Davis Best Ideas ETFs Raise $100 Million in 1Q17

Why Actively Managed ETFs?

Dodd Kittsley, Director of ETF Strategy, Davis Advisors sits down with Julie Cooling, Founder & CEO of RIA Channel to discuss their newly launched, actively managed ETFs: DUSA, DFNL, and DWLD.

If you can’t beat ‘em, join ‘em. The 49 year old investment management firm out of New York launched three new exchange traded funds in January. These latest entrants are more than benchmark followers. Like a number of newcomers trying to shield their mutual fund business from cheaper ETFs, Davis takes an active approach to…being passive.

Kittsley says getting into the ETF game was a “natural evolution”.

“It came from client demand. They liked our mutual fund strategies, but wanted them in an ETF format,” he says. “These are traditional ETFs, but they use time tested active management.”

Their Davis Select Financial (DFNL) is similar to their financial themed mutual fund that’s been around since 1991. Even that fund wasn’t so expensive. The expense ratio was just 0.92%, well below the Lipper category average of 1.63%. The ETF is cheaper of course with an expense ratio of 0.65%.

The two other funds launched besides DFNL are the Davis Select Worldwide (DWLD) and the Davis Select U.S. Equity (DUSA) funds.

“For all practical purposes, we made these just as a different way to deliver the product to clients than through mutual funds,” he says. Kittsley talks about how they sell these new active ETFs to advisors, many who still see the words “active” and “ETF” as being an oxymoron.

An actively managed ETF has a benchmark index, but managers are not wedded to imitate it. They may change sector allocations, market-time trades or go under- or over-weight a stock. In an ideal world, this gives the fund a chance to beat the benchmark, whereas the SPDR S&P 500 (SPY) is up 8.9% over the last six months and so is the S&P 500 which it tracks.

Davis Advisors has $27 billion under management.

In December, Financial Times ran a three part series on actively-managed ETFs, billing them the possible “savior” of mutual fund companies.

“In this industry you see that successful funds beget more successful funds, so you are likely to see more active ETFs,” Jeffrey Sherman, co-manager of State Street’s SPDR DoubleLine Total Return Tactical (TOTL) fund told the FT. That ETF is considered the most successful active ETF launch so far with $2.5 billion under management. The fund is invested in a strategy similar to DoubleLine’s Total Return mutual fund (DLTNX). Over the last six months, the ETF has the mutual fund beat.

Under the Hood

The Davis Select U.S. Equity Fund is a large blended fund whose closest benchmark is the Russell 1000 Index. The fund is currently a bit overweight large cap U.S. equity compared to the index and underweight medium and small cap as of May 23, according to Morningstar.

Morningstar puts that ETFs long-term earnings growth at around 12% versus the benchmark average of 9.5%.

Some of the fund’s top 10 holdings include Berkshire Hathaway (BRK.B); Amazon (AMZN); Alphabet (GOOG); United Technologies (UTC) and American Express (AXP).

The fund is up 3.23% so far this year, underperforming the iShares Russell 1000 (IWB) by about 250 basis points.

Their Select Financial is similar in that it is benchmark agnostic, long only and for long termers. The fund ended April with a total return of 3.46%, besting the S&P 500 Financials Index, which rose 0.33% in the same period. Its three biggest holdings as of May 23 are Markel Corp (MKL), American Express yet again and Warren Buffet.

Their Select Worldwide has underperformed the MSCI All Country World Index by a hair, with a total return ending April of 6.58% versus 6.75% in the MSCI ACWI. Its top non-U.S. holdings include South Africa’s vertical media technology and broadband company Naspers Ltd. (NPN), JD.com and Alibaba Group (BABA), two of China’s biggest billionaire-owned e-commerce names, and Canadian energy giant Encana (ECA).