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Holly LaFon
Holly LaFon
Articles (8839)  | Author's Website |

Chris Davis Funds: Fall Update from Portfolio Managers Christopher Davis and Danton Goei

Discussion of holdings and markets

October 12, 2017 | About:

In 2017, Davis New York Venture Fund continued its long record of building shareholder wealth. As shown in the chart below, the value of an initial $10,000 investment has increased in all periods shown since the Fund’s inception.


Compounded over decades, our advantage over the S&P 500 Index has created enormous value for shareholders. Just consider an initial $10,000 investment in Davis New York Venture Fund at our inception would now be worth more than $2.1 million, more than twice as much as a comparable investment in the S&P 500 Index (as shown in the chart below).2


While our disciplined investment approach has not always been rewarded by the market over every short-term period, our research-driven active management has created wealth for our shareholders over the long run. By standing apart from the crowd, keeping expenses low, investing alongside our shareholders, and ignoring short-term fads, we have built wealth for shareholders and beaten the S&P 500 Index since 1969.

2 Class A shares without a sales charge. Past performance is not a guarantee of future results. Inception of the Fund was February 17, 1969. Investments cannot be made directly in an index.3 Class A shares without a sales charge. Past performance is not a guarantee of future results. Inception of the Fund was February 17, 1969. Investments cannot be made directly in an index.

Investment Outlook
Equities should outperform bonds for the next decade.4 Invest in beneficiaries of capitalistic creative destruction. Avoid overpriced dividend darlings.

  • With bond yields at historic lows, equities should outperform bonds over the next decade.
  • Within the equity universe, selectivity is a key to success. We believe durable, well-managed businesses whose true value is not recognized by the market should outperform.
  • Technology and globalization are reconfiguring industries at an unprecedented rate. We look for the beneficiaries of this capitalistic creative destruction. Many long-standing brands are being disrupted in unexpected ways and many iconic companies are becoming obsolete. We estimate 75% of the companies in the S&P 500 Index will be replaced in the coming decade at the current rate of change.
  • Avoid conventional thinking and remain flexible by considering investments in out-of-favor areas of the market.
  • Risks in today’s market include companies with unsustainable profit margins and overvalued dividend darlings that are riskier than they appear.5 The 25 most commonly held stocks in the five largest dividend-focused ETFs are valued at 25 times earnings, a P/E ratio significantly higher than the market’s.

4 Common stocks and bonds represent different asset classes subject to different risks and rewards. Unlike bonds, the Fund does not offer a fixed rate of return if held to maturity, and the Fund has risks not associated with holding a bond. Bonds are considered to have less risk than equities. Future economic events may favor one asset class over another. 5 While Davis Advisors attempts to manage risk there is no guarantee that an investor will not lose money. Equity markets are volatile and the investment return and principal value of an investment will vary.

Portfolio Update
Positioned for the future, four portfolio themes have allowed us to create a powerful combination of growth and value with above-average resilience and attractive prices.

Global Leaders Trading at Attractive Prices

Some of the strongest and best-known companies in the world make up the largest portion of the Portfolio. Buying top tier businesses at attractive prices is a value investor’s dream.6


Dominant Lesser-Known Businesses

This group dominates 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, yet can generate attractive returns.


Blue Chips of Tomorrow
Another theme is fast-moving companies 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.


Beneficiaries of Short-Term Misperceptions

Shortsighted investors often avoid companies that have suffered though challenging periods, creating an opportunity for long-term investors willing to look beyond today’s headlines. For example, contrary to perception many top tier banks are not only reporting record earnings with room for further growth but are also far better capitalized than at any time in the last 50 years. In addition, these banks are returning increasing amounts of capital through rising dividends and share repurchases. Turning to the energy sector, we own a select group of focused exploration and production companies with strong capital allocation discipline, highly experienced management and low-cost, long-lived reserves. In contrast to many of their peers, our energy holdings are well positioned to increase production for decades to come.


By focusing the Portfolio on these four areas of opportunities, we combine above-average resiliency and growth with attractive prices. Rather than trying to predict the unpredictable, this positioning prepares the Portfolio for a wide range of possible outcomes, balancing the strength needed to endure the inevitable storms with the growth required to reach our long-term goals.

6 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.

Active vs. Passive: Has Everything Been Said?

Huge fund flows into passive investments have created a momentum-driven feedback loop, as more money is automatically invested in those stocks whose prices have already gone up. Momentum-based strategies lead to bubbles and bubbles eventually burst.

This explains why active and passive investment approaches tend to move in cycles. As the chart below indicates, we are at a cyclical high for passive investing outperformance. Such highs have historically been followed by sharp reversals in which most active managers outperform passive investment strategies.


Moreover, successful active managers possess certain quantifiable characteristics including lower than average fees, differentiation from the benchmark index (sometimes referred to as “active share”), low portfolio turnover, strong alignment of interests, experienced leadership, and a proven record. While investors may rush into passive strategies, the data is overwhelming that select active managers with the characteristics listed above can and have beaten the indexes over the long term. Data presented in the chart below, for example, shows that managers with low fees and high ownership in their own funds have outperformed in 89% of all rolling 10-year periods.


At the Davis Funds, all five of our equity funds have outperformed their benchmarks and peers since their inception, including Davis New York Venture Fund, Davis International Fund, Davis Global Fund, Davis Financial Fund, and Davis Opportunity Fund.


7Source: Morningstar Direct. Universe includes: Large Value, Large Blend and Large Growth. 8Source: Capital Group, based on Morningstar data. Based on monthly rolling periods from July 1996 to June 2016. Funds in the “Average Fund” category are those U.S. domestic equity funds in the Morningstar Large Value, Large Blend and Large Growth categories. Funds in the “Select Active Funds” group are those U.S. domestic equity funds in the Morningstar Large Value, Large Blend and Large Growth categories filtered for the quartile with the lowest net expense ratios (NER) and the quartile with the highest manager ownership. U.S. index is S&P 500. The index is unmanaged and, therefore, has no expenses. Investors cannot invest directly in an index. Past performance is not a guarantee of future results. 9As of 8/31/17. Class A shares without a sales charge. Figures will vary in future periods. Past performance is not a guarantee of future results. Lipper Peer Category data is compiled using Lipper, as of 8/31/17. The Index and Lipper Peer Category respectively for each fund are: Davis New York Venture Fund: S&P 500 Index and Large Cap Core; Davis International Fund: MSCI ACWI (All Country World Index) ex US and International Multi-Cap Growth; Davis Global Fund: MSCI ACWI (All Country World Index) and Global Multi-Cap Growth; Davis Financial Fund: S&P 500 Index and Financial Services; and Davis Opportunity Fund: Russell 3000 Index and Multi-Cap Growth. Index and Lipper Peer Category average returns are based on the Funds’ inception dates except for Large Cap Core, which is based on February 28, 1969. Inception dates for the Funds are: Davis New York Venture Fund: 2/17/69; Davis International Fund: 12/29/06; Davis Global Fund: 12/22/04; Davis Financial Fund: 5/1/91; and Davis Opportunity Fund: 12/1/94. 10Portfolio is constructed from the bottom up, on a company by company basis, and is not designed to mirror an index. 11Gross expenses. As of the most recent prospectus. See endnotes for expense ratios. 12As of June 30, 2017. Includes investments of the Davis family, Davis Advisors, employees and directors.


We see significant opportunity today in global leaders, blue chips of tomorrow, beneficiaries of short-term misperceptions, and beneficiaries of capitalistic creative destruction.

We believe our proven investment discipline, experienced team and the carefully selected companies that make up Davis New York Venture Fund put us in a strong position to build wealth for our shareholders going forward. We look forward to continuing our investment journey together.

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.

About the author:

Holly LaFon
I'm a financial journalist with a master of science in journalism from Medill at Northwestern University.

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