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Davis New York Venture Fund Semi-Annual Review

Holly LaFon

Holly LaFon

254 followers
The chart below summarizes results through June 30, 2012 for the Davis New York Venture Fund compared with the S&P 500® Index against which my co-manager Ken Charles Feinberg, our colleagues and I judge ourselves. Although results over the very long term have been satisfactory, results in more recent periods have fallen short of our goal.1



DNYPMComm2Q12PerfTable2.gifThe performance presented represents past performance and is not a guarantee of future results. Total return assumes reinvestment of dividends and capital gain distributions. Investment return and principal value will vary so that, when redeemed, an investor’s shares may be worth more or less than their original cost. The total annual operating expense ratio for Class A shares as of the most recent prospectus was 0.89%. The total annual operating expense ratio may vary in future years. Returns and expenses for other classes of shares will vary. Current performance may be higher or lower than the performance quoted. For most recent month-end performance, click here or call 800-279-0279.

This has been a difficult time for our investors and in this report we will provide a candid accounting, including a review of mistakes and detractors from Portfolio returns. These returns, combined with economic weakness, political uncertainty and pervasive pessimism have driven many investors to the point of giving up on equities in general and our Fund in particular. While this is understandable, we believe it is the wrong thing to do. As a result, although it is generally our practice to moderate expectations and highlight reasons for caution, we want to be crystal clear about why we are convinced that returns should be much more satisfactory in the years ahead.2 We do so not to be promotional but rather because we feel a responsibility to help ensure that investors who have already come through these difficult times can be with us for the improved returns we expect in the decade ahead.

Our expectation for improved returns is driven in part by our outlook for equities in general, which we consider the most undervalued and least risky large asset class available to investors.3 This positive outlook is not based on rosy prospects for the economy, which we expect to remain sluggish both here and abroad, but rather on the attractive current valuation of stocks. Although economic and political uncertainty are likely to produce continued market volatility and price gyrations, we believe those who wait for a more benign outlook before investing will likely pay much higher prices.

Beyond rising general equity returns, our positive expectation is driven by the durability, valuation and growth prospects of the specific companies we own. The vast majority of these businesses have made solid progress during this difficult period. In fact, virtually all have significantly higher sales, profits and dividends than five years ago and most (including all of our financial holdings) have much stronger balance sheets. Moreover, as we will discuss later in this report, because many of our companies are repurchasing shares, their current low prices actually accelerate growth in their intrinsic value per share. Put simply, although stock prices have been disappointing, business values have been rising.

Because such a gap between price and value often persists for long periods, investors like us who focus on determining the intrinsic value of a business rather than trying to predict short-term changes in its price must be prepared for periods of underperformance. Indeed, we have gone through such periods before and consider them an inevitable though unsettling requirement in building a successful long-term investment track record. Our conviction is bolstered by the fact that every five year period in which our results lagged in the past was followed by a five year period in which we made up the lost ground.4 While we cannot know whether this same pattern will hold in the future, we believe it should and will outline our rationale in the pages that follow.

Finally, because we, our families and colleagues are significant investors in the funds we manage, we have shared the cost of these lagging results. At the same time we are putting our money where our mouth is regarding our expectations for substantial improvement by continuing to increase our investment. Years ago my grandfather Shelby Cullom Davis said, “You make most of your money in a bear market, you just don’t realize it at the time.” We are now more than a dozen years into one of the worst bear markets since the Great Depression. Based on the quality and valuation of the companies that make up the Portfolio today, we see no reason to doubt his wisdom and look forward to the time when we will report that today’s low prices created tomorrow’s improved returns.

This report includes candid statements and observations regarding investment strategies, individual securities, and economic and market conditions; however, there is no guarantee that these statements, opinions or forecasts will prove to be correct. Equity markets are volatile and an investor may lose money. Past performance is not a guarantee of future results.1 Class A shares, without a sales charge. Past performance is not a guarantee of future results.2 While we believe we have a reasonable basis for our appraisals and we have confidence in our opinions, actual results may differ materially from those we anticipate.3 Please note that we define an asset’s risk based on our assessment of the probability the investment could result in a loss of purchasing power over our contemplated holding period. Large asset classes considered are equity, bonds and cash. Equity markets are volatile and the investment return and principal value of an investment will vary. While we believe we have a reasonable basis for our conclusions, there can be no guarantee an investor will not lose money.4 Class A shares, without a sales charge. Past performance is not a guarantee of future results. See "5 Year Periods of Underperformance" chart below.

Performance Review

Before turning to our future outlook, we must first spend time on these trailing results. While there is no doubt that they are disappointing in recent periods, they are neither unprecedented nor inconsistent with a successful, long-term investment approach.

Because no manager can outperform over all periods, an important objective of our firm is to increase the probability of outperformance the longer an investor stays with us. If we are successful, an investor who invests with us for 10 years should be more likely to outperform than an investor who invests with us for only three years. Indeed, that has been the case. As shown in the chart below, the longer clients have stayed with us, the more likely they have earned above-average returns.



DNYPMComm2Q12Batt1.gif

While achieving a satisfactory “batting average” may seem an appropriate goal at any investment firm, it is not easily achieved. In fact, the chart below, which applies the same criteria across all comparable funds (shown by the tan bars), seems to indicate the opposite result. The longer investors stayed with these comparable funds, the less likely they were to outperform.

Because these results are almost the mirror image of ours, it may be worth asking what are we doing differently from these other firms that causes the percentage of time our Portfolio outperforms to diverge so sharply over time.

One likely answer comes from James Montier, a leader in the field of behavioral finance who notes that “investors who have previously suffered a loss…(such as during a bear market or a period of underperformance)…( are likely to ignore) cheap valuations, where future returns are likely to be good.” 6 Instead, they are attracted to investments that have done well and trade at higher valuations where future returns are less likely to be good. With this in mind, one explanation for the data below may be that when portfolio managers experience a bad period, they become more likely to sell their underperforming stocks and replace them with the popular favorites of the day. In essence, bad short-term performance may cause investors to lose conviction in their investment discipline at precisely the wrong time.7

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While impossible to prove, we are convinced that this type of capitulation is a significant reason why short-term underperformance so often becomes permanent, long-term underperformance. In contrast, we believe our fundamental research and focus on value helps us to maintain our conviction, even during bad times. This conviction in turn means that though we will always spend time learning from our mistakes and trying to adapt to changes in the market or the economy, we will not be tempted to abandon an investment approach that has worked for decades to conform to what has been working recently.

A brief review of what happened in years following our past stretches of underperformance adds more strength to this conviction. If both our assessment of value and our belief that markets eventually reflect value are correct, then we would expect a review of our long-term results to show that past periods of lagging returns were followed by much improved returns.

Indeed this has been the case. In the chart below, the light green bars indicate every five year stretch during which our results were disappointing. The dark green bars measure our relative results in the five years that followed each of these stretches. In every period in which our five year results lagged, the results in the subsequent five years were more than satisfactory.9

We cannot know what the next five years hold in store. However, the fact that the gap between price and value tends to close eventually and that over our entire history stretches of underperformance have always been followed by stretches of stronger outperformance strengthen our commitment to our investment discipline.10

SAS5YR.jpg

5 Source: Thomson Financial, Lipper and Bloomberg. Class A shares, without a sales charge. Past performance is not a guarantee of future results. Performance includes the reinvestment of dividends and capital gain distributions. The market is represented by the S&P 500® Index. There is no guarantee that Davis New York Venture Fund will continue to outperform the market over the long term. See endnotes for a description of rolling returns.6 James Montier, The Little Book of Behavioral Investing (Hoboken: John Wiley & Sons, Inc., 2010), 23–24.7 This is one potential explanation. Others may be possible.8Class A shares, without a sales charge. Past performance is not a guarantee of future results. Performance includes the reinvestment of dividends and capital gain distributions. The market is represented by the S&P 500® Index and peers are represented by the average of all funds within the Lipper Average Large-Cap peer group. All funds within the group are weighted equally. There is no guarantee that Davis New York Venture Fund will continue to outperform the market and its peers over the long term. See endnotes for a description of rolling returns.9 Class A shares, without a sales charge. There is no guarantee that periods of underperformance will be followed by outperformance. See endnotes for a description of rolling returns. Past performance is not a guarantee of future results.10 There is no guarantee that periods of underperformance will be followed by outperformance.11 Class A Shares, without a sales charge. There is no guarantee that periods of underperformance will be followed by outperformance. Only the most recent period where there is not a subsequent 5 year period is shown. Past performance is not a guarantee of future results.

Portfolio Review

More than past results, our optimism about the future is based on our Portfolio today. In other words, while history presents a positive statistical picture, the most important basis for our optimism is the strong fundamentals and attractive valuations of the individual companies that make up the Davis New York Venture Fund now.

As equity investors, we never forget that stocks represent ownership interests in real businesses like Wells Fargo (WFC), Costco (COST), American Express (AXP), CVS Caremark (CVS), Google (GOOG), and Berkshire Hathaway (BRK.A)(BRK.B).12 Over the long term, the growing value of these businesses will determine our success, not the fluctuating prices of their stocks. As a result, while we recognize that the prices of the stocks we own have been disappointing in recent years, the revenue, earnings, cash flow, and dividends of the vast majority of the companies we own have continued to make progress during this difficult period. Furthermore, virtually all of these companies have strengthened their balance sheets by reducing debt and, in the case of all of our financial holdings, also increased capital and reserves.

While we are always glad to own companies with such durability, resiliency and growth, the cornerstone of our optimism is that these companies in aggregate currently trade at a discount to the averages. The combination of above-average businesses at below-average prices is not one that investors often see.

In recent manager commentaries, we have outlined the investment rationale for many of our most important holdings. As these holdings remain in our Portfolio and as their valuations remain comparable, we would recommend these commentaries for anyone who would like greater detail about specific companies. However, there is one important characteristic many companies in the Portfolio share that we have not previously discussed that we believe is a critical differentiator. This characteristic is one of the reasons we are so confident about the Portfolio going forward.

To understand this characteristic, it may be helpful to consider a typical company in our Portfolio trading at a price-earnings multiple of 13 times earnings.13 Now suppose that this company (like many in our Portfolio) dedicates a third of its earnings to dividends, retains a third to fund its business and spends the remaining third to repurchase its own shares. Finally, assume over the next five years that this company is only able to grow its earnings 3% per year and that its price-earnings multiple remains the same at 13 times earnings. Here is the question: What return will shareholders of this company earn over this five year period?

At first glance, the obvious answer would seem to be 3% per year. After all, earnings only grew 3% per year and the price-earnings ratio stayed at the same 13 times earnings. Although this seems obvious, it is wrong. The correct answer is that shareholders of this company would have earned more than 8% per year over this five year period. The secret to this surprising result is one of the most important and under-appreciated characteristics of our Portfolio, namely that we put great emphasis on how the earnings generated by the companies we own are allocated. In this example, the one-third of earnings allocated to dividends added about 2.5% per year to the stock return. The one-third of earnings allocated to share repurchases added another 2.5% per year to the return since earnings and dividends were then spread over fewer shares outstanding. As a result, the combination of a reasonable dividend yield and disciplined share repurchase turned a 3% growth in earnings into a more than 8% return to shareholders.

Our investment focus on capital allocation is one of the primary reasons we think Portfolio returns can be satisfactory even in an anemic economic environment. For those who would suggest that our expectation for even 3% profit growth is too optimistic, we would note that during the last 12 years, our country absorbed the bursting of the Internet bubble, two recessions, September 11th, the invasion of Afghanistan and Iraq, the housing bust, the financial crisis, and a 12 year bear market. Yet despite all of these enormous and in some cases unprecedented headwinds, earnings still grew roughly 6% per year for the S&P 500® companies overall. As a result, we consider 3% a realistic but sober expectation. Furthermore, should stock prices fall farther, reported returns might look disappointing, but the opportunity to repurchase more shares at lower prices would actually serve to accelerate growth in intrinsic value per share and improve our eventual returns.

In Berkshire Hathaway’s 2011 annual report, Warren Buffett explains this counterintuitive dynamic by noting when Berkshire buys “stock in a company that is repurchasing shares, we hope for two events: First, we have the normal hope that earnings of the business will increase at a good clip for a long time to come; and second, we also hope that the stock underperforms in the market for a long time as well.…The logic is simple: If you (own)…a company that is repurchasing shares, you are hurt when stocks rise. You benefit when stocks swoon.”

This logic becomes clear if you imagine that you own a business with only one other partner. If you plan to gradually buy out your partner’s interest in the business, then it seems obvious that you would want the business to do well and your partner to sell you shares at a lower price rather than higher price. What is true when there is only one other shareholder is equally true when there are thousands of other shareholders. Buying at lower prices increases future returns.

The fact that so many of our companies are repurchasing shares at low prices is an important silver lining to the weak market performance of recent years. In addition, because this topic is so poorly understood and rarely discussed by market commentators, it is a source of differentiation for our Portfolio that should help relative returns in the years ahead. Amazingly, 18 of our top 20 holdings repurchased shares last year. The fact that share repurchases and dividends should be such important contributors to our future returns allows us to be more dispassionate about both stock price volatility and our sober economic outlook. Put differently, with disciplined capital allocation many of our Portfolio companies should be able to build shareholder value in the face of an anemic economy while actually benefiting from the market volatility that worries so many investors.

12 Individual securities are discussed in this piece. While we believe we have a reasonable basis for our appraisals and we have confidence in our opinions, actual results may differ materially from those we anticipate. The return of a security to the Fund will vary based on weighting and timing of purchase. This is not a recommendation to buy, sell or hold any specific security. Past performance is not a guarantee of future results.13 The company discussed is a hypothetical example and is not any particular company.

Mistakes

As stewards of our clients’ savings, we firmly believe in the discipline of providing a review of our most significant mistakes. Before beginning, however, we should emphasize we do not consider an investment a mistake simply because its stock price has declined below our purchase price. Given the truth of the old saying that the only people who buy at the bottom and sell at the top are liars, every company we buy will likely trade below our purchase price at some point. Similarly, we do not consider an investment a mistake simply because it is controversial or the subject of negative articles in the press. After all, one of our most successful investments over the last decade was Philip Morris (now Altria and Philip Morris International), an unquestionably controversial company that spent many of those years in the headlines. Although the controversy caused stock price volatility that was sometimes difficult to bear, the combination of low valuation, growing dividends, significant share repurchases, and a gradual increase in investor confidence created huge returns for long-term shareholders. In recent years, we sold our position in Altria and significantly reduced our holding of Philip Morris International as valuations climbed.

The fact that we do not define a mistake in terms of critical press reports and declining stock prices does not mean that we ignore them. Such negative events often reflect or contain new information that must be considered when assessing value. Successful investing requires balancing the patience and discipline needed to maintain conviction when our work is correct with the open-mindedness and humility required to admit mistakes when new information proves it wrong.

As a result, we label an investment a mistake when we meaningfully reduce our estimate of a company’s intrinsic value. In the worst cases, usually caused by some combination of leverage (e.g., Lehman Brothers, Fannie Mae, Freddie Mac), low-cost competition (e.g., General Motors, Kmart), obsolescence (e.g., Polaroid, Kodak), or fraud (e.g., WorldCom, Enron), the company is unable to ever return to profitability and equity investors are essentially wiped out. While we avoided all the examples mentioned above, we invested about 1.5% of the Fund’s assets in what was believed to be the largest forestry company in Asia, Sino-Forest. As discussed in our last two reports, because of a combination of poor governance, corrupt business practices and some element of fraud, we reduced our estimate of the company’s intrinsic value to zero, indicating a permanent loss. Sino-Forest has since declared bankruptcy. Although extremely rare in our history, such permanent losses are the most serious type of mistake. Moreover, because fraud involves intentionally misleading financial documents, it can be very difficult for even experienced investors to detect. However, having carefully reviewed our investment process in light of this experience, we have implemented several new procedures that we believe reduce our exposure to this type of risk. These procedures are meant to highlight circumstances that tend to coincide with the risk of fraud and make sure that in such cases we maintain a greater level of scrutiny and liquidity. As my grandfather said, “The value of a mistake lies in the lesson learned.”

In our last report, we also discussed the reduction in our estimate of intrinsic value for Bank of New York Mellon, a large detractor from our three year return. Unlike the example above, we do not believe this loss will be permanent. Instead, we expect the durability and resiliency of Bank of New York Mellon’s business, combined with its 2.4% dividend yield, low valuation and steady share repurchases will allow us to earn satisfactory returns from today’s price.

Conclusion

Poor stock market returns and disappointing relative results have made the last decade difficult for our investors. In this report, we have outlined our rationale for holding fast to our investment discipline and for expecting improved returns in the decade ahead. We do so not to be promotional but instead to help ensure that investors who have come through these difficult times with us will be with us for the brighter days that we believe lie ahead.

This positive view of the future may sound out of place in a present so characterized by nervousness, pessimism and uncertainty. After more than a dozen years of sluggish economic growth and poor stock market returns, investors are giving up on stocks and flocking to the perceived safety of cash and bonds. USA Today captured the mood perfectly with a front-page headline declaring, “Invest in Stocks? Forget About It!” The article went on to disparage stock investing, saying that the “long-running story about how stocks are the best way to build wealth seems tired, dated and less believable.…the (new) mentality (is)…get-me-out, wait-and-see, bonds-are-safer.…”

This article is as much a product of its time as the articles in 1999 and 2000 trumpeting Internet stocks and predicting that the Dow Jones would be at 40,000 by now. What these articles have in common is that they ignore valuation. Back when the press and pundits loved equities, the market was at an all-time high, valued at 30 times earnings, or a 3% earnings yield, while a government bond yielded 7%. Today, when the same publications are advising investors to “forget” about equities, the market trades at 14 times earnings or a 7% earnings yield and pays annual dividends in excess of government bonds, which now yield a paltry 2.4%.

In the face of such negative articles and press reports, the desire to sell stocks 12 years into a bear market in order to buy bonds at their all-time high or hold cash with a zero percent interest rate is perfectly understandable from a psychological point of view. However, it is likely to be significantly wrong from an economic point of view. Nervousness, pessimism and uncertainty have driven down prices and the golden rule of investing is that low prices increase future returns.

As a result, while it is our general tendency to moderate expectations, we want to be emphatic about our conviction that stocks at today’s prices are the most undervalued large asset class available to investors. What’s more, because we accept Warren Buffett’s definition of risk as “the reasoned probability of…(an) investment causing its owner a loss of purchasing power over his contemplated holding period,” we also consider stocks among the lowest risk asset class for long-term investors, especially compared with cash and government bonds. The idea that cash and low yielding government bonds are “risk free” is one of the most dangerous fictions there is. After all, a dollar hidden under a mattress 50 years ago has lost more than 80% of its purchasing power and now can only buy what 20 cents used to buy. It is hard to understand how an asset that has declined 80% in value over 50 years can be considered risk free. Yet despite an 80% decline in purchasing power over 50 years, investors continue to describe holding cash as “risk free.” A dollar invested in the late 1960s in Davis New York Venture Fund has increased its purchasing power twenty fold and now has a nominal value of more than $100.14

Our positive outlook for stock returns is not based on a rosy economic outlook. The deflationary trends from global deleveraging continue, Europe is a mess, Washington dysfunctional, and Asia slowing. But today’s low valuations discount a great deal of bad news. Furthermore, because our companies tend to pay dividends and repurchase shares, they should be able to generate satisfactory investor returns even with relatively anemic earnings growth. In short, by remembering that stocks represent actual ownership in real operating businesses, investors can focus on the quality, durability and profitability of these businesses and tune out the blaring headlines, day-to-day noise and rampant pessimism. While no one can know for sure what the future holds, we do know that our Portfolio is made up of world-class companies generating an earnings yield of close to 8%, much of which they are returning to shareholders. These facts are what make us look to the future with optimism.

As always, we would like to end by thanking our team and particularly highlighting the work of Danton Goei. During the almost 15 years in which we have worked together, Danton’s insight has added to our returns while his character has added to our culture.

All of us at Davis Advisors remain mindful of our responsibility and grateful for the trust placed in us by our clients.

14 Class A shares, without a sales charge. Past performance is not a guarantee of future results. Period discussed is from February 17, 1969 to June 30, 2012.

This report is authorized for use by existing shareholders. A current Davis New York Venture Fund prospectus must accompany or precede this material if it is distributed to prospective shareholders. You should carefully consider the Fund’s investment objective, risks, charges, and expenses before investing. Read the prospectus carefully before you invest or send money. This report includes candid statements and observations regarding investment strategies, individual securities, and economic and market conditions; however, there is no guarantee that these statements, opinions or forecasts will prove to be correct. These comments may also include the expression of opinions that are speculative in nature and should not be relied on as statements of fact.

Objective and Risks. Davis New York Venture Fund’s investment objective is long-term growth of capital. There can be no assurance that the Fund will achieve its objective. The Fund invests primarily in equity securities issued by large companies with market capitalizations of at least $10 billion. Some important risks of an investment in the Fund are: stock market risk: stock markets have periods of rising prices and periods of falling prices, including sharp declines; manager risk: poor security selection may cause the Fund to underperform relevant benchmarks; common stock risk: an adverse event may have a negative impact on a company and could result in a decline in the price of its common stock; financial services risk: investing a significant portion of assets in the financial services sector may cause the Fund to be more sensitive to problems affecting financial companies; foreign country risk: foreign companies may be subject to greater risk as foreign economies may not be as strong or diversified; emerging market risk: securities of issuers in emerging and developing markets may present risks not found in more mature markets; foreign currency risk: the change in value of a foreign currency against the U.S. dollar will result in a change in the U.S. dollar value of securities denominated in that foreign currency; trading markets and depositary receipts risk: depositary receipts involve higher expenses and may trade at a discount (or premium) to the underlying security; headline risk: the Fund may invest in a company when the company becomes the center of controversy. The company’s stock may never recover or may become worthless; and fees and expenses risk: the Fund may not earn enough through income and capital appreciation to offset the operating expenses of the Fund. As of June 30, 2012, the Fund had approximately 15.8% of assets invested in foreign companies. See the prospectus for a complete description of the principal risks.

Davis Advisors is committed to communicating with our investment partners as candidly as possible because we believe our investors benefit from understanding our investment philosophy and approach. Our views and opinions include “forward-looking statements” which may or may not be accurate over the long term. Forward-looking statements can be identified by words like “believe,” “expect,” “anticipate,” or similar expressions. You should not place undue reliance on forward-looking statements, which are current as of the date of this report. We disclaim any obligation to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. While we believe we have a reasonable basis for our appraisals and we have confidence in our opinions, actual results may differ materially from those we anticipate.

The information provided in this material should not be considered a recommendation to buy, sell or hold any particular security. As of June 30, 2012, Davis New York Venture Fund had invested the following percentages of its assets in the companies listed: American Express, 5.81%; Bank of New York Mellon, 5.46%; Berkshire Hathaway, 3.62%; Costco, 3.45%; CVS Caremark, 6.10%; Google, 3.58%; Philip Morris International, 0.71%; Sino-Forest, 0.07%; Wells Fargo, 5.84%.

Davis Funds has adopted a Portfolio Holdings Disclosure policy that governs the release of non-public portfolio holding information. This policy is described in the prospectus. Holding percentages are subject to change. Click here or call 800-279-0279 for the most current public portfolio holdings information.

Broker-dealers and other financial intermediaries may charge Davis Advisors substantial fees for selling its funds and providing continuing support to clients and shareholders. For example, broker-dealers and other financial intermediaries may charge: sales commissions; distribution and service fees; and record-keeping fees. In addition, payments or reimbursements may be requested for: marketing support concerning Davis Advisors’ products; placement on a list of offered products; access to sales meetings, sales representatives and management representatives; and participation in conferences or seminars, sales or training programs for invited registered representatives and other employees, client and investor events, and other dealer-sponsored events. Financial advisors should not consider Davis Advisors’ payment(s) to a financial intermediary as a basis for recommending Davis Advisors.

We gather our index data from a combination of reputable sources, including, but not limited to, Thomson Financial, Lipper and index websites.

Rolling Returns and Outperforming the Market. Davis New York Venture Fund’s average annual total returns for Class A shares were compared against the returns of the S&P 500® Index as of the end of each quarter for all time periods shown from February 17, 1969, through June 30, 2012. Returns on the chart showing 5 Year Periods of Out/Underperformance are instead calculated annually on December 31. The Fund’s returns assume an investment in Class A shares on the first day of each period with all dividends and capital gain distributions reinvested for the time period. The returns are not adjusted for any sales charge that may be imposed. If a sales charge were imposed, the reported figures would be lower. The figures shown reflect past results; past performance is not a guarantee of future results. There can be no guarantee that the Fund will continue to deliver consistent investment performance. The performance presented includes periods of bear markets when performance was negative. Equity markets are volatile and an investor may lose money. Returns for other share classes will vary.

The S&P 500® Index is an unmanaged index of 500 selected common stocks, most of which are listed on the New York Stock Exchange. The Index is adjusted for dividends, weighted towards stocks with large market capitalizations and represents approximately two-thirds of the total market value of all domestic common stocks. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue chip stocks. The Dow Jones is calculated by adding the closing prices of the component stocks and using a divisor that is adjusted for splits and stock dividends equal to 10% or more of the market value of an issue as well as substitutions and mergers. The average is quoted in points, not in dollars. Investments cannot be made directly in an index.

The Lipper Average Large-Cap peer group is a combined category including the Lipper Large-Cap Growth, Core and Value peer groups. Lipper Large-Cap peer groups are funds that, by portfolio practice, invest at least 75% of their equity assets in companies with market capitalizations (on a three-year weighted basis) above Lipper’s USDE large-cap floor. Funds are categorized as Growth, Core or Value based on their portfolio characteristics; price to earnings ratio; price to book ratio; and three year sales per share growth value. Growth funds typically have above-average characteristics, Core funds typically have average characteristics and Value funds typically have below-average characteristics, compared to the S&P 500® Index.

After October 31, 2012, this material must be accompanied by a supplement containing performance data for the most recent quarter end.

Shares of the Davis Funds are not deposits or obligations of any bank, are not guaranteed by any bank, are not insured by the FDIC or any other agency, and involve investment risks, including possible loss of the principal amount invested.

Item #4772 06/12 Davis Distributors, LLC, 2949 East Elvira Road, Suite 101, Tucson, AZ 85756, 800-279-0279, davisfunds.com


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