Lead-Lag Live

Research & Selectivity: Davis Advisors Market Outlook & Active ETFs

• Michael A. Gayed, CFA

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In this episode of Lead-Lag Live, Michael Gayed sits down with Dodd Kittsley, Co-CIO of Davis Advisors, to discuss why fundamental research and selectivity are becoming increasingly critical as markets transition into a period of normalized interest rates.

From Davis Advisors’ 60-year history of “eating their own cooking” to the evolution of active equity ETFs, Kittsley explains how a high-conviction, benchmark-agnostic investment philosophy can help investors compound capital over the long term—especially in a richly valued market.

From the “time arbitrage” embedded in their discipline to their views on AI-driven growth and undervalued financials, Kittsley outlines why what investors don’t own may matter just as much as what they do in the next market cycle.

In this episode:
– Why Davis Advisors pioneered the active equity ETF space nearly a decade ago
– The benefits of high-conviction, concentrated portfolios that ignore benchmarks
– How “picks and mortars” technology is reshaping financials like Capital One
– Valuation discipline in an overvalued market and the risks of unsustainable dividends
– The “time arbitrage” advantage of long-term ownership and owner-operator focus

Lead-Lag Live brings you inside conversations with the financial thinkers who shape markets. Subscribe for interviews that go deeper than the noise.

#ActiveETFs #FundamentalInvesting #MarketOutlook #Equities #Valuation #LongTermInvesting #PortfolioStrategy

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SPEAKER_01:

Going first webinar uh that we're doing with Davis Advisors here at Lead Lag Media. Uh do me a favor, focus, if one of if you happen to be an advisor and you were in an office where there are other advisors, let them know that this is happening. Uh Davis Advisors is a uh hell of a firm. They've been around for a while. I know a lot of advisors might be familiar with their sort of older flagship product, the New York Venture, uh, the venture fund, right, as I recall. Um so we've got uh Dod Kitsley here, who I've known since 2020. Uh, we're gonna be talking about markets, outlook for next year, what uh Davis Advisors sees. If you are here for the C credits from the CFP for the CFP board, I will email you after this webinar, get your information, submit it to the CFP board, just state at the end of the presentation. Uh and if you do uh questions, put it in the QA, put it in the chat. We'll try and address it towards the end. Dodd wants to make this more of a kind of more of an informal presentation and discussion. So, you know, feel free to interact with us here. So with all that said, my name is Michael Gaia. This webinar is sponsored by Davis Advisors. Uh let me hand it off to Mr. Dodd Kitsley, who's gonna introduce himself and uh we'll get right into what's gonna happen next to markets.

SPEAKER_00:

Thanks so much. And I appreciate everyone tuning in uh in uh your interest uh in our ETFs. Uh we find that uh our suite of four ETFs are often uh, you know, uh people aren't aware of them. And uh the irony is we were way ahead of this uh major trend in asset management, this major trend in uh the ETF industry uh of active ETFs. And we were really the first to launch active equity ETFs that were based on strategies that had existed uh in most cases for multiple decades. Uh so tried and true uh investment discipline and research approach uh that has you know a strong track record, uh great people at the helm with a very long tenure. Uh in we launched our ETFs, it's gonna be nine years, believe it or not, uh, come January uh 11th, which was uh was a great day. Uh so as the saying goes, I guess it's often better to be uh early than late. And uh we uh really feel like pioneers in the space uh and uh really grateful that uh the industry's really taken off. Uh but the fact of the matter is most of uh people aware and familiar with Davis are traditional mutual fund users or uh SMA users. Uh and we entered uh the mutual fund space back when there were uh not a lot of mutual funds. It was back in uh 1969. Uh in our firm and our investment discipline uh has its roots that uh go back to the uh 1940s. Uh were privately owned. Uh three generations of the Davis family. Uh the grandfather, uh Shelby Collin Davis, uh went essentially made a fortune investing$100,000 uh that he compounded over his lifetime uh to be over$800 uh million. And uh those investments were exclusively in stocks, uh and primarily financial stocks. And very few people have built that kind of wealth uh exclusively uh through investing in the stock market. So uh we uh or a learning-based culture, uh we uh certainly uh I think get better uh as time progresses. Uh we debrief on the mistakes. Uh we've realized that uh uh you got to do lessons learned sometimes when you make mistakes. And it only makes you stronger when you become aware uh and accountable for uh where the wheels might have fallen off the cart uh in some instances. And we all make mistakes, uh, but certainly uh trying to minimize those uh in the pursuit of compounding wealth over time, uh, which is which is our goal. Uh the second Davis was was also named Shelby, Shelby MC Davis, uh, and Shelby uh started our firm in 1969, uh, off the heels of a very successful uh institutional investor career, uh working with uh pensions endowments, uh other institutions, large institutions. Uh and uh he really launched the firm in partnership with advisors. Uh and it was he was a little reluctant at first. And I share this story because I think it's a neat parallel uh where uh to why we got into ETFs. But uh he as an institutional investor was approached in the the late 60s, and people said, Well, why don't you do what you do but deliver it to a broader group through these things called mutual funds? And his knee-jerk reaction was, Well, we don't do that. We're an institutional shop. Uh well, thankfully he thought about it, and uh our firm was was formed in '69. Uh and I think the parallel exists today where the third generation uh of Davis is Chris Davis, who's our chairman, uh, is our portfolio manager for our large cap strategy and our financial strategy, uh, co-portfolio manager uh in both those strategies and really the culture carrier of our firm. Uh and uh Chris hired me uh nine years ago uh to help launch our ETFs. Uh, and I think the rest is history. Uh, but I think the fact still remains that our ETFs are are largely um you know not on people's radar screens. And uh my goal today is to give you information uh so you are aware uh and uh to be able to follow up uh with any specific questions you have if we don't get to it during the call. Uh Michael asked me to put together a uh presentation. So I guess I'll share my screen here uh with you, but I'm gonna loosely follow it. Uh, I want to just share uh some things that really can get you more familiar with uh our process, our people, uh, and the value that we have to offer uh in the marketplace today. Again, this is my direct uh number, uh my email, and I urge people not to hesitate uh if we don't cover uh the topics uh or the questions that are most important uh to you. Uh so let me just start with a little bit more, give you the history of a little bit of the history of Davis Advisors, and we do have a very rich history uh being pioneers in mutual funds, being pioneers in SMAs in the 90s, uh, and thankfully today, uh ETFs. Uh but what hasn't changed really is our investment discipline. Uh and to give a little background there, uh we are high conviction managers, uh, long-only equities, uh, generally large cap stocks. Uh, and we're uh deeply rooted in the research process, uh, where we simply try to answer two questions uh as pretty high bars of what we want to include in the portfolio. So not based on any indexes, uh, you could say that we're benchmark agnostic, if you will, uh, where we won't own entire sectors at a time uh if we think they're unfavorable. Uh it's really a best ideas portfolio uh of of uh of stocks, uh essentially. So um let me go to two just to uh kind of tie with a bow, the different products we offer. Uh my heart is with ETFs. I've been doing ETFs for uh almost 30 years now, which is embarrassing to say uh age-wise, but it's been truly an honor to be uh somebody that has been educating, uh promoting, uh, and uh, you know, really sharing insights on a product that's added so much value uh to the marketplace today. And I think the the best days are still ahead. It's just a better mousetrap. Uh that being said, uh we do offer SMAs, mutual funds, and ETFs. Uh, and the reason we got into the ETF business in the first place uh really was to provide choice. Uh advisors came to Chris Davis, uh, came to uh the folks working at Davis uh before I was here, and essentially, you know, asked the question of, you know, why don't you offer your strategies in an ETF format? So uh that was really the genesis of uh thankfully me being hired here, uh, but also the products coming out. And uh the commonality between all of these, uh they're not carbon copies, they're not clones per se, uh, but they uh are analogs, is like what we like to call it. Uh, but they're essentially trying to provide the same type of exposure, whether your preference is to access their SMAs, mutual funds, or uh ETFs. And that's driven by the advisor, it's driven by the investor, uh, and you know, they're uh essentially, you know, what what their goals are. Uh obviously in in tax-sensitive accounts, ETFs make more sense. Uh I'm partial to ETF, so we'll leave it at that. But we simply got into the ETF business uh to provide uh exposures that we've been um very uh successful in, uh in a deep expertise uh for nearly 60 years now. Uh, you know, the ETFs uh will have uh less uh stocks in general because uh we do manage to make sure that the basket that we provide is is very liquid, uh, that uh large trades can occur, that spreads are uh relatively tight. Uh in the nine years we've been doing this, we haven't had uh a single complaint on execution. Uh you know, standard uh rules apply, uh, use limit orders, uh, don't buy at the market open or the close uh for uh obvious reasons, uh, so that uh you know the trading community can really get a sense for uh what's in uh the portfolio and what its valuation is uh after the market opens. And uh there's often a lot of influx of trading uh near the close. So if you you follow those those rules, uh you're gonna be in very well stead. Uh the ETFs have got a strong track record of uh very little, if zero, capital gains in each and every year they've been around. So a strong almost nine-year track record now there. Uh so let me get back to kind of what do you get when you buy a Davis portfolio? Uh and I really want to focus on our large cap strategy. That's the one that's been out uh the longest really since 1969. Uh, in in these examples, uh, I will often interchange uh the portfolio SMA, the fund, or the ETF. Uh it's really uh more for compliance reasons, uh, but you're gonna get the same type of exposure uh regardless of the wrapper that you're you're using. Uh so I'll backtrack. Uh we uh are certainly research uh based, and and the two questions we're we're really you know trying to answer is uh what businesses do we want to own? Uh and the second is what do we want to pay for them? Uh and I would say that uh if you were to characterize us in the value landscape, uh Davis is is clearly in the relative value type of uh camp. Uh we want to buy uh great businesses at fair prices. Uh we don't want to buy fair businesses uh at great prices. So we're not picking up the cigar butts, uh the stocks that maybe uh are trading at a very you know low valuation, uh and rightfully so, because they're uh impaired businesses. Uh what we're looking for uh is really the growth in value and the value in growth. Uh so while we think we're clearly in the relative value, large cap value camp, uh many advisors, many investors use us for uh their core exposure. Uh so what do we look for in a business? Uh and this this kind of sums up uh the characteristics that that we're looking for. We're looking for uh businesses that are uh have competitive advantages, that are sustainable, uh, that are gonna be compounding uh machines over time uh in their business. So we think about businesses very much like uh Berkshire Hathaway does uh in that uh for every stock that we buy, we assume that, hey, we're gonna buy the entire business. So uh we look at it that way. Uh and I think taking a very long-term approach, because we are very long-term oriented uh and have relatively low turnover, uh, we deeply research these companies that are gonna be uh high quality, strong balance sheets, uh excellent management teams uh with a proven track record, uh, you know, fair uh executive compensation, uh strong cultures, uh, and again, competitive motes, uh strong competitive motes that are sustainable over time. Uh what you get from that, and we'll go into the holdings uh and uh the portfolios uh a little bit, uh, but uh you're you're essentially getting um, again, the the growth and value and the value in growth. So um it's not a traditional uh you know all low PE uh stocks with kind of not great earnings. Uh in it, it's certainly not a go-go growth where uh earnings estimates uh are uh kind of exaggerated and unsustainable over long periods of time. Uh our research team, uh, average tenure has been um nearly 15 to 20 years with the firm uh and being together, uh, they uh hold themselves accountable to really be in the top decile of knowledge of any business that we buy. So uh we spent a lot of time um with with Google before its IPO. Uh we didn't invest initially at the IPO, and that was a mistake we learned on, uh learned from. Uh, but uh it's one that is in our portfolios uh today. Uh not a traditional growth name um alphabet, but uh it's one that we do see uh that the higher valuation uh in that stock is is certainly justified in our opinion, going out three, four, five, uh even 10 years in a lot of instances. Uh we will will own some uh very attractively valued stocks relative to the market too, uh in uh with with less growth, uh, but uh still find uh that those businesses are are sustainable uh and and maybe they're discounted a little bit too much uh to uh um to to its price at the at the current time. Um so our average holding period is relatively long. Uh we do true up positions uh businesses that we really own, uh very much like a company buying back stock when they have serious conviction that you know their their business is uh undervalued at the time. So uh we are our stewards uh first and foremost. Uh and I think another differentiator, I know I'm throwing a lot at Jeff here, but uh want to cover cover the bases so you really get a feel for who we are. Uh we eat our own cooking. Uh we are the largest shareholder. The firm is uh the Davis family and the foundations uh that that we uh represent. Uh about just under 3 billion of the 30 that we manage uh is firm, family, uh, and employee money. So we truly do uh eat what we cook. Uh and and that's really unique, I think, in this this industry where uh we're gonna uh make the right decisions because we're not managing money for our shareholders. Uh we're managing money alongside our shareholders. And uh the fiduciary standard uh is one that we take very seriously. Uh it's not to say that we're sometimes out of sync with the market, especially when the market gets a little uh long in the tooth, uh, as it has uh in our opinion over the last uh say 10 to 15 years. Uh it's been an abnormal period. I think everyone would agree with that, where there's been some uh major excesses uh in the marketplace. Uh, but we're undergoing some significant transitions right now that uh we believe we're entering a period where fundamentals truly do matter. Uh it's not just uh stocks that are great stories that uh everyone wants a piece of uh and get bit up so high that uh they all of a sudden become uh unattractive investments, yet uh still very uh desirable businesses to be in. Um and that's that's that's not something that that we will uh ever invest in uh and is often uh a trigger if uh a company becomes uh too highly valued uh to lighten up or exit the position, uh, which uh is is a good problem to have, I suppose. Uh so second question is uh you know, what are we gonna pay for it? Uh and I think I I covered that pretty well, uh, but happy to expand on that in QA uh in terms of cell discipline, in terms of uh, you know, valuations. But uh bottom line is we look uh at all the companies relative to each other, and what is the expected long-term IRR? So free cash flow is something really important to us, uh, as well as a lot of the qualitative things that uh I don't think anyone could ever capture uh in a uh a stock screen. Uh we certainly do screen for the the characteristics that I talked about, like high quality moats, those sort of things, uh as a sourcing uh in idea generation process, but it really ends there. Uh in our guys are out on the road, our guys and gals are out on the road, uh meeting with management teams, meeting with CEOs, uh uh competitors, uh customers, time and time again, uh, to really get a great 360 view of every business that uh we're we're investing in on behalf of our shareholders. Uh so from a top-down perspective, and this is the way I always viewed the world being in the ETF business for so long that was largely active until uh relatively recently, at least materially. Uh so uh if we were to really characterize what the output um and what you're you're getting when you buy a Davis portfolio such as D USA, uh you're getting uh uh a portfolio that is, again, best ideas of a highly rigorous uh investment discipline. So uh anywhere between 25 to, in this case, is the mutual fund, 43 stocks. Uh so it's very selective. And uh we firmly believe that we've entered a period uh where rising uh tides is not gonna, you know, rise all the all the boats. Uh and what you don't own uh is gonna be just as important as what you do. Uh and we can't say that for every time period we've been in, but over economic cycles, that certainly pays off, and I think has been one of our secret sauces. Uh we call it time arbitrage, if you will. So in D USA, again, like 26, 27 individual names, we often get the question how do you weight these things? And we weight them by conviction. We generally won't let a position run up to over 10%. And when you see big weights, it's either highest conviction names is generally the reason, or a massive recent run-up. And I would expect us to trim to the right size of position to maintain very good diversification. We feel we provide that with uh you know 27 names in the in the ETF. Um and uh we certainly can go into our global strategy, can go into our um international strategy. And a lot of folks ask why do you have a financial strategy? And uh again, that's been the roots of the firm. Uh I would argue that doing fundamental research on financial businesses is is is probably the hardest uh of any sector in the market. It's the most diverse uh sector in the market. Uh, but that's that's where uh our investment discipline really uh came from. Uh from the grandfather, Chris has managed our uh financial fund for 35 or so years uh very successfully. So so uh we have a high degree of expertise uh and perspective uh from a long time uh in financials. Okay, so selective, we've kind of gone through that and I'd say an emphasis on quality and uh competitive moats and sustainability of earnings, uh earnings growth balance with valuation. Uh the next one is is uh we're undervalued. Uh so uh relative to the market, uh if you define it as the SP 500, uh, and even uh relative to the Russell 1000 value, which is uh you know, trading a little rich. Uh it's gone down a little bit since uh we did this slide. It's uh just under 18 now, uh, but but so is uh D USA uh trading at uh 14 uh.3 multiple uh as of as of the close yesterday. Uh so very attractively valued. And I think this is really, really important in this environment because you know the thing that we hear uh among the biggest concerns on the minds of investors is uh overvaluation, overvaluation in the market, the Mag 7, uh you know, uh just overvaluing the U.S. equity market in general and you know, what's gonna pop uh pop that bubble or uh create a sell-off. Uh, we feel very comfortable uh that uh in the event of a recession, uh in the event of a uh economic uh slowdown uh and even a crises, uh, that we can emerge from that will be defensive uh in the first first place, but we'll also emerge from that even stronger. Uh and we that that's part of every uh discussion in every investment consideration as well, is we assume that at some point during our holding period that we're gonna go through an economic downturn and we model for that. And that's that's why there's an emphasis so much on quality and strong balance sheets. Um we certainly don't want uh to have to go through that. Nobody does. Uh but is uh one one of the fun sayings, uh, and I think it really rings true of uh Shelby Collum Davis was uh you make most of your money in a bear market, you just don't realize it at the time. So uh we we don't wish uh market turmoil on anyone uh in anyone's investments, but that's uh I think a time where true fundamental research and a disciplined approach, uh that's where you earn your stripes, uh, not when everything's high flying and in and going well. Uh and then I want to also underscore the uh the last part of this slide, the the attractive growth. Um, you know, we we do look for companies that have uh above average earnings, uh, but more important than that is the sustainability of the earnings. So again, we'll own uh some companies with higher earnings, uh, but only if we feel confident that that's sustainable over long periods of time. Uh, you know, it's interesting because in my past uh quarterly earnings of of businesses really meant everything. Uh in here, uh it's not that it's unimportant, but what's more important uh is actually earnings on the sustainability at over long periods of time. So certainly an earnings report is important to us because it's a checkpoint um along a long journey, uh, could raise red flags, could be a confirmation that, hey, we're we're getting this right. We're we're really our assumptions about the businesses are playing out on the growth of the businesses. Uh, but uh we don't put too much emphasis on, you know, did did Alphabet make its earnings yesterday or JP Morgan or what have you? So uh attractive growth and in the results, again, is is uh above average growth, uh, even relative to the S P 500, believe it or not. So uh a comp a portfolio that's trading at just over 14 times today, uh, that has above average uh five-year earnings growth rates. Uh that is historic. But if you look at it uh on a forward basis, uh, and there's biases there because it's based on analyst estimates. Uh, but uh we're we're we're above average in earnings growth. So it's kind of Goldilocks where you're getting uh a little bit of everything, uh growth, but at the same time, uh some some potentially defensive characteristics as well. All right. Uh, I didn't want to go too far on that. Um anyway, uh again, sector breakdown here. Uh I just really have this slide up here, not not to emphasize uh as much about, hey, you know, we're not really favorable on utilities or real estate right now. And certainly we can go into that on QA. Uh and we uh our biggest overweight is is financials, not surprisingly, because we think we have a real edge there. Uh, I think the information technology uh bars are a bit misleading because of the classification of uh uh companies like you know, like Meta and uh and Alphabet uh in the realignment there. So we still think of those as largely technology companies. But the real point here, uh, and this does change over time, uh, is that uh we are completely benchmark agnostic. And I think that's uh something that really makes Davis, D USA, and our large cap portfolio so special and so unique, is that we're so different than than anyone else. And it goes along with the saying of you can't expect different results or extraordinary results if you're doing what everyone else is doing. Um, and that leads me to, you know, how are people using our portfolios? Well, because we're so unique, um, you know, for investors that are uh benchmark sensitive, uh sometimes it makes them a little queasy because you will see a lot of tracking error. But we think tracking error is is is a beautiful thing. And tracking error um needs to exist uh to justify uh an active expense ratio. Uh so uh that's that's one thing that I think really differentiates uh the long-term outperformers over time. Uh if you're gonna benchmark Hug, uh you've no business being an active manager uh in most cases. Uh and you know, the trade-off for an investor is uh, you know, SP 500 at three basis points or Russell 1000 at eight, you know. So uh anyway, uh we don't want to belabor that, but uh a great thing that the DTFs did was really let indexing be an option to inferior active management. And there's a lot of bad active out there. Uh, you know, I was shocked when it came to Davis because I again came from the indexing side, but uh I really started to get religion and understand uh that that there is a place, and I think everybody's portfolio for long-term investors, those that want to compound wealth over time, uh, there's a place for active. Uh a lot of folks are using us in conjunction with index-based products, with other managers. Uh, if you look at us uh relative to uh some of the very popular uh large cap ETFs that are active, uh like a capital group uh ETF, for example, uh very little overlap. So you're getting something very different that that gives you a couple things. Uh the opportunity to zig when the market zags or have have positions that are gonna, I don't want to say offset, but offset risk a little bit, uh, and yet be able to outperform over time if you're doing something different than the market uh in a very thoughtful, methodical way. And uh that's again something I think that you get um in uh in enormous amounts uh by uh uh investing in Davis ETFs and in funds. Uh so I talked about actor share, uh, 86% uh in our large cap portfolios, D USA. Uh this this usually is is is pretty consistent across the board uh because of our very nature of having a concentrated portfolio of again 25 to say 35 to 40 names, um, and uh really being very research uh driven. Uh and for the names that we do have that overlap, uh the weightings are often uh very different because uh, you know, we uh don't think uh, you know, market cap or the size of a company really should define the opportunity. And uh essentially, uh don't get me wrong, I I I love indexing. I think there's a a time and a place for it. But if you really take a step back and think about what is your strategy in a market cap-weighted index, um, it's it's allocating more money to the companies that are are bigger, but also allocating more money to the companies that have grown the most uh from a stock price perspective over time. Um, in you know, a more expensive company, a company that just went up, uh is is when you're allocating a lot more to over time. And sometimes that that strategy doesn't necessarily um pay off or uh be really kind of risk um intentional, if you will. Uh so let me just move on here. Uh performance, uh, this is a mutual fund. I wanted to show a long-term track record. Uh, we certainly take our lumps during a uh momentum-based market, but use that as an opportunity to really uh position the portfolio to have a strong performance. And we're in just that period right now where we're seeing uh so many transitions from you know rates going from nothing to be more normalized, uh, and that uh is is weeding out a lot of things and making fundamentals matter more. Uh we're in a a period where uh you know globalization has certainly slowed, almost stopped, uh in that's created things. Uh and we're in a period where AI uh is something that is fundamentally changing uh not just technology, not just the chipmakers, uh, but every single uh business. Um we all feel that it maybe it's a statement of the obvious, but AI is something that uh in in recent years, well, in recent year, uh has really become a fundamental question again on in uh when we're considering any line item, any business to add, you know, how will it impact um financials is is is is a great example here, uh, where we think you know, scale uh certainly helps, where you can can can buy or build uh you know things through technology and AI, uh, gives gives some of the larger banks, uh, for example, some competitive uh advantages. Uh Capital One, I think, is is a great example too of a company we own that maybe isn't top of mind uh for for everyone, uh maybe more so now after the closing of the Discover merger. But uh Capital One uh WeView is a data science company. Uh they didn't even have brick and mortar until recently. Um they have over uh thousand AI patents. Um so they're very much uh leveraging technology and leveraging artificial intelligence to to price risk, uh, and and to add some real synergies in um in their business. Um they're still run by their their founder, uh Rich Fairbank, uh, and uh we're very impressed with uh his approach. Um and we tend to uh favor sometimes owner operators and and founders uh because it it really does encourage uh good corporate behavior um in oversight. Uh, you know, if we're talking ETFs in in D USA, uh you know the the fund's almost a billion dollars right now, uh about 900 million. Uh and it shocks me because uh out of the 192 large cap uh value ETFs, uh the largest is about a hundred and over 150 billion. So uh gosh, I mean 150 times the size. Uh but you know D USA's a very strong track record, too. So uh out of the 192 large cap value ETFs, uh it's the eighth best performer on a one-year basis. We're including active and passive here. Uh it was the number one performer now uh over the last past three years. Uh, and it was in the top quartile over the last five years. So uh I guess our joke, and it really shouldn't be a joke, we should be crying instead of uh kidding around, but uh it's it's the ETF, the best ETF that no one's ever heard of. Uh so we urge you to take a look uh if what we do resonates with you. Uh, you need more, more, more details. Uh urge you to um, you know, follow up uh with me uh and our our team of uh representatives. Uh we've got uh very strong team of client service folks that have, I think, the longest tenure of any asset manager, uh, both internals and externals. So uh we're here for you. Uh we're not a fit for everybody, but uh uh we'd love to continue the conversation. And if there's a a place in your portfolio uh for us, uh, we'll do everything we can to make sure you have all the details um and transparent um transparency into not only the portfolio, but also uh our thought process in each and every holding that we uh we have. Uh and I in a time where you know things are uncertain, people are nervous, valuations are high, uh, you can't put a praise tag on um really understanding uh the minds um and the process of the people that are you know acting as fiduciary for you in the case of advisors uh clients as well. I've got a lot more slides here. Uh I know we're at like 36 minutes. Uh there's some here, um, you know, uh kind of describing the last uh really kind of challenging period coming out of the dot-com bubble and where we can shine. Um, it was New York Venture Fund because uh the ETF hadn't launched until 2017. Uh, but we can kind of continue this conversation uh as a follow-up or in the QA period. Uh and I do have a bunch of slides as well uh on how we think about AI uh and how that kind of fits within our uh decision making and investment discipline, uh, because it is kind of a new addition, uh, even though we're true and tried in terms of ask asking those two basic questions that we try to answer uh in and committing to really being the top decile of knowledge of the businesses we own. Uh, you know, we also are a learning-based culture and will evolve over time. So um with that, uh, Michael, I'm gonna turn it back to you to moderate, ask questions. Uh, I'm around here and we'd love to hear what's on people's minds.

SPEAKER_01:

And by the way, folks, if you want to get access to the deck, just shoot me an email, respond to the Substack posts I put out, uh, and I'm sure Doc can get those to you. I see a couple questions. Ray, good to see you, by the way. Uh Ray Scheimer here. Uh his comment here. It seems like over a long time frame, years, the exposure to financials while still high relative to indexes is less than it used to be, now around 30 as compared to around 50% in the past. Yep. It's a long-term change or change to the opportunities that you're currently seeing?

SPEAKER_00:

Yeah. Uh it's a great question. Um, we often hear, you know, people take a glance and they're like, well, you're always overweight financials. And they think we cover a little bit of that. We do think we have an edge and there's enough companies in there to uh uh to select from to really feel like we've we've got some some good ones in in most market conditions. Um, you know, and financials are so misunderstood. Uh, but we have uh paired back pretty materially, uh, even though it is our largest overweight still. Um that's been largely on valuation. Um we we exited positions in like uh JP Morgan because it just it ran. It was it was such a great performer. Uh we've lowered our weights uh and paired back in in some of the big names. I mean, with 40, 50% runs. Um, we always balance that question on a daily basis of, you know, does the valuation justify the earnings growth that we're seeing? And uh in the case of financials, uh, surprisingly, uh, because you know, they are largely viewed as either boring or part of the problem, not part of the solution, uh, but they they have been part of the solution since the global financial crisis in most instances. So um, yeah, we pick our spots. Uh, you know, people are like, well, with higher rates, you know, that that's gonna be, you know, sometimes beneficial, but uh with with higher rates and pressure on credit and credit losses, you know, why why you're still high? Uh that's not really driving it as much as valuation in the in the moves.

SPEAKER_01:

Question from uh Jay about the overlap between your venture and uh the financials fund.

SPEAKER_00:

Oh, um well, oh between the financials, it's largely everything you get in the financials fund, by and large, there are a few exceptions. And the beauty of ETFs is you can see this, right? Uh the financials fund is a little bit more diverse, but it it's it's gonna rhyme um pretty darn closely. Uh so you certainly just download from our website. It's Davisetfs.com, DFNL, M D USA, and see that difference. But uh if we've got top our top picks, the highest weights that are in the financial fund most certainly will uh be in uh the uh D USA or New York venture.

SPEAKER_01:

And then a uh follow-on question from Jay. Uh thoughts on AI, because no one ever talks about AI. So I it is it it's if we look at it right. But I think from your perspective, you know, as as uh a very serious active shop. Yeah. Yeah.

SPEAKER_00:

And again, we we look at a couple different ways. Um, you know, uh beyond the darlings, beyond the you know, the the high flyers or the the big names like NVIDIA. And don't get me wrong, we we think NVIDIA is a wonderful business, but we think some of the uh baked in growth assumptions on its valuation are just not sustainable. I mean, uh historically, companies to be able to maintain margins and um earnings growth is the i i that the NVIDIA is having right now, uh in many of the other chip players and and others uh is uh we think A little bit risky and certainly a little bit long in the teeth in terms of assumptions. So we played a different way within technology. And I've got a few slides on this that Michael can send to you, or please ping me, I'll shoot you the deck as well. We've written a lot about this. Chris wrote about it a lot in his commentary that's on our website as well. But we uh like the picks and mortars a little bit. So Applied Materials has been a company that makes uh semiconductor manufacturing equipment and is going to benefit uh but it from the growth in uh the demand for AI, uh, but uh you know isn't at quite that same kind of valuation. Uh we started to scale into some energy companies uh again. Uh we were completely out for a few years uh for the the demand uh on energy, uh, but we're picking our places there. Uh you know, Capital One, I mentioned, uh, we think is is a bit of an AI play given all their patents and their leveraging of. Um Meta is another big one. Uh so we have a whole host of these. And uh it's Chris always says investing is the art of the specific, and and it truly is, at least, at least here it is. Uh Meta, we think is is gonna uh benefit tremendously because of their use of AI um in terms of driving uh higher margins in their advertising. Uh and in it really with the three over three billion users and them collecting data on this worldwide. I mean, you everyone thinks of you know, Meta Facebook is being kind of a U.S. thing, and U.S. is a smaller part of their overall business. So uh they've got a lot of growth opportunity there, too, because of their uh user base and their ability to leverage AI to uh to demand higher margins and more sustainable margins from an ad perspective.

SPEAKER_01:

Uh we'll wrap it up with one more question. I think this is uh uh uh interesting question because it is on most people's minds, because you talk about fundamentals and valuation from Steven here. Uh, do you think that the buffet indicator, US GDP versus market cap, is outdated uh due to many multinational corporations generating revenues overseas, or does it still point to overvaluation in the overall market? Now, very specific question, but I do think it's interesting to hit on because it's to a lot of people it looks like uh everything's overvalued, but it keeps staying overvalued and gets more overvalued. So is it really overvalued or is the indicator broken, right? And it's like, you know.

SPEAKER_00:

Yeah. Yeah. I I guess I'll answer a couple different ways. I mean, the easy way out is uh go on our website, uh we actually have the buffet indicator in Chris's commentary. Uh and we do think, you know, that it's not outdated. Um it's not something we rely on, but we're we're not, you know, investors in the overall market. Uh again, we we uh we see some unbelievable opportunities out there, but the market as a whole, just the way it's weighted and defined by the indexes, uh is uh is is very richly valued overall. And I think poses risk when um some event happens and you know the the big events that move the market are the ones no one can predict, right? So uh another saying we have here is that you know you can't predict, and so much of our energy is spent trying to predict because people ask. Uh, but you just gotta prepare. Uh and that's what we do. And um, I think is evidence of that. I mean, you can get D USA, uh, large cap, primarily large cap, uh, US equities at a you know, just over 14 multiple in this market that's trading really rich, uh, even defined as the value market. You know, and I think a lot of people cite S P 500 as being so richly valued, but uh with the Russell one value, uh trading at 18, 17, 18, 19 times, uh, it's bounced around a bit. Uh that's pretty rich when you think about your buying uh value stocks. And that's one of the reasons why we don't own utilities. Uh, because uh in in a lot, we a caught another cautionary tale, and it's in the deck. I'm sorry we didn't have time to get at it. I get a little verbose sometimes, but uh uh you know, dividend plays are perceived uh as defensive. And in many instances, uh these companies are pruning the furniture to pay the dividends, right? And it's it's just not sustainable over time. So look at the payout ratios, look at the specifics, but there was so much demand for income-generating ETFs and funds that it's essentially and and stocks for that matter, um, you can't blame the structure, uh, but uh it's bit up the valuations. So all of a sudden these yields are not attractive. I mean, the Russell 1000 value index doesn't have a very attractive handle on its dividend yield. So um I know it went a lot of directions there, but uh, I guess the point I'll drive home is is look, we got a lot of opinions. Um, and we'll we'll punt when it's a company or uh a business that we don't feel we have expertise in. Uh, but we we do have a lot of opinions in surprising areas like the hex Davis, a value manager, talking about AI for. But uh I think you know that's that's that's our value add, right? Is to uh share your expertise in certain areas and share your perspective when it differs from many other managers that you're using or approaches or your own. Um in you only learn through discourse and and understanding the other side to to really make uh make moves.

SPEAKER_01:

So I think that's a uh good place to wrap up this webinar. Appreciate those that attended. Again, if you want the deck, just shoot me an email. I will email you for the C credits for those that need that or want that afterwards. Uh special thanks to Doc Kipsley, to Davis Advisors, and I'll see you all in the next webinar. Thank you, Dod. Appreciate it.

SPEAKER_00:

Uh thanks everyone and Michael. I really appreciate this. Uh it's an honor to be on your uh on your show. So appreciate it. Thank you, everybody. Cheers, I'm not sure.

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Michael A. Gayed, CFA

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