Active management is not dead. But high-fee active management might have one foot in the grave.
As Matt Hougan (CEO — Inside ETFs) and Dave Nadig (CEO — ETF.com) told 2,200-plus attendees at The World’s Largest ETF Conference ("Inside ETFs") in late January:
ETFs had a record year. $288 billion flowed into ETFs in 2016. That’s 20% more than what’s happened in any previous year. Or twice the flows of five years ago.
This still dramatically undersells the story. $187 billion flowed out of mutual funds. Basically, half a trillion dollars moved from mutual funds to ETFs in just one year.
If you take into account indexed mutual funds, $340 billion left active and $505 billion went to passive. $845 billion changed hands. To put that in perspective, that’s roughly $1.6 million per minute or about $27,000 every second of every day (weekdays and weekends). A flood of assets went to passive.
To add insult to injury, the No. 1 active manager last year for inflows was Vanguard. (Primarily a low-cost index shop.)
Even as products have gotten better (narrowing spreads, more tax-efficiency, tracking error reduction and more tools), we’ve seen a 70%-80% decline in expenses in almost every asset class.
These statistics aren’t really anything new, though. Other than an anomaly in 2012, the shift from active to passive — or high cost to low cost — has been under way for several years …
|Source: FactSet, Morningstar|
There’s no question that active management, as a group, is suffering in terms of asset flows.
That’s a big reason why some active managers are jumping into the ETF world.
While the lion’s share of actively managed ETFs is in fixed income — State Street Global Advisors’ TOTL (Jeffrey Gundlach of DoubleLine), PIMCO’s BOND (now team-managed, but formerly run by Bill Gross) and iShares’ NEAR (BlackRock’s Short Duration Portfolio Team) — some stock-pickers are making the leap, as well …
I was surprised to see Chris Davis (Chairman & Portfolio Manager — Davis Advisors) on stage at "Inside ETFs" this year for a panel discussion on active ETFs.
Chris may not be a household name like value investing legends Ben Graham, Peter Lynch and Warren Buffett. But he is an old-school value investor cut from the same mold …
His grandfather, Shelby Cullom Davis, was known as the "Dean of Insurance stocks." Shelby started with $50,000 of family money in 1947. When he died in 1994, it was worth $900 million — a compound annual growth rate of 23.2% over 47 years.
Shelby is one of the all-time greats in value investing. And Shelby’s son (also named Shelby) founded Manhattan-based Davis New York Venture in 1969.
Today, Chris is carrying on the family’s value-based investment philosophy and penchant for financial stocks. (His brother Andrew oversees the Davis Real Estate Fund.)
Chris and his team follow the "Davis Investment Discipline." That is, they seek durable, well-managed companies at discounted prices. And they follow a classic "buy-and-hold" mentality — allowing the power of compounding to work its magic.
This approach has served Davis Advisors — and the firm’s clients — very well over the years.
Today, Davis Advisors manages over $26 billion of assets across institutional accounts, mutual funds, separately managed accounts (SMAs), variable annuities and ETFs.
The investment results of the Davis New York Venture Fund (the firm’s flagship mutual fund) demonstrate why this fund family has attracted and retained a large asset base since its 1969 inception …
|Source: Davis Advisors|
With a $10,000 initial long-term investment, an investor would have collected an extra million dollars vs. investing in the S&P 500 Index!
It’s not just the Davis New York Venture Fund that’s been the lone outperformer in the Davis Family’s fund lineup …
All five original Davis strategies have outperformed their peers/benchmarks since inception …
|Source: Davis Advisors|
Davis Advisors’ long-term success is based on rigorous research, patience and a willingness to have portfolios that look different from the crowd.
They also pride themselves on maintaining low expenses for shareholders. (That’s across all offerings.) The Davis family, Davis Advisors, employees and directors have more than $2 billion invested side-by-side with clients.
Chris was a featured speaker at the ETF conference because his firm had just launched three new ETFs a week earlier:
Davis Select U.S. Equity ETF (DUSA)
Davis Select Financial ETF (DFNL)
Davis Select Worldwide ETF (DWLD)
Why did Davis Advisors join the ETF party?
Obviously, that’s where asset flows are going. And they should continue moving in that direction …
|Through March 20, DUSA (equity) rose 1.4%, DFNL (financial) rose 4% and DWLD (worldwide) rose 4.7% since their January launch.|
A lot of future ETF growth should be driven by active management as financial advisers and institutions make the switch from high-cost active (mutual funds and hedge funds) to low-cost active (new style of ETFs).
As Chris stated during his panel discussion:
Our clients were asking for them. This vehicle structure appeals to folks because it’s fully transparent, low-cost, easy-to-use and tax-efficient.
But, our three new ETFs are truly actively managed. Our approach is benchmark-agnostic, long-term-oriented and highly research-driven. The end result is concentrated portfolios that look nothing like their peers or corresponding indexes.
Other than the typical regulatory headaches to work through, an ETF wrapper was a natural fit for these money managers. As Dodd Kittsley (Director of ETFs — Davis Advisors) told me:
The way we manage money, our investment discipline, is especially well-suited to be delivered in a traditional ETF. Our approach is long-term in nature, with low turnover, and our portfolios generally hold large and liquid names. Moreover, our firm has always viewed transparency as a virtue — it’s an important part of our culture.
If you’re interested in inexpensive (Davis ETFs have expense ratios of 0.60%, 0.65% and 0.65%), actively managed equity strategies with a longer-term approach, the proven management team at Davis Advisors is worth consideration.
To learn more about Davis ETFs, click here.