On the recent webcast (available on demand for CE Credit), How to Avoid Emotional Investing, Christopher Davis, Chairman and Portfolio Manager of Davis Advisors, argued that advisors can add tremendous value to help investors build their wealth as many follow a strict strategy that helps keep emotions in check. For instance, Davis pointed out that in the two decade period ended 2015, the average stock fund that kept emotions in check and followed a disciplined strategy generated a 3 percentage difference of outperformance or alpha when compared to the average stock investor whom traded on emotions.
Contrary to popular belief, the short-term direction of the market and economy is unknowable. It is up to an investor to have a plan in place to address these sudden changes and limit any downside effects.
Davis pointed out that market pullbacks are inevitable. Over the close to 90 year period ended 2016, the markets experienced a 5% dip every three months, a 10% decline every 8 months and a 20% plunge every two-and-a-half years. The percent of years with a double-digit drawdown was 57% over the past 35 years.
As investors look for strategies to help limit these short-term drowdowns, Davis also suggested that investors should be constantly looking for the right investment. Investors may even have to hire and fire a manager based on near-term results as no single actively managed fund will continuously outperform. Over the past five years, among the percentage of the decade’s top-quartile large-cap funds, 83% of funds fell into the bottom half.
When seeking a diversified investment, investors may even be taking on more risk than they intend. Davis pointed out that so-called dividend darlings carry more risk than many may expect. For instance, the average price-to-earnings ratio of the 25 most commonly held dividend paying stocks trades at 25x, compared to the S&P 500’s P/E of 21x. With more investors looking at yield-paying stocks to bolster an income portfolio, some may find they are sitting on pricey valuations.
Many investors have shifted into passive index-based strategies and dumped actively managed funds over the years, but Davis warned that active and passive investments have historically moved in cycles. In an extended bull market environment, active managers that have more flexibility may be better positioned to outperform a benchmark ahead.
If investors are looking for an alpha-generating active manager, Davis suggested that people look for quantifiable characteristics of a successful manager, such as low fees, different from an index, low turnover, long-term orientation, proper incentives, strong alignment of interest, experienced management team and a proven record.
For example, Davis Advisors manages benchmark agnostic, high conviction, low turnover portfolios. They have over $2 billion invested alongside shareholders in the portfolios they manage, ensuring a strong alignment of interests. Instead of making capricious trades based on instincts, the fund manager has implemented a disciplined strategy to successfully access various markets.
Now, ETF investors can also gain exposure to Davis’ proven research and investment styles through the Davis Select U.S. Equity ETF (NasdaqGM: DUSA), Davis Select Financial ETF (NasdaqGM: DFNL), and Davis Select Worldwide ETF (NasdaqGM: DWLD). DUSA is 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 also manages DFNL while Goei manages DWLD.
Financial advisors who are interested in learning more about better investment practices can watch the webcast here on demand.