SCAP The AdvisorShares Cornerstone Small Cap ETF 1
Table of Contents About Cornerstone Investment Partners...3 Investment Strategy Overview...4 Investment Process Overview....5 Small Cap Historical Performance...6 Drivers for Security Selection...7-8 Portfolio Construction...9 Reconstitution & Risk Mngmt......10 The Case for SCAP...11 How SCAP Fits Within a Portfolio...12 Strategy Summary...13 Benefits of the Active ETF Structure...14 About AdvisorShares...15 Contact Us...16 Disclosure...17 2
About Cornerstone Investment Partners Cornerstone Investment Partners is an independent asset manager headquartered in Atlanta, GA that specializes in managing equity investment strategies for both institutional and individual investors with approximately $2.7 billion in assets under advisement.* Cornerstone s investment team shares almost 125 years of investment analysis and portfolio management experience, which they bring to SCAP. Cornerstone delivers uncommon portfolio management team continuity. They have worked together adhering to the same investment philosophy, exercising the same approach to security selection and employing the same discipline throughout their careers together. At its core, Cornerstone focuses on buying high quality companies at attractive prices while exercising the patience necessary to unlock value. *As of 3/31/2018 3 Next slide: Investment Strategy Overview
Investment Strategy Overview SCAP is a diversified, small-cap equity strategy that seeks to provide total return through long-term capital appreciation and current income, using a rules-based approach that focuses on investing in companies with fundamental characteristics that are underappreciated by the market. The strategy is selective and disciplined, which follows Cornerstone s belief that the market can both often misprice fundamental improvements as well as be slow to recognize improving fundamentals, particularly among small cap equities. SCAP delivers an alpha-seeking strategy that aims to identify companies that are demonstrating fundamental improvement, have a history of achieving expected results and maintain robust balance sheets and cash flows. Through diversification, the strategy seeks to minimize individual, stock-specific risks but also avoid unattractive small cap offerings that can be problematic for index-based ETFs. SCAP became the first actively managed ETF to successfully convert its prior track record from another investment structure. While SCAP began trading as an actively managed ETF in July 2016, the strategy s actual performance history begins in 2012. 4 Next slide: Investment Process Overview
Investment Process Overview Invests primarily in U.S. exchange-listed securities including common and preferred stock, ADRs, and publicly-traded REITs. Utilizes a disciplined process that begins with an investable universe constructed by Cornerstone s investment team of approximately 1,800 securities designed to mimic the market capitalization range of the largest 90% of the Russell 2000 index. Seeks to identify companies with favorable characteristics that include improving underlying fundamentals, balance sheet strength, and financial flexibility. The portfolio is diversified, typically comprising the most compelling 240 small-cap equities within its investible universe. The portfolio is reconstituted each quarter, which ensures SCAP responds to changes in market conditions and targets the most attractive securities, while limiting annual turnover. 5 Next slide: Small Cap Historical Performance
Small-Cap Historical Performance Growth of $1 Investment (Log Scale) $100,000 $10,000 Small-Cap Large-Cap $1,000 $100 $10 $1 Annualized Returns July 1, 1926 December 31, 2017 Small-Cap: 12.0% Large-Cap: 9.8% Difference: 2.1% $0 1926 1933 1940 1947 1954 1961 1968 1975 1982 1989 1996 2003 2010 2017 Source: Cornerstone Investment Partners, Fama-French. Small-Cap represents the bottom 30% of US equity securities by market capitalization and Large-Cap represents the top 30% of US equity securities by market capitalization out of the universe of NYSE, AMEX and NASDAQ listed securities. 6 Next slide: Drivers for Security Selection
Drivers for Security Selection Improving relative momentum in recent earnings estimates Financial flexibility Positive earnings surprises Tangible book value 7 Next slide: Drivers for Security Selection
Drivers for Security Selection The following represents an example of favorable characteristics that Cornerstone seeks in a holding candidate for the SCAP portfolio. Earnings Per Share Estimates Increasing Cash Flow Greater Than Costs Positive Tangible Net Worth 8 Source: Cornerstone Investment Partners Next slide: Portfolio Construction
Portfolio Construction Investment universe of ~1,800 U.S. exchange-listed equities constructed by portfolio management team designed to mimic the capitalization range of the Russell 2000 Index Cornerstone s Rules-Based Screening Process Portfolio Holdings (typically ~240 securities) 9 Next slide: Portfolio Reconstituting & Risk Management
Portfolio Reconstituting & Risk Management Every quarter 60 securities are replaced based on relative attractiveness New positions begin with a modified equal weighting Sectors are constrained at the index weight plus or minus 15% Existing positions capped at 5% Diversified portfolio of ~240 small-cap equities seeks to mitigate idiosyncratic risks associated with individual securities 10 Next slide: The Case for SCAP
The Case for SCAP Small-cap equities have demonstrated an established history of outperforming large-cap equities. Rules-based, alpha-seeking strategy seeks companies that are demonstrating improving fundamentals, strong execution, and a robust balance sheet and cash flows. Disciplined approach designed to avoid behavioral mistakes as the market can often misprice small-caps and be slow to recognize improving fundamentals. A selective, diversified portfolio that seeks to avoid unattractive offerings that can be problematic for index-based ETFs. 11 Next slide: How SCAP Fits Within a Portfolio
How SCAP Fits Within a Portfolio SCAP can serve as a core allocation of small-cap equities and as an alternative to an index-based small-cap allocation. SCAP provides a selective, diversified investment strategy that seeks to deliver alpha against its Russell 2000 Index benchmark. SCAP 12 Next slide: Strategy Summary
Strategy Summary - SCAP SCAP is a diversified, small-cap equity strategy that seeks to provide total return through long-term capital appreciation and current income. Seeks to amplify small-cap investment opportunities through a disciplined, rules-based approach designed to identify companies with favorable characteristics that include improving underlying fundamentals, balance sheet strength, and financial flexibility. Selective, alpha-seeking strategy seeking attractive risk-adjusted returns relative to its core benchmark, designed to mitigate the risks associated with individual small-cap names, and avoids buying unattractive small-cap names that index-based ETFs cannot. SCAP s investment strategy run by a deeply experienced institutional investment manager carries an established performance history that precedes the ETF s inception date. 13 Next slide: Benefits of the Active ETF Structure
Benefits of the Active ETF Structure Full Transparency Investors can view all the underlying holdings of this active ETF on a daily basis. Intraday Liquidity This active ETF can be bought and sold like a stock during the market trading day. Also, volume does not equal liquidity. This ETF s liquidity is driven by the constituents of its underlying portfolio. Operational & Tax Efficiency Unlike mutual funds where investors are responsible for taxes on capital gains, the active ETF structure provides the potential to not pay any taxable capital gain distributions. 14 Next slide: About AdvisorShares
About AdvisorShares AdvisorShares is a leading provider of actively managed exchange-traded funds (ETFs) with approximately $1.1 billion in assets under management. nvestors can view all the underlying holdings of this active ETF on a daily basis. AdvisorShares became among the first firms to bring actively managed ETFs to market, delivering numerous industry firsts, and remains a leading and innovative provider in the rapidly expanding actively managed ETF space. Our diversified suite of investment strategies features accomplished investment managers making active decisions, similar to traditional mutual funds, except our fund portfolios are delivered in a fully-transparent ETF structure. 15 Next slide: Contact Us
Contact Us AdvisorShares 4800 Montgomery Lane Suite 150 Bethesda, MD 20814 You May Reach an AdvisorShares Investment Consultant by Calling: 1-877-843-3831 Follow AdvisorShares on Twitter Like' Us on Facebook Get active ETF insights at AlphaBaskets.com 16 Next slide: Disclosure
Disclosure 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. Investing in small capitalization companies may be riskier and more volatile than large cap companies. Security prices of small-cap companies are generally more vulnerable than those of large-cap companies to adverse business and economic developments. Other Fund risks include market risk, equity risk, large cap risk, liquidity risk and trading risk. Please see prospectus for details regarding risk. 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 CALLING 1.877.843.3831. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE YOU INVEST. Distributor: Foreside Fund Services, LLC 17