First Manhattan, a New York-based investment advisor managing over $32 billion in assets, has unveiled its second ETF, the FM Compounders Equity ETF (FMCE US).
Himayani Puri, Head of Research at First Manhattan.
Listed on NYSE Arca, this semi-transparent actively managed fund focuses on US-listed equities that First Manhattan identifies as highly resilient, with a proven ability to generate and compound free cash flow over time.
Free cash flow is a measure of a company’s financial performance, calculated as operating cash flow minus capital expenditures. It represents the cash that a company generates after spending the money required to maintain or expand its asset base.
The metric is important because it shows the amount of funds that a company possesses to pursue opportunities that enhance shareholder value.
Free cash flow is considered a reliable indicator of a company’s underlying fundamentals as it is less prone to manipulation compared to other metrics such as sales, earnings, assets, or liabilities which can, in some cases, be massaged.
Investment Strategy
The fund employs a fundamentals-driven approach honed by First Manhattan over six decades. The methodology searches for stocks with strong potential for attractive returns over a three-year horizon or longer, focusing on companies with sustainable competitive advantages and long-term growth prospects while excluding those facing significant risks. It emphasizes high-quality management by evaluating executive compensation and incentives to ensure alignment with shareholder interests.
From this pool of screened securities, the ETF selects just 25 to 35 stocks that demonstrate the ability to reinvest excess cash flows at superior rates of return, measured through metrics such as return on invested capital (ROIC) or return on capital employed (ROCE).
The fund is designed for long-term investors, with a low-turnover portfolio that emphasizes steady, compounding growth.
Himayani Puri, Head of Research at First Manhattan, commented: “Our deep fundamental research allows us to identify high-quality companies and invest at valuations we believe are attractive, ensuring long-term value creation for investors.”
The ETF comes with an expense ratio of 0.70%. It employs Precidian Investments’ semi-transparent ‘ActiveShares’ structure, which shields daily portfolio holdings to reduce the risk of front-running while maintaining transparency for investors.
FMCE joins the FM Focus Equity ETF (FMCX US), launched in April 2022, which similarly focuses on a high-conviction portfolio of US equities, leveraging First Manhattan’s extensive bottom-up research methodology to select firms with durable competitive advantages, high-quality earnings, and attractive reinvestment opportunities. FMCX also charges an expense ratio of 0.70% and employs the ActiveShares structure.