Avantis U.S. Large Cap Value pursues stocks trading at lower multiples relative to their profitability. This attractive combination of the value and quality risk factors should lead to better risk-adjusted performance than the Russell 1000 Value Index, earning a Morningstar Analyst Rating of Bronze.

Avantis' portfolio managers select stocks from the top 90% of the U.S. market by market capitalization. The managers sort this large cohort by their 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 metrics, 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 weights. Those trading at lower price/book ratios with greater profitability receive larger multipliers than those with the opposite characteristics. The strategy intentionally excludes REITs and utilities. Avantis offers the former in a separate real estate fund, while the latter have attractive valuations but less upside potential owing to stronger industry regulations.

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 tied to one another, with greater profitability commanding higher price multiples.

The portfolio looks unconventional in some ways. It 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 19% stake in the energy sector at the end of November 2022. These stocks typically trade at low multiples, but they have been among the more profitable companies in the U.S. market over the 12 months prior to November 2022. 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 a 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 almost 3.9 percentage points annualized from its inception in late September 2021 through November 2022. Avantis charges 0.15% for both, an expense ratio far lower than many category peers.

Analyst Rating

A different approach to value investing.

Senior Analyst

Daniel Sotiroff

Apple

JPMorgan Chase & Co

Costco

Exxon Mobil

Union Pacific

Walmart

Verizon

Chevron

Johnson & Johnson

This rules-based strategy targets profitable companies trading at relatively low multiples, a combination of the value and quality risk factors that should lead to better risk-adjusted performance than the Russell 1000 Value Index. It earns an Above Average Process Pillar rating.

Avantis' managers build this portfolio from stocks that roughly land in the top 90% of the U.S. market by market cap, with a few exceptions. They exclude REITs and regulated utilities. Avantis offers the former through a separate dedicated fund, while utilities tend to have the characteristics of value stocks with less upside potential. These exclusions represent a small segment of the Russell 1000 Value Index, so excluding them shouldn't have a big impact on the final portfolio's index-relative performance.

The managers sort the remaining cohort by their price/book ratio (adjusted to remove goodwill) and a cash-based measure of profitability that limits the influence of accruals. They select stocks that simultaneously look attractive on these two measures and include the top 25% of the eligible pool's market cap. The managers initially weight those names by market cap before applying market-cap multipliers to adjust the weight of each stock. Names with lower valuations and higher profitability receive larger multipliers than those with the opposite characteristics. These adjustments further emphasize the most profitable stocks trading at attractive valuations without incurring too much additional turnover. The strategy caps sector weights at the lower of 30% or their market-cap-weight plus 10%.

Above Average

Process

This is a newly formed portfolio management team built around experienced and capable people. But the team’s small size could magnify the impact of personnel turnover. And the systems that it built to run its portfolios haven’t been around long. This team warrants an Average People Pillar rating.

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 co-CEO and co-CIO of DFA. The four managers jointly manage all the firm’s equity strategies, and there is little specialization on the team.

The Avantis team leverages much of the infrastructure at American Century, including a central trading desk, data collection, and compliance teams. The group built out a new portfolio management system, which helps automate the managers’ workflow and improve efficiency. This allows managers to spend less time on routine tasks and focus on cost-efficient execution. They update the portfolio daily and give the traders some flexibility about which trades to execute on any given day to reduce transaction costs.

All four managers have investments in this fund. That said, there is no direct link between fund performance and manager compensation. To some extent that’s fair. This is a rules-based strategy, and the managers don’t have much discretion over the composition of the portfolio.

Average

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.

Parent

Avantis US Large Cap Value ETF

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

AVLV is a relatively new, actively managed Value ETF that should be particularly attractive to index fund investors concerned about the dominance of the Magnificent Seven. We explore the nuanced methodology used by AVLV's managers to select and manage its stocks and explore how its unusual, flexible market cap weighting plays out in its actual holdings. There are some risks, which we detail, but overall, this could be a great place to put new funds in today's very uncertain economy.

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