2024-01-11 01:31:59 ET
Summary
- The Motley Fool Global Opportunities ETF had a strong 2023 with a return of 28.1%, outperforming the S&P 500 and MSCI World Index.
- TMFG is managed to seek out high-quality businesses with healthy balance sheets, high free cash flows, and attractive valuations.
- The Fund has historically underperformed passive global funds and exhibits greater volatility, making it a less attractive option for global exposure.
In recent articles, I have mentioned a preference to seek global exposure, as I believe global stocks may offer better return opportunities in the coming years (Figure 1).
Figure 1 - Asset class forward returns (GMO)
While screening for global large-cap funds, I came across the Motley Fool Global Opportunities ETF ( TMFG ). I was intrigued by TMFC's 2023 returns of 28.1%, better than the S&P 500 Index and the MSCI World Index.
However, after further analysis, I am turned off by TMFG's boom/bust returns profile. The TMFG ETF has historically underperformed passive global funds while exhibiting greater volatility. For investors seeking global exposure, I recommend they look elsewhere.
Fund Overview
The Motley Fool Global Opportunities ETF gives investors a low-cost and convenient way to access high-conviction Motley Fool global stock picks.
The TMFG ETF is an actively managed ETF that invests in high-quality global companies with strong market positions and robust balance sheets that are trading at attractive valuations. As per its mandate, the TMFG ETF will invest at least 40% of its assets outside of the United States.
Who Are The Motley Fool?
The TMFG ETF is managed by Motley Fool Asset Management, an asset manager that grew out of The Motley Fool's ("TMF") investment education/newsletter business.
Motley Fool's service is similar to Seeking Alpha where new investors can learn about investing while seasoned investors can subscribe to a variety of TMF newsletters, similar to Seeking Alpha's Investment Group (Figure 2).
Figure 2 - The Motley Fool's timeline (fooletfs.com)
TMF's investment philosophy is generating "long-term returns by buying and holding high-quality businesses with lasting competitive advantages, healthy balance sheets, high profit margins, and attractive returns on capital".
After many years of running a successful newsletter service, TMF branched off into asset management in 2008 with the launch of mutual funds based on their stock picks, and in 2018, TMF began offering ETFs.
The TMFG ETF was originally launched as a mutual fund called the Motley Fool Independence Fund in 2014. This fund was acquired and merged into the MFAM Global Opportunities Fund in 2016. The MFAM Global Opportunities Fund was further reorganized into its current ETF form in December 2021 (Figure 3).
The TFMG ETF charges a 0.85% expense ratio and currently has $419 million in assets (Figure 3).
Portfolio Holdings
The TMFG ETF currently has 56% of its assets invested in the American markets with the rest invested globally, with 10% invested in Irish stocks, 4% in Canada, 4% in the Philippines, 4% in Australia, and 3% in China (Figure 5).
Figure 6 shows the TMFG's current sector allocation. The fund's largest sector weight is Industrials at 22.7%, Financials at 19.5%, Consumer Discretionary at 15.1%, Communication Services at 12.8%, and Information Technology at 10.9%.
Figure 6 - TMFG sector allocation and top 10 holdings (fooletfs.com)
Figure 6 also shows the fund's top 10 holdings, which account for 46% of the portfolio, making the TMFG ETF a fairly concentrated fund.
Figure 7 shows the sector weights of the iShares MSCI World ETF ( URTH ) for comparison. Relative to the URTH, the TMFG ETF is very overweight in Industrials (22.7% vs. 11.0%), Consumer Discretionary (15.1% vs. 10.7%), and Financials (19.5% vs. 15.3%). It is underweight Information Technology (10.9% vs. 22.7%), Health Care (7.2% vs. 12.5%), and Consumer Staples (2.5% vs. 6.9%).
Distribution & Yield
The TMFG ETF pays an annual distribution, with the most recently announced annual distribution of $1.51 amounting to a 5.5% trailing yield.
Returns
TMFG's short-term performance has been exceptional, with 2023 return of 28.1% being the reason it caught my eye in the first place. However, TMFG's longer-term returns have been more modest, with 3 and 5-year average annual returns of -0.3% and 12.1%, respectively, (Figure 8).
Returns prior to 2016 may not be comparable for the TMFG ETF, as the predecessor fund was employing a different strategy at the time.
Figure 9 shows the historical returns of the URTH ETF for comparison. Relative to the URTH, the TMFG ETF has outperformed in the short term, returning 28.1% vs. 23.9% in 2023. However, on a 3-year horizon, the TMFG ETF has underperformed with returns of -0.3% vs. 7.5%. The TMFG ETF also underperformed on a 5-year horizon, returning 12.1% vs. 13.0%.
Boom/Bust Returns Profile Makes It A Challenging Recommendation
Looking at TMFG's annual performance in more detail, from 2016 to 2023, the fund had 4 very strong years with average returns of 31.5% in 2017, 2019, 2020, and 2023. However, it also had poor performance in the other years, capped with a -28.4% decline in 2022.
This has led the TMFG ETF to exhibit lower risk-adjusted returns than peers. The TMFG ETF has a 5-year Sharpe ratio of 0.57 compared to 0.65 for the URTH (Figure 10). Compared to the Morningstar Global Growth Index, the TMFG ETF also has roughly the same 5-year average annual returns, but significantly higher volatility.
Figure 10 - TMFG has poor risk-adjusted returns (morningstar.com)
Conclusion
While The Motley Fool Global Opportunities ETF had a strong 2023, returning 28.1% compared to 23.9% for the iShares MSCI World ETF, the TMFG ETF had historically underperformed the passive URTH ETF. Furthermore, TMFG has a boom/bust returns profile with comparable returns but higher volatility. This leads to lower risk-adjusted returns for TMFG.
I recommend investors seeking global exposure to look elsewhere.
For further details see:
TMFG: Boom Bust Global Fund