November 2019 IssueLong scroll reading

Launch Alert: Avantis International Small Cap Value (AVDV)

By David Snowball

Between September 17 – September 24, 2019, Avantis Investors launched a series of five actively-managed ETFs. They are:

Avantis Emerging Markets Equity ETF AVEM, e.r. 0.33%

Avantis International Equity ETF AVDE, e.r. 0.23%

Avantis International Small Cap Value ETF AVDV, e.r. 0.36%

Avantis U.S. Equity ETF AVUS, e.r. 0.15%

Avantis U.S. Small Cap Value ETF AVUV, e.r. 0.25%

Because of the fundamental similarities between them, we choose just one as an exemplar of the group. Chip, MFO’s cofounder and technical director, declared “international small cap value sounds cool, do that one!” Since she is, she reminds me, never wrong, I did.

Avantis Investors is a subsidiary of American Century, a $168 billion asset manager that was one of the pioneers of no-load investing. They have five strategies which they’ll offer through active ETFs, institutional mutual funds and separately managed accounts. Their particular distinction in the marketplace is that their principals are all alumni of Dimensional Fund Advisors (DFA). DFA is a legendary firm whose investment disciplines are based on rigorous academic research; long before it became vogue, DFA was pioneering smart beta portfolios where conventional index portfolios were reshaped by overlays for factors such as size and value. DFA’s concern for the integrity of their brand made them legendary, and largely inaccessible. Their funds could be purchased only through financial advisors, and the advisors had to earn the right to sell DFA funds through rigorous financial coursework.

For reasons not yet clear, a group of experienced DFA executives and managers left the firm to found Avantis. They are:

Eduardo Repetto, PhD, former co-Chief Executive Officer and co-Chief Investment Officer of Dimensional Fund Advisors; Dr. Repetto’s degrees are all in engineering, including a doctorate in aeronautics from CalTech.

Pat Keating, CFA, former Chief Operating Officer of Dimensional Fund Advisors

Mitchell Firestein, investment manager at DFA from 2005-2019

Daniel Ong, CFA, senior portfolio manager and vice president at Dimensional Fund Advisors (DFA) from 2005 to 2019.

Ted Randall, portfolio manager at DFA from 2001-2015 and founder of Pro-Value Construction Services, Inc. from 2016 to 2018. Really: “I was growing tired of working as a portfolio manager at a mutual fund and not sure what I wanted to do next, but I knew I didn’t want to continue what I was doing. So, I quit my job of 16 years and started working on the house with our new contractor.” After being burned by unscrupulous contractors, he decided that he and a partner, Tre, could do better. (“Meet Ted Randall and Tre Green of Pro-Value Construction Services in Rolling Hills Estates,” VoyageLA, June 12, 2017)

An interesting side benefit of working with Avantis is that Jim Stowers, the founder of American Century, created a structure whereby AC and its affiliates would provide financial support to the Stowers Institute for Medical Research at the University of Missouri. Since 2000, American Century’s dividends distributed to the Institute have totaled more than $1.5 billion.

International Small Cap Value ETF invests primarily in a diverse group of non-U.S. small cap value companies across market sectors, industry groups, and countries. The portfolio currently has about 850 stocks while their benchmark index, MSCI World ex USA Small Cap Index, has 2500. They aim to harvest three sets of advantages:

  1. the advantages of with indexing (diversification, low turnover, transparency of exposures)
  2. the advantages of active tilts driven by academic factor research and quantifiable factors
  3. the advantages of careful trading. At base, they recognize that some trades are not, in practical terms, worth making.

The portfolio’s tilts place an emphasis on firms with smaller market caps and high profitability. They’ll underweight or exclude some of the indexes larger, more expensive or less profitable firms. The term “small cap” is, they note, relative so that what qualifies as “small” in one country might be “large” in another.

Morningstar concludes that DFA “continues to be an outstanding steward of its shareholders’ capital … [their] investment strategies are rooted in research from the top minds in financial academia. These same researchers use a rigorous vetting process when developing new strategies or modifying existing ones. Proposals must be exploitable in a well-diversified, low-turnover, and cost-effective manner.” Investors hoping that the (accessible) apple doesn’t fall far from the (inaccessible) tree might want to investigate the five Avantis ETFs more closely.

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About David Snowball

David Snowball, PhD (Massachusetts). Cofounder, lead writer. David is a Professor of Communication Studies at Augustana College, Rock Island, Illinois, a nationally-recognized college of the liberal arts and sciences, founded in 1860. For a quarter century, David competed in academic debate and coached college debate teams to over 1500 individual victories and 50 tournament championships. When he retired from that research-intensive endeavor, his interest turned to researching fund investing and fund communication strategies. He served as the closing moderator of Brill’s Mutual Funds Interactive (a Forbes “Best of the Web” site), was the Senior Fund Analyst at FundAlarm and author of over 120 fund profiles. David lives in Davenport, Iowa, and spends an amazing amount of time ferrying his son, Will, to baseball tryouts, baseball lessons, baseball practices, baseball games … and social gatherings with young ladies who seem unnervingly interested in him.