AVUS - AVUS: Active Factor-Based Fund With Short-Term Outperformance

2023-10-09 23:46:09 ET

Summary

• Avantis US Equity ETF is an active factor-based ETF with a focus on lower-priced, higher-profitability stocks.
• AVUS has outperformed in the short-term, with a 12.3% 3-year average annual return compared to 9.2% for the Russell 3000 Index.
• However, I have some concerns on whether this outperformance is sustainable in the long run based on the performance of a similar strategy at the manager's prior firm.
• Furthermore, the AVUS ETF has only outperformed its benchmark 50% of the time in its short history, so there is not enough data to draw conclusions.
• I am placing the AVUS ETF on a watchlist to see how it performs in the coming quarters/years.

The Avantis US Equity ETF ( AVUS ) has shown strong recent performance, with a 12.3% p.a. 3-Yr return vs. 9.2% for the Russell 3000 Index. AVUS' outperformance was credited to its strategy of emphasizing value-priced, high-profitability stocks.

However, it is unclear whether AVUS' short-term outperformance is sustainable over the long run, as a similar strategy at the manager's prior firm has essentially delivered index-like returns over the prior 2 decades.

Fund Overview

The Avantis U.S. Equity ETF is an actively managed ETF offered by Avantis Investments, a subsidiary of American Century Investments.

American Century was founded by James Stowers in 1958 and is one of the largest privately owned investment management companies in the U.S. with over 1,400 employees and 9 global offices. American Century was one of the pioneers of using computers to screen for stocks, and recently, was one of the first companies to launch actively managed ETFs.

The Avantis U.S. Equity ETF invests in a broad set of U.S. companies across all market capitalizations and has a value tilt by overweighting companies trading at lower valuations with higher profitability ratios. Value is defined mainly as book value to price while profitability is defined mainly as adjusted cash from operations to book value. When the manager identifies companies with the desired characteristics, the manager will seek to overweight them within a broadly diversified portfolio. Conversely, the manager may underweight or exclude securities that do not have the desired characteristics.

The AVUS ETF has been quite successful, garnering over $4 billion in assets while charging a low 0.15% net expense ratio (Figure 1).

Rocket Scientist Fund Manager Deserves Mention

Dr. Eduardo Repetto is the CIO of Avantis and the portfolio manager of the AVUS ETF. Dr. Repetto is literally a rocket scientist, with a Ph.D. in Aeronautics from Caltech and was formerly Co-CEO and Co-CIO of Dimensional Fund Advisors ("DFA").

Dimensional Fund Advisors is one of the leading firms practicing factor investing , an investing style pioneered by Eugene Fama and Kenneth French of the University of Chicago, widely considered the founding fathers of the Efficient Market Hypothesis .

Portfolio Holdings

Figure 2 shows AVUS' sector allocation as of June 30, 2023. As discussed above, the AVUS portfolio is value-tilted, with a weighted average book value to the market price of 0.25x vs. 0.16x for the benchmark, the Russell 3000 Index. Profitability appears to be in line with the benchmark.

As of June 30, 2023, the AVUS ETF was overweight Energy (8.0% vs. 4.2%), Industrials (12.6% vs. 10.0%), Financials (15.3% vs. 13.0%) and Materials (4.6% vs. 2.8%) while it was underweight Information Technology (20.9% vs. 26.4%), Real Estate (0.4% vs. 3.0%), Health Care (11.% vs. 13.5%), and Consumer Staples (5.1% vs. 6.1%).

Distribution & Yield

The AVUS ETF pays a trailing 12-month distribution yield of 1.6%, which is roughly in line with the market (Figure 3). AVUS' distribution is paid quarterly.

Returns

Ultimately, investors buy active funds because they believe the fund manager can outperform the markets. In this regard, the AVUS ETF appears to be delivering on its promise so far in its limited operating history. The AVUS ETF has delivered 12.3% average annual returns on a 3Yr basis to September 30, 2023 (Figure 4).

The AVUS ETF has outperformed its benchmark, as represented by the iShares Russell 3000 ETF ( IWV ), which has only returned 9.2% on a 3-year basis (Figure 5).

Looking at the annual performance, it appears much of AVUS' outperformance came from 2022 when it declined 13.8% vs. a 19.3% decline for the IWV ETF. AVUS also beat the IWV ETF in 2021, returning 28.6% vs. 25.5%. However, the AVUS ETF underperformed in 2020 (17.5% vs. 20.7%) and so far in 2023 (8.9% vs. 12.3% to September 30, 2023). So AVUS' outperformance is quite inconsistent.

Look To DFA For Long-Term Performance Guide

While the AVUS ETF itself has a short operating history, investors may be able to look at Dr. Repetto's prior firm, Dimensional Fund Advisors, to get a sense of how AVUS' strategy may perform over the long run.

For example, DFA's flagship $30 billion fund, the U.S. Core Equity 1 fund ( DFEOX ), has a strategy very similar to the AVUS ETF with a stated focus on lower relative price and higher relative profitability companies benchmarked to the Russell 3000 Index.

The DFEOX fund has delivered respectable average annual returns of 9.1% since inception in September 2005 (Figure 6).

However, if we compare the performance of DFEOX versus the IWV ETF, we find that there is little long-term difference between the returns profile of DFEOX and the IWV ETF, with DFEOX returning a 9.1% CAGR compared to IWV's 9.0% (Figure 7).

DFEOX is slightly more volatile (16.6% Std. deviation of returns vs 15.8%), so it actually has a lower Sharpe Ratio (0.53 vs. 0.54) compared to IWV.

So the key question in my mind is whether AVUS' recent outperformance, with 3-year average annual return of 12.3% for AVUS vs. 9.3% for DFEOX, is sustainable in the long run given the similarities in their stated strategies.

Conclusion

The Avantis U.S. Equity ETF is an active ETF managed by former Dimensional Fund Advisor CEO/CIO, Eduardo Repetto. It follows a similar factor-based investing approach that has underpinned DFA's investment strategies for the past few decades.

The AVUS ETF has performed well in the past few years with a 3-year average annual return of 12.3%, beating its benchmark, the Russell 300 Index. However, looking at the long-term historical performance of DFA's US Core Equity 1 fund, a fund with a similar stated strategy as the AVUS ETF, the DFEOX fund has performed essentially in line with the benchmark since 2005. Therefore, it is unclear whether AVUS' short-term outperformance is sustainable in the long run.

I am placing the AVUS ETF on my watchlist, as I find its outperformance deserves monitoring, but I am not ready to rate it a buy just yet.

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