Selectivity is critical to uncover long-term investment opportunities. Tested ETF strategies backed by active management can focus on conducting bottom-up, fundamental research to uncover businesses with superior growth and attractive valuations.
On the recent webcast, Where are Today’s Opportunities? Using Active ETFs to Find Superior Growth at Low Valuations, Chris Davis, Portfolio Manager and Chairman, Davis Advisors, touched upon the growing pessimism in an extended bull run, but he also warned that investors shouldn’t rely too heavily on short-term forecasts since most get it wrong. For example, looking at Wall Street Journal surveys of economists from 1982 through 2019, the six-month average forecasted direction versus the actual direction of interest rates was incorrect 64% of the time. Davis advised investors to look beyond “click-bait” headlines that have ruled the recent news cycle.
Market ebbs and flows are part of a natural, inevitable cycle. Specifically, Davis pointed out that from 1928 through 2019, -5% market corrections occurred about three times per year, a -10% correction materialized about once per year, and a -20% correction took place about every three-and-a-half years.
As investors weigh the current environment, Davis highlighted various opportunities in the global markets. For instance, in the U.S., there are resilient businesses that are out of favor and wide-moat businesses with attractive earnings growth and valuations. When looking into the international markets, he argued that selectivity is key. Investors may find dominant financials in Nordic Countries, along with premier multinational leaders with strong, long-term growth prospects. Additionally, the developing markets show rapidly growing, attractively priced consumer services businesses.
A Need To Be Selective
A key takeaway is a current need to be selective in the current market environment. For the U.S. markets, Davis underscored the risks associated with what we would perceive as safe areas. Less risky sectors like utilities and consumer staples have been outperforming, which have caused valuations to grow pricier.
When it comes to investing styles, Davis argued that investors should be considering actively managed strategies, especially in an aging bull market when a more nimble manager may be better suited to navigate quickly changing conditions. Actively managed strategies have historically outperformed during a more variable market condition, whereas passive products outperform in very strongly trending markets. Additionally, active managers have exhibited a strong track record for international stock picking, with 92% of large-cap international stock fund managers outperforming the benchmark MSCI ACWI ex-US Index over the past 10 years.
Active managers are able to exploit market inefficiencies through time arbitrage; intangibles such as management, capital allocation or competitive moats; sector inefficiencies, accounting arbitrage; business bias versus profession; and geographic inefficiencies, like knowledge of foreign markets.
Davis highlighted the opportunities in international markets and argued that “non-U.S. stocks may outperform in the decade ahead.” The international markets are also more attractively priced with the MSCI ACWI ex-US Index trading at 13.4x forward price-to-earnings, compared to the 18.3x for the S&P 500.
Investors may look to a time-tested active approach to potentially enhance returns. For example, the actively managed 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.
Davis also singled out the financial sector as a potential value play, with the segment exhibiting the lowest price-to-earnings of any other S&P 500 sector at 11.7x. “In our opinion, many financials today have the following attributes: strong balance sheets, attractive ROEs, and record net income, durability of business model, stabilizing and improving regulatory environment, rising dividends with low payout ratios, steady decline in shares outstanding and attractive valuations,” he added.
Investors can look to the targeted Davis Select Financial ETF (NasdaqGM: DFNL) to focus on the best opportunities in the financial sector.
Financial advisors who are interested in learning more about long-term investment opportunities can watch the webcast here on demand.