Traditional active money managers have turned to ETFs as a way to expand their businesses and provide their time-tested strategies through the cheap and efficient investment tool that has rocked the financial industry.
“Clients asked for our strategies that have been around now for 50 years in an ETF format,” Dodd Kittsley, National Director, Davis Advisors, said at the 2019 Schwab IMPACT conference. “Many advisors have transitioned their book of business over to be more ETF focused for those that really wanted to reserve a place in their portfolio for active. So, we did it really to provide choice for folks that saw some of the great benefits ETFs offer relative to mutual funds.”
For example, the actively managed Davis Select U.S. Equity ETF (DUSA), Davis Select Financial ETF (DFNL), Davis Select International ETF (DINT) and Davis Select Worldwide ETF (DWLD) are backed by Davis Advisors’ focuses on long-term opportunities and incorporate the money manager’s judgement experience, high conviction, low turnover, accountability and alignment. The Davis team screens for fundamental characteristics, including cash flows assets and liabilities, and other criteria.
The management team looks to durability, adaptability and resiliency of a company for strong 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 true value by calculating owner earnings to arrive at the true value of a company.
Davis Advisors’ management style largely targets durable businesses with above average margin returns, strong competitive advantages and durability. Companies also have to show strong management that have been in place for over five years as long-term investors can be sure that these are ethical, honest people that will help the business last. The management team will determine valuation or what’s the right price of the company, targeting long-term free cash flow of businesses, owner earnings and how durable the cash is available.
Active managers are also 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.
Watch the interview between ETF Database Co-CEO Tom Lydon and Dodd Kittsley:
For more ETF-related commentary from Tom Lydon and other industry experts, visit our video category on ETF Trends.