Davis International ADR Portfolio
Special Update March 2020
Because the COVID-19 outbreak and market volatility have created fear and uncertainty, we wanted to provide you with an update through this period.
What advice do you have for investors and what are your thoughts on the market?
Our thoughts are with advisors and their clients during this challenging time. News of both the health and economic effects of COVID-19 are understandably unsettling and has led to a rapid drop in the equity markets. However, as an investment firm with over 50 years of history, we at Davis Advisors have experienced investing in numerous challenging circumstances. It is remarkable to think that over the 50 year period from 1969 through 2019, the market has returned a very healthy 10.6% per year, despite challenging periods such as the Vietnam War, the Oil Crisis, 9/11, and the Financial Crisis, to name a few.1
Businesses, importantly, have historically persevered, adapted, and eventually thrived as each crisis receded, as we expect the COVID-19 outbreak will as well. While we do not know the future, it is encouraging that we have already seen certain countries succeed at bringing the outbreak under control, and innovative healthcare companies are hard at work developing a long-term solution.
In fact, our founder Shelby Davis famously said, “You make most of your money in a bear market. You just don’t realize it at the time.” This has proven true over and over again. You succeed both by owning the right companies heading into a bear market and by taking advantage of the opportunities presented. We at Davis Advisors are convinced that on both fronts, investors are being well-served by the Davis International ADR SMA’s Portfolio of leading businesses from around the globe.
Could you provide an update on the Portfolio?
Whether in a bull or bear market, the three key areas of focus for our Portfolio companies remain the same:
- Companies with durable competitive advantages
- Excellent, experienced, and honest management teams
- Attractive valuations
The focus on companies with durable competitive advantages served us very well as we navigated the market concerns surrounding the trade war in 2019 when we outperformed the MSCI ACWI ex US Index by a wide margin.2 The strong balance sheets and cash generation of Davis International ADR SMA Portfolio’s companies are outpacing the Index so far in 2020. Our top holdings, all have extremely strong balance sheets and competitive positions that may help them not only to ride out an economic downturn, but also to thrive when growth resumes. Ferguson, a leading distributor of heating, plumbing and water supplies, is an example of such businesses in the portfolio.
While the market downturn over the past few weeks is certainly unpleasant, we believe it also means future returns from this point may have the opportunity for improvement. Valuations for our Portfolio companies at the end of 2019 were already attractive, which was particularly evident relative to both the market index and fixed income yields. Today, these same companies, as well as the ones we have been adding to in the market downturn, are particularly attractive, and we believe future returns will be good.
Putting aside how challenging things are for people on many levels, where do you see the best investment opportunities?
The largest area of significant outperformance in the Davis International ADR SMA Portfolio year-to-date has been the Chinese consumer companies we own. These businesses include e-commerce as well as more specialized investments in companies like China Index Holdings. Our largest holding, a provider of private educational services in China, adapted efficiently to the challenge of closed schools by shifting all their classes online. They had already been using its scale and profitability to invest $150 million a year in building the best online education offering and was well-prepared for the current health challenge and we believe it will be in an even stronger competitive position once the crisis has passed. Another Chinese consumer company and a leader in the Chinese online grocery business also used its competitive advantage to generate growth in a challenging environment. Its business more than doubled as households rapidly changed their grocery shopping habits and moved online. Encouragingly, the valuations of these Chinese consumer companies remain attractive both on a relative and absolute basis.
The one large sector in the Portfolio that has underperformed is financials, and we believe it is well-poised to make up ground and outperform in the future. Select international financials including several leading international banks and wealth managers are proven businesses we believe are among the best capitalized financials globally and are trading at very attractive valuations. We have been adding to all of them in the latest market downturn. Energy, similarly, has been deeply discounted. We hold small investments in the energy sector where we believe the liquidity profile and staying power, as well as the production potential in the future, may not be appreciated by the market. Seven Generations Energy is a representative holding of this theme.
Market distress is also a potential market opportunity, as long as you are invested in well-run durable franchises trading at attractive valuations. We believe this is an accurate description of Davis International ADR SMA Portfolio’s companies. We thank you for your trust and interest. If we can answer any questions about the Davis International ADR SMA Portfolio, please do not hesitate to reach out and contact us: 800-717-3477.
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 International 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 International Fund or any other fund.
Effective 9/23/14, Davis Advisors created an International Equity SMA Composite which excludes the institutional accounts and mutual funds. Performance shown from 10/1/14, through the date of this report, the Davis Advisors’ International Equity 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.
A time-weighted internal rate of return formula is used to calculate performance for the accounts included in the Composite. The net of fees rate of return formula is calculated based on a hypothetical 3% maximum wrap fee charged by the wrap account sponsor for all account services. For the gross performance results, custodian fees and advisory fees are treated as cash withdrawals.
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,” “feel,” 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.
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 International 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. Each of these holdings must come from a different country.); 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. If there are multiple purchases and/or sales on the same day, the one that is the largest percentage of assets will be discussed. If a holding to be discussed (excluding the buys/sells) is no longer in the model portfolio as of quarter end, the next listed holding is selected and discussed.
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 International 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) issued by both United States and foreign companies, including countries with developed or emerging markets. The global companies’ strategy may invest in large, medium, or small companies without regard to market capitalization. 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.
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