One of the holy grails in the investment management industry is finding a strategy that can consistently beat the best actively managed strategy out there, the S&P 500 Index.
The only manager I can think of that has done this in recent memory was Legg Mason portfolio manager Bill Miller, who managed to do it for 15 straight years up until 2006. The only other recent manager to report a consistent advantage over SPX was Bernard Madoff, but we all know how that turned out. While I'm not sure there is a guaranteed way to outperform the S&P Index Committee, I did find a fund that has been around since 2006 and has been giving SPX a run for its money, beating it in nine of the past 15 full-year periods staring in 2007. It's ahead of SPX year-to-date to July 22, and also beat the index by 3.05% on an annualized basis since the Covid bottom on March 13, 2020.
The fund in question? It started out at pioneering ETF issuer PowerShares and has been since folded into the Invesco Family of ETFs: The Invesco Buyback Achievers ETF (PKW) .
Source: Factset, All You Can ETF
The Strategy
The $1.2 billion Invesco Buyback Achievers ETF has a 64-basis point expense ratio, so a shareholder with $1,000 invested over a calendar year would pay $6.40 over that period. While Bill Miller was an active manager and Bernie just had an active imagination, PKW is a passive fund and tracks the Nasdaq US Buyback Achievers Index. It is often said that the best investment strategies are the simplest ones; reading through the index methodology, you can see that aside from some geographic and liquidity requirements the only real eligibility requirement is that "the issuer of the security must have effected a net reduction in shares outstanding of 5% or more in the trailing 12 months." What I find interesting is that while there is a liquidity requirement of a minimum average daily dollar value of shares traded of $500,000 over the three months preceding the index rebalance there is no stated market capitalization minimum in the eligibility criteria. The index is reconstituted ("evaluated" in the language of the methodology) in January of each year and rebalanced every quarter, effective on the last trading day of January, April, July, and October.
My Take
As you can see from the below chart, PKW is no slouch when it comes to tracking SPX. I ran some performance attribution from March 31, 2022, to July 22 and came within 0.58% of the fund's -10.15% return (vs SPY's -12.52%) so while not 100% spot on still paints a good picture of what's driving these results.
Looking at contributors to return over this period, five of the top ten slots are held by consumer discretionary names like Dollar General (DG) , Autozone (AZO) , and Autonation (AN) . Detractors from performance include Financials like Ameriprise (AMP) , Metlife (MET) , and Bank of America (BAC) from least to most pain.
Source: Factset, All You Can ETF
PKW is one of the rare cases where paying up in the form of a higher expense ratio for a fund can be worth it. While some may argue over the source of funding for share buybacks, there is no arguing that, over time, investing in companies that take steps to manage/reduce their share float is a strategy that can benefit investors.
