All-Cap Portfolio Commentary
Winter Update 2017

Short-Term and Long-Term Results

In 2016, the Davis All-Cap strategy outperformed the Russell 3000 Index, continuing the strategy’s long record of building shareholder wealth.1

While no investment approach consistently outperforms the market over the short term, since its inception in 1999 the Davis All-Cap strategy has outperformed its benchmark by a wide margin.

Looking ahead, we believe the durability and growth potential of the individually selected companies that make up the Davis All-Cap Portfolio position us strongly for the years and even decades to come.

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. 1Davis Advisors’ Multi-Cap Equity Composite, gross of fees. The Multi-Cap Equity Composite is a representation of Davis Advisors’ overall results employing this strategy. Individual account performance may vary. Inception was January 1, 1999. Past performance is not a guarantee of future results.

Investment Outlook
Equities should outperform bonds for the next decade.2 Avoid overpriced dividend darlings and expensive companies with peak profit margins. Technology and globalization are disrupting industries at an unprecedented rate.

When evaluating the investment landscape, we do not make investment decisions based on short-term forecasts, which history has shown can be unreliable. Instead, we focus on the important and knowable while maintaining a long-term perspective.

In today’s market, our long-range assumptions include:

  • Equities should outperform bonds over the next decade given bond yields are at multi-century lows.
  • Within the equity universe, selectivity is critical. Durable, well-managed businesses whose true value is not recognized by the market in the near term should ultimately outperform.
  • Opportunities in today’s market include global leaders selling at bargain prices, dominant lesser-known businesses in necessary economic niches, blue chips of tomorrow and beneficiaries of short-term misperceptions.
  • Risks in today’s market include companies with near peak margins and overvalued dividend darlings that are riskier than they appear. The 25 most commonly held stocks in the five largest dividend-focused, exchange-traded funds are valued at 25 times earnings, a P/E ratio significantly higher than the market’s.
  • Technology and globalization are reconfiguring industries at an unprecedented rate. Many longstanding brands and business moats that enable companies to maintain competitive advantages are being disrupted in unexpected ways. For example, in recent years iconic companies in the newspaper, retailing and media industries have all become obsolete. At the current rate of change, much of the Russell 3000 Index could be replaced in the coming decade. To succeed, investors should avoid conventional thinking and remain flexible.

2 Common stocks and bonds represent different asset classes subject to different risks and rewards. Unlike bonds, the portfolio does not offer a fixed rate of return if held to maturity, and the portfolio 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.

The Portfolio
Global leaders trading at bargain prices. Dominant lesser-known businesses. Blue chips of tomorrow. Beneficiaries of short-term misperceptions.3

Unlike the index benchmarks, which by definition must own most of the largest publicly traded companies in the United States without making distinctions based on quality or price, the Davis All-Cap Portfolio seeks to own a focused group of extraordinary businesses that in general offer above-average resiliency and growth with below-average prices.

Global Leaders Trading at Bargain Prices—Some of the strongest and best-known companies in the world make up the largest portion of the Portfolio. Short-term economic concerns over the past year have reduced the share prices of many global leaders to bargain levels at a time of high valuations for the average company. Buying top-tier businesses at bargain prices should be a goal for long-term investors in any environment.

A final example of a lesser known but highly durable business is Quest Diagnostics, a leading independent clinical laboratory services provider.⁴ Quest offers its services at a fraction of the cost hospital labs normally charge patients, giving the company an enduring competitive advantage and the opportunity to grow market share over time.

Applied Materials, a new addition to the Portfolio, is an industry-leading producer of semiconductor fabrication tools that was founded in 1967 in Mountain View, CA. The company has 15,600 employees in 17 countries providing materials engineering solutions for semiconductor manufacturing. In addition to that core business, the company is a leading supplier of manufacturing tools for advanced flat-panel display screens that have similar technologies to semiconductor fabrication. Demand for Applied Materials’ products and support services should continue to increase as the semiconductor fabrication process becomes more complex. With a leading market share and a top-notch management team, we believe the company is well positioned for future growth.

Dominant Lesser-Known Businesses—The Portfolio’s investments also include lesser-known businesses that dominate dull but necessary niches in the global economy operating in unglamorous industries or headquartered in different countries that are not household names. As a result, their shares often trade at a discount to better-known companies despite having the same qualities of market dominance and durability as the global leaders described above. These businesses combine the strengths and resilience of blue chip companies with below-average valuations.

An example of a dominant lesser-known but highly durable business is Quest Diagnostics, a leading independent clinical laboratory services provider.4 Quest offers its services at a fraction of the cost hospital labs normally charge patients, giving the company an enduring competitive advantage and the opportunity to grow market share over time.

Wesco Aircraft Holdings, a leader in the niche business of distributing aircraft parts, was until recently a representative business in this category as well that we sold to fund more compelling opportunities.

Blue Chips of Tomorrow—Another theme is fast-moving companies that use innovation to disrupt the economics of larger but less agile competitors. Capitalism is a process of constant change that rewards businesses that can adapt. Over decades, we have seen many examples of today’s disrupters emerging as tomorrow’s blue chips. Several of the Davis All-Cap Portfolio’s core holdings, particularly in the online retailing and social media sectors, are currently in this category.

Alphabet, the parent company of Google, globally dominates the business of online search with a market share of more than 65%. The company’s Google search engine allows users to search the World Wide Web for free but charges advertisers for placing ads on the search results page. Advertisers gladly pay for this ad placement as their ads are displayed only when searches are relevant to their business. This makes Alphabet a new generation media company in our view with a business model that is exceptionally well positioned to capitalize on the continuing transition from traditional print and television media to Internet-based content and advertising. In addition the company owns YouTube and has been successful in increasing advertising from this excellent business.

A much earlier-stage innovator in the Portfolio is Angie’s List, an online, subscription-based rating and review company that provides information about local service professionals.

Beneficiaries of Short-Term Misperceptions—Investors with a short-term focus often avoid companies that face any type of controversy or negative near-term outlook, creating an opportunity for long-term investors willing to look beyond today’s headlines.5

Valeant Pharmaceuticals is an example of a holding in the Portfolio that faces near-term controversy. This Canadian-based company manufactures and sells a broad line of pharmaceutical and health care products, including patented and generic drugs, branded generic drugs and various over-the-counter products mostly for dermatological and ophthalmological uses.

Valeant’s stock has been volatile in recent quarters due to concerns about the debt the company has amassed to fund its acquisitions as well as its pricing of certain pharmaceutical products, among other reasons. However, we believe Valeant has an array of strong business lines the value of which is not reflected in the company’s share price.

Building wealth in the coming decade will require equity investors to look beyond the market index and be selective, adaptable and flexible. Given the quality and valuations of the companies in the Davis All-Cap Portfolio, we believe we are well positioned to grow shareholder wealth and exceed the performance of the broader market over the long term.

3While 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. 4Holdings discussed in this commentary are selected according to objective, non performance-based criteria. They are chosen each quarter according to a consistent methodology based on their weight in the Davis Advisors Large-Cap Value model portfolio as well as recent purchases and recent sales and are intended only as illustrations of the Davis Investment Discipline. They are not recommendations to buy, sell or hold any security. Individual account holdings may vary. 5While we research companies subject to such contingencies, we cannot be correct every time, and a company’s stock may never recover.

This material may be shared with existing and potential clients to provide information concerning market conditions and the investment strategies and techniques used by Davis Advisors to manage its client accounts. Please refer to Davis Advisors Form ADV Part 2 for more information regarding investment strategies, risks, fees, and expenses. Clients should also review other relevant material, including a schedule of investments listing securities held in their account.

The performance of mutual funds is included in the Composite. The performance of the mutual funds and other Davis managed accounts may be materially different. For example, the Davis Opportunity Fund may be significantly larger than another Davis managed account and may be managed with a view toward different client needs and considerations. The differences that may affect investment performance include, but are not limited to: the timing of cash deposits and withdrawals, the possibility that Davis Advisors may not buy or sell a given security on behalf of all clients pursuing similar strategies, the price and timing differences when buying or selling securities, the size of the account, the differences in expenses and other fees, and the clients pursuing similar investment strategies but imposing different investment restrictions. This is not a solicitation to invest in the Davis Opportunity Fund or any other fund.

Davis Advisors is committed to communicating with our investment partners as candidly as possible because we believe our clients 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 Davis All-Cap Equity is represented by Davis Advisors’ Multi-Cap Equity Composite.

Performance shown from January 1, 1999, through December 31, 2005, is the Davis Advisors’ Multi-Cap Composite which includes all actual, fee-paying, discretionary Multi-Cap investing style institutional accounts, mutual funds, and wrap accounts under management including those accounts no longer managed. Effective January 1, 1998, a minimum account size of $3,500,000 was established. Accounts below this minimum are deemed not to be representative of the Composite’s intended strategy and as such are not included in the Composite. A time-weighted internal rate of return formula is used to calculate performance for the accounts included in the Composite. For the net of advisory fees performance results, custodian fees are treated as cash withdrawals and advisory fees are treated as a reduction in market value. For mutual funds, the Composite uses the rate of return formula used by the open-end mutual funds calculated in accordance with the SEC guidelines adjusted to treat mutual fund expenses other than advisory fees as cash withdrawals; sales charges are not reflected.

Effective January 1 2011, Davis Advisors created a Multi-Cap (SMA) Composite which excludes institutional accounts and mutual funds. Performance shown from January 1, 2006, through December 31, 2010, the Davis Advisors’ Multi-Cap SMA Composite includes all eligible wrap accounts with a minimum account size of $3,500,000 from inception date for the first full month of account management and includes closed accounts through the last day of the month prior to the account’s closing. For the performance shown from January 1, 2011, through the date of this report, the Davis Advisors’ Multi-Cap SMA Composite includes all eligible wrap accounts with no account minimum from inception date for the first full month of account management and includes closed accounts through the last day of the month prior to the account’s closing. Wrap account returns are computed net of a 3% maximum wrap fee. For the gross performance results, custodian fees and advisory fees are treated as cash withdrawals. A list of Davis Advisors’ Composites is available upon request.

This report discusses companies in conformance with Rule 206(4)-1 of the Investment Advisers Act of 1940 and guidance published thereunder. The companies we discuss are chosen in the following manner: starting at the beginning of the year, the holdings from an All Cap Core model portfolio are listed in descending order based on percentage owned. Companies that reflect different weights are then selected. (For the first quarter, holdings numbered 1, 11, 21, and 31 are selected and discussed. For the second quarter, holdings numbered 2, 12, 22, and 32 are selected and discussed. This pattern then repeats itself for the following quarters. No more than two of these holdings can come from the same sector per piece.); one recent purchase and one recent sale are also discussed. A sale is defined as a position that is completely eliminated from the portfolio before the end of the quarter in question. If there were no purchases or sales, the purchases and sales are omitted from the report. If there were multiple purchases and/or sales, the purchase and sale discussed shall be the earliest to occur; no holding can be discussed if it was discussed in the previous three quarters. The information provided in this report does not provide information reasonably sufficient upon which to base an investment decision and should not be considered a recommendation to buy or sell any particular security. There is no assurance that any of the securities discussed herein will remain in an account at the time this report is received or that securities sold have not been repurchased. The securities discussed do not represent an account’s entire portfolio and in the aggregate may represent only a small percentage of any account’s portfolio holdings. It should not be assumed that any of the securities discussed were or will prove to be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein. It is possible that a security was profitable over the previous five year period of time but was not profitable over the last year. In order to determine if a certain security added value to a specific portfolio, it is important to take into consideration at what time that security was added to that specific portfolio. A complete listing of all securities purchased or sold in an account, including the date and execution prices, is available upon request.

The investment objective of a Davis Multi-Cap Equity account is long-term growth of capital. There can be no assurance that Davis will achieve its objective. The principal risks are: stock market risk, manager risk, common stock risk, large-capitalization companies risk, mid- and small-capitalization companies risk, headline risk, foreign country risk, emerging markets risk, foreign currency risk, depositary receipts risk, and fees and expenses risk. See the ADV for a description of these principal risks.

Small cap companies have market capitalizations less than $3 billion. Mid cap companies have market capitalizations from $3 billion to $10 billion. Large cap companies have market capitalizations greater than $10 billion. Under normal circumstances, the Multi-Cap Equity Composite invests the majority of its assets in equity securities issued by companies with market capitalizations of less than $20 billion.

Broker-dealers and other financial intermediaries may charge Davis Advisors substantial fees for selling its products 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.

Trailing Price/Earnings (P/E) Ratio is the weighted average of the price/earnings ratios of the stocks in a portfolio. The P/E ratio of a stock is calculated by dividing the current price of the stock by its trailing 12 months’ earnings per share. Portfolio totals are computed using an inverse harmonic methodology.

The Russell 3000 Index measures the performance of the 3,000 largest companies incorporated in the United States and its territories and listed on the NYSE, AMEX, or NASDAQ. The companies are ranked by decreased total market capitalizations. Investments cannot be made directly in an index.

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