Waning confidence in this team's ability to deliver on its bold approach warrants a downgrade of Clipper's People Pillar rating to Average from Above Average, making it and the related Davis Concentrated Equity and Davis Select U.S. Equity ETF decent but not compelling offerings.

Managers Chris Davis and Danton Goei have ample experience, but they've struggled to execute their high-conviction approach. Davis began managing Clipper in 2006, while Goei joined Davis Advisors in 1998 and was elevated to comanager there in 2014. Intrepid sector and regional bets haven't paid off, though, and middling stock selection across many market environments doesn’t inspire confidence. Indeed, while most of their U.S.-focused peers ignore emerging-markets stocks, the managers built sizable stakes in Chinese names including New Oriental Education & Technology Group EDU and Alibaba BABA, which sold off sharply. The strategy's perennially hefty financials stake—averaging 45% of assets since Davis joined the team—has also weighed on returns, and the team’s stock selection in that sector has been mediocre. And though the managers have made some good calls, such as adding to their Amazon.com AMZN position in late 2022, their poor picks have outnumbered the good ones.

While the team's bold and focused process has attractive features, it comes with significant risks. It seeks competitively positioned firms with financial strength. The team primarily assesses risk at a stock level, and it readily allows its stock selection to result in sizable sector and regional bets. The portfolio has consistently held just 20-30 stocks, and its top 10 holdings typically account for a staggering 55% to 75% of its assets. Longtime financial holdings such as Berkshire Hathaway BRK.A and Wells Fargo WFC serve as staples of the portfolio.

This style tends to produce volatile results. Under Davis and Goei, Clipper’s performance has ranked in the top or bottom quartile of its Morningstar Category in seven of nine calendar years. Its 8.2% annualized return from January 2014 through September 2023 trailed both the S&P 500's 11.1% and the typical peer's 8.9%.

Analyst Rating

Decreased confidence.

Analyst

Andrew Redden

Capital One

Berkshire Hathaway Inc. - Ordinary Shares - Class B

Amazon

Wells Fargo

Humana

Markel

Alphabet

Viatris

MGM Resorts

This focused approach has a mix of strengths and weaknesses that warrants an Average Process rating.

The team's high-conviction style is underpinned by sound fundamental research. However, its propensity to build hefty stakes in individual names and to concentrate holdings in certain sectors or regions creates significant portfolio-level risks.

The team seeks well-managed, competitively advantaged companies trading at discounted prices. Negative market sentiment does not deter the team from initiating or adding to a position if it believes the share price doesn’t reflect the underlying fundamentals. The team often concentrates the portfolio around certain investment themes or specific areas of the market, such as Chinese or financial-services stocks. Its willingness to be contrarian also means frequently taking on heightened jurisdictional and regulatory risk. 

The team is patient and stresses taking a long-term view. It's also collaborative, with Chris Davis and Danton Goei closely working with analysts to determine buy/sell decisions and position sizing. The portfolio’s shift in the Morningstar Style Box to value from blend during 2022 came not as a change in process but rather from selloffs in its Chinese holdings and an increased stake in financials stocks, which tend to be on the value side of the style box.

Average

Process

Decreased confidence in this experienced team warrants a People rating downgrade to Average from Above Average. 

Chris Davis and Danton Goei's extensive industry experience and substantial investments in their own funds are impressive, but their mistakes keep piling up. Davis joined the firm in 1989 and began managing Clipper in 2006, providing a solid foundation to the team. Goei joined Davis Advisors in 1998 and was promoted to manager here in 2014 and to lead manager of Davis International DILAX and Davis Global DGFAX in 2016. Those strategies have struggled under Goei's leadership, and some of his high-conviction international picks have also hampered this strategy.

Meanwhile, the team's stock selection has been disappointing in recent years here, while its overall decision-making has been questionable. For example, the team made a poorly timed exit from energy stocks in 2020's second quarter because its long-term outlook on the industry dimmed. That decision left little room for energy analyst Kent Whitaker to utilize his decades of expertise, and he left the firm in 2021. 

Still, the team remains experienced overall and has stabilized in recent years. Its five analysts average more than two decades in the industry and 15 years at the firm, and its deep knowledge of the financials sector (a main focus for Davis Advisors) is a bright spot.

People

Davis Advisors has built an investor-friendly backbone, which underscores its Above Average Parent rating.

The Davis family has provided stability to this U.S. equity-oriented asset manager for more than 50 years. Christopher Davis, CEO and portfolio manager, is a third-generation investor at the firm, and his family has significant investments in its strategies. An experienced 10-person investment team supports him. Portfolio managers invest alongside fundholders, with a large portion of their pay tied to beating their benchmarks over five-year periods; some of that reward is invested in fund shares.

These attributes don’t mean the firm is perfect. Although the investment team has stabilized, it experienced heightened turnover between 2014 and 2021. Disappointing performance since the 2007-09 global financial crisis exposed weakness in the team’s high-conviction approach. Bold forays into markets such as China and other concentrated bets highlight an old-fashioned approach to risk—considering it primarily when picking stocks rather than when building portfolios.

The team’s expertise in financials remains a bright spot, and these stocks often comprise a significant portion of its portfolios. Davis offers an apt number of strategies, and fees remain competitive, even as assets under management dropped to USD 20 billion from USD 100 billion in the mid-2000s.

Above Average

Parent

Davis Select U.S. Equity ETF

DUSA is an actively-managed portfolio of US large-cap stocks. The fund seeks long-term capital growth and capital preservation.

DUSA is an actively managed vehicle offering exposure to an ultra-minimalist equity portfolio calibrated using sophisticated methods based on the Davis Investment Discipline. It seems DUSA may have finally hit its stride after years of underperformance, as it beat IVV in 2023, with strong momentum lasting into 2024. However, while not being bearish and appreciating its improvements on the growth factor front, I would prefer to maintain a more neutral opinion.

DUSA Has Hit Its Stride, But Concerns Remain

Davis Select Financial ETF

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DUSA is an actively managed ETF with a highly selective investment strategy based on the Davis Investment Discipline. 2023 was grossly successful for the fund as it beat IVV for the first time since its inception in January 2017. Since October, DUSA's portfolio has seen notable changes; its quality exposure increased, yet growth is still mostly soft.

DUSA: Quality-Heavy Portfolio Lags On Growth, Remains A Hold

Davis Select U.S. Equity ETF has an ultra-minimalist, high-conviction approach to portfolio management. It has placed the lion's share of its bets on financials, which is one of the key reasons for its earnings yield being so alluring. After reassessing DUSA's factor exposures, I see no reason for a rating upgrade as its relatively strong EY of about 8% is insufficient to succeed in the current environment.

DUSA: Solid Earnings Yield Does Not Guarantee Strong Performance

DUSA is an actively managed vehicle with a concentrated portfolio of mostly U.S. mega and large caps, with a footprint in developed markets. Almost 44% of its net assets are allocated to the 5 main holdings. The 5 smallest equity positions account for just 4.4%. DUSA has beaten IVV this year amid the growth rotation; nevertheless, the longer-term returns reveal the strategy's weaknesses.

DUSA: Tilting Toward A More Skeptical View Owing To Performance Nuances

In the last five years, many well-established asset managers joined the ETF market, including Capital Group, DoubleLine, Federated, Harbor, Neuberger Berman, and Matthews Asia. But Davis Advisors was ahead of them, launching its first three ETFs in January 2017 and its fourth in March 2018.

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iShares MSCI ACWI ETF

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Davis Select Worldwide ETF

Vanguard Total Stock Market ETF

These ETFs have been outperforming recently, but there are caveats for investors to keep in mind.

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ARK Web x.0 ETF

Capital Group Growth ETF

JPMorgan Equity Premium Income ETF

Despite representing just 4% of ETF assets at the end of the first quarter of 2022, actively managed ETFs pulled in 11% of the net inflows in the first three months of the year.

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Davis Select International ETF

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Financial Select Sector SPDR Fund

After years as an index fund evangelist at top ETF firms like BlackRock and SSgA, Dodd Kittsley did a 180 of sorts, becoming Director of active manager Davis Advisors. Still opposed to the “closet indexing

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After years as an index fund evangelist at top ETF firms like BlackRock and SSgA, Dodd Kittsley did a 180 of sorts, becoming Director of active manager Davis Advisors. Still opposed to the “closet indexing” that marks many active managers, he was drawn to Davis' unique approach to active management: High-conviction, low turnover, low cost, tax-efficient and fully transparent.

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WisdomTree U.S. Earnings 500 Fund

FlexShares STOXX US ESG Impact Index Fund

First Trust Mega Cap AlphaDEX Fund

Wahed FTSE USA Shariah ETF

Xtrackers Russell 1000 US Quality at a Reasonable Price ETF

iShares MSCI USA Quality Factor ETF

SPDR MSCI USA StrategicFactors ETF

The Large Cap Blend style ranks second in Q4'20. Based on an aggregation of ratings of 61 ETFs and 661 mutual funds in the Large Cap Blend style.

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Davis Advisors’ active management exchange traded fund approach is uncovering dominant, growing businesses around the world today that may be overlooked by those unwilling to look beyond the index and think long-term. In the recent webcast, Finding Long-Term Opportunities in a Short-Term World – A Conversation with Davis PMs Chris Davis & Danton Goei, Chris [.

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Fidelity MSCI Consumer Discretionary ETF

Exchange-traded funds with heavy exposure to tech giants outperformed Wednesday even as the companies faced questioning on Capitol Hill. Shares of Amazon.com Inc.

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Communication Services Select Sector SPDR Fund

While Twitter made headlines recently for telling employees they can keep working from home “forever” if they so desire, Alphabet CEO Sundar Pichai said the company anticipates it will welcome a chunk of its employees back to work by the end of 2020. The Google parent would have employees return on a rotating schedule in an attempt [.

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Invesco NASDAQ Internet ETF

UP Fintech China-US Internet Titans ETF

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Traditional active money managers have turned to ETFs as a way to expand their businesses and provide their time-tested strategies through the cheap and efficient investment tool that has rocked the financial industry.

Davis Advisors Actively Managed ETFs Are Backed by Years of Expertise

Inspire 100 ETF

Axs Change Finance ESG ETF

Cornerstone Total Return Fund Inc

ProShares Ultra Dow30

SPDR Dow Jones Industrial Average ETF

Trns DS S&P 500 Shs

ProShares Short Dow30

ProShares UltraShort Dow30

First Trust Dow 30 Equal Weight ETF

Swedish Exp Cred ELEMENTS

ALPS Equal Sector Weight ETF

Invesco S&P 100 Equal Weight ETF

ESGL Holdings Ltd

First Trust Large Cap Core AlphaDEX Fund

Madrna Domestic Shs Madrona Domestic

Goldman Sachs Equal Weight U.S. Large Cap Equity ETF

First Trust Horizon Managed Volatility Domestic ETF

iShares Core S&P 500 ETF

iShares Russell Top 200 ETF

iShares Russell 2000 ETF

John Hancock Multifactor Large Cap ETF

iShares Morningstar US Equity ETF

Prncpl SusMmnt Shs

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iShares MSCI Global Multifactor ETF

SPDR Bloomberg 1-3 Month T-Bill ETF

Invesco Treasury Collateral ETF

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SPDR Global Dow ETF

iPath US Treasury Long Bond Bear ETN

Barclays Bank iPath US Treasury 2 Yr Bear Exchange Traded

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iPath US Treasury 10-year Bear ETN

Vanguard Extended Duration Treasury ETF

BlackRock Enhanced Government Fund

The three-month stock-to-bond ratios in the U.S. and Europe have soared, indicating that equities should lose momentum in Q2 at the expense of a further decline in bond yields.

Front-Running Easy Money

Portfolio+ S&P 500 ETF

Listening to the message of the market will always outweigh the ongoing rhetoric. More often than not that talk is totally meaningless.

News for Davis Select U.S. Equity ETF ETF (DUSA)