Summary
• Davis Opportunity Fund has built shareholder wealth over time. Over the most recent one, three and five year periods, a $10,000 investment grew to $10,395, $13,949 and $17,396, respectively.1
•”‚ Davis Opportunity Fund has outperformed the Russell 3000® Index by a wide margin since Davis Advisors began managing the Fund in January 1999.1 We believe this long-term track record demonstrates an effective, consistently applied investment discipline can add significant value relative to passive investment alternatives over time and anchors our conviction in our investment process.
• Decades of investment experience and judgment are particularly valuable to take advantage of today’s market. Opportunities include: quality on sale, blue chips of tomorrow and timely investment themes.
• In our experience, despite short-term stock price fluctuations, equities remain the best way to maintain long-term purchasing power.
• Davis Advisors, the Davis family, employees, and directors are the largest shareholders in the Fund.²
Results of Our Investment Discipline
Our investment discipline has built wealth for shareholders over the long term. More recently in the year-to-date period ending June 30, Davis Opportunity Fund returned 4.1% versus 3.6% for the Russell 3000® Index.3
Shareholders invest in Davis Opportunity Fund because they want us to grow the value of their savings over the long term. As shown in the chart below, we have achieved this goal in all meaningful time periods and extended this record in 2016. Since Davis Advisors began managing Davis Opportunity Fund in 1999, we have grown the value of an initial $10,000 investment in the Fund to $38,313 today, a nearly fourfold increase. 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 has helped us increase the value of our clients’ savings. The longer clients have invested with us, the more their savings have grown.
In addition to generating satisfactory absolute returns, our investment approach has delivered relative returns in excess of the Russell 3000® Index over the long term. Since Davis Advisors began managing Davis Opportunity Fund in 1999, the Fund has achieved an average annual return of 7.98%, exceeding the 5.49% of the Russell 3000® Index.3 We consider this both a significant margin of outperformance as well as evidence that an effective, consistently applied investment discipline can add significant value relative to passive investment alternatives over time, anchoring our conviction in our investment process.
In the year-to-date period, our relative outperfor mance was driven primarily by the strong results of our energy and technology-related holdings.
Encana (ECA, Financial), Apache (APA, Financial), Cabot Oil (COG, Financial), and Amazon.com (AMZN, Financial) were strong individual contributors to results.5 Health care and consumer-related businesses detracted from relative results on balance. We are gratified both our more recent and longer term results have exceeded the market’s returns and compare favorably to other managers. More important, despite these good short-term results, many of our large holdings and new purchases trade at significant discounts to the averages, positioning us well for the years ahead should these companies be appropriately revalued.
Our conviction in the investment discipline that has helped our shareholders build wealth over the long term is strengthened when we consider an initial $10,000 investment in the Fund has grown to more than $38,300 since we began managing the Fund in 1999, as the chart below shows. •
The Portfolio
Long-term compounders, quality on sale, the blue chips of tomorrow, and timely investment themes
The core of Davis Opportunity Fund includes an exceptional group of companies with fundamental competitive advantages. Although the short-term stock performance of these core holdings may be driven by changes in market sentiment, their long-term returns will be driven by the competitive advantages of their underlying businesses. These advantages are the key requirement for a business to become a wealth-compounding machine.
While we build and manage the Portfolio from the bottom up, analyzing and evaluating each investment on its own merits, we consider three key investment themes the biggest areas of opportunity in the current market environment.
First, one notable aspect of volatile markets is they create the opportunity to acquire more shares of great businesses at compelling prices. We call this opportunity quality on sale. Companies such as United Technologies, Monsanto and Berkshire Hathaway fall into this category.
A second area of opportunity is best captured by the statement today’s disrupters are tomorrow’s blue chips. Companies such as Amazon.com and Facebook (FB, Financial) have powerful, growing competitive advantages and produce cash flows that we believe are becoming more durable over time. Moreover, as disrupters relentlessly grow, perceptions change. Older established competitors lose market share and disrupters become the new blue chips.
The third theme is our constant interest in those areas of the market most out of favor with investors, provided the underlying companies deliver essen-tial products and services that are highly unlikely to become obsolete. Today, two sectors fit this de-scription: financial services and energy. Companies such as Wells Fargo and JPMorgan are trading at low valuations as near-term headwinds are mask-ing much of their latent earnings power while their dominant market positions remain indisputable.
Turning to energy, recently the price of oil has rebounded from its February lows, leading to an upward revaluation of stocks that just six to 12 months ago were languishing. We look for the combination of sensible management, a strong balance sheet, great geological formations, and leading technology that gives energy companies a global competitive advantage. Investments that meet these criteria include Encana, Cabot Oil & Gas and Apache. •
Conclusion
At Davis Advisors, we are committed to helping our clients achieve their goals by growing the value of the savings entrusted to our care. Every Davis Fund has grown shareholder wealth since inception and has low expenses. Davis is also among the largest shareholders of each Fund.
Looking ahead, we believe the competitive advantages of our core holdings, our willingness to invest in sectors that are currently out of favor, and the opportunities presented by recent stock market volatility should lead to strong results going forward. •
This report is authorized for use by existing shareholders. A current Davis Opportunity 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 Opportunity Fund’s investment objective is long-term growth of capital. There can be no assurance that the Fund will achieve its objective. 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; 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, 2016, the Fund had approximately 19.8% 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; 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, 2016, the top ten holdings of Davis Opportunity Fund were: Amazon.com, Inc., 6.65%; Alphabet Inc., 6.03%; United Technologies Corp., 3.95%; Apache Corp., 3.83%; Quotient Technology, Inc., 3.66%; Encana Corp., 3.43%; Didi Chuxing Joint Co., Series A, 3.10%; Eaton Corp. PLC, 2.92%; Occidental Petroleum Corp., 2.92%; UnitedHealth Group Inc., 2.80%.
