Chris Davis’ Davis Funds 2013 Portfolio Managers Update
The chart below summarizes results through December 31, 2013 for Davis New York Venture Fund. As the Fund’s managers, my colleagues and I at Davis Advisors have two objectives: to earn a satisfactory absolute investment return and to generate relative results in excess of the S&P 500 (INDEXSP:.INX). In our view, the data in the chart below presents a mixed picture. Over virtually all periods, the Fund’s absolute returns have been satisfactory. In particular, a one year return of 35% and five year compounded annual return of 16% should be considered extraordinary.1 On a relative basis, we fell short of our goal in a number of these periods. Although both goals are important, if forced to choose between strong absolute returns in which we trailed the market or negative absolute returns in which we beat the market, we would far prefer the former. When people choose to invest rather than spend their hard earned money, their objective is generally to be able to afford something more in the future. For our shareholders, this might mean a child’s or grandchild’s education, a more comfortable retirement, a new house, or simply the peace of mind that comes from being prepared for life’s unexpected expenses. Thus, as stewards of shareholders’ savings, we always remember the wisdom of the old saying, “you can’t eat relative returns.” However, we aim to achieve both goals and unquestionably have ground to make up on a relative basis. The year 2013 was a good start but we have a ways to go.
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.
As always, our goal in preparing these reports is to provide the information we would want if our positions were reversed and we were investors in rather than the manager of Davis New York Venture Fund. At Davis Advisors, this mindset is not just theoretical but is grounded in the fact that we, our colleagues and our families have more than $2 billion of our own money invested alongside shareholders in the funds we manage.2 As a result, making decisions and communicating based on what best serves Fund shareholders is second nature to us.
With this perspective in mind, we would like to discuss two important topics in this report. First, we want to provide some perspective on our decision to ask my longtime colleague Danton Goei to join me as comanager of Davis New York Venture Fund. Second, we want to provide an update on the Portfolio as well as offer some insight into our conviction that the Portfolio is well positioned in today’s uncertain world both to generate long-term growth and to weather the inevitable storms and shocks that can occur any time.
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. 1Class A shares without a sales charge.Past performance is not a guarantee of future results. 2As of December 31, 2013.
Our Investment Team
Starting with our investment team, in mid December last year we announced that after working together since 1998, Danton Goei would be joining me as comanager of Davis New York Venture Fund effective January 1, 2014. At the same time, we asked Ken Feinberg to step down. We thank Ken for his service and wish him the best.
As fellow investors, we made this decision because we believe it will lead to better investment results in the years ahead. In coming to this conclusion, we considered a number of factors, the most important of which is Danton’s proven investment ability. His research has been the foundation of many of our successful investments over the last 15 years in a range of different industries, including many of our current holdings.
As a member of our analyst team, Danton’s stock recommendations for our larger diversified funds, including Davis New York Venture and Selected American Shares, have meaningfully added to Fund returns.3 In fact, we have had such high regard for Danton’s contribution that we have singled him out more than any other individual in our shareholder commentaries over the years. His performance as one of our most influential contributors was another important consideration in our decision.
Beyond his talent as an investor, Danton also embodies the stewardship culture, research approach, investment philosophy, and valuation discipline of our firm. Given our focus on culture when evaluating potential investments, shareholders should not be surprised that culture played a role in this decision. On a personal level, Danton’s work ethic, modesty and humor make him a collegial as well as a capable partner that I look forward to working with in the years and decades ahead. In sum, as stewards of our clients’ savings, our responsibility is to field the best team we can. Danton’s results and character have earned him this place in our starting lineup.
3 This is not a solicitation for Selected American Shares.
Turning to the Portfolio, strong market returns over the last five years have divided investors into two camps. The first camp includes those who worry because stock prices have gone up so much the market must be due for a fall. These investors point out the S&P 500® Index now trades a bit above the highs of 2000 and 2007, both of which preceded a steep market decline. The second camp includes those who have been heartened by the price increases and are anxious to jump on the bandwagon for fear of missing out. These investors are quick to point out because the world seems far less risky than it did during the dark days of the financial crisis now is a better time to invest.
Although one of these camps will ultimately prove to be correct both their forecasts rest on the faulty assumption that short-term changes in stock prices are predictable when the overwhelming evidence suggests that they are not. For example, in the chart below, the tan line represents investment strategists’ average forecast for stock market returns in the following 12 months. The green line shows what actually happened. As far as we can tell, these lines are uncorrelated.
Beyond the folly of short-term market predictions, investors in both camps are making a second mistake by focusing on price rather than value. Because stocks represent ownership interests in real underlying businesses, discussing the price of a stock without reference to the value of the underlying business makes no sense. Bearing in mind the old saying “price is what you pay, value is what you get,” a closer look makes