Diamond Hill Capital Management, an Ohio based independent investment manager with about $16 billion in assets under management that provides services to institutions and individuals through separate accounts, mutual funds and private investment funds, recently entered the exchange-traded funds arena.
Founded in 2000 by Ric Dillion during the peak of dot-com mania, it took 15 years for the investment manager, now a publicly-traded entity itself, to enter the world of ETFs.
The newly-launched Diamond Hill Valuation-Weighted 500 ETF (DHVW) is based on the firm’s belief that intrinsic value is unrelated to a stock’s current price and is more of a fundamentally-weighted play, thus differing from the more traditional market-cap weighted products.
The passively-managed fund tracks the Diamond Hill Valuation-Weighted 500 Index, an index consisting of about 500 of the largest US-listed equity securities weighted by intrinsic value capitalization. The index is rebalanced every quarter.
Intrinsic value of a security is calculated using both fundamentals and consensus earnings estimates from a universe of 700 of the largest US-listed companies in terms of market capitalization.
DHVW uses a discounted cash flow (DCF) methodology that assumes mean reversion of price-to-earnings ratios. Instead of using own estimates, the fund utilizes consensus data and plugs them into DCF methodology. The intrinsic value is based on forward estimates of normalized earnings and earnings growth, dividends expected to be paid over the next five years and the company’s book value. The strategy aims to give smaller weight to richly priced stocks and greater weight to cheaper stocks.
Recent estimates suggested American companies are sitting over cash in excess of $1.8 trillion. To address the problem of growing liquidity in corporate balance sheets, DHVW incorporates tangible book value into the calculation, arguing it reflects a more realistic assessment of the amount of liquidity than the simple P/E multiples.
Needless to say, the fund is well diversified with nearly all the blue-chips finding a place in the portfolio. However, technology and financials are given more weight (18 percent each) while healthcare, consumer discretionary and industrials also get double-digit allocation among all the sectors. Apple Inc is the top holding (4.6 percent) followed by Microsoft and Google (1.8 percent each).
DHVW charges 10 basis points in net fees annually.
Disclosure: No holdingsContact Ulli