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.

Validea is a sub-advisor to two mutual funds in Canada offered through the National Bank of Canada, and its managed accounts are available to financial advisors through Validea itself and through both the Placemark UMA Marketplace Network and the Envestnet Advisor Suite. The investment minimum for its managed accounts is $250,000.

Reese says the impetus for creating the VALX fund came from both advisors and investors who have subscribed to Validea’s newsletter and research tools but couldn’t  pony up the $250,000 minimum for one of its managed accounts. The ETF, he notes, appeals to investors looking for a more retail-level product.

The Nasdaq-listed VALX fund has 100 holdings, carries an expense ratio of 0.79 percent and rebalances monthly. “The ETF has the big advantage of being tax efficient to mitigate short-term capital gains taxes [from the fund’s monthly rebalancing],” Reese says.

Morningstar classifies the product in its mid-cap blend style box category. That’s an appropriate classification for now, Reese says, because the fund’s model has a bias toward small- and mid-sized stocks. But he notes that will probably change over time because Validea’s model––like other guru-based models at competing ETFs––aren’t limited to traditional categories because they float, or alter their biases as market conditions change.

“We feel the best comparison is the S&P 500 index because it’s the broadest benchmark,” he says.

Many of Validea’s managed account portfolios are benchmarked to the S&P 500, and on that basis their performance track records are mixed. According to Validea, the portfolio that’s the closest comparison to the VALX fund––the Select Blend portfolio of 60 small- and mid-cap securities based on investment guru models––has topped the benchmark since 2003, though some of that period incorporates back tested results. 

13F Funds
Whether or not Validea has built the proverbial better mousetrap remains to be seen. What is known is that the two oldest funds in the guru ETF category have done quite well during their short lifetimes.

The AlphaClone Alternative Alpha Exchange-Traded Fund (ALFA) and the Global X Guru Index ETF (GURU) launched within a week apart in mid 2012. Both funds have generated significant investor interest––GURU has attracted $357 million in assets versus $107 million for ALFA, and both have annualized returns of about 25 percent. ALFA sports an expense ratio of 0.95 percent versus 0.75 percent for GURU.

Global X added to its guru franchise when it launched the Guru Small Cap Index ETF (GURX) last March. The fund, which also carries an expense ratio of 0.75 percent, hasn’t come close to matching the success of its big brother in terms of investor interest (AUM of just $2 million) or performance (down about 7 percent since inception).

The other ETF in this group, the Direxion iBillionaire Index ETF (IBLN), launched last August and already has nearly $40 million in assets. It’s up more than 5 percent since inception, and charges 0.65 percent. 

The Validea Market Legends ETF has garnered more than $18 million in AUM in just three months. “I’m very pleased with the results so far considering our original goal was to have $25 million AUM in the first year,” Reese says.

The fund has gained 7 percent since its launch.

For now, advisors can access the VALX fund through any online discount brokerage platform such as Charles Schwab, TD Ameritrade, Fidelity, Scottrade and others. But Validea is working to expand its reach to the advisor community through other means.

“We’re in the process of making inroads with the ETF due-diligence teams at major wirehouses, including Morgan Stanley and UBS,” says Justin Carbonneau, a partner who manages Validea’s private client group.