Active Value Investing in a Passive World: Why PVAL Defies the Index

The rise of passive indexing has reshaped global markets. Low-cost index funds now dominate investor portfolios, driven by the allure of simplicity, transparency, and fee efficiency. Yet, in this landscape of mechanical replication, a compelling case remains for active management—particularly in value equity strategies. The Putnam Focused Large Cap Value ETF (PVAL) exemplifies how active ETFs can outperform passive alternatives by leveraging human insight, risk-adjusted discipline, and strategic agility.

The Case for Active Value Investing

Passive indexing assumes markets are efficient, with no room for consistent outperformance. But history repeatedly shows that inefficiencies persist, especially in value stocks—companies trading at a discount to fundamentals. These firms often face temporary mispricings due to macroeconomic shifts, sector-specific challenges, or investor sentiment. Active managers, unlike index trackers, can identify and exploit these dislocations.

PVAL's strategy is rooted in this philosophy. By focusing on large-cap U.S. value stocks, it targets companies with strong balance sheets, sustainable cash flows, and undervalued metrics. The fund's managers, Darren Jaroch and Lauren DeMore, have demonstrated a knack for selecting such stocks. Over the past three years, PVAL has returned 19.27%, outperforming the 12.3% average for its category. This edge is not accidental but a product of disciplined stock-picking and a willingness to deviate from the index when necessary.

Performance and Risk: A Nuanced Edge

While passive funds mirror benchmarks, active ETFs like PVAL aim to enhance returns while managing risk. PVAL's Sharpe Ratio of 0.79 over the past year—compared to the S&P 500's 0.71—suggests it delivers better returns per unit of risk. Its Sortino Ratio of 1.19 further underscores this advantage, as it penalizes only downside volatility, a critical metric for value investors.

This risk-adjusted performance is particularly striking given PVAL's 54% portfolio turnover, higher than the category average of 41%. While critics argue that active trading inflates costs, PVAL's managers justify it as a tool to avoid underperforming stocks and capitalize on emerging opportunities. The fund's 0.55% expense ratio, though higher than passive alternatives (0.03%–0.20%), is offset by its ability to generate alpha.

The Human Element: Manager Tenure and Strategy Consistency

Active management hinges on expertise. PVAL's managers have averaged 4.19 years with the fund, a rarity in an industry where frequent turnover can derail long-term strategies. Their tenure allows them to weather short-term volatility and maintain a focus on long-term value creation. This stability contrasts sharply with passive funds, which are bound by rigid index rules and lack the flexibility to adapt to changing fundamentals.

Consider PVAL's response to the 2022 market downturn. While the fund experienced a 16.64% drawdown, it recovered in 84 trading sessions—faster than many passive peers. This resilience reflects active risk management, such as reducing exposure to overvalued sectors and increasing holdings in undervalued ones. Passive funds, by design, cannot make such adjustments, leaving investors vulnerable to index-driven declines.

Dividends and Income Generation

For income-focused investors, PVAL's 1.27% dividend yield may seem modest compared to the category average of 2.07%. However, its dividend growth trajectory is noteworthy. From $0.13 per share in 2021 to $0.52 over the trailing twelve months, the fund has demonstrated a commitment to rewarding shareholders. This growth reflects the compounding power of active management, where reinvested gains can fuel future distributions.

The Trade-Offs and Considerations

No strategy is without flaws. PVAL's higher fees and turnover may deter cost-sensitive investors. Additionally, active management carries the risk of underperformance, as not all stock-pickers can consistently beat the market. However, PVAL's top Morningstar rating and consistent outperformance over multiple time horizons suggest that its managers have navigated these challenges effectively.

Conclusion: A Compelling Alternative to Passive Indexing

In a market saturated with passive options, PVAL stands out by combining the rigor of value investing with the adaptability of active management. Its ability to generate alpha, manage downside risk, and leverage manager expertise offers a compelling alternative to index funds. For investors seeking to diversify beyond mechanical replication, PVAL represents a disciplined, data-driven approach to value equity investing.

Ultimately, the choice between active and passive depends on an investor's risk tolerance, time horizon, and belief in market efficiency. In the case of PVAL, the evidence suggests that active management, when executed with skill and discipline, can deliver superior outcomes—even in a world obsessed with passive indexing.