Davis International ADR Portfolio Commentary
Spring Update 2019

Market Perspectives

During the first quarter of 2019, the MSCI ACWI (All Country World Index) ex US returned 10.31%, offsetting 2018’s performance of −14.20% to a meaningful degree. The Davis International SMA strategy outperformed the MSCI ACWI ex US in the period, led by consumer discretionary and communications services holdings while our energy holdings lagged modestly on a relative basis.1

With respect to last year’s correction, we believe the pullback was long overdue based on historical experience. That said, we saw little indication the short-term volatility in stock prices reflected weakness in the underlying economy. In our view, while stocks entered correction territory in the second half of last year, the bear market in share prices was not driven by otherwise healthy business and economic fundamentals but rather by investor sentiment and macroeconomic concerns we believed would likely prove temporary. As a result, our conviction in the stocks we owned and the stocks we purchased during the period generally increased as prices declined given the strength of our strategy’s companies’ balance sheets, competitive moats, earnings drivers, and proven management teams, coupled with more attractive valuations. We believe our focus on selective, attractive growth and undervalued businesses should yield attractive results over the long term.

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. 1 Davis Advisors’ International SMA Equity Composite, net of fees. Inception was 9/23/14. Past performance is not a guarantee of future results.

Portfolio Review

In keeping with our philosophy of buying durable businesses at value prices and holding them for the long term, we are investing selectively in businesses with attractive valuations that meet our investment criteria of strong balance sheets, durable competitive moats, and the potential for earnings to expand over time.

The Davis International SMA strategy holds three categories of businesses including in order of proportion:

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

Naspers of South Africa is a media holding company that is more than a century old but one that has reinvented itself for the modern digital age.3 With a market capitalization that exceeds $100 billion, Naspers owns interests in a wide array of e-commerce and classified ad businesses (some private, some public) around the world whose value together exceeds Naspers’ market capitalization by a material amount. As a result, we believe Naspers is trading at an attractive discount to the sum of its parts yet should benefit from the many fast-growing businesses in the company’s portfolio over the long term.

Among our out-of-the-spotlight holdings is Noah Holdings, a financial services company in Singapore that is well-positioned for long-term growth in our opinion as wealth and economic activity across the Asia-Pacific region continue to grow.

Azul S.A., another out-of-the-spotlight business in the strategy, is among the top three airlines in Brazil. Established in 2008 by the founder of JetBlue, Azul’s market share has grown over time not only on major routes, both domestically and internationally, but also in underserved areas of the country where Azul is in some cases the only airline serving the area giving the company superior economic fundamentals in our view relative to other airlines.

Among our contrarian investments are select energy holdings. As an example, we hold shares in Seven Generations Energy, which is based in Alberta, Canada. In contrast to many of the large, integrated major companies in the broader energy sector that maintain highly expensive wells around the globe, some of which require high oil prices just to break even, Seven Generations Energy focuses on high-productivity shale oil opportunities with long life reserves and lower production costs. We believe Seven Generations’ value will become more apparent as the company demonstrates its ability to increase production and generate free cash flow at highly attractive rates for years to come.

Overall, we believe our strategy is positioned to provide a diversified balance of durable, well-managed businesses with attractive growth prospects.

Since our firm’s inception more than 50 years ago, Davis Advisors has employed a time-tested investment discipline of buying durable businesses at attractive prices and holding them for the long term. The more than $2 billion the Davis family and Foundation, Davis Advisors, and our employees have invested in similarly managed accounts and strategies remains a true sign of our commitment to and conviction in this enduring philosophy.4

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 International 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 4As of 12/31/18.

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.

Data provided herein is representative of a model account. Data provided is as of the date indicated and is subject to change. This material should not be considered a recommendation to buy, sell or hold any of the securities mentioned. We gather our index data from a combination of reputable sources, including, but not limited to, Thomson Financial, Wilshire Atlas, Lipper, and index websites.

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,” 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.

Davis Advisors’ International Equity Composite includes all actual, fee-paying, discretionary International investing style institutional accounts, mutual funds and wrap accounts under management for each investment period from 1/1/05, through the date of this report, including those accounts no longer managed. Effective 1/1/98, 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. 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.

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 foreign companies, including countries with developed or emerging markets. The international 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.

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 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.

Historical 5 Year EPS Growth represents the annualized rate of net-income-per-share growth over the trailing five-year period for the stocks held.

The Forward P/E ratio is the aggregate of the Forward P/E ratios of the holdings. The ratio is not a forecast of performance and is calculated for each security by dividing the current ending price of the stock by a forecast of its projected Earnings Per Share (EPS).

After 7/31/19, this material must be accompanied by a supplement containing performance data for the most recent quarter end.

Item #3850 3/19 Davis Advisors, 2949 East Elvira Road, Suite 101, Tucson, AZ 85756, 800-717-3477