All-Cap Portfolio Commentary
Summer Update 2020

Market Perspective

In the first half of 2020, the S&P 1500 Index returned -4.08%. Stocks have been volatile, which is understandable, given the near-term disruption and uncertainties introduced by COVID-19. It remains to be seen how the pandemic might ultimately impact individual businesses, different industries and whole economies. Our view is that opportunities are available at very attractive prices, but it is essential to be selective and, ideally, to apply the margin-of-safety principle in terms of valuation discipline.

We are neither optimists nor are we pessimists. Rather, it is a time to be realistic, both about the near-term uncertainty and challenges economically that we face, but also taking into account how the future may improve from here in iterative fashion.

In the immediate term, we know headline figures such as unemployment claims, a decline in gross domestic product and other such metrics will look unfavorable, and they could persist for some time. We believe, therefore, that investors should be prepared for that potentiality both in terms of their mindset and their allocations and positioning in general. As for how long this period could last, the answer will depend in large part on industry and government efforts to address the virus situation with treatments and/or vaccines. But there are also important components of the U.S. response to the virus already underway, and they must figure into one’s assessment about the probability of successfully weathering these recessionary conditions.

Where businesses and consumers have fallen on very challenging times, the U.S. government has by all measures been willing to step in and provide fiscal and monetary support. It is worth noting that many of the tools and measures being utilized today proved their efficacy in the real-world test of the last crisis of 2008-2009. The key difference in the country’s response this time is that both the scope and the magnitude of stimulus dwarf the last crisis measures. In addition, emergency measures were deployed immediately in the present case, whereas they were rolled out with significant delay in the previous crisis. At the same time, the major U.S. banks that provide the basic economy with the lifeblood of liquidity and credit have, in some cases, more than twice the capital that they did entering 2008, with much more stable, deposit-based funding this time. The Federal Reserve has opened the discount window at virtually no cost, providing near frictionless liquidity to the banks, precluding the possibility of a “run on the banks” scenario. Last but not least, while some companies have levered up, given the low interest rates and borrowing costs that prevailed over the last decade, many have used the favorable economic and financial conditions in recent years to strengthen their balance sheets. Taken together, we believe these multiple levels of “shock absorbers” put the economy in a position to weather a near-term recession without losing its ability to expand thereafter in resilient fashion.

There are a number of guideposts and parameters that can prove useful in navigating crisis periods while one is in them, precepts we have learned over our more than 50 years navigating the stock market through all manners of conditions and crises:

The first lesson is to focus intensely on each and every investment one holds and to be positioned in highly durable, defensible businesses. Surviving through the period of near-term stress is the paramount goal at the outset. Invaluable attributes in environments like the present include balance sheet strength (with net cash preferably) and stable sources of funds and cash flow to support operations and necessary capital expenditures.

Second, it is important to revisit the long-term and perennial relevance of different businesses—and whole industries—looking out some number of years. Some may fit squarely in the paradigm of how consumers and businesses interface (e.g., e-commerce, semiconductors embedded in smart mobile devices worldwide, financial services, etc.). In other cases, businesses may prove more ephemeral and non-essential in leaner economic times where consumers have to make more choices. Casinos, certain areas of travel, brick-and-mortar retail (already under secular pressure from online competition) and luxury goods, for example, could in theory take longer to recover, and some of those businesses may not recover fully for a long time as they engage in “nice-to-have” products and services versus non-discretionary, “must-have” categories.

Finally, diversifying one’s portfolio with a varied set of businesses can be beneficial in our experience to prevent putting all of one’s eggs in a single basket. It is prudent in our view to hold investments with differentiated drivers of success and to diversify risk factors to reduce the likelihood of a permanent and substantial loss of capital as an additional, portfolio-level risk mitigator.

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. This is not a recommendation to buy, sell or hold any specific security. There is no guarantee that the Fund performance will be positive as equity markets are volatile and an investor may lose money.

Portfolio Positioning

The Portfolio is invested in both the proverbial tortoises and hares of the market—individual businesses that are cash-generative, have attractive returns on capital and strong competitive moats and are trading at value prices.

On the one hand, we own positions in staid, fairly mundane cash-generative industries, such as financial services and certain types of healthcare and industrials, many of which have a long history of returning capital to shareholders through dividends and share repurchases, while also reinvesting at attractive, if not exceptional, returns on equity. They tend to be slower growth in nature, but extremely proven, durable, established and cash-generative, and they can deliver value to shareholders through a combination of dividends, accretive share repurchases and capital appreciation driven by reinvestment rates over the long term in our estimation, even if short-term results may reflect the impact of COVID-19.

At the other end of the spectrum are exceptional companies that possess superior growth characteristics, in our estimation. For example, we hold a number of technology-related businesses serving a wide range of industries, from e-commerce and cloud computing to software services and semiconductors, among others. Beyond choosing the right businesses, it is imperative with these types of businesses to adhere to a valuation discipline and to establish why one should feel confident those companies are likely to sustain their leading edge in the face of formidable competitive forces. Overall, we are trying essentially to capture total returns in a variety of ways involving considerations around both defense and offense in our selections.

The Portfolio is diversified consciously across 31 differentiable businesses, each with its own attractive features, according to our analysis. What unifies the entire Portfolio thematically is the concept of durability. First, we seek to own businesses that are built to last, and second, we look to them as vehicles for compounding shareholders’ capital over the long term—and in that order, starting first with defense and then proceeding on to offense. We “look down,” assessing downside risk, in other words, before “looking up” at the total return potential long-range for each investment.

Short-term market volatility has allowed us to make a number of adjustments to the Portfolio at the margin. Certain sectors, especially high-grade financials, have declined more than the overall market, and they present investors with, in select instances, single-digit valuations and possess financial strength well beyond the 2008-2009 crisis. This means, importantly, that we have a constructive view of our financial positions over the next three to five years and beyond—even if the current year proves somewhat challenging. The major banks in the U.S. have more than twice as much capital coming into this year as they did entering the 2008-2009 crisis. From a cash flow perspective, they continue to take in cash as their business models center around the activity of “making money on money,” which is really a digital product at this point, not a foot-traffic-dependent, physical product that must be sold in a store, for example. We are avoiding consciously businesses and industries that, in a new normal environment looking ahead, fail to meet the definition of “evergreen”—i.e., perennial and enduring —favoring instead contrarian areas whose financial soundness is underappreciated, in our view. To fund new purchases, we sold Cabot Oil & Gas, among select other positions that appear less compelling today relative to other opportunities.

It is really time to avoid extreme optimism or pessimism. It is a time to be realists, as noted earlier. One reality is that the near-term news headlines, headline economic statistics and possibly share price performance may prove trying psychologically for investors. We are prepared for that potentiality and are focused instead on ensuring that the businesses we own do not fluctuate in their true long-term earnings power—and therefore intrinsic values—anywhere near the extent to which their share prices might vacillate. We believe that a realistic view also should leave open the possibility that from this point of extreme depression and stress, conditions can and should improve markedly for at least the right businesses in the right sectors in the coming years and possibly quarters. Starting at low multiples of normalized earnings, we feel we have an appropriate and favorable balance of risk and reward in terms of business characteristics in our Portfolios, as well as a consciously built-in margin of safety, valuation-wise. Lastly, we own a wide array of different businesses for the purpose of diversification.

Portfolio Review

In the first six months of 2020, Davis All-Cap SMA Portfolio delivered negative results.1 By comparison, the S&P 1500 Index returned -4.08%. On balance, the performance of financial and energy stocks, in particular, have caused us to lag this year. We expect many businesses to recover, if not fully at first, then gradually, and feel that long-term fundamentals are in many instances overly discounted today, especially in the lagging financials sector. With some exceptions, particularly in energy, we believe many of the positions that have hurt performance most this year could well stage a recovery on a fundamental, earnings-defined basis and feel they are trading at unjustifiably low valuations.

Financial shares have been a notable laggard this year relative to the broad market. It is worth elaborating on our financials as they are more individually nuanced than their recently correlated share prices would suggest. For instance, at one end of the spectrum is Markel Corporation, a specialty provider of nonstandard property and casualty (P&C) and life insurance products.2 Markel generally underwrites policies in certain less competitive niche markets where the company has developed significant expertise over many years, including P&C coverage for museums and private libraries, child care centers and camps, historic homes, private schools, and horse farms and riding clubs, among other niche markets. The company’s underwriting margins remain stable, and Markel continues to benefit from positive momentum in property and casualty reinsurance. Markel has also been successful in reinvesting the “float” (cost-free funds generated from premiums held on behalf of policyholders) provided by its insurance operations not only in stocks but also through the purchase of entire companies. By operating unobtrusively and shrewdly in its underwriting niches while earning good investment returns, Markel has created significant wealth for long-term shareholders.

Among other financials, the Portfolio holds a conglomerate with significant property casualty insurance and reinsurance, one of the largest banking institutions in the U.S. and a leader in consumer finance, among others. We believe in all of these cases that the balance sheets, funding stability, liquidity, risk management and management experience combine to form a relatively favorable case, starting at these low valuations. It is a contrarian thesis for the time being, but one that we believe has the potential to be among the future drivers of results over the long term.

Energy, as a sector, is challenged due to collapsing oil prices in recent years. Our energy investments, which we recently exited, focused on low-cost shale producers with above-average production growth and above-average economics relative to the broader industry. We believe the economic slowdown across the globe could be prove extremely challenging to the supply and demand picture for energy commodity prices, with oil trading at uneconomical levels, even for low-cost producers. Therefore, as the facts changed on a secular basis, we revised our views and decided to exit at a loss. We feel confident that allocating to more attractive areas today is a better use of capital and are willing to admit and learn from our mistakes in energy.

Supporting results in a positive way were companies generally engaged in different areas of technology that, as a sector, have proven remarkably resilient. We own a number of leading semiconductor and semiconductor-related businesses, whose future prospects are expanding in potential rather than shrinking, as areas such as cloud computing, artificial intelligence, autonomous driving vehicles, 5G, video gaming and e-commerce continue to proliferate. We also hold market leaders in other areas of technology, ranging from software to Internet marketing and advertising to e-commerce.

Within the healthcare sector, we hold a leading independent lab and diagnostics services provider that offers lab testing at a fraction of the cost of hospitals—an important long-term competitive advantage and moat. We believe this business is well-positioned as demand for healthcare services continues to increase with not only the pandemic, but also longer-term as the population ages, since it is clear that costs must be contained. The company, in other words, essentially has exposure to the healthcare industry’s growing demand, but is a rare business insofar as it makes more money by driving down costs for the system—an uncommon combination that figures prominently in our long-term assessment of its business model, its competitive position and longevity overall. Another holding within the sector is Cigna, a global health service company with more than 180 million customers that figures among the most dominant players in the managed care industry.

In the industrial space, we own Carrier Global, a relatively new position, among other large, strong businesses. Our major industrial holdings also include industry leaders in aerospace and certain high-technology areas of defense. Carrier Global is the leading Heating, Ventilation and Air Conditioning (HVAC) provider in the U.S. spun out of the conglomerate United Technologies.

Overall, our conviction is that the businesses in the Portfolio should, in our estimation, demonstrate their considerable earnings power over the coming quarters and years, and they are trading at very attractive valuations on fortress balance sheets by and large. Even taking into account the likelihood that near-term economic realities may prove challenging for businesses of all types, what will matter ultimately is whether investors hold businesses that are sufficiently resilient and relevant to confront the near-term realities and whether these investments have the ability to resume an expansion of earnings power in the years ahead. We are willing to be contrarians by owning such companies in volatile markets, provided the short-term challenges do not markedly alter what we see as attractive long-term economics for those companies.

1Davis Advisors’ Multi-Cap SMA Equity Composite, net of fees. Inception was 1/1/99. Past performance is not a guarantee of future results. 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 All-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.


Times of crisis, especially those that are truly unprecedented, are universally difficult and unsettling. Whether the crisis is war, natural disasters, terrorist attacks or in this case, a global pandemic, there is always an adjustment period afterwards that can change the fortunes of people and certainly of businesses and industries on a secular basis. With many unknowns in the near term, what an investor should seek to understand with a high degree of confidence, in our view, is how and why their businesses should be able to sustain recessionary conditions for a time and then resume a pattern of growing earnings thereafter—and then whether that long-term earnings accumulation is appropriately priced in.

In terms of whether this is an advantageous time to invest or not, we remain fully invested and maintain a constructive multi-year view for our businesses, especially starting from a point of modest expectations. That stated, it is advisable in our opinion to invest today with a very selective eye and on a bottom-up, company-by-company basis. This also means applying an independent, fresh lens to the broader market and being willing to avoid certain industries or sectors whose futures have changed due to the coronavirus and/or other secular forces such as competition or commoditization.

Thank you for your confidence, and we wish all of our shareholders and their families well in this time.

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,” “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.

The Davis All-Cap Equity is represented by Davis Advisors’ Multi-Cap Equity Composite.

Performance shown from 1/1/99, through 12/31/05, is the Davis Advisors’ Multi-Cap Composite which includes all actual, fee-paying, discretionary Multi- Cap investing style institutional accounts, mutual funds, and wrap accounts under management 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.

Effective 1/1/11, Davis Advisors created a Multi-Cap (SMA) Composite which excludes institutional accounts and mutual funds. Performance shown from 1/1/06, through 12/31/10, 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 1/1/11, 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 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 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 assets 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 Form ADV Part 2 for a description of these principal risks.

Small cap companies have market capitalizations less than $3 billion. Mid cap companies have market capitalizations from $3 billion to $10 billion. Large cap companies have market capitalizations greater than $10 billion. Under normal circumstances, the Multi-Cap Equity (SMA) Composite invests the majority of its assets in equity securities issued by companies with market capitalizations of less than $20 billion.

We gather our index data from a combination of reputable sources, including, but not limited to, Thomson Financial, Lipper, Wilshire, and index websites.

The S&P 1500 Index is comprised of the S&P 500, MidCap 400, and SmallCap 600, which together represent approximately 90% of the U.S. equity market. Investments cannot be made directly in an index.

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