## [# Today’s Markets Are Setting Up for Active Manager Success](/sections/conferences/todays-markets-are-setting-active-manager-success) # Today’s Markets Are Setting Up for Active Manager Success Chris Davis of Davis ETFs shares how historically sideways and contracting markets have benefited active managers and why today’s markets appear to be setting up once more for active manager potential outperformance. [![ETF.com](/sites/default/files/styles/author_image_icon/public/2023-12/etf.com_400x400.png?itok=LO34LQE1)](/contributors/etfcom-staff) [By ETF.com Staff](/contributors/etfcom-staff) Apr 27, 2026 Edited by: ETF.com Staff [ + Follow ](/etf/login) Share Email LinkedIn Facebook X (Twitter) googletag.cmd.push(function() { googletag.display('js-dfp-tag-article_page_302x26'); }); Loading let duration = 0, percent = '0', new_percent = ''; jwplayer("etfVideo").setup({ playlist: "https://cdn.jwplayer.com/v2/media/RbfZ05l6", aspectratio: "16:9", autostart: "viewable", ga: {} }); jwplayer().on('time', function(e) { duration = e.duration if (e.position >= duration * 0.25){ percent = '25'; } if (e.position >= duration * 0.50){ percent = '50'; } if (e.position >= duration * 0.75){ percent = '75'; } if (e.position == duration){ percent = '100'; } if (new_percent != percent){ // GTM Datalayer - Video Event dataLayer.push({ 'event': 'video', 'video_id': 'RbfZ05l6', 'video_percent': percent, 'video_url': 'http://www.etf.com/markdownify/node/136624' }); new_percent = percent; } }); Sumit Roy, Senior ETF Analyst at ETF.com, caught up with Chris Davis, Portfolio Manager at Davis ETFs, at Future Proof Citywide to talk the macro environment, equity concentration, active management, and the[ **Davis Select U.S. Equity ETF (DUSA)**](https://www.etf.com/DUSA). The following is a transcript of their conversation. ## Determining What Companies to Invest in **Roy:** Chris, great to see you. How are you doing? **Davis:** I'm doing great. I'm glad to be here. **Roy:** So I want to talk about your ETF, Chris. But I want to set the context a little bit. Over the past ten, 15 years, as everyone watching knows, the S&P 500 and other large cap indexes have done phenomenally. Why should investors consider an active large cap ETF like the one you manage when the S&P has done so well? **Davis:** Well, the answer is in your question, right? It's because it's done so well, right? So what we have is we have an index trading at 26 times earnings. Super concentrated at a time when we have technology disruption through AI and economic disruption through geopolitics. So this is a time, just like it was in the at the end of the late ‘90s — long bull market, concentrated, expensive index. That's when active management shines. We launched our ETF almost ten years ago. Outperformed the value indexes every period. It was the number one large cap value ETF, active or passive, for the last three years. So we feel like the world is moving the right way. But really people are getting in a lot of trouble investing looking backwards. They got to look at—what's going to work the next ten years is not going to be what worked in this last ten. **Roy:** Makes a lot of sense. Now you invest in so-called best of breed companies. Can you tell us a little bit about what it means to be a best of breed company? **Davis:** Well, it's a very hard thing to define because really we're looking for a confluence of the business, the people and the price. And what I mean by that is we want businesses that are durable. That is really an important word. We want businesses that are adaptable. We want businesses that are resilient, and we want businesses that are profitable and growing over time. So we're trying to manage not just thinking about how much we can make, but also how much can we lose. People: We think about the people running the business because at a time of disruption and change. You have this innovator's dilemma where the companies that are afraid to move, the CEOs that want to fight last year's battles, they end up like Kodak or the local newspaper companies in the time of the internet. There are a lot of walking dead companies out there. And then the price valuation discipline matters. There are a lot of great companies in that Mag 7 but when you start with required growth rates that go out decades, high margins that assume no competition, you're taking a lot of risk even buying a great business at a crazy price, because a great business can become a really mediocre investment. I think investors are starting to see that these days. googletag.cmd.push(function() { googletag.display('js-dfp-tag-in_article_unit'); }); ## AI and Equity Concentration **Roy:** And you mentioned the Mag 7, obviously, they have powered the indexes higher over the past decade, decade and a half. What are your thoughts on Big Tech and AI? Some people think AI is in a bubble. Others think we're just getting started. What's your take? **Davis:** Well, AI is a powerful new technology is going to change everything. Anybody that is not looking at their investments through a lens of AI is making a mistake. However, everybody is focused on, I want to pick the big AI emerging new winners, right? Now let's go back to a time when we had a big technological transformation. Let's think about the railroads. Let's think about the internet. Let's think about broadband. It ended up that the people that were the built the networks didn't get the value, right? The value went to the users. But it also is because people are trying to identify emerging new winners when the technology and the business models are still being bought. This is very much like, we can all name the three biggest, most surefire winners of the internet; Cisco, Yahoo and AOL. There were the largest, best positioned, unquestioned winners. They're shadows of themselves. So at a time that the technology is emerging and everybody's excited about AI, you have to remember Amara's Law and Amara’s Law says innovative new technologies tend to be overestimated in the short term and underestimated in the long term. We are in the overestimated period. That's when there's lots of risk. But boy, do you want to be ready. You want to have a price discipline, you want to be ready to pounce. **Roy:** And what does the portfolio look like today? S&P 500 obviously concentrated in Nvidia, Google, Meta, things like that. What's the portfolio for DUSA look like? **Davis:** Well if you think about let's just think of it as if it was a single company. So think of our portfolio as a single company. Think of the Russell 1000 Value as if it was a single company, and the S&P as if it was a single company. So we'll start with the S&P 500, trading at 26 times earnings, 500 companies very concentrated at the top with the highest valuation companies. So 26 times earnings. The middle portfolio, the Russell 1000 Value, 20 times earnings, 1,000 companies and something like that. Our portfolio is 25 to 30 companies, 14 times earnings. So we call that a value investor stream. You're getting quality durable growth, but you're getting it at this huge discount to the market: 14 times earnings versus 20 versus 26. So that's how we think of our portfolio position in this environment. ## A Time for Active Management to Shine **Roy:** Gotcha. Now we're recording this in March, and there's a lot of stuff going on in the geopolitical scene — oil prices spiking. How are we thinking about risks in the current environment? We haven't seen a significant sell off in the markets for quite a while. **Davis:** Well, you'd expect a 20% correction every three or three and a half years, right? And whenever it happens, people act like it's never happened before. And you never know in advance what the trigger will be. Nothing really changed in March of 2000. You just had this sort of sudden... it's like the emperor had no clothes. People just all of a sudden changed the belief system. And then you had 9/11, right? So you had this one two punch. That's very much what we could see happening today. We have... now, if you knew that was going to happen in 1999 and you said, "I'm going to go to the sidelines because the Nasdaq is going to go down 50%. The market's going to be down for the next five years. I'm going to wait on the side." You missed one of the great periods to be invested with active managers with a value discipline. So over the next five years we compounded shareholder wealth and the market went nowhere. The same was true in ’72, the market hit a high, was still at the same level 1981. It really hit the high intraday in '66. So it really was a sideways market for 15-18 years. Boy did active managers do great. They had a value discipline. They were willing to differentiate from the index. So I think we're setting up for that kind of environment, we're long overdue correction. We had one — CNBC will run a special saying, “Market in turmoil." Do you know every time they've interrupted their regular programing to do a Market in Turmoil special, every single time the market return in the next year was positive, and I think the average was like 30 or 40%. Like very high. So we're overdue for a correction, absolutely. Does that mean hiding in cash is a good idea? Absolutely not. I think that's why looking at that' 99 period, that the value that was added by value discipline, active management, that's where I see us setting up. **Roy:** Fantastic. Well, a ton of great food for thought. Chris. It's been an absolute pleasure. **Davis:** Thank you so much. I was really glad to be here. [ + Follow ](/etf/login) [ETF.com Staff](/contributors/etfcom-staff) etf.com is the single source for ETF intelligence. We provide real-time ETF news and analysis to educate investors and drive financial knowledge in… [View Bio](/contributors/etfcom-staff) Related Topics [Equity](http://www.etf.com/topics/equity) [Active Management](http://www.etf.com/topics/active-management) [Davis](http://www.etf.com/topics/davis)