Reasons the Independent Trustees Approved Continuation of the Advisory Agreement − (Continued)
take many factors into consideration in representing the shareholders of the Funds, including those listed below. In connection with reviewing comparative performance information, the Independent Trustees generally give greater weight to longer-term measurements.
The Independent Trustees assessed (a) comparative fee and expense information for other funds as selected and analyzed by a nationally recognized independent service provider; (b) information regarding fees charged by Davis Advisors to other advisory clients, which includes other funds it advises, other funds which it sub-advises, private accounts, and managed money/wrap clients, as well as the differences in the services provided to such other clients; and (c) the fee schedule of each of the Funds, including an assessment of the fee waiver and expense limitation agreement that is in place for each Fund.
The Independent Trustees reviewed the management fee schedule and expense ratio for each Fund, noting that each of the Funds currently has in place a fee waiver and expense reimbursement agreement, the profitability of each Fund to Davis Advisors, the extent to which economies of scale might be realized if the Funds’ net assets increase, and whether the fee schedules reflect those potential economies of scale at this time. The Independent Trustees considered the nature, quality, and extent of the services being provided to each Fund and the costs incurred by Davis Advisors in providing such services. The Independent Trustees considered various potential benefits that Davis Advisors may receive in connection with the services it provides under the Advisory Agreement with the Funds, including a review of portfolio brokerage practices. The Independent Trustees noted that Davis Advisors does not use client commissions to pay for publications, both paper-based or electronic, that are available to the general public or for research reports that are created by parties other than the broker-dealers providing trade execution, clearing, and/or settlement services to the Funds. The Independent Trustees also considered the potential for any fall-out benefits that may be realized by Davis Advisors as a result of its relationship with the Funds.
The Independent Trustees compared the fees paid to Davis Advisors by the Funds with those paid by Davis Advisors’ advised and sub-advised clients, private account clients, and managed money/wrap clients. To the extent sub-advised, private account, or managed money/wrap fees were lower than fees paid by the Funds, the Independent Trustees noted that the range of services provided to the Funds is more extensive, with greater risks associated with operating SEC-registered, actively managed exchange-traded funds. Serving as the primary adviser for actively managed exchange-traded funds is more work because of the complex overlay of regulatory, tax, and accounting issues, which are unique to exchange-traded funds. The Independent Trustees considered the investments necessary to manage the Funds, including the areas of risk oversight, information technology, which includes maintenance of the Davis ETFs website, and compliance. With respect to risk, the Independent Trustees noted that not only have regulations become more complex and burdensome, but the scrutiny of regulators and shareholders has also become more intense. The Independent Trustees concluded that reasonable justifications existed for any differences between the fee rates for the Funds and Davis Advisors’ other lines of business.
Davis Select U.S. Equity ETF (“DUSA”)
The Independent Trustees noted that DUSA’s net asset value (“NAV”) return underperformed both its benchmark, the Standard & Poor’s 500® Index (“S&P 500®”) and the Lipper Large-Cap Value category average over the one-, three-, five-year, and since-inception time periods, all periods ended April 30, 2023. The Independent Trustees also reviewed Lipper ranking data comparing DUSA’s one-, three-, five-year, and since-inception performance to the Lipper Large-Cap Value category average as of December 31, 2022. Broadridge, an independent service provider, presented a report to the Independent Trustees that included comparative fee, expense, and investment performance data. The report compared the Fund’s performance, fees, and expenses to other similar funds as selected by Broadridge. As DUSA does not yet have a meaningful long-term track record, the Independent Trustees also considered the historical performance of Davis Advisors’ concentrated equity composite strategy on an absolute basis as well as relative to the S&P 500®. The Independent Trustees considered DUSA’s management fee and total net expense ratio. They observed that both were reasonable and in line with the median of its expense universe, as determined by Broadridge. The Independent Trustees also noted that the Adviser has capped expenses through March 1, 2024.
Davis Select Financial ETF (“DFNL”)
The Independent Trustees noted that DFNL’s NAV return outperformed both its benchmark, the S&P 500® Financials Index (“S&P 500® Financials”) and Lipper Financial Services category average over the three-year time period, and outperformed the Lipper Financial Services category, but underperformed S&P 500® Financials, over the one-, five-year, and since-inception time periods, all periods ended April 30, 2023. The Independent Trustees also reviewed Lipper ranking data comparing DFNL’s one-, three-, five-year, and since-inception performance to the Lipper Financial Services category average as of December 31, 2022.
