Large Cap Value Portfolio Commentary
Summer Update 2019

Market Perspectives

In the year-to-date period, the Davis Large Cap Value SMA Portfolio delivered double-digit returns, building further on our long-term record of growing wealth for our clients. Our investment approach seeks to add value over multi-year holding periods. It is important to us, therefore, that historically, the longer clients have remained invested in Large Cap Value strategy, the more likely they have realized positive wealth building. Over the most recent one, five and ten year periods, a $100,000 investment in Davis Large Cap Value SMA Strategy grew to $98,245, $127,393 and $238,649, respectively.1

Average Annual Total Returns as of June 30, 2019 for Davis Large Cap Value SMA Composite with a 3% maximum wrap fee: 1 Year, −1.75%; 5 Years, 4.96%; 10 Years, 9.09%. The performance presented represents past performance and is not a guarantee of future results. Total return assumes reinvestment of dividends. Investment return and principal value will vary so that an investor may lose money. Current performance may be higher or lower. Total return updates are available quarterly. Please ask your financial advisor to contact Davis Advisors. See endnotes for a description of the Composite.

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. 1The Davis Large Cap Value portfolio is represented by Davis Advisors’ Large Cap Value (SMA) Composite. Past performance is not a guarantee of future results. Based on a hypothetical $100,000 investment in the Portfolio.

Portfolio Review

Our performance relative to the S&P 500 Index this year and calendar year 2018 has been strongly influenced by our conscious positioning, which reflects our assessment of where true value resides in the broader market, and by where we feel risks have increased and should be avoided (the so-called “dividend darlings” being the notable example in our view).

On the first question of where we are positioned, we currently hold 26 high-conviction equity positions in what we believe are durable businesses that have delivered above-average earnings-per-share growth of more than 22% per year over the last five years. They are trading at only 14.3 times forward earnings despite this compelling and attractive growth rate.

The S&P 500 Index, by comparison, holds 505 securities with an approximate average position size of 0.20%, which we believe is overly-diversified and not focused enough on a set of best ideas. The index has grown earnings per share at a rate of more than 16% over the trailing five years, 6% below the Davis Large Cap Value SMA Portfolio’s companies’ record. Despite this earnings growth difference, the S&P 500 Index’s underlying holdings actually trade at a much higher valuation of 17.9 times forward earnings than those of our Portfolio, whose average valuation is only a multiple of 14.3.

It is worth noting that many of the market’s leading performers have relatively high valuations and should be avoided at this time, in our opinion. The corollary to this is that elsewhere in the market, stocks have lagged the broader average. It has come to the point where we believe the market is now presenting stockpickers with a rare opportunity to buy extremely robust earnings growth at discounted prices. Furthermore, most of our holdings have fortress balance sheets, and we always seek discernible competitive advantages—both of which are important buffers against many different types of risks.

We believe this market setup is ideally suited for our approach of buying durable, growing businesses at value prices and holding them for the long term; we believe this may provide a powerful springboard from which to generate attractive future returns.

Given the opportunity today to purchase durable growth at discounted prices, we are finding the most value, broadly speaking, in:

  • Financials— a natural core of the Portfolio, based on cash earnings generation, soundness of balance sheets, attractive returns on equity, and very cheap valuations, with many of our top holdings trading at 9–11 times owner earnings. Much of our thesis for financials is predicated on the belief that return of capital through rapidly rising dividends and large share buybacks will constitute a large portion, and in some instances the majority, of our expected total return. One of our top bank holdings, for instance, has a 3.8% dividend yield, earns more than $27 billion pre-tax, and returned more than $24 billion to shareholders in 2018 alone. Meanwhile, its multiple is roughly 10 times earnings. Other financial businesses in the portfolio share similar attributes.
  • Consumer businesses—companies that can benefit from strong consumption trends, both in the U.S. and internationally. The growth of the online dominant players is explained in no small part by the growing penetration of online versus offline businesses around the world. Taking retail as an example, within the U.S., only 10% of retail volume is online today, and this secular trend is still in its infancy. Globally, that share is even smaller but is growing at double-digit rates. In other words, the online theme has a long runway for stockpickers searching for selective companies that are natural beneficiaries of Internet-enabled business models; these opportunities touch multiple geographies and are creating disruption (and opportunities) in consumer-related industries ranging from retail to media to video gaming.
  • Technology—With more than 50 years of history investing in technology, we are very comfortable owning many different segments of the sector, including Amazon, Oracle, Applied Materials, and Intel.2  Our recent additions have primarily been in the semiconductor space, where we believe valuations are low, even on trough earnings. Other technology businesses possess strong cloud businesses, enterprise software cash cow businesses, leadership positions in artificial intelligence, dominant online video services, and video gaming.
  • Industrials— Our interest in this sector lies primarily in the aerospace industry, as evidenced by our positions in certain companies, such as a leader in the manufacturing and services of jet engines. Our thesis is based on the fact that the world supply of passenger and cargo jets is woefully behind demand. This is because global expansion of air travel linkages is running into a bottleneck on the assembly lines of the two largest airplane manufacturers. The backlog of orders for both is measured in years, not months. As such, we feel the manufacturers who make the engines and provide high-margin maintenance parts and services over the life of planes are exceptionally well-positioned to grow with aerospace around the world. In addition, in the past year, we sold our position in Wabtec, a manufacturing company in the railway industry, to reallocate our capital to other opportunities.
  • Energy—Our interest lies primarily in North American shale players today. There is a select list of companies with excellent, high-productivity acreage that should, within the very near future, begin producing oil and natural gas at increasing rates. Our observation is that the performance of this group has reflected widespread capitulation among investors in this sector, driving down valuations to bargain prices. We understand the contrarian posture this represents. We are invested in this sector because we do not believe the market’s price accurately reflects the growth potential of our names, on the one hand; on the other hand, we believe the market under-appreciates the companies’ staying power—as expressed in balance sheet liquidity. In addition, we own relatively mid-size companies; hence, we believe there are two ways to win—organically or by acquisition. Either way, we see real value in this extremely beaten-down sector.

However markets behave for a time, we must at all times remain singularly focused on pursuing investments that, at the business and industry level, represent acceptable and attractive long-term opportunities to us and our clients. Historically, the longer clients have remained invested in the Large Cap Value strategy the more likely they have realized positive wealth building. We believe that an ability to look through the current market gyrations and recognize the confidence we have in businesses we own is critical to staying the course. For suitable clients, this may also be an attractive time to add further capital, given the opportunity set.

2Holdings 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 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.


The following summarizes our views relative to today’s markets and the Portfolio:

  • Selectivity, earnings growth and value are a powerful combination that is possible to achieve in a single portfolio, based on today’s excellent market opportunities.
  • Equities remain the most attractive asset class long-term versus bonds and cash.
  • Current events such as the U.S.-China trade dispute, while a headwind to the market’s advance, should eventually de-escalate, which we believe would be bullish for equities—and the market has successfully proven its resilience during much more serious tensions over the course of history.
  • Economic and business fundamentals remain generally healthy in the U.S.
  • The current market conditions are favorable to active stockpickers.

At Davis Advisors, we seek to purchase durable, growing businesses at value prices and hold them for the long term. Since our firm’s inception more than 50 years ago, we have adhered to the same, time-tested investment philosophy and rigorous research process of buying durable businesses at attractive prices and holding them for the long term. The more than $2 billion Davis Advisors, the Davis family and Foundation, our employees, and Fund directors have invested in similarly managed accounts and strategies remains a true sign of our commitment to and conviction in this enduring philosophy.3

3 As of 6/30/19.

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.

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 a Multi-Cap 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. If there are multiple purchases and/or sales on the same day, the one that is the largest percentage of assets will be discussed. 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 Large Cap Value 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 assets principally in common stocks (including indirect holdings of common stock through depositary receipts) issued by large companies with market capitalizations of at least $10 billion. Historically, the Large-Cap Value strategy has invested a significant portion of its assets in financial services companies and in foreign companies, and may also invest in mid- and small-capitalization companies. The principal risks are: common stock risk, depositary receipts risk, emerging markets risk, fees and expenses risk, financial services 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.

Definitions: 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). 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 by the Portfolio.

The attractive growth reference in this piece relates to underlying characteristics of the portfolio holdings. There is no guarantee that the Portfolio’s performance will be positive as equity markets are volatile and an investor may lose money.

The S&P 500 Index is an unmanaged index of 500 selected common stocks, most of which are listed on the New York Stock Exchange. The Index is adjusted for dividends, weighted towards stocks with large market capitalizations and represents approximately two-thirds of the total market value of all domestic common stocks. Investments cannot be made directly in an index.

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