Mutual fund and ETF sponsors aren’t a stupid lot. They know exactly how to get the products retail investors are clamoring for into their hands in a quick and efficient manner. And with the market up big during the past few years and equity valuations (perhaps) getting stretched, the name of the game for many investors is finding quality and value among the herd.
And what could be considered higher on the quality scale than firms that have lasted the test of time?
That’s what the new PowerShares NYSE Century Portfolio ETF (NYCC) aims to do — track U.S.-based companies that have thrived for more than a century.
While that claim is certainly admirable, investors shouldn’t be jumping for joy and plowing all of their retirement savings into the fund just yet.
Because investors willing to dig a little deeper into the underlying portfolio will see that NYCC falls flat on a number of metrics, and seems more like a shrewd attempt at fund marketing than a game-changing product.
NYCC: ‘Century’ Is a Bit Loose
The concept behind the new NYCC ETF does certainly sound appealing. The fund’s underlying index — the NYSE Century Index — seeks to capitalize on some of America’s largest and oldest companies. Thus, to be eligible for inclusion in the index, a firm:
- Must have been incorporated in the U.S. for at least 100 years.
- Must have been listed on a major U.S. exchange at some point.
- Have a market capitalization of at least $1 billion.
But certainly not private equity player Kohlberg Kravis Roberts & Co. (KKR), which was founded in 1976.
Well, KKR is in there too … and that’s the first step toward understanding why the underlying portfolio of NYCC is a bit wonky.
Not every stock in the Century Portfolio ETF has even been around for a century.
According to the official explanation of the fund, the nitty-gritty of the ETF is that if a firm buys a business that that fits NYCC’s underlying criteria, it can be in the index. Because KKR purchased businesses like industrial compressor maker Garner Denver and produce firm Del Monte — both founded in the late 1800s — the private equity player can be included in the ETF.
A few other examples in NYCC’s portfolio — such as Level 3 Communications (LVLT) — fit this loose definition of a being a century leader. That’s something to keep in mind when looking at the ETF. Garner Denver might be a “century” business, but it’s only one small piece of KKR’s private equity empire.
… OK, It’s REALLY Loose
Another thing is not all the firms in NYCC have been publicly traded for 100 years.
For example, while Abercrombie & Fitch (ANF) T-shirts proudly display its 1892 origins, Abercrombie didn’t trade until 1996, when ANF hit the market. The same can be said for UPS (UPS), which has only been trading since 1999.
The potential issue there is that firms can and do operate differently when not under the guise of public investors. If you’re private, business decisions can be made with more of a long-term focus rather than just a few quarters ahead.
Try convincing today’s analysts that you’re building your brand for the next 100 years.
What Will You Do for Me Next?
Perhaps the most serious hit to NYCC’s “century” portfolio is that it is incredibly (but unsurprisingly) backward-looking. Problem is, what worked during the past hundred years might not work for the next hundred. The rise of new technology, e-commerce, unconventional resources and other factors have completely changed various markets and sectors.