New ETF Of ‘Old’ Firms An Odd Bird; NYCC ETF fund holds U.S.-listed companies with at least 100 years of operating history

New ETF Of ‘Old’ Firms An Odd Bird

By Scott Burley

January 23, 2014

There’s something to be said for tradition. The latest hot IPO might be exciting, but you could be buying into a fad that won’t last. Facebook, less than a decade old, might already be past its prime, and Twitter has yet to turn a profit.

Better to buy stable companies with long histories of proven performance.

That’s the pitch for the PowerShares NYSE Century Portfolio (NYCC), which launched Jan. 15. The fund holds U.S.-listed companies with at least 100 years of operating history. The holdings list is full of names your great-grandparents might have recognized: Coca-Cola (founded 1886), Ford Motor (1903), US Steel (1901), Campbell Soup (1869) and AT&T (1885).

NYCC’s premise makes intuitive sense. If a company has survived the ravages and pitfalls of the last century—the Great Depression, wars, stagflation, bubbles, crises and vast economic, technological and social change—then surely one can count on it to stick around for another 100 years.

Or maybe it’s a dinosaur that’s seen better days. Is Sears (1893) a safe bet for the next decade, let alone the next century? What about the New York Times (1851)? J.C. Penney (1902)?

In fact, the fund uses a rather loose set of criteria in determining the age of a company, one that safety-seeking investors might not be comfortable with. The holdings list is littered with firms that have declared bankruptcy at some point in the past 100 years. That’s right, a Chapter 11 reorganization doesn’t automatically disqualify a company from membership in the fund’s index.

To take a recent example: Auto parts supplier Dana Corp. (founded 1904) declared Chapter 11 in 2006, canceling its stock and wiping out equity holders in the process. The company emerged from bankruptcy in 2008 and is held by NYCC today. Dana survives—but pre-2006 shareholders lost their entire investments.

There are other concerns. NYCC doesn’t add new holdings based on any measure of fundamental or technical strength. Rather, it picks up new constituents whenever they cross that arbitrary 100-year mark.

In the recent past, this would have led to some unfortunate timing. Both General Motors and lender CIT Group were founded in 1908, meaning that they would have been added to the fund (had it existed) at its annual rebalance at the end of 2008. Both went bankrupt just months later. Both companies, now reorganized and trading newly issued shares, are held by NYCC today.

But wait, it gets weirder. The fund holds Berkshire Hathaway. No problem there—Berkshire is a conglomerate of boring, stable businesses. Berkshire has a long track record of success under the leadership of Warren Buffett. It’s a stock-picker’s stock. But Buffett isn’t a centenarian, so what qualifies the company for membership in a century portfolio?

Buffett has controlled Berkshire since 1964, when it was a New England-based textile manufacturer. The company was created by the 1955 merger of Berkshire Fine Spinning Associates and Hathaway Manufacturing Co.

But NYCC’s methodology looks back further than that, taking into account the history of all predecessor firms. Hathaway Manufacturing traces its lineage back to 1888, meaning Berkshire easily meets the requirements for membership.

But does any of this matter? Berkshire sold off or shut down the last pieces of its textile business almost 30 years ago.

Investors buy the company today to get a stake in Warren Buffett’s investing empire, not Horatio Hathaway’s cotton mill. (Coincidentally, Hathaway’s old mill was demolished on Jan. 14, 2014, the day before NYCC launched. There’s a metaphor in this somewhere.)

Berkshire Hathaway isn’t the only company to make it into NYCC’s portfolio on a technicality.

The new fund holds a stake in private equity firm KKR, of 1980s leveraged buyout fame. Compared with some of the other companies in the fund, KKR is quite young indeed—it was founded as a private partnership in 1976, and only went public in 2009. Private equity as an industry, strictly speaking, didn’t exist until the 1940s. So what’s it doing in the PowerShares NYSE Century Portfolio?

In 2013, KKR acquired industrial machinery producer Gardner Denver, descendent of the Gardner Governor Co., founded 1859.

But here’s the catch: Buying KKR won’t get you equity in Gardner Denver; that belongs to the pension funds and other institutional investors that have contributed to KKR’s private equity capital. KKR makes its money on management fees, and might turn a profit on the deal—or not—regardless of Gardner Denver’s performance.

It’s hard to imagine a more tenuous connection to the past.

NYCC’s strategy is odd, no doubt. But is it bad?

Not necessarily. The fund is well diversified, with almost 400 names. Effectively, it’s a U.S. total market portfolio with a distinct value tilt, as there aren’t too many companies still in a growth phase after 100 years.

Technology and health care are underrepresented, for obvious reasons, with most of the balance going to industrials, utilities, materials and financials.

Also, equal weighting of the constituents tilts the fund toward mid- and small-caps.

There are worse choices out there. But there are better, cheaper ones too.

With a 0.50 percent expense ratio—$50 for each $10,000 invested—NYCC would have been a bargain among mutual funds not too long ago. But with the advent of efficient, index-based ETFs with single-digit price tags and broad exposure, it may simply be out of date.