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

1, 23  - View Full Page