Chris Davis Intl Fund Semi-Annual Portfolio Review

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Q: Please discuss the Chris Davis Intl Fund’s recent performance.

A: During the 12 months ending June 30, 2014, international equity markets advanced broadly with the MSCI ACWI® (All Country World Index) ex U.S. returning 21.75%. Davis International Fund outperformed the Index by a wide margin, returning 28.07% during the period.1

Over the past 12 months, our holdings in China, Switzerland and France on balance contributed to overall performance while our holdings in Brazil and Hong Kong lagged. On a sector basis, consumer discretionary, industrial and health care holdings contributed to performance while the returns from consumer staples holdings, although positive, lagged. Our allocations to particular sectors and countries are a byproduct of bottom-up stock selection.2

Notable individual contributors to performance included Schneider Electric (French-based specialist in energy management), Compagnie Financière Richemont (Swiss-based luxury goods manufacturer), Vipshop Holdings Ltd – ADR (NYSE:VIPS) (Chinese online retailer), and Chocoladefabriken Lindt & Spruengli AG (SWX:LISN) (Swiss manufacturer of premium chocolates).3 Detractors included Brasil Pharma SA (BVMF:BPHA3) (Brazilian pharmacy chain), Experian (U.K.-based consumer credit bureau), and Valeant Pharmaceuticals (Canadian health care products company). We are encouraged by recent results and believe the businesses represented in the Portfolio are well positioned for the years ahead.

Q: Please describe Davis Advisors’ approach to international investing.

A: Davis International Fund uses the same investment philosophy and research methodology as other portfolios managed by Davis Advisors, drawing on the extensive global research from our seasoned investment professionals. What makes this Portfolio distinct is its flexibility to invest opportunistically anywhere outside the United States, in developed and emerging markets, based on rigorous bottom-up stock selection. Davis International Fund employs a focused approach to building the portfolio concentrating on approximately 30 to 40 holdings and is designed to provide a portfolio of best ideas from our skilled research team. The Fund’s objective is to maximize shareholder returns over the long term without attempting to mirror any particular market index while prudently managing risks.

Q: In what types of businesses does Chris Davis Intl Fund typically invest?

A: 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.4 We 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’ 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.

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

Q: What are some examples of businesses Chris Davis Intl Fund owns in each of these three categories?

A: An example of a global market leader in the Portfolio is Compagnie Financière Richemont, one of the world’s leading luxury goods groups. This Swiss-based company owns some of the world’s most prestigious brands, including jewelers Cartier and Van Cleef & Arpels; watchmakers Piaget, Vacheron Constantin, Jaeger-LeCoultre, Officine Panerai, and IWC; and makers of fine writing instruments such as Montblanc. Richemont has been adding stores in flagship cities, a strategy that offers better brand control and higher margins than its wholesale channel. Its powerful brands provide pricing power and act as a barrier to competitors. Long term we believe Richemont is well positioned to benefit from the global wealth effect, particularly in fast-growing emerging markets.

Another example of a global market leader is Essilor International Cmpgn Gnl d’Opq SA (EPA:EI), the world’s leading provider of coated prescription eyeglass lenses. Based in France, the company’s reach is truly global as it operates in more than 100 countries and dominates the market on every continent. It is also an innovator with a strong global research and development effort and regularly adds to its base of more than 5,000 patents. Essilor estimates as much as two-thirds of the world’s population could be helped by corrective lenses but only about a quarter so far have corrected vision, offering the company significant growth opportunities in the years ahead.

Groupe Bruxelles Lambert SA (EBR:GBLB), an investment holding company listed on the Brussels Stock Exchange since 1956, is an example of an out-of-the-spotlight business in the Portfolio. The company, whose capitalization makes it one of the largest firms in Belgium, is an investment vehicle for Belgium businessmen Albert and Gerald Frère and the Desmarais family in Canada. Groupe Bruxelles Lambert tends to concentrate its investments in a handful of mostly European public companies it believes are undervalued industry leaders. Holdings include the integrated energy and chemicals company Total, the international utility company GDF Suez, the building materials firm Lafarge, the industrial minerals company Imerys, and the global wines and spirits company Pernod Ricard, all of which are based in France. Because the stock of Groupe Bruxelles Lambert trades at a significant discount to the market value of its investments, our ownership of this stock allows us to participate in this portfolio of businesses at a steeply discounted price.

A current contrarian investment is Kuehne+Nagel, one of the world’s leading freight forwarders, whose business is currently out of favor due to the slowdown in global trade that we believe will be a temporary headwind. This Swiss-based company works behind the scenes to arrange the transport of heavy cargo typically from a manufacturer in one part of the world to a buyer who may be thousands of miles away. Logistics businesses like Kuehne+Nagel not only play a critical role in global trade but also are essential in managing the increasingly complex supply chain of global multinationals. While trade volume is cyclical in nature over the short term, we believe that the long-term trend in global trade favors growth and Kuehne+Nagel is well positioned to benefit from this tailwind in the years ahead.

Q: What is your outlook going forward?

A: The stock market is a market of individual stocks that represent ownership interests in real businesses. Therefore, our outlook for the Portfolio is based on the long-term prospects of the businesses we own.

Through our investment process we seek to identify companies that have: 1) a capable, disciplined management team with a proven track record; 2) a business model offering a high return on invested capital; 3) sustainable competitive advantages; and 4) a reasonable valuation.5 These metrics are the key to understanding why we choose the particular businesses we own when evaluating the vast array of opportunities in international markets.

Looking five years and beyond, our outlook for the companies we have selected for our shareholders is highly favorable. Our conviction is based on both the durability and resilience of the underlying businesses, as determined by factors that provide good defense (e.g., balance sheet strength, liquidity and a substantial amount of recurring revenues), all while affording investors the opportunity to participate in long-term earnings growth and the power of compounding. We believe the Portfolio reflects an appropriate and favorable balance of risk versus reward.6

Our confidence in 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.
  • The portfolio management team for Davis International Fund is led by veteran investors Danton Goei and Tania Pouschine, both of whom have a proven record of adding value for shareholders over the long term across a wide variety of businesses and geographies.
  • 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.

As stewards of our shareholders’ capital and a sign of our commitment to them, the Davis family, Davis Advisors, employees and directors are among the largest investors in Davis International Fund and have more than $2 billion of their own money invested side by side with our clients in the various funds and portfolios we manage.7

Thank you for investing with us. We are mindful of the trust you have placed in our firm and we look forward to continuing our investment journey together.

5While very few companies have all of these characteristics, we search for those possessing several of these characteristics, or an appropriate combination of these characteristics. 6While 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. Diversification does not ensure against loss. 7As of June 30, 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.

Chris Davis: 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 June 30, 2014, the Fund had approximately 34.6% 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 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; 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.

Chris David International Fund’s holdings

The information provided in this material should not be considered a recommendation to buy, sell or hold any particular security. As of June 30, 2014, the top ten holdings of Davis International Fund were: Schneider Electric SE, 5.96%; Compagnie Financière Richemont SA, 5.91%; Heineken Holding NV, 5.19%; Lindt & Spruengli AG, 4.99%; Kuehne+Nagel International AG, 4.78%; Diageo PLC, 4.55%; Vipshop Holdings Ltd.–ADS, 4.46%; Lafarge SA, 4.34%; Roche Holding AG, 4.32%; Grupo Televisa SAB, ADR, 4.04%.

Davis Funds has adopted a Portfolio Holdings Disclosure policy that governs the release of non-public 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 October 31, 2014, 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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