Hillman Capital Management launches ETF with SS&C ALPS Advisors
US-based boutique value equity manager Hillman Capital Management is the latest firm to step into ETF waters through a partnership with SS&C ALPS Advisors.
The active large-cap value ETF, the ALPS Hillman Active Value ETF (NYSE:HVAL), is designed to bring the value investment philosophy of Mark Hillman, founder, CEO and CIO of Hillman, to the investing public.
Hillman has been investing in large cap value since the early 1990s, searching out businesses with sustainable competitive advantages that are mispriced by markets and so available at discounted valuations. Assets currently stand at USD 460 million, up from roughly USD85 million two years ago”.
Hillman says: “We are excited about the opportunity that this represents as it seems like the ETF industry is the fastest growing segment at the moment and with fully transparent active ETFs being a bit newer, we feel like we are on the cusp of that – it’s a great avenue for growth for us.”
The fund will be fully transparent. “We have a good institutional following and a long history and tradition of value management,” Hillman says. “We have a long track record of out-performance and a history of discipline.”
The lion’s share of the business of the companies in the investable universe for the new ETF needs to be in the US so the portfolio is mostly focused on US businesses with anything more than USD3 billion in market capitalisation, but always firms that have sustainable competitive advantages in their industry, proven over several economic cycles.
“We don’t find companies that no one else has noticed,” Hillman clarifies. “We find well-established companies that are dominant in a segment of their industries.
“When we start our strategic analysis, we prohibit ourselves from looking at valuation because we believe that analysts often want to like the company if they know that it is undervalued. First we have to satisfy ourselves that the company has sustainable competitive advantages.”
There are approximately 175 companies in the qualified universe at the moment. The valuation work is done on a discounted cash flow analysis. The ETF will have a 45-stock portfolio, targeting 2.2 per cent for each position.
“We bought the 45 most undervalued stocks in our universe, subject to diversification guidelines, and we will sell a stock from the portfolio either because it has become overvalued by as much as 20 per cent or it falls out of our qualified universe, although usually it is the former reason, and we replace it with the most undervalued stock in our qualified universe.”
Consumer staples firms are currently held in the portfolio such as Kellogg as well as energy companies such as Exxon Mobil and Consumer Discretionary companies such as Amazon.com. This last firm is in because on a discounted cash flow basis, they are undervalued, Hillman explains.
“We are in some interesting volatile times in the market with the hemming and hawing about where the economy is going and what new shape will it be in,” he says. “We see opportunities where there is a company that has a strong future cash flow profile but it is undervalued by the market.”
The Amazon story is a good example of the firm’s discipline around valuation. “We owned Amazon before folks got carried away with buying it because of the increased demand during the Covid shutdown,” Hillman says. “We sold it because it was over-valued and then bought the stock again, when people over-reacted to the reopening of the economy.”
Over a 10-year period, Hillman’s Advantage Value Equity Portfolios, the model utilised for managing HVAL, have achieved annualised performance of 15.41 per cent net of fees, versus 11.61 per cent for the Russell 1000 Value TR Index.