Avantis U.S. Large Cap Value pursues stocks trading at lower multiples relative to their profitability. It’s an attractive combination of risk factors that should lead to better risk-adjusted performance than the Russell 1000 Value Index.

Avantis' portfolio managers select stocks from the top 90% of the U.S. market by market capitalization. They intentionally exclude REITs and utilities. The former are held in a separate real estate fund, while the latter have attractive valuations but less upside potential owing to stronger industry regulations. The managers sort this large cohort by price/book ratio (adjusted to remove goodwill) and a cash-based measure of profitability. The portfolio holds the top 25% of stocks based on the combination of those two risk factors, preferring names that trade at lower multiples with greater profitability. The managers initially weight these stocks by market cap before assigning market-cap multipliers to scale their weightings. Those trading at lower price/book ratios with greater profitability receive larger multipliers than those with the opposite characteristics.

The portfolio's average characteristics closely reflect its emphasis on profitable companies trading at attractive valuations. Its average profitability, as measured by return on invested capital, has consistently landed above the Russell 1000 Value Index, along with its average price/book ratio. These two characteristics are often closely related to one another, with greater profitability commanding higher price multiples.

The portfolio can hold growth stocks if their profits justify their relatively steeper multiples. Apple AAPL has landed among the fund's 10 largest holdings since it was launched in late 2021. Overall, the portfolio retains an emphasis on relatively cheaper companies. The fund had a sizable 17% stake in the energy sector at the end of October 2023. But stocks in this line of business typically trade at low multiples and have had reasonable, if not above average, profits over the 12 months prior to October 2023. A strong emphasis on profitability should steer the fund away from these stocks should their profits decline.

Avantis launched the exchange-traded fund in September 2021, and the mutual fund version followed in June 2022. Both have delivered strong index-relative performance over their short lives. The ETF beat the Russell 1000 Value Index by 3.2 percentage points annualized from its inception in late September 2021 through November 2023. Avantis charges 0.15% for both, an expense ratio far lower than many Morningstar Category peers'.

Analyst Rating

A different approach to value investing.

Senior Analyst

Daniel Sotiroff

Apple

JPMorgan Chase & Co

Costco

Exxon Mobil

Amazon

Johnson & Johnson

Caterpillar

Chevron

Walmart

This strategy strikes a good balance between two risk factors. It targets profitable companies trading at relatively low multiples, a combination that should lead to better risk-adjusted performance than the Russell 1000 Value Index.

Above Average

Process

The Avantis team has consistently delivered on its fund’s targeted risk exposures. It has grown, and management responsibilities are spread across more individuals, earning a People Pillar upgrade to Above Average from Average.

Daniel Ong, Mitchell Firestein, Ted Randall, and Eduardo Repetto are the fund's named portfolio managers. All four joined Avantis in 2019 and had managed similar strategies at DFA. Repetto is the group's chief investment officer and previously served as DFA's co-CEO and co-CIO. The four managers jointly manage the firm's equity strategies, along with relative newcomer Matthew Dubin.

These managers have access to much of American Century's infrastructure, including a central trading desk, data collection, and compliance teams. The group built out a new portfolio management system that helps automate the managers' workflow and improve efficiency. It allows managers to spend less time on routine tasks and focus on items around the edges that can improve performance, such as cost-efficient execution and voluntary corporate actions.

The management processes have been working as intended. The funds managed by this group have followed expected performance patterns. None of the equity ETFs overseen by this team had made capital gains distributions as of November 2023.

People

An evolution is taking hold at American Century, but some pluses and minuses continue, supporting a continued Parent rating of Average.
The firm entered the ETF market in 2019 by launching Avantis Investors, led by former executives from Dimensional, a strong firm that manages semi-passive strategies with value tilts and low fees. Avantis is now running roughly a dozen ETFs with similar features, while American Century’s in-house teams manage another 16 active ETFs. This effort is still fairly new and small as a percentage of assets under management, as most ETFs have been launched since 2019, but they help American Century compete with lower-cost passive and strategic-beta funds.
The bulk of the firm’s assets remain in U.S. mutual funds run by its internal boutiques. The U.S. value team has long been a standout, with tenured, stable management and good long-term results, but other investment teams haven’t produced consistently distinctive portfolios or performance, and some have continued to endure investment-professional turnover.
The firm’s ownership structure is noteworthy and supports a long-term strategy. While the firm has worked with a few large minority shareholders, including current 41% stakeholder Nomura, The Stowers Institute for Medical Research owns 45% of the firm but holds 70% of the equity voting rights. Employees own the rest, which should encourage retention.

Average

Parent

Avantis US Large Cap Value ETF

AVLV is an actively-managed portfolio of US large-cap value companies selected based on fundamental criteria.

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As Active ETFs Gain Popularity, Get Quality-Oriented Exposure

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