer was below where the company traded recently, and QEP has not yet responded.

Performance in the portfolio was offset by the Consumer Discretionary and Health Care sectors. Our stock selection in Consumer Discretionary, Health Care, and Industrials hurt overall performance. Materialise (MTLS), Merit Medical Systems (MMSI), and Guess? (GES) were three of the largest individual detractors.

  • Materialise (Information Technology) is a provider of software for the 3D printing space. The company was the best performer last month, but investors appear to have less confidence in the company’s prospects, even though other companies in the additive manufacturing space performed better.
  • Merit Medical Systems (Health Care) is a medical device company with a diverse collection of primarily consumable products. The stock was a relative underperformer during the month, along with many other medical device companies.
  • Guess? (Consumer Discretionary) is an apparel designer and retailer, with stores around the world. The company announced its CEO Victor Herrero would exit the company a few days later, with no explanation, and named previous COO Carlos Alberini, who is currently running Lucky Brand, to the role. The market reacted poorly to the news, likely suggesting concerns around either forward earnings or management uncertainty.

Portfolio Weights by Sector

Our largest overweight exposures are the Information Technology and Communication Services sectors. Our largest underweight exposures are to the Financials and Utilities sectors.

Excludes cash and unassigned. Source: Factset; as of 01.31.2019.

Top 10 Holdings

One name exited the top 10 and was replaced. Chicken wing restaurant concept Wingstop (WING) was a relative underperformer, and cryogenic gas equipment supplier Chart Industries (GTLS) was strong during the month.

Rank Ticker Company       Sector     Weight
1 EHTH eHealth, Inc.     Financials   1.11%
2 SKYW SkyWest Inc.     Industrials   1.11%
3 MMSI Merit Medical Systems, Inc.   Health Care   0.99%
4 GLUU Glu Mobile, Inc.     Information Technology 0.95%
5 TCMD Tactile Systems Technology, Inc. Health Care   0.91%
6 AMED Amedisys Inc.     Health Care   0.88%
7 FOXF Fox Factory Holding Corp.   Consumer Discretionary 0.76%
8 GTLS Chart Industries, Inc.   Industrials   0.71%
9 LHCG LHC Group Inc.     Health Care   0.71%
10 LOCO El Pollo Loco Holdings Inc   Consumer Discretionary 0.70%

Note: Cash (including accrued dividends) represents a 1.27% weight in the portfolio. As of 01.31.2019.


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.