Some performance reviews of the Avantis fund

A few weeks ago I had an email exchange with my contact at Avantis Investors. He provided a brief update on how the funds have performed.

I thought I’d just list them here, for your benefit.

The table below provides an overview of the funds listed and incorporated in the US:

These are total returns, including dividends. Avantis started sometime in late 2019 and so their longest running fund is six years.

The one that stood out the most is definitely AVDV or the International Small Cap value. I always laugh that three years ago you would never let people buy anything international… let alone small… let alone valuable.

There is actually a 5% annualized difference compared to the MSCI World ex USA Small Value NR and to me this is important for two reasons:

1. You can’t say: “Oh, because the international small cap is doing well, so this AVDV did well too.” The underlying exposure of the index, and at any point in time of AVDV, determines performance and AVDV did well thanks to the selection.
2. Look at the number of investments currently: 1617. It is not a concentrated fund and it does not perform better because of the concentration. Despite that, it performs excellently.

And in that respect, AVDE or International Equity is quite good, with an outperformance of almost 2% per year. This is a measure of mix and not value.

I like the return on investment grandfather or Avantis US Equity ETF also interesting.

Because it relates to the Russell 3000, the ETF is intended as the core of many investors’ portfolios and includes large-cap, mid-cap and small-cap stocks. The Russell 3000 is cap-weighted, meaning they have done well in recent years thanks to the outperformance of Amazon, Nvidia, Microsoft, Apple and Alphabet.

If you underweight them, you’re fxxked.

That’s exactly what an AVUS will do. Stay diversified, but consider the investments with higher expected returns (i.e. future returns).

Yet they are still keeping pace and are even outperforming the Russell 3000 index.

To help you all visualize, I’ve stacked a few indexes on top of each other:

The dark blue line is AVUS since inception (153% of Tradingview). The pink line is the Russell 3000 ETF (144%), the light green is just the SPY or S&P 500 large cap (153%) and finally the orange is the RSP or the S&P 500 with equal weights (111%).

You’d notice how close the AVUS stayed to the Russell 3000, doing well for some years and worse for some years. Most importantly, if you stay invested, you will build wealth.

The end of 2019 is pre-Covid and $1 million in both will be $2.5 million today. This is the most important thing you need to focus on.

There are a lot of side stories to deal with.

People will say it doesn’t matter, just focus on the big cap, lah. And you can see that we’re at a point where the AVUS is almost on par with SPY’s performance.

If you didn’t include mid-cap and small-cap, but equal weight (RSP), you would have lagged behind the Russell 3000 ETF.

Six years is probably not long enough to judge, but there are a lot of ebbs and flows as you live with it during this period. And there will be more ebbs and flows.

Finally, both AVEM (emerging markets) and AVUV (US small cap value) did well, but I’ve mentioned them a lot so I won’t say much.

Some people will say… “you’re measuring AVUV at the Russell 2000 value. Isn’t that a low bar?”. They measure against something valid and objectively speaking this is the right benchmark to measure against.

But let’s push it. You all like the US large-cap market cap or the S&P 500. This is completely unfair considering how well Amazon, Nvidia, Microsoft, Apple and Alphabet did.

Let me pit the two against each other:

Dark blue is AVUV (149%) and green is SPY (153%).

No Amazon, Nvidia, Microsoft, Apple and Alphabet. Only a number of small companies with a higher expected return have been filtered. They have an overweight in all the underperforming energy companies and all the small banks, which you hear all the scary things about. (You can see the gap when the green line is above the blue line. I call it the ‘Gap of Doubt’, which most people will wonder what the fxxk am I doing with this)

The UCITS Avantis funds

Here are the performances of the 3 UCITS funds:

It’s a very short history and this year they may underperform, so I don’t want to comment much.

All three have done better, but I want to focus on the fact that they could do this with such broad diversification (look at the holdings).

It’s something I paid attention to sometimes when we said it Diversification is also about capturing revenue from the big artists.

Some questions and answers

I had a chance to try to clarify a few things (that I think I can get the answers to instead of something I couldn’t).

The first was that we noticed that the UCITS AVEM outperformed the US-based AVEM and asked if they had any comments on the better performance:

My contact assures me that the portfolios are managed similarly and idiosyncratically in the short term and that they should be comparable over time.

My second question is to determine if Avantis has the same setup as Dimensional, in that there is a rolling daily list of securities that can move in and out of the portfolio based on higher expected returns. The portfolio managers would communicate to the execution traders what to add or remove from the portfolio. The importance of this to you is that they don’t just replicate a factor index two or four times a year. It means that there will be consistent portfolio actions, just that they will be done according to a systematic strategy.

My contact assures me that they work the same way as Dimensional.

The last question is a variation on the second question, but more focused on AVDV.

We all know AVDV’s stellar performance over the past year and if this is a passive index, the stocks that have done well would account for a large portion of the returns. But in a systematic active strategy, the top performers would obviously be sold if their future expected returns are lower.

My contact person confirms that this understanding is correct.

This is a favorite grid that Avantis used to show how their stock universe, in this case the MSCI World ex US, can be accommodated:

We can group them based on book-to-price, where a low book-to-price is more expensive and a high book-to-price is cheaper. Lower profitability means the security should post lower adjusted cash profitability, and high profitability means the security has higher adjusted cash profitability.

The goal is to build a portfolio with higher expected future returns and if so, then you want the portfolios that are more towards the top right. Or your portfolio should have a higher percentage of stocks on the top right, or more on the top, more on the right.

When these stocks rise, they could potentially move left. Therefore, Avantis should reserve them for sale unless they still look good based on profitability.

If you buy AVDV today, in a sense, even after a 50% increase in a year, the fund’s book value/market cap is higher than the benchmark, indicating that its book value is worth more than its price, meaning it is cheaper than the benchmark.

A systematic active value strategy, which does not reflect a factor index, will consistently help you rejuvenate the portfolio into the mix you desire.

Okay, I hope this information is useful and let me know if you like it so I can do more.

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