Davis proposes folding a nine-shareholder research fund into its U.S. equity ETF
Davis Fundamental ETF Trust filed Wednesday, September 30 to merge the $86.1 million Davis Research Fund into Davis Select U.S. Equity ETF, and the research fund's shareholders vote on November 10.
Key takeaways
Davis Fundamental ETF Trust filed on Wednesday, September 30 to reorganize Davis Research Fund into Davis Select U.S. Equity ETF, DUSA, a fund that holds a concentrated portfolio of U.S. stocks. The research fund has nine shareholders. Davis Selected Advisers, L.P., which advises both, owns approximately 99% of the shares, and the filing says that where the adviser or an affiliate has discretion to vote, those shares will be cast for the deal.
Davis Research Fund has not been offered to the public. It opened on October 31, 2001, and only current and former directors, officers and employees of the fund or the adviser, and affiliated companies, may buy it. The adviser splits the portfolio among its research analysts and uses the results to judge them. Firm money, the filing says, does that job better than paper portfolios.
The filing says the fund has served its purpose over more than 20 years and is no longer necessary, because the analysts are experienced and other funds, also split among analysts, already track how they do. For newer analysts, the adviser may use a much smaller custody account.
Both boards backed the exchange. Holders would move at net asset value, with no sales charge, in a transaction the filing expects to be tax-free. The funds share an adviser and many of the same stocks. The filing also cites lower expenses at DUSA, a slightly better longer-term record, and a possible benefit to the adviser and its affiliates.
Davis Selected Advisers will pay the reorganization costs. The filing leaves the estimate blank.
What the other holders would own
As of Tuesday, June 30, the research fund had $86.1 million, which the filing calls 7% of the $1.22 billion in DUSA. DUSA normally invests at least 80% of its assets in U.S. stocks and generally holds 15 to 35 companies. Christopher Davis and Danton Goei have managed it since it launched in January 2017.
The research fund seeks long-term growth of capital, and the filing describes it as diversified. DUSA adds capital preservation to that goal. It is non-diversified, so it may focus on fewer companies than a diversified fund is allowed to.
The research fund's expenses were 0.68% in the year ended July 31. The filing estimates 0.59% for the combined fund, on the six months ended April 30, adjusted for current fee arrangements. Both pay a 0.55% management fee. Class A shares of the research fund, ticker DRFAX, carry a maximum sales charge of 4.75% on purchases. DUSA has no sales charge, the exchange itself has none, and the same estimate leaves existing holders of DUSA, who do not vote, at 0.59%.
Eligible holders would receive DUSA shares equal in total value to the shares they turn in, plus cash for any fraction of a share. The filing expects the exchange to qualify as tax-free for U.S. federal income tax purposes. Cash for a fraction may be taxable.
The meeting
Shareholders of record at the close of business on Friday, October 9 are being asked to vote on Tuesday, November 10 at 8:00 a.m. ET. One-third of the shares entitled to vote is a quorum. Approval requires a majority of the outstanding voting securities. The filing uses the Investment Company Act definition: the lower of 67% or more of the shares present or by proxy, when more than 50% of the shares are represented, or more than 50% of all shares outstanding.
The ETF trust's board approved the agreement on Wednesday, August 19, and the research fund's board approved it on Tuesday, September 15. The filing expects a closing on or about Friday, November 13 if shareholders approve and the agreement's other conditions are met.
ETFs in this story
Frequently asked questions
Why does Davis want to fold the research fund?
The filing says it has served its purpose for more than 20 years and is no longer necessary, because the analysts are experienced and other funds already track their results.
Has the research fund been sold to the public?
No; only current and former directors, officers and employees of the fund or the adviser, and affiliated companies, may buy it.
Will shareholders owe tax on the exchange?
The filing expects the exchange to be tax-free for U.S. federal income tax purposes, though cash for a fractional share may be taxable.
When do shareholders vote?
Shareholders of record on October 9 are being asked to vote on November 10.
