Scharf ETF (KAT)
Scharf ETF (KAT) is an actively managed exchange-traded fund that concentrates a diversified portfolio into fewer than forty carefully selected holdings chosen through bottom-up fundamental analysis rather than by formula or index. It is built on the principle that rigorous research can identify stocks trading below their intrinsic value, and that holding a small number of high-conviction positions is better than owning hundreds of mediocre ones.
The case for concentration and research
Concentration forces discipline.
The defining philosophy of Scharf ETF runs against the grain of modern diversification doctrine. Instead of holding hundreds or thousands of stocks weighted by market capitalisation, KAT holds only twenty-five to thirty-five. This means every single position is a decision — not a residual of an index formula. The fund operates on the conviction that a team of experienced investors can identify companies trading at prices materially below what their earnings or assets are worth, and that owning more of those ideas matters more than spreading risk across passive holdings.
This is a bet on research. The alternative — buying a broad market index — does not require research at all; it is a passive acceptance of whatever the market prices. Scharf instead employs human analysis to find divergences between price and value, betting that those divergences close over time.
How the selection process works
Scharf Investments screens for four types of opportunity. The first is straightforward value: companies trading at low multiples of earnings or book value, where the financial health is sound enough to support the low price as genuine discount rather than a value trap. The second is quality at a discount — strong businesses with competitive moats and recurring revenue, but whose shares have fallen out of favour and now trade cheaply relative to their earning power. The third exploits time: situations where the market is fixated on near-term uncertainty, but the business has a multi-year path to recovery or to a more realistic valuation. The fourth is negative sentiment that has detached from reality — companies where real operational challenges exist, but where investor expectations have fallen so far that the risk-reward equation flips in your favour.
The portfolio that emerges is global, spanning sectors and geographies wherever the process finds opportunity. There is no target allocation by region or industry; the discipline is purely investment-based. Holdings have historically included major names like Microsoft, Samsung Electronics, Union Pacific, and Occidental Petroleum alongside smaller or less obvious positions, showing the breadth of the underlying research.
Concentration and volatility
The portfolio structure creates a clear tradeoff. Because the largest positions often represent four to six per cent of fund assets, a few key bets can drive the fund’s overall performance. In strong markets for value stocks, or when the largest holdings perform well, the fund benefits from that concentration. In weak periods for the strategy, or if a major thesis misfires, the concentrated positions amplify the damage. A broad index fund owner feels the same underlying stock loss, but diffused across hundreds of holdings; a Scharf ETF owner feels it acutely.
The fund therefore carries higher volatility than a diversified index. This is not a flaw — it is the accepted cost of the concentrated approach. Investors using this fund need to have genuinely long time horizons and comfort with periods of underperformance.
Risks and limitations
Active management introduces style risk: the risk that the market systematically favours growth over value, or expensive stocks over cheap ones, for years at a stretch. Historical data shows that most actively managed funds fail to beat their benchmarks after fees, a headwind that any active strategy must overcome. If Scharf’s research process is sound, it should add enough alpha to justify its costs, but this is an assumption to test, not a given.
The fund also carries manager risk. Its returns depend on the skill and judgment of the investment team. Turnover in key personnel, or drift in the disciplined process over time, can degrade performance.
How to assess the fund
Begin with the prospectus and factsheet, available through Scharf Investments and any broker. These lay out the strategy, the research process, fees, and turnover. Compare the fund’s performance against a broad global index over multiple time periods — three years, five years, ten years — to understand whether the active management has earned its fees. Watch the annual turnover rate: a lower number suggests true buy-and-hold discipline; a higher one suggests the team is rotating holdings more frequently than the philosophy would imply.
The real test is reading the holdings list and understanding the thesis. For each of the top positions, ask: is the research logic credible? Is the stock still undervalued, or has the market repriced it upward? How would you research whether the team’s analysis holds up to scrutiny? If you cannot answer these questions, or if you find the concentration uncomfortable, a lower-cost diversified fund may suit your temperament better.