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SCAP: June 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

As the spring goes on, the days get longer and longer, peaking this month on June 21st, the summer solstice. Normally, that’s a great opportunity to go and enjoy the outdoors for a few more hours a day (or at least leave the office while it’s still daylight). These days, however, it seems to be just providing more time in the day for things to happen to the market!

Warren Buffett said 15 years ago, “It won’t be the economy that will do in investors; it will be the investors themselves. Uncertainty is actually the friend of the buyer of long-term values.” Market volatility has certainly reflected that uncertainty recently. The Russell 2000 has moved by more than 5%, either up or down, during five out of the last seven months. The last time that happened was in 2010, almost a decade ago, in the still-uncertain period coming out of the global financial crisis. Not only is this shift in volatility historically large, it is a stunning divergence from the market environment preceding it. Until trade war and rate hike fears hit the market in November, there were only four months out of the last 30 with such a move. The last time similar volatility happened was in 2015, when there were actual questions over economic growth in the United States as commodity prices collapsed, industrial growth turned negative, and GDP decelerated. On the other hand, the Department of Labor just announced a big June beat for non-farm payrolls, commodity prices are off their May lows, and the “Blue chip consensus” U.S. GDP estimate for Q2 is holding steady. On a total return basis, small caps are now up 17.0% year-to-date, and are only down 3.3% for the last twelve months.

Extending the sine curve-shaped returns of the last seven months, the Russell 2000 Index was up 7.1% in June after falling 8% in May, and is now out of correction territory from the last peak in September. While this month, small and large cap stocks were generally in line, large caps have continued to be stronger than small caps over the last year. For the month, the Russell 2000 beat the Russell 1000 index by 5 basis points, but remains behind large caps by over 1,335 basis points over the last year. On a style basis, growth also continued to drive positive performance, with the Russell 2000 Growth outperforming the Russell 2000 Value by approximately 135 basis points in June, and 690 basis points YTD. At the sector level, all sectors were up for the month behind strong performance out of Materials (+14.6%) and Industrials (+10.0%) as rhetoric around the Chinese trade war settled down in advance of the G20 meeting, and Health Care (+9.7%). On the other hand, safety sectors (Real Estate +2.6%, Utilities and Consumer Staples +4-5%), and Communications Services (+0.3%) were relative underperformers.

With less fear related to the trade war with China, which has penalized small cap stocks since the end of last year, small cap valuations increased during the month, with the Russell 2000 rising from to 12.0x to 12.6x LTM EV/EBITDA. While valuations are up from 11.0x at the end of the year, they are in line with their five year median of 12.6x, and a turn below highs we saw last year. Valuations relative to large caps have returned to below parity, a rare occasion. It’s unclear whether small cap valuations will rise to historical premia or large caps need to fall, but given the historical growth performance of small cap stocks, it seems this is unlikely to persist forever, given the long-term median premium is over 14%. Small cap buybacks have flattened out, but remain at high levels versus the past, and leverage continues to remain (almost 3.3x Net Debt/EBITDA) at post-recession highs.

Earnings growth continues to decelerate with the year-over-year EBITDA growth of Russell 2000 constituents moving to 3% from 4% last month and 9% in March, as both revenue growth and margin contraction expectations fell. The large to small margin spread continues to widen to high levels (currently, large cap EBITDA margins average ~19% versus ~10% for small caps) as high-margin technology companies continue to grow. Since the recession, large cap margins have improved significantly, while small cap margins have remained stagnant. A key driver of outperformance for individual small cap stocks is likely to be the ability to separate themselves, fundamentally, from these broader trends.

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. We have a long-term view on both small caps in general, and our approach to the market more specifically. As such, we remain confident in the long-term sustainability of our strategy and philosophy. 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 June, the NAV of the AdvisorShares Cornerstone Small Cap ETF was up 7.1%, in line with the Russell 2000 Index, which was up 7.1%. The AdvisorShares Cornerstone Small Cap ETF returned 6.4% during the month, underperforming the iShares Russell 2000 Index ETF (+7.0%). Since the ETF began trading just under three years ago (7/7/2016), the AdvisorShares Cornerstone Small Cap ETF has returned 13.9% on an annualized basis, outperforming the iShares Russell 2000 Index ETF increase of 12.3% by over 1.5% a year net of fees.

Monthly Performance By Sector

Past performance is not indicative of future results. Source: Factset; as of 06.30.2019.

Contributors and Detractors

Consumer Discretionary, Information Technology, and Real Estate were the best-performing sectors versus the benchmark during the month. At a component level, the largest positive contributors to performance included our underweight position to Real Estate and Utilities, and our stock selection in Consumer Discretionary and Information Technology. Fox Factory (FOXF), Boot Barn Holdings (BOOT), and Stitch Fix (SFIX) were three of the largest individual contributors.

  • Fox Factory (Consumer Discretionary) is a provider of components for bicycles and performance vehicles. While the company did not have any particularly important news announcements during the quarter, investor confidence increased as Fox reaffirmed its long-term growth plan, suggested strong growth in both its power vehicle and specialty sports businesses, and stated that tariff headwinds are so far relatively insignificant.
  • Boot Barn (Consumer Discretionary) is a retailer of western wear and work clothing and shoes. Investors were increasingly supportive of the company during the month, as it reported that comps have “remained strong,” suggesting they have being up 7.5% through the first half of their last quarter.
  • Stitch Fix (Consumer Discretionary) is an online retailer of curated clothing shipments. The company announced strong quarterly results and raised guidance for both revenue and profit. The company continues to deliver accelerating revenue per active client, higher retention rates, and an increasing active client base.

Performance in the portfolio was offset by the Health Care, Industrials, and Materials sectors. At a component level, the largest negative contributors to performance included our stock selection in Health Care, Industrials, and Materials. Glu Mobile (GLUU), Hibbett Sports (HIBB), and Montage Resources (MR) were three of the largest individual detractors.

  • Glu Mobile (Communication Services) is a developer of mobile video games. The company was a weak performer last month on concerns related to higher user acquisition costs and lower ad revenue from changes to Apple’s app store rules, and continued to underperform the market this month.
  • Hibbett Sports (Consumer Discretionary) is a retailer of sporting goods. The company announced fundamentally strong first quarter results at the end of May, but the stock was weak during June after two FP&A missteps, including updating incorrect data in its press release and disclosing it would delay the filing of its most recent 10-Q while it finalizes the implementation of recent lease accounting changes.
  • Montage Resources (Energy) is an oil and gas exploration and production company focused on the Utica and Marcellus shale regions. While oil prices increased during the month, natural gas prices were weaker, and companies with exposure to gassier regions like Appalachia underperformed those from oilier areas such as Texas’ Permian basin.

Portfolio Changes

We did not initiate or exit any positions in the portfolio during the month.

Top Holdings

One name changed within the top 10. Endava (DAVA) outperformed call center SaaS business Five9 and joined the top 10 securities in the portfolio. The top 10 holdings continue to represent 8.4% of the portfolio.

Ticker Security Description Sector Portfolio Weight %
SKYW SKYWEST INC Industrials 1.28%
FOXF FOX FACTORY HOLDING CORP Consumer Discretionary 1.03%
LHCG LHC GROUP INC Health Care 0.78%
GLUU GLU MOBILE INC Communication Services 0.68%
DAVA ENDAVA PLC- SPON ADR Information Technology 0.68%

Note: Cash (including accrued dividends) represents a 0.71% weight in the portfolio. As of 06.30.2019.

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 June, our largest exposures compared to the benchmark remain the Information Technology and Energy sectors, and the Financials and Real Estate sectors the largest underweights.

Source: Factset. Weights as of 06.30.2019. Excludes cash and unassigned.

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.