Smart investors are smart for a reason. Namely, it’s because they have a knack for cranking out winning performance on a consistent basis. That’s why people try to emulate their strategies, which is why a small number of exchange-traded funds have launched during the past three years that seek to mimic the acumen of billionaire investors, successful hedge fund managers, so-called investing gurus and the like.
The newest player in this niche space is the Validea Market Legends ETF (VALX), which began trading in December. It was the third such ETF to launch last year, coming on the heels of two existing funds following a similar tack that both launched in 2012.
The underlying strategies of four of these five funds are based on Form 13F filings that institutional investment managers with more than $100 million in qualifying assets––generally U.S. equity securities––must submit to the U.S. Securities and Exchange Commission within 45 days of the end of each quarter. These filings publicly disclose the qualifying holdings of investment managers and provide insights into their portfolios.
The managers of ETFs based on Form 13Fs comb through these filings and then apply their own proprietary methodologies to construct portfolios based on those filings. This approach has been successful, at least as can be measured so far with the two older funds that are approaching their respective three-year anniversaries. That said, 13F filings are a rearview tool that can be dated by the time the filings are made public.
The Validea Market Legends ETF aims to stand out from the crowd by ignoring 13F filings and instead constructing its own computerized investment models that play off the proven strategies of Wall Street legends. “The holdings in our fund our freshly generated using original criteria based on these legendary masters,” says John Reese, CEO and lead portfolio manager at Validea Capital Management, a West Hartford, Conn.-based investment advisor with total assets under management and sub-advisory of about $620 million.
The VALX fund comprises 10 factor-based equity models based on the strategies of famous investors and encompasses investment styles including value, growth, momentum and income. Warren Buffett, Benjamin Graham, Peter Lynch and Martin Zweig are among the legends Validea uses as foundations for its models.
Reese, who holds a computer science degree from the Massachusetts Institute of Technology, says he started the original premise for Validea after reading books from investor greats and identifying those who had a good performance track record and were clear enough in their writing to where he could apply his artificial intelligence background from M.I.T. and incorporate that into a computer program employing multi-factor analysis models to mimic the way these legends picked stocks.
“At a high level, I might be summarizing the number of factors in their particular model by using my best interpretation of how they went about picking their stocks,” Reese says. “I’m not overlaying additional factors. I may be ascribing in general terms a number of factors they may use.”
Reese says he started the research for what eventually became Validea in 1996. He co-founded the company with chief investment officer Jack Forehand in 2004, and they rolled out their first portfolios that year.
Since then, Validea has created 10 managed account portfolios that are divided into four major groups ––long only, moderate risk, reduced risk and rotational portfolios.