Q: Please provide an overview of Davis Financial Fund.
A: Davis Financial Fund invests in durable, well-managed financial services companies at value prices that can be held for the long term. Our expertise in studying and investing in financial services traces its roots to the 1940s when legendary investor Shelby Cullom Davis, known as the “Dean of Insurance Stocks,” began investing in financial companies. Davis Financial Fund was opened to investors in 1991.
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.
Q: Please provide examples of the types of businesses the Fund owns.
A: The Fund is essentially a group of business models we have researched and view as attractive vehicles for compounding capital over the long term based on their management quality, business durability and competitive advantages, coupled with relatively attractive valuations and weighted according to our conviction.
A representative holding in the Fund is American Express (AXP).1 The company combines a strong, upscale charge card brand with ownership of the underlying payment network to create a unique business model. The company attracts some of the most desirable cardholders whose affluence leads to average spending about three times as great as ordinary bank cards. American Express reinforces this higher charge card spending with a market-leading cardholder rewards program, creating a virtuous circle of higher spending and higher rewards. The company earns much of its revenue from the transaction or interchange fees it charges merchants that accept its card. Because its payment network is wholly owned, American Express avoids sharing this important revenue source, generating significantly better economics than the payment networks of its competitors whose interchange fees are shared with banks. We believe American Express is well positioned to benefit over the long term as card-based transactions continue to increase at the expense of cash-based transactions.
Wells Fargo (WFC), another representative holding in the Fund, is one of the largest and we believe best-managed financial services companies in the United States. Wells Fargo provides banking, insurance, investment, mortgage, and consumer finance services across North America through its branch network as well as other channels. A key competitive advantage is its sizeable, low-cost retail deposit base that enables it to generate one of the highest net interest margins in the industry. We believe that risk management is a core company strength and that this business is well positioned for the years ahead.
Bank of New York Mellon (BK) is a third example of the type of financial services businesses that Davis Advisors finds attractive. This company is a behind-the-scenes giant in the mundane yet durable businesses of trust services, asset custody, transaction processing, and asset management. While less widely understood than its traditional banking peers, Bank of New York Mellon is at the forefront of its industry in size and depth, operating in 35 countries with a leading $27.9 trillion under custody and/or administration. Although not in a glamorous industry, we believe its business lines are profitable, scalable, less risky, and less capital intensive than traditional banking with good long-term growth potential worldwide.
1Individual 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.
Q: How has the Fund performed over the long term?
A: Since its inception in 1991, Davis Financial Fund has exceeded the return of its benchmark, the S&P 500® Index, by a wide margin.2 This track record illustrates a consistently applied investment discipline can add significant value relative to the broader market over time and anchors our conviction in our time-tested investment discipline.
The 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 0.88%. 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 visit davisfunds.com or call 800-279-0279.
2Class A shares without a sales charge. Past performance is not a guarantee of future results.
Q: Please discuss the Fund’s more recent performance.
A: For the 12 month period ending June 30, 2014, Davis Financial Fund returned 21.14%, while the S&P 500® Index returned 24.61%.2 While the Fund lagged the broader market over this brief time period, it performed well relative to major indexes of financial stocks. Contributors to performance in the period included American Express, Wells Fargo, Bank of New York Mellon, and Markel while the State Bank of India (now sold) and Loews Corp. were detractors.
While we have reviewed our results for the most recent one year period, our investment discipline is based on a much longer view. We evaluate each investment in the Fund based on its potential to create value over multiyear time periods. Through bottom-up stock selection and rigorous fundamental research, we aim to construct a total portfolio that we believe has a high probability of producing satisfactory compound returns over complete market cycles.
Q: Please provide some perspectives on the current market environment.
A: Over the past several years, stock prices have advanced steadily and now trade above their levels prior to the financial crisis of 2008–2009. From the depths of the crisis to the present time, what is most remarkable in our view is the market’s incredible resilience. Since the stock market is really a market of individual stocks, the market’s recovery reflects the resilience of the underlying individual businesses and the durability of their earnings power. Many financial businesses have successfully built fortress balance sheets, cut costs, strengthened and expanded their product offerings, invested in their competitive moats, and as a result significantly increased their earnings power. Even after its strong performance in 2013, the U.S. stock market is still trading at a 6% to 7% earnings yield by our estimate and remains positioned for long-term growth based on underlying business fundamentals in our opinion. Within the context of today’s extremely low interest rate and low inflation environment, stocks represent the most attractive major asset class in our view in both absolute and relative terms. Within the broader equity markets, select financial businesses continue to represent good value in our opinion based on their balance sheet strength, our expectations for their long-term earnings power and current valuations.
We hope this update has provided useful perspectives on the Fund, and we thank you for your support and confidence. As we have done for many years, we stand side by side with our investors through our own significant investment in the Fund and look forward to continuing our long investment journey together.
This report is authorized for use by existing shareholders. A current Davis Financial 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 Financial Fund’s investment objective is long-term growth of capital. There can be no assurance that the Fund will achieve its objective. Under normal circumstances the Fund invests at least 80% of its net assets, plus any borrowing for investment purposes, in securities issued by companies principally engaged in the financial services sector. 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; large-capitalization companies risk: companies with $10 billion or more in market capitalization generally experience slower rates of growth in earnings per share than do mid- and small-capitalization companies; mid- and small capitalization companies risk: companies with less than $10 billion in market capitalization typically have more limited product lines, markets and financial resources than larger companies, and may trade less frequently and in more limited volume; 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; financial services risk: investing a significant portion of assets in the financial services sector may cause the Fund to be more sensitive to systemic risk, regulatory actions, changes in interest rates, non-diversified loan portfolios, credit, and competition; foreign country risk: foreign companies may be subject to greater risk as foreign economies may not be as strong or diversified. As of June 30, 2014, the Fund had approximately 15.6% of assets invested in foreign companies; 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; depositary receipts risk: depositary receipts may trade at a discount (or premium) to the underlying security and may be less liquid than the underlying securities listed on an exchange; focused portfolio risk: investing in a limited number of companies causes changes in the value of a single security to have a more significant effect on the value of the Fund’s total portfolio; interest rate sensitivity risk: interest rates may have a powerful influence on the earnings of financial institutions; credit risk. The issuer of a fixed income security (potentially even the U.S. Government) may be unable to make timely payments of interest and principal; and fees and expenses risk: the Fund may not earn enough through income and capital appreciation to offset the operating expenses of the Fund. 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, 2014, the top ten holdings of Davis Financial Fund were: American Express Co., 9.87%; Wells Fargo & Co., 9.85%; Bank of New York Mellon Corp., 6.52%; Markel Corp., 6.42%; American International Group, Inc., 4.69%; Visa Inc., Class A, 4.66%; Everest Re Group, Ltd., 4.63%; JPMorgan Chase & Co., 4.40%; Brookfield Asset Management Inc., Class A, 4.36%; Julius Baer Group Ltd., 4.34%.
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.
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. Investments cannot be made directly in an index.
After October 31, 2014, 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 #4438 6/14 Davis Distributors, LLC, 2949 East Elvira Road, Suite 101, Tucson, AZ 85756, 800-279-0279, davisfunds.com
