In 2023 the MSCI ACWI returned 22.20%. Its performance was driven by strong returns among U.S. equities while international shares lagged by comparison. The strength of the U.S. market reflects economic developments that are mostly positive. Gross domestic product continues to grow at approximately 3%, the unemployment rate is extremely low at 3.7%, and inflation appears to be tapering from recent highs. Still, it is worth noting that U.S. equities advanced in 2023 despite a number of headwinds and uncertainties that included fears of a potential near-term recession, the implications and impact of a regional banking crisis from early last year, and two major wars.

International markets have lagged the U.S. in recent years for reasons that are largely regional in nature. In Europe, inflation and interest rates remain elevated. As such, the European Central Bank has maintained its tightening stance with respect to interest rates, and there appear to be growing signs of a slowdown in some of the larger European economies. That said, we see numerous attractive opportunities in European markets, in which we are investing selectively.

In Asia-Pacific, China has been slow to find its economic footing after a very prolonged shutdown due to COVID, a fact that has weighed on the growth rate of the entire region. While China’s recovery has required patience, we firmly believe its economic activity level and vibrancy will improve in the foreseeable future, and that this is a moment to consider owning Chinese equities. To put the present opportunity into perspective, Chinese equities today have rarely been cheaper in our estimation, both in absolute and relative terms. Given this, we have seen net purchasers of China-related stocks at the margin.

With country markets moving according to different cycles, different geographies are out of step with one another. In 2023 our U.S. holdings on balance were in bloom and we have pared some of the more successful investments in recent months. Meanwhile, we are taking advantage of low prices in foreign markets, particularly in Asia-Pacific.

In 2023 the Davis Global ADR SMA portfolio delivered double-digit positive results, trailing the benchmark somewhat but still representing progress in long-term wealth building.

In terms of overall positioning, the portfolio is built around a highly selective list of well-researched businesses and its characteristics are very attractive, in our view.

In the following table we compare the portfolio with the index with respect to three key metrics—the number of holdings, five-year trailing average annual earnings per share growth rate, and the average forward price-to-earnings (P/E) multiple.

With 33 portfolio holdings, we are capitalizing on the opportunity as active managers to own only what we feel are best-of-breed companies with attractive future prospects. In contrast, the unmanaged index is rather indiscriminately allocated across thousands of names, most of which we consider less attractive. Within reason and subject to diversification considerations, we believe that owning fewer holdings and focusing on what we deem superior companies can be an advantage versus the passive alternative.

Our five-year earnings per share growth rate demonstrates the level of historical growth that our businesses have been able to achieve on balance. Relative to the benchmark, the portfolio has generated higher earnings per share growth rates even while its P/E is much lower than that of the index.

In our experience, this combination of selectivity, low starting valuations, and long-term earnings growth can provide an attractive balance of risk and reward and can combine to deliver powerful results over the long term.

50/50 Regional Mix

The portfolio is comprised of both U.S. and international stocks with the proportions of the two being roughly equal at 50% each.

The U.S. (at 50% of the portfolio) is by far our largest regional exposure. Asia-Pacific is the next largest allocation (23% of the total), followed by Europe (17%), and then finally the last 10% representing smaller allocations to other areas of the world. These allocations are driven primarily by stock selection and reflect, in general, where we are finding opportunities today.

In addition to stock selection, we are guided at the portfolio management level by long-tailed themes where we can concentrate our research efforts. In effect, this means that we seek to “fish where the fish are” in terms of broad areas of the global market. Three of the primary themes running through the Davis Global ADR SMA portfolio include: (1) high-grade financials, (2) a broad swath of technology companies, and (3) healthcare.

Within financials, we favor competitively advantaged, very durable financial institutions in multiple geographies, including the U.S., Asia-Pacific and Europe. One of our financial holdings in the U.S. is Wells Fargo which is slowly but surely building value for shareholders by generating healthy cash earnings and growing book value in solid fashion over time. While the company is still a contrarian name, it is one of the cheapest mega-banks in the U.S., with a strong balance sheet, reasonably high capital ratios, and proven management. This gives it a degree of optionality which could prove a significant boost to our thesis if the yield curve improves or regulators lift the asset cap they imposed on the bank in 2018.

“In the short term, …share price declines… reflect the malaise in China’s economy… Longer-term, we expect the region’s general level of economic activity, e-commerce traffic and broader consumption trends to improve markedly...”

In Europe, we hold shares of Swiss bank Julius Baer which is going through somewhat of a transition. Despite some negative headlines in recent periods, we like Julius Baer’s core private banking franchise which is sticky and highly profitable, as well as its cheap valuation currently.

In Bermuda we sold our position in Bank of Butterfield on strength during the last quarter of 2023.

Technology, the second principal theme running through the Davis Global ADR SMA portfolio, spans multiple areas including: e-commerce, social media, online search, cloud computing, and semiconductor-related companies.

Two consumer-oriented technology holdings that we like today are JD.com and Coupang, both in Asia- Pacific. In the short term, both companies’ share price declines in the last year reflect the malaise in China’s economy post-COVID lockdowns, among other factors. Longer-term, we expect the region’s general level of economic activity, e-commerce traffic, and broader consumption trends to improve markedly, however unknowable the exact timing may be. In the meantime, we are very comfortable owning these types of businesses. They have strong competitive positions and extraordinarily cheap valuations for what are normally high-growth profit models, and we expect that their sectors should do well over time relative to other areas of the market.

Within healthcare, we are investing primarily in generics manufacturers as well as healthcare services and are focusing mostly on the U.S. market at this time. We recently added Quest Diagnostics, a leading independent lab and testing company in the U.S. at what we feel is an attractive valuation. The base business is solid, in our view, given its nearly ubiquitous footprint across the U.S., its low cost of growth, the stickiness associated with mass scale delivery of lab services, and its comparative cost advantage versus the far more expensive hospital labs in this country.

In addition to the above themes, we have many individual positions that are rather unique and do not fall neatly into a broader theme per se. Whether grouped by theme or based on more stand-alone theses, note that we select all of our investments on a case-by-case, company-by-company basis according to a single, clear-minded investment philosophy and discipline.

The global stock market is really a market of many individual stocks from which investors can pick and choose. We are exercising extreme selectivity to maximize what we believe are the most attractive opportunities across regions. In addition, we believe the overall positioning of the Davis Global ADR SMA portfolio is advantaged given a rare combination of low starting valuations (in absolute and relative terms), comparatively high earnings growth potential, and the overall competitive and financial strength of the underlying holdings.

In conclusion, as stewards of our clients’ savings our most important job is growing the value of the funds entrusted to us. With more than $2 billion of our own money invested alongside that of our clients, we are on this journey together.⁴ This alignment with our clients is uncommon in our industry; our conviction in our portfolio of carefully selected companies is more than just words.

We are grateful for your trust and well-positioned for the future.