The exchange traded fund universe has quickly expanded as money managers craft numerous index-based strategies. While passive ETFs have flourished, the actively managed ETF segment has been conspicuously left depopulated.
However, things are changing as more traditional open-end fund managers step into the ETF business. For instance, David Advisors launched the Davis Select U.S. Equity ETF (NasdaqGM: DUSA), Davis Select Financial ETF (NasdaqGM: DFNL), and Davis Select Worldwide ETF (NasdaqGM: DWLD). DUSA will be managed by Christopher Davis and Danton Goei, a portfolio manager for the Davis Large Cap Value Portfolios and a member of the research team. Davis will also manage DFNL while Goei will manage DWLD.
“Our goal here; we feel what we are offering hasn’t been available in markets today,” Davis said in a conference call. “What we feel has not been available is a combination of real proven active management with the benefit of a traditional ETF.”
There are now 1,979 U.S.-listed exchange traded products with $2.639 trillion in assets under management, according to XTF data. However, there are only 173 actively managed ETFs with $31.1 billion in assets.
Davis’ entry into the ETF space could help bridge the gap and help investors gain active expertise in an efficient ETF wrapper.
“When we look at proven active management, there is long-term opportunity to generate results combined with judgement experience, high conviction, low turnover, accountability and alignment,” Davis said. “We don’t feel in the market there is anything available that combines strengthens of traditional ETFs with proven active management.”
Davis also explained that their fundamental active strategies are very well suited to be adapted into an ETF wrapper. Specifically, Davis explained that they are already a low cost operation with below average expense of current funds, produce low turnover that lends itself into an ETF format, focus on larger more liquid themes, include high conviction investments that are also agnostic and have a culture and history of transparency.
Many active managers may have been loath to craft an active ETF since the transparent nature of the funds would reveal a manager’s secret sauce. However, Davis does not seem to be worried about it.
“The fact ETFs have transparency suits our culture,” Davis said.
The active component may be a good way for investors to target value in the upcoming market after an extended bull market has left pushed valuations up in many segments.
“There will be a time when investors will want active management,” Davis said.
Goei explained how the Davis investment discipline is comprised of three parts: business, management and valuation. They focus on durable businesses with above average margin returns, strong competitive advantages and durability. Companies also have to show strong management that have been in place for over five years as long-term investors can be sure that these are ethical, honest people that will help the business last. Lastly, the management team will determine valuation or what’s the right price of the company, targeting long-term free cash flow of businesses, owner earnings and how durable the cash is available.
“We buy above average businesses at a below average price,” Davis added. “We adapt, use judgement and experience to make sound investment decisions.”
For more information on active strategies, visit our actively managed ETFs.