It’s a new day for the value investing factor following today’s debut of the Acquirers Fund (ZIG) on NYSE Arca.
ZIG is a deep value ETF that will hold long positions in deeply undervalued, fundamentally strong targets for activists and buyout firms, and short positions in overvalued, financially weak companies.
Tobias Carlisle is the founder of Acquirers Funds, the firm behind this new ETF, and author of the best-selling books The Acquirer’s Multiple, Deep Value, and Quantitative Value, which set out the philosophy underpinning the fund.
“In 2019, after one of the most prolonged growth rallies ever, value spreads are widest since the run-up to the Great Depression and the Dot Com bubble,” Carlisle said. “Historically, the base rate for investing in value after it has disappointed and spreads are wide has been extremely attractive. As a concentrated, 130/30 long/short deep-value fund, ZIG is designed to maximally exploit this rare opportunity.”
Carlisle added previous attempts to bring a long/short value strategy to the broad investment marketplace have had a number of key shortcomings.
He said this included high fees, which in some cases were in excess of three percent; were mere value “factor” funds, which have seen the outperformance arbitraged away; were too broadly diversified to deliver outperformance; or included what we feel are useless metrics like profitability for marketing purposes, resulting in diluted portfolios that couldn’t capture deep value opportunities.
“We begin our investment process with the ‘acquirer’s multiple,’ the measure financial acquirers such as activists and buyout firms use to find potential targets,” he said. “We take a holistic approach to valuation, examining assets, earnings, and cash flows, to understand the economic reality of each company. An important part of this process is a forensic-accounting diligence of the financial statements, particularly the notes and management’s discussion and analysis, to find information that may impact investment decisions. We find most of our short positions revealed here. That type of thinking and research is what we’ve looked to build into ZIG, so investors of all types and sizes can now add the same approach to their portfolios via a liquid, low-cost ETF.”
ZIG is a 130/30 long/short deep-value strategy that is designed to track, before fees and expenses, the performance of The Acquirer’s Index. For both long and short positions, a stock must be listed in the U.S. and have a market cap in the largest 25 percent of all companies by market cap. From that universe of equities, ZIG’s rules-based index will hold the 30 most deeply undervalued, fundamentally strong stocks in the “long” portion of its portfolio, while its short portfolio will consist of the 30 stocks deemed to be most overvalued, and fundamentally weak.
“There is no shortage of value-factor ETFs available today, but value-as-a-factor and value-as-a philosophy are two very different things,” said Carlisle. “Any company with a seemingly depressed stock price can make it through many value screens, but truly undervalued stocks are much more than ‘cheap’; they also have strong, liquid balance sheets, and a robust business capable of generating free cash flows, and more. Looking at the fund landscape of the past several years, it’s no surprise that many investors may have been disappointed in their ‘value’ investments, but with ZIG, they now have the opportunity to augment that part of their respective portfolios with a true deep value approach that’s designed to uncover real opportunities, not just low-priced stocks.”
ZIG trades on the NYSE Arca with an expense ratio of 0.94 percent. That expense ratio is well below the Morningstar category average for alternative, long/short equity of 2.17 percent and far below the average “1.6 and 19” fee model charged by alternative, long/short equity managers.
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