Dodd Kittsley is a director at New York-based money manager Davis Advisors and is one of the firm’s key figures in driving the growth of its ETF business. From his early days at Morgan Stanley following the closed-end fund space to his work convincing his bosses to get into the index ETF business, Kittsley has spent his career developing a number of solutions for his clients.
Kittsley describes Davis as a boutique firm that focuses entirely on its core strategies built on a value discipline that looks for “long-term compounding machines”. He notes that they don’t have as many resources available as the big money managers do, but they know what their core is and stick fiercely to it.
A lot of the conversation centered around China and what is going on there currently. Kittsley believes that some of the best companies and opportunities still exist in China and the growing middle class makes China transformational. His company is being very selective in its investments since uncertainty has jumped dramatically with the current degree and pace of regulation. Right now, the market is throwing the baby out with the bath water, but the regulations being put into place now could position its economy for future growth.
China, he says, hasn’t really done anything the U.S. government wouldn’t want to do with tech companies. It’s just being more direct than what we’re used to in the United States. We’ve seen regulation around the world, but China still has a lot of catching up to do. Reducing anti-competitiveness at a high level is a good thing because what Alibaba was doing, for example, wasn’t advantageous to consumers. The Chinese government does need to be careful with its stiff approach because it could impact tech development. There’s still the potential for disruption in the FANG stocks in the United States.
In terms of overall portfolio strategy, Kittsley believes investors have gotten a little spoiled by the continuous high returns from equities with only minor pullbacks. Investors need to have the expectation for inevitable periods of underperformance since even the best money managers will have them from time to time. People have gotten into the habit of abandoning anything that is down, as we’ve seen with the ARK ETFs, and investors almost always experience a lower return than the fund itself over time because of this buy high/sell low tendency. Investors need to have a longer-term time horizon to account for this.
Another thing to watch out for is fund managers who don’t “eat their own cooking”. Kittsley notes that only about half of active fund managers own shares in their own funds and about 86% have less than a million dollars invested. At Davis, they try to align manager and shareholder interests by compensating managers based on performance versus their benchmark and reward managers in shares of the fund itself.
Where does Kittsley see opportunity in the markets today? Investors are still mostly favoring mega-cap tech stocks, but his firm is a believer in the potential of the financials. He says that the sector is still unloved and misunderstood because there’s still some bias that exists from the financial crisis. Banks were limited in what they could do because they needed to set so much capital aside to cover potential loan losses. Today, financials are beginning to buy back shares again and there’s a lot of cash on their balance sheets. He believes that this group could become the next dividend darlings.
He says that financials could be threatened by the development of blockchain, but the sector has a history of taking disruptors and absorbing them into the system, using companies such as Venmo and Zelle as examples. Money markets and online banks were also disruptors at one point and they’ve now become a fundamental part of the financial system. Banks have been around for centuries and have exhibited a great deal of durability over time.
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