Davis International Fund annual review for the year ended December 2014.

Davis Advisors’ approach to international investing

Since its inception eight years ago, Davis International Fund has been managed with the same investment philosophy, research process, valuation methodology, and stewardship principles as all the Davis funds. What makes this Portfolio distinct is its flexibility to invest opportunistically anywhere outside the United States, in developed and emerging markets, based on the rigorous bottom-up stock selection process executed by our team of seasoned global investment professionals. As a research-focused investment firm specializing in equities, our mission has always been to concentrate first and foremost on finding the best risk/reward opportunities around the globe for our clients, which we consider a key competitive advantage. Davis Advisors today has more than $4 billion of assets invested in non-U.S. companies in the various portfolios we manage.

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.

Recent performance

During 2014, the performance of Davis International Fund reflected generally weak stock markets outside the United States. The Fund generated a ?3.05% return during this period but slightly outperformed the MSCI ACWI® (All Country World Index) ex US, which returned ?3.87%.1

Davis International Fund

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 Fund is subject to a 2% short-term redemption fee for shares held for fewer than 30 days. The total annual operating expense ratio for Class A shares as of the most recent prospectus was 1.28%. 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 or call 800-279-0279. The Fund’s performance benefited from IPO purchases in 2014. After purchases, the IPOs rapidly increased in value. Davis Advisors purchases shares intending to benefit from long-term growth of the underlying company; the rapid appreciation of the IPOs were unusual occurrences.

Over the past 12 months, our holdings in China, Switzerland, Sweden, and Mexico on balance contributed to overall performance while our holdings in Brazil and Canada lagged. On a sector basis, consumer discretionary and health care holdings contributed to performance while information technology and energy lagged. Our allocations to particular sectors and countries are a by-product of our bottom-up stock selection process.2

Notable individual contributors to performance included Chocoladefabriken Lindt & Sprüngli (Swiss-based chocolatier), Vipshop Holdings and Alibaba Group (Chinese online retailers), and Heineken (Dutch-based global beer distributor).3 Detractors included Encana (Canadian exploration and production energy company), SouFun (online real estate services business operating in China), Compagnie Financière Richemont (Swiss-based luxury goods group), and Experian (U.K.-based global consumer credit bureau).

1Class A shares without a sales charge. Past performance is not a guarantee of future results. 2Foreign investments, particularly those in emerging markets, involve greater risk than U.S. investments. Some of these risks are foreign country risk, currency risk, market risk, and emerging market risk. See endnotes for a complete description of these risks. 3Individual 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.

Types of business in which Davis International Fund invests

Davis International Fund focuses on three primary categories of businesses. The first and typically largest category is global market leaders. These are often businesses with universally known brands, operations that span the globe and strong or even fortress balance sheets. Holdings in this category provide a core foundation for the Portfolio. The next largest category of businesses is “out-of-the-spotlight” holdings. These are often less well-known companies that operate behind the scenes in mundane industries such as energy exploration and production, manufacturing or industrial services. The final and smallest category of holdings is headline risk or contrarian investments that are often out of favor with investors or involve controversy.4We make these investments on a selective basis and only when we believe the market has overly discounted a company’s shares given the probable economic risk to the business’s long-term fundamentals. As with all our investments, underpinning these positions is our internal assessment that the overall risk/reward trade-off is favorable.

The investments we have made in market leaders, out-of-the-spotlight companies and headline risk businesses combine to create a Portfolio we believe is well diversified with a balance of offensive and defensive characteristics that can produce satisfactory compound returns over full market cycles.

4 While we research companies subject to such contingencies, we cannot be correct every time, and a company’s stock may never recover.

Examples of companies the Fund owns

An example of a global market leader in the Portfolio is Diageo (DEO), the world’s leading premium alcoholic beverage company. Based in Great Britain, Diageo is a truly global business operating in more than 180 countries with only about a third of its sales in North America and ample exposure throughout the developing world. The company owns an array of strong brands in the spirits, wine and beer categories including Smirnoff, Ketel One, Johnnie Walker, Captain Morgan, Baileys, and Guinness. Solely focused on the alcoholic beverage business and capably managed, Diageo has returned capital to shareholders both through share buybacks and dividends.

Another example of a global market leader is Swiss-based Nestlé (NSRGY). Its portfolio of brands, mostly serving the global food and beverage market segments, include Gerber baby food products, Poland Spring water and Purina pet food, among many others. Nestlé sales show broad geographic diversification with revenues spread almost evenly among the United States, Europe and emerging economies. The company has a long history of disciplined capital allocation and regularly returns cash to shareholders through share buybacks and annual dividends.

The final example of a global market leader is Heineken (XAMS:HEIO), one of the world’s top beer brewers. Founded in Amsterdam in 1864 the company today operates globally selling beer in more than 70 countries and has more than 200 brands including Amstel, Dos Equis, Kingfisher, and Newcastle as well as its namesake. Although headquartered in a relatively small country, Heineken became a leading exporter of beer to other countries starting as early as the 1920s, and today the company’s reach is truly global. For example, Heineken sells more beer in Africa than it does in the United States. As beer sales growth has been flat in most developed economies over the past decade, we believe Heineken’s established position in developing and frontier markets may be a key to the company’s continued success.

An example of an out-of-the-spotlight company in the Portfolio is Lafarge (XPAR:LG), a global cement, concrete and aggregates producer with operations throughout North America, Western Europe and emerging markets. Emerging markets account for about two-thirds of the company’s earnings and may be a key driver of long-term growth. While Lafarge does business around the globe, its operations in specific local markets often enjoy a significant barrier to competition. Transporting its products over long distances is costly and impractical and, as a result, competition is limited to firms that operate in a specific region. From a financial perspective Lafarge in our view is still earning below its potential largely as a result of the recent recession, which may make the company’s stock even less expensive than it appears. Key to our investment is that some 35% of its shares are controlled by Groupe Bruxelles Lambert and the investor Nassef Sawiris, which we view as a significant long-term advantage. Lafarge recently announced its intention to merge with the Swiss-based cement company Holcim (XSWX:HOLN). If the merger is completed, the combined entity will be the largest cement company in the world and well positioned to benefit from global growth for decades to come.

Looking to the Future

Our optimism about the future prospects of Davis International Fund is based on numerous strengths:

  • The Portfolio is managed according to the same time-tested investment philosophy of buying durable businesses at value prices and holding them for the long term that Davis Advisors, an independent equity research firm, has successfully employed for more than 45 years.
  • The Fund possesses greater flexibility than most funds in its category to pursue investment opportunities in international markets. This means our skilled investment team can draw on ideas in which we have a high degree of conviction from an extensive array of opportunities, using firsthand, rigorous bottom-up research to guide decisions.
  • We are intensely focused on achieving above-average performance over the long term while keeping expenses low relative to the industry average for international stock funds, which is a core part of the value we offer our shareholders.

Our confidence in the Fund and alignment with investors is demonstrated by the fact the Davis family, Davis Advisors, employees, and directors have more than $2 billion in our mutual funds.5 We are mindful of the trust you have placed in our firm and we look forward to continuing our investment journey together.

5 As of December 31, 2014.

This report is authorized for use by existing shareholders. A current Davis International 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 International 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; foreign country risk: foreign companies may be subject to greater risk as foreign economies may not be as strong or diversified; emerging market risk: securities of issuers in emerging and developing markets may present risks not found in more mature markets. As of December 31, 2014, the Fund had approximately 33.5% of assets invested in securities from emerging 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 involve higher expenses and may trade at a discount (or premium) to the underlying security; 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 midand 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; 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.

The Fund is subject to a 2% short-term redemption fee for shares held for fewer than 30 days.

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 December 31, 2014, the top ten holdings of Davis International Fund were: Compagnie Financière Richemont S.A.–A, 4.61%; Kuehne & Nagel International AG, 4.51%; Lindt & Sprüngli AG–PC, 4.48%; Schneider Electric SE, 4.26%; Heineken Holding N.V., 4.15%; Diageo PLC, 3.84%; Experian PLC, 3.52%; Essilor International S.A., 3.52%; Lafarge S.A., 3.26%; NetEase, Inc.–ADR, 3.19%.

Davis Funds has adopted a Portfolio Holdings Disclosure policy that governs the release of nonpublic 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.

During the period from inception (December 29, 2006) through December 30, 2009, only the directors, officers and employees of the Fund or its investment adviser and sub-adviser (and the investment adviser itself and affiliated companies) were eligible to purchase Fund shares. Since inception, the Fund’s investment strategies and operations have remained substantially the same.

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 MSCI ACWI® (All Country World Index) ex US is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets, excluding the United States. The Index includes reinvestment of dividends, net of foreign withholding taxes. Investments cannot be made directly in an index.

After April 30, 2015, 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.

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