Davis Advisors’ active management exchange traded fund approach is uncovering dominant, growing businesses around the world today that may be overlooked by those unwilling to look beyond the index and think long-term.
In the recent webcast, Finding Long-Term Opportunities in a Short-Term World – A Conversation with Davis PMs Chris Davis & Danton Goei, Chris Davis, Portfolio Manager and Chairman, Davis Advisors, argued that investors should look past the short-term noise and focus on long-term opportunities.
Davis highlighted a growing disparity in the U.S. markets where one segment has been overpriced by hype and momentum. The S&P 500 has increased 4.1% year-to-date, but if an investor were to take out the top 5 contributors, the benchmark index declined 2.9%. The Russell 1000 Growth Index jumped 22% this year, compared to the 12% pullback in the Russell 1000 Value Index.
Consequently, Davis wants to focus on resilient businesses that are out-of-favor, wide-moat businesses with earnings growth and attractive valuations, and select tech leaders.
Investors should also take on a more selective approach to international markets as well. Danton Goei, Portfolio Manager, Davis Advisors, noted that economic conditions vary widely by country across Europe, but the region boasts some premier multinational leaders with strong, long-term global growth prospects, along with dominant financials in Nordic countries. Meanwhile, in the developing economies, we see significant differences across countries, strong economic growth, an expanding middle class, and attractive valuations.
When it comes to investing styles, Davis argued that investors should be considering actively managed strategies, especially in the current market environment, when a more nimble manager may be better suited to navigate quickly changing conditions.
For example, investors have looked to a time-tested active approach to potentially enhance returns and provide greater stability, especially in times of heightened volatility. For example, the actively managed Davis Select U.S. Equity ETF (NasdaqGM: DUSA), Davis Select Financial ETF (NasdaqGM: DFNL), Davis Select International ETF (NasdaqGM: DINT), and Davis Select Worldwide ETF (NasdaqGM: DWLD) are backed by Davis Advisors’ focuses on long-term opportunities and incorporate the money manager’s judgment experience, high conviction, low turnover, accountability, and alignment. The Davis team screens for fundamental characteristics, including cash flows, assets and liabilities, and other criteria.
The management team looks to durability, adaptability, and resiliency of a company for substantial competitive advantages, superior business models, attractive financials, and superior free cash flows. They also select those with proven, capable management with a track record of good decisions, intelligent capital allocators, and alignment of interests. Additionally, the team focuses on discount to real value by calculating owner earnings to arrive at the actual value of a company.
Davis also highlighted the opportunity in the financial segment. Financials are the most attractively priced S&P 500 sector, with a forward price-to-earnings ratio of 14.3, compared to a 27.9 P/E for the technology sector, 37.7 P/E for consumer discretionary, and a 22.6 P/E for the broader S&P 500. Additionally, financials make up a good chunk of S&P 500 earnings but have seen their share of the S&P 500 market cap decline, which Davis argues is an opportunity for investors to capitalize on this disparity between price and value.
The Davis Advisors’ international ETFs also include a heavy tilt toward Chinese companies, which Goei believes also offer long-term growth potential. Chinese companies are among the world’s largest and most competitive, and they make up 124 of the Fortune Global 500 companies. The emerging economy has seen its share of global GDP expand over the years. It still has more room to grow with an urbanization rate of 61.4%, compared to the 82.3% in the U.S., and a service sector of 53.9% of its GDP, compared to 77% in the U.S.
Financial advisors who are interested in learning more about long-term opportunities can watch the webcast here on demand.