As investors consider the current investment landscape and related investing risks, many are looking to long-term exchange traded fund opportunities.
In the recent webcast, Navigating Today’s Uncertain Market: Opportunities, Risks & Keeping Emotions in Check, Chris Davis, Portfolio Manager and Chairman, Davis Advisors, outlined the current short-term uncertainties against long-term probabilities. Many have pointed to potential shot-term outcomes, but Wall Street strategists’ average predictions have historically not reflected actual market returns. Consequently, Davis warned that short-term forecasts have no predictive value.
However, over time, market watchers have come to see some long-term trends. For example, Davis argued that while market pullbacks are painful, they are also inevitable and will eventually pass. Looking at historical data since 1929, the S&P 500 annual peak to trough pullbacks reveal that in 23% of the years, the benchmark has experienced drawdowns of at least 20% and it suffered through average drawdowns of -15%. On the other hand, 72% of the years have been positive and 57% of the years have shown returns over greater than 10%.
When looking ahead, Davis underscored three timeless insights for investors: investors should maintain long-term focus, we should keep emotions in check and equities have built wealth despite crisis. Every decade has encountered a significant crises, but markets have always bounced back, pushed higher and helped investors build wealth.
In the current market environment, Davis highlighted the ongoing short-term uncertainty, an unknown shape of recovery and long-term risks of increased government debt. Davis Advisors, though, maintains a conviction that the economy will reopen, infection rates should fall, a vaccine could eventually be available, governments should be better prepared for future pandemic events, no significant long-term impact on many businesses and the opportunity to buy at bargain prices is both rare and valuable.
As we look for opportunities, Davis highlighted attractive attributes that help companies stand out. For example, quality companies include those that are show durability, adaptability and resilience, with proven and capable management teams. Additionally, they should be selling at attractive discounts to true value. On the other hand, Davis warned that investors should avoid industries with high fixed costs, plummeting revenue and high debt levels, like those in the travel and leisure industries.
The current environment favors some companies, and their share prices have bucked the negative trends. For example, consumer staples, e-commerce, communication services and video gaming have broken from the rest of the weaker pack.
Davis Advisors 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.
Those who are interested in Davis Advisor’s approach could turn to 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). The ETFs have generated attractive growth with a long-term outlook and trade at lower multiples or are more attractively priced relative to broader benchmarks.
Through their selection process, Davis Advisors have singled out some of the best opportunities in the various segments of the market. For instance, DWLD’s top components include many up-and-coming international names, including New Oriental Education & Technology, Alphabet, Alibab, Amazon.com, JD.com and Berkshire Hathaway. Davis Advisor’s more focused approach and smaller portfolio relative to benchmarks also highlights their greater conviction picks, which have a larger weight within the ETFs.
Financial advisors who are interested in learning more about active strategies for today’s markets can watch the webcast here on demand.