Summary
•”‚ Davis New York Venture Fund has built shareholder wealth over time. Over the most recent one, three and five year periods, a $10,000 investment grew to $10,885, $13,259, and $17,841 respectively.1
•”‚ $1.86 million versus $897,612 is the value of a $10,000 investment in the Fund since inception versus the value of a $10,000 investment in the S&P 500® Index.1
• Opportunities in today’s market include global leaders selling at bargain prices; dominant, lesser-known businesses in necessary economic niches; blue chips of tomorrow and beneficiaries of short-term misperceptions.
•”‚ Risks in today’s market include overvalued dividend darlings and companies with near peak profit margins.
•”‚ The Davis family, employees, and directors together are among the largest shareholders in the Fund.²
Results of Our Investment Discipline
Our investment discipline has built wealth for shareholders for more than 45 years.
Clients invest in Davis New York Venture Fund because they want us to grow the value of their savings over the long term. Below is a review of our results in achieving this goal, how the Fund is positioned to extend this record in the years ahead and why we expect to build on our short-term returns.
Since our beginning more than 45 years ago, we have grown the value of an initial $10,000 investment in the Fund to $1.86 million today, a more than 180-fold increase.3 While at times this rate of growth has been faster or slower, our steadfast focus on equities combined with an investment discipline centered on research, careful stock selection and a long-term perspective have helped us increase the value of our clients’ savings no matter when they invested with us. Moreover, as the chart below shows, the longer clients remained with us, the more we increased their savings.
In addition to generating satisfactory absolute returns, our investment approach has delivered relative returns in excess of the S&P 500® Index over the long term.
For example, the same $10,000 investment we grew to $1.86 million in Davis New York Venture Fund since its inception would have grown to only about $898,000 invested in the S&P 500® Index over the same period of time.3
Our conviction in the investment discipline that has helped our shareholders build wealth for more than 45 years is strengthened when results are viewed on a rolling basis rather than a trailing basis.
The chart below illustrates the percentage of time the Fund has outperformed the market over various holding periods. As with our absolute returns, the longer clients remained invested with us the higher the probability they outperformed the market.
Along the way we have experienced inevitable periods of underperformance when our investment approach of seeking durable, well-managed businesses at attrac-tive prices was not rewarded by the market. In recent periods, for example, two time-tested principles of our investment discipline have been temporarily out of favor.
First, we choose to avoid companies and sectors that have done particularly well in the past but do not offer investors sustainable long-term opportunities in our view. Because many such companies are current market favorites, their prices are driven more by mo mentum and sentiment than underlying fundamentals. Although such trends can persist, we believe eventually economics will beat perception and many high flyers will fall back to earth.
Second, we seek to invest in strong and durable businesses at a time when they are temporarily out of favor. Today we hold a number of businesses with stock prices that do not reflect their intrinsic value.
Over the long run, the strong economics of these outstanding businesses should prevail and higher stock prices should be the result. •
Investment Outlook
Equities should outperform bonds for the next decade.4 Avoid overpriced dividend darlings and companies with peak profit margins. Technology and globalization are disrupting economies and markets at an unprecedented rate.
When evaluating the investment landscape, we do not make investment decisions based on short-term market and economic forecasts, which history has shown are unpredictable. Instead, we focus on the important and the knowable, which in today’s markets include the following:
•”‚ Equities should outperform bonds over the next decade given that bond yields are at multi-century lows.
Opportunities in today’s market include global leaders trading at bargain prices; dominant lesser-known businesses operating in necessary economic niches; blue chips of tomorrow; and beneficiaries of short-term misperception.
•”‚ Risks in today’s market include companies with near peak margins and overvalued dividend darlings that are riskier than they appear. The 25 dividend paying stocks most held in common by the 5 largest dividend-focused ETFs are valued at 25 times earnings, a 23% higher P/E ratio than the market.6
•”‚ Technology and globalization are reconfiguring the world’s economy at an unprecedented rate. Many long-standing brands and business moats are being disrupted in unexpected ways. For example, in recent years the newspaper, retailing and media industries have all seen iconic companies become obsolete. Over the past decade, about half of the S&P 500® Index has been replaced. At the current rate of change, 75% of the S&P 500® Index will be replaced in the coming decade. Investors are required to avoid conventional thinking and remain flexible.
•”‚ To beat the index, we must look different from the index. Best of breed, well-managed businesses whose true value is not recognized by the market should outperform the market. •
The Portfolio
Global leaders trading at bargain prices; dominant lesser-known businesses; blue chips of tomorrow; beneficiaries of short-term misperceptions
Four portfolio themes have allowed us to create a powerful combination of growth and value in Davis New York Venture Fund:
Global Leaders Trading at Bargain Prices—Davis New York Venture Fund holds some of the strongest and best-known companies in the world and these make up the largest portion of the portfolio. This fact is nothing new. What is unusual though is short-term economic concerns over the past year have reduced the share prices of a handful of global leaders such as United Technologies, American Express and Monsanto to bargain levels at a time of high valuations for the average company.7 Buying top tier businesses at bargain prices is a value investor’s dream.
Dominant Lesser Known Businesses—Davis New York Venture Fund also invests in a group of lesser known businesses that dominate dull but necessary niches in the global economy. Whether they participate in unglamorous industries or are headquartered in different countries, these businesses are not household names to U.S. investors. As a result, their shares often trade at a discount to better-known companies despite having the same qualities of market dominance and durability as the global leaders described above. Whether considering Tyco (TYC, Financial)’s leadership in fire and security, building controls, and car batteries (through the company’s recent acquisition of Johnson Controls), Liberty Global (LBTYA, Financial)’s strength in European cable TV and broadband, LafargeHolcim’s dominance of the world cement industry, or Safran’s leadership in jet engines (the company has been an equal but less well-known partner of GE for more than 30 years), these companies combine the relevance and resilience of blue chip companies with below-average valuations.
Blue Chips of Tomorrow—A third category of select investment opportunity includes fast-moving compa nies that use innovation to disrupt the economics of larger but less agile competitors. Similar to evolution, capitalism is a process of constant change that rewards businesses that can adapt. Over the decades, we have seen many examples of today’s disrupters emerging as tomorrow’s blue chips. Several of Davis New York Venture Fund’s core holdings reflect this dynamic. Amazon (AMZN, Financial) has not only revolutionized the retail business, but also the information and technol ogy industry through Amazon Web Services (AWS). Alphabet (GOOGL, Financial) (the parent company of Google) began by making the world’s information accessible through the Internet and emerged as the largest and most profitable advertising firm in the world, the brains behind the vast majority of all smart phones, a leader in Internet video, and the emerging leader in artificial intelligence and self-driving cars.
Charles Schwab (SCHW, Financial) and CarMax (KMX, Financial) are two additional ex amples of innovators that have been just as disruptive in their industries. Beginning as a discount broker, Schwab has emerged as a dominant financial services company. CarMax has been no less revolutionary in the auto sector, bringing trust, choice and quality into the murky but enormous used car industry. Investors in such disruptive leaders stand to benefit not just from the growth in these companies’ underlying businesses, but also from their gradual inclusion in the ranks of blue chip stocks.
Beneficiaries of Short-Term Misperceptions—Davis New York Venture Fund is also positioned to capitalize on the fact short-sighted investors are avoiding com panies that face short-term misperceptions, creating an opportunity for long-term investors willing to look beyond today’s headlines. In banking, for example, memories of the financial crisis of 2008–2009 combined with subsequent anti-banking rhetoric and media coverage have blinded investors to the fact carefully selected banks are both cheap and safe, in our opinion. Contrary to perception, many top tier banks are not only reporting record earnings but are also far better capitalized than at any time in the last 50 years. Moreover, leaders such as Berkshire, JPMorgan, Wells Fargo and American Express demonstrated their resiliency through the worst financial crisis since the Great Depression and while unloved now, we believe these companies will be big contributors to Davis New York Venture Fund’s future returns as the reality of their strong economic fundamentals and rising dividends eclipses current investor perceptions.
Similarly, over the past year, investors fled the energy sector in response to the dramatic (and unsustainable) collapse in oil prices. While oil prices are unknowable in the short term, they must exceed the cost of replacing reserves over time. This simple fact will eventually lead to higher energy prices and should drive future returns for the well-positioned, low-cost producers the Fund holds.
As a result, we repositioned the energy portion of the portfolio, adding to existing holdings and initiating new investments. We own a select group of innovative and well-positioned energy companies with the capital allocation discipline, management experience and low-cost, long-lived reserves that will allow them to increase production for decades to come. Holdings include Occidental Petroleum, Apache, Cabot Oil & Gas, and Encana.
All in all, the carefully selected companies that make up Davis New York Venture Fund combine above-average resiliency and growth with below-average prices. •
Conclusion
As stewards of our clients’ savings, our overarching responsibility is to increase the value of the assets entrusted to our care. Every Davis Fund has grown shareholder wealth since inception, has low expenses and counts our firm, our families, and our employees among the largest shareholders.8
Given the quality and valuation of the companies that make up Davis New York Venture Fund, we are well positioned to build on the Fund’s long-term record of growing shareholder wealth. Furthermore, by keeping our own expenses relatively low, we make sure that the vast majority of our returns accrue to shareholders. We remain mindful of our stewardship responsibility and grateful for your trust. •
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.
