Exchange traded fund investors seeking to diversify should consider the case for actively managed investments in China.
In the recent webcast, Unpacking Global Markets: Getting Beyond Beta – A Conversation with Davis PM Danton Goei, Danton Goei, Portfolio Manager, Davis Advisors, argued that standard global benchmarks like the MSCI All Country World Index are overly diversified with weightings that are not conviction-based. Specifically, the MSCI ACWI includes 2,962 holdings from 77 countries with an average individual position size of 0.03%. Yet is important to note that the United States makes up 57.1% of the MSCI ACWI, so investors will potentially miss out overseas.
When considering long-term performance, Goei argued that four factors have historically helped support gains, including a conviction-weighted portfolio that is different from an index; being highly selective at the country, sector, and company level; rigorous, time-tested investment discipline; and investments alongside shareholders.
For example, the actively managed Davis Select Worldwide ETF (NasdaqGM: DWLD) and Davis Select International ETF (NasdaqGM: DINT) focus on long-term opportunities and incorporate the money managers’ judgment experience, high conviction, low turnover, accountability, and alignment.
The Davis Select Worldwide ETF is comprised of 34 high-conviction global companies across 13 countries with an average position size of 2.90%. Additionally, the Davis Select International ETF includes 26 selective picks across 17 countries with an average position size of 3.20%. The Davis Advisors’ methodology is overweight China and underweight European countries.
Goei specifically highlighted opportunity within China. China’s GDP has skyrocketed to $14.3 trillion as of 2019 as the country shifts toward a more consumer-centric economic model. The portfolio manager noted that the upper middle-income class could make up 54% of urban households by 2022, compared to just 14% back in 2012.
China is also home to many of the world’s fastest growing companies. There were 29 Global Fortune 500 Companies in China back in 2007, but there are now 124. In comparison, the number of U.S. Global Fortune 500 Companies dropped from 153 to 121 over the same period.
Goei argued that the Chinese services sector has more room to run. China’s services sector only makes up 54% of its economy. In comparison, the sector makes up 69% of Japan’s economy, 70% of France’s economy, and 77% of the economy in the United States.
Meanwhile, China is growing less reliant on trade. China’s net exports have declined from 8.7% of GDP in 2007 to 1.2% in 2019.
While there are opportunities in China, Goei also believes that selectivity is key. He highlights players in the fields of e-commerce, online education, social media, gaming, software, leading industrials, and select financials.
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 a track record of good decisions, intelligent capital allocators, and alignment of interests. Lastly, the team focuses on discount to real value by calculating owner earnings to arrive at the actual value of a company.
Financial advisors who are interested in learning more about international market can watch the webcast here on demand.