Portfolio Manager & Chairman
Until recently, active equity strategies in a traditional ETF format have not been widely available. Davis ETFs, which were launched earlier this year, offer investors ETFs based upon a proven investment discipline. Chris Davis explains why his firm’s strategies are especially well-suited to an ETF structure and what drives its time-tested investment approach.
Describe Davis’ three actively managed equity ETFs.
We are pleased to offer investors the Davis Select U.S. Equity ETF (DUSA), Davis Select Financial ETF (DFNL) and Davis Select Worldwide ETF (DWLD). These are among the first actively managed equity ETFs offered by a manager with decades of experience investing in these areas. Each ETF is managed using the Davis Investment Discipline. They are high-conviction, benchmark-agnostic portfolios with low expected turnover and a strategic long-term time horizon.
Davis ETFs offer investors the benefits associated with traditional ETFs including low costs, tax efficiency, intraday trading and transparency. With almost 50 years of investment experience and over $25 billion in assets under management,3 our goal has always been to provide our research expertise to investors in the vehicle of their choice, which now include ETFs.
Would you explain the Davis Investment Discipline?
The Davis Investment Discipline traces its roots back to my grandfather. Using the same process we use today, he compounded a $100,000 initial investment in 1947 into over $800 million by the time of his death in 1994.4
Our investment approach is based on the premise that stocks are not pieces of paper like lottery tickets, but ownership interests in real businesses. With that as the starting point, our entire investment process boils down to two questions: “What kinds of businesses do we want to own?” and “How much should we pay for them?”
When answering the first question, our goal is to invest in companies with financial strength, deep competitive moats and superior management.
When determining how much we should pay for each business, we dispense with traditional Wall Street metrics like P/E, which is subject to discretionary accounting choices, in favor of a measure we call “Owner Earnings” which is a cash-based metric.
Putting it all together, our goal is to invest in durable, well-managed businesses at value prices that we can hold for the long-term. The result is our portfolios are truly actively managed, are high-conviction and look nothing like their benchmark indices.
What makes Davis ETFs different?
We are providing an investment solution that has not been widely available: proven active management in a traditional ETF. Davis Advisors has specialized in equity investing since 1969. We have a proven investment discipline and a capable, experienced management team that has built long-term wealth in U.S. equities, the financial sector and global equities.
Our active management approach evaluates financial strength, culture, vision, and quality of management to invest in stronger companies and avoid weaker ones. These portfolios are not based on a particular benchmark index but instead are composed of companies in which we have a high degree of conviction combined with expected low turnover and a strategic long-term time horizon.
Davis ETFs deliver a combination of active management with the benefits of traditional ETFs. As a firm, we have a significant alignment of interests with more than $2 billion invested side by side with clients’ assets.
Are Davis ETFs analogs of your firm’s other investment products?
I think analog is a good word. They aren’t identical, and for various practical reasons, they can’t be identical. We look at our history of active management over the long term as a validation of our decision to launch ETFs. We wouldn’t launch an ETF in an area where we didn’t have decades of experience.
Why should investors consider Davis actively managed ETFs?
The main reason to use Davis actively managed ETFs is to give clients the potential to enhance investment returns. We believe selectivity and sound judgment are the keys to long-term outperformance. We evaluate each company’s financial strength, culture, vision, and quality of management. A passive indexing approach must invest in every single company in the index, regardless of the company’s future growth prospects or valuation.
With that said, we think investors need not commit entirely to all active or all passive approaches. Many sophisticated investors combine investments in exceptional active management strategies with investments in passive strategies to their advantage.
This report includes candid statements and observations regarding investment strategies, and economic and market conditions; however, there is no guarantee that these statements, opinions or forecasts will prove to be correct. Equity markets are volatile and an investor may lose money. Past performance is not a guarantee of future results.
1Davis Advisors has contractually agreed to waive fees and/or reimburse the Funds’ expenses to the extent necessary to limit total annual fund operating expenses as shown until March 1, 2018.
2As of March 10, 2017.
3As of December 31, 2016.
4While Shelby Cullom Davis’ experience forms the basis of the Davis Investment Discipline, this was an extraordinary achievement; other investors may not enjoy the same success.
Before investing in the Davis Fundamental ETF Trust, you should carefully consider the investment objectives, risks, charges, and expenses of the Funds before investing. The prospectus contains this and other information about the Funds. You can obtain performance information and a current prospectus by visiting davisetfs.com or calling 800 279 0279. Please read the prospectus carefully before investing or sending money.
Davis Select U.S. Equity ETF’s investment objective is long-term capital growth and capital preservation. The Fund invests primarily in equity securities issued by large companies with market capitalizations of at least $10 billion. Davis Select Worldwide ETF’s investment objective is long-term growth of capital. Davis Select Financial ETF’s investment objective is long-term growth of capital. Under normal circumstances, the Fund invests at least 80% of its net assets, plus any borrowing for investment purposes, in securities issued by companies principally engaged in the financial services sector. There can be no assurance that the Funds will achieve their objectives. An investment in Davis ETFs is subject to numerous risks, including possible loss of principal. The Fund is actively managed and does not seek to replicate a specified index. The Fund is subject to the following principal risks: authorized participant concentration risk, common stock risk, depositary receipts risk, exchange-traded fund risk, fees and expenses risk, financial services risk, focused portfolio risk, foreign country risk, foreign currency risk, headline risk, intraday indicative value risk, large-capitalization companies risk, manager risk, market trading risk, mid- and small-capitalization companies risk, and stock market risk. See the prospectus for a complete description of the principal risks.
Shares of Davis ETFs are bought and sold at market price (not NAV) and are not individually redeemed from the ETF. There can be no guarantee that an active trading market for ETF shares will develop or be maintained, or that their listing will continue or remain unchanged. Buying or selling ETF shares on an exchange may require the payment of brokerage commissions and frequent trading may incur brokerage costs that detract significantly from investment returns.
Price/Earnings (P/E) Ratio is the weighted average of the price/earnings ratios of the stocks in a portfolio. The P/E ratio of a stock is calculated by dividing the current price of the stock by its trailing 12 months’ earnings per share. Portfolio totals are computed using an inverse harmonic methodology.
Foreside Fund Services, LLC, 3 Canal Plaza, Suite 100, Portland, Maine 04101 800-279-0279, davisetfs.com