All-Cap Portfolio Commentary
Fall Update 2017

Market Perspectives

In the year-to-date period ending September 30, 2017, the U.S. stock market advanced with the Russell 3000 Index returning 13.91%. The Davis All-Cap Portfolio also delivered positive results, outperforming its benchmark.1

Business conditions remain favorable with relatively full employment and moderate growth prospects in the United States coupled with low interest rates and inflation levels. In our view, now more than at any other point in the current business cycle investors must select companies individually using a true active management approach as businesses differ widely in their growth rates and valuations and, as a result, in their risk and return profiles.

In addition, current valuations and operating margins favor investing selectively. We continue to find value on a company-by-company basis both in businesses with wide competitive moats and room for margin expansion and earnings growth as well as in select out-of-favor businesses, particularly in the financial services and energy sectors. We have also made long-term investments in leading technology companies whose long-term growth prospects are more durable than the market recognizes in our estimation.

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

Portfolio Review

The Davis All-Cap Portfolio holds three categories of businesses including, in order of proportion:

  • Dominant market leaders
  • Lesser-known, “out-of-the-spotlight” businesses
  • Contrarian investments2

A representative market leader in the Portfolio is Texas Instruments, the world’s largest manufacturer of analog semiconductor chips.3 The company designs, tests and builds a broad array of analog and embedded processing products—two areas in the semiconductor industry that offer growth, diversity and attractive financial characteristics. Both analog and embedded processing are pervasive technologies used worldwide by more than 100,000 of the company’s customers. Texas Instruments has a strong competitive position in these large and highly fragmented but growing markets that should translate into expanding revenues over the long term. The company invests more than $1 billion annually in R&D to develop new products, exercises greater control over its supply chain by owning its own factories, and has strategically expanded capacity and equipment well ahead of demand. In addition to positioning Texas Instruments for growth, the company’s management team distributes a substantial amount of excess cash to shareholders through dividend increases and share buybacks.

Current out-of-the-spotlight businesses in the Portfolio include Express Scripts and Eaton Corporation.

Express Scripts is a market-leading U.S.-based pharmacy benefits management firm. While the health care industry continues to undergo change, we believe Express Scripts maintains a highly durable competitive position and, trading at less than 13 times earnings, offers value to patient long-term shareholders.

Eaton Corporation is a multinational industrial conglomerate with operating units that manufacture truck and car engine components as well as hydraulic and aerospace systems used by both commercial and military aircraft. Importantly, through its 2012 acquisition of Cooper Industries, Eaton astutely acquired a leading provider of power management systems. Because of Eaton’s complex conglomerate structure, the company’s potential is not fully recognized by investors in our view. Eaton is a solid company that continues to improve margins and, while challenges remain, we are optimistic about the long-term prospects for this durable business.

Among the more contrarian investments in the Portfolio are select energy companies that, despite recent volatility in energy prices as well as share prices for the group as a whole, remain undervalued in our view based on their current and expected production growth per share.

An example of an out-of-favor business is Apache Corporation, a North American based energy exploration and development company focused on oil production, most notably in the Permian Basin in Texas and New Mexico. Apache’s CEO John Christmann is properly focused on shareholder returns and the company completed a series of advantageous property sales in recent years using a substantial portion of the proceeds to reduce debt. We believe Apache is well positioned in today’s energy price environment and holds properties offering decades of potential growth.

During the quarter we initiated a position in Intel, the U.S.-based leader in microprocessors with a market capitalization of $170 billion. Intel is the second largest semiconductor chipmaker globally based on revenue and dominates the PC, Mac, and server markets with a vast installed base of platforms that run on the company’s design. We believe the company will continue to expand margins as its unit costs gradually decline while at the same time growing revenue in the high single digit range for years to come.

Overall, 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. Our perennial investment discipline has delivered attractive and consistent long-term results over many different market and economic cycles, and we believe we have the opportunity to continue building long-term wealth for shareholders using our proven, time-tested methodology.4

The Davis family, our firm and our employees have more than $2 billion invested side by side with clients.5 We look forward to continuing our investment journey together.

2 While we research companies subject to such contingencies, we cannot be correct every time, and a company’s stock may never recover. 3 Holdings 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 Multi-Cap Equity Composite 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.4 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. Equity markets are volatile and an investor may lose money. 5 As of June 30, 2017.

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.

Performance shown from January 1, 1999, through December 31, 2005, is the Davis Advisors’ Multi- Cap Composite which includes all actual, feepaying, 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. Davis Advisors uses the Davis Investment Discipline to invest a client’s portfolio principally in common stocks (including indirect holdings of common stock through depositary receipts). The Multi-Cap Equity strategy may invest in large, medium, or small companies without regard to market capitalization and may invest in issuers in foreign countries, including countries with developed or emerging markets. The principal risks are: common stock risk, depositary receipts risk, emerging markets risk, fees and expenses risk, foreign country risk, foreign currency risk, headline risk, large-capitalization companies risk, manager risk, mid- and small-capitalization companies risk, and stock market risk. See the ADV Part 2 for a description of these principal risks.

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.

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.

The Equity Specalists™ is a service mark of Davis Selected Advisers, L.P.

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