All-Cap Portfolio Commentary
Summer Update 2021

Market Perspectives

For the first half of 2021, the broader equity markets delivered solid positive performance, with the S&P 1500 Index returning 15.61%. The financial resiliency and health of most major economies have been tested, but one by one, they are beginning to show the green shoots of recovery. Meanwhile, unlike the financial crisis of 2008–2009, the recent recessionary conditions did not stem from, nor cause, excessive leverage or other balance sheet problems for the U.S. economy. With relatively healthy credit conditions (which are rare after most recessions) and the important support of both fiscal and monetary stimulus, we are seeing evidence that the U.S. economy is healing and even growing again.

Aiding the resumption of economic activity and expansion is the fact that the major banking institutions in the U.S. are, by and large, holding excess capital with which, as COVID subsides, they can increase return of capital through higher dividends and share buybacks; they can also redeploy large amounts of money into loans at significantly higher net interest margins than what they endured in the recent years of compressed spreads. The main point is that we have a relatively strong foundation underpinning this economy from a balance sheet and financing perspective, coupled with signs of stirring economic activity, significant spend at both the consumer and business levels and a healing employment picture.

In certain spots, speculative valuations have bubbled up. That does not describe the whole market. The stock market is just a market of individual stocks, and when we sift through the landscape of hundreds of companies, we believe there are well-priced investment opportunities. On the subject of hype and manias in the markets, our more than 50-year history as a firm has taught us not to be lured into such risky situations.

We are not optimists nor are we pessimists. We try to be realists, and our sense of reality is grounded in history. Every decade has its iconic examples of excessively priced, speculation-driven momentum stocks. Relatively few of those stocks, from their peak levels, delivered competitive returns against the broader market over subsequent periods that in many cases lasted a half decade or more.

In short, the existence of some overvalued situations in the market is commonplace, but does not mean there is a dearth of things to buy. On the contrary, we own today some of the finest businesses in the world, and through true active management and stock-picking, we are concentrating on a portfolio of stocks that we believe are well-priced. Every business we hold presently has the potential, in our estimation, to generate, over a business cycle, attractive returns on capital, which is an important input when our investment discipline relies to a large degree on compounding shareholder wealth through the businesses we own. It is not always necessary nor advisable in our opinion to jettison good businesses in the short term in search of all new businesses. If the businesses we have identified can compound their internal free cash flow at high rates, then theoretically we could do well by simply holding these financial locomotives, with some changes at the margin as truly warranted.

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. Past performance is not a guarantee of future results. Unless otherwise noted, all performance information is as of 6/30/21. The investment strategies described herein are those of Davis Advisors. These materials are being provided for illustrative and informational purposes only. The information contained herein is obtained from multiple sources that are believed to be reliable. However, such information has not been verified, and may be different from the information included in documents and materials created by the sponsor firm in whose investment program a client participates. Some sponsor firms may require that these Davis Advisors materials are preceded or accompanied by investment profiles or other documents or materials prepared by such sponsor firms, which will be provided upon a client’s request. For additional information, documents and/or materials, please speak to your Financial Advisor.

Portfolio Review

In the year-to-date period through June 30, Davis All-Cap Equity SMA outperformed the S&P 1500 Index by a wide margin.

The drivers of performance this year include many businesses that had negative stock price trends just a year or so ago, as the effects of COVID were being felt much more. The Portfolio’s largest sector allocation—a byproduct of individually chosen stocks that each have their own merits, in our analysis—is financial services, which saw performance hurt in 2020, but has been a tailwind this year. The Portfolio holds an eclectic balance of businesses and industries, including technology, industrials, healthcare (such as UnitedHealth Group and CVS) and consumer-oriented businesses.1

Last year around this time, the share prices for many of our holdings declined dramatically in the face of the COVID outbreak. We sharpened our collective pencils, and after some significant investment of time studying the direct and indirect implications of COVID, we took a few notable actions.

The first was to compare the relative opportunities, since prices had changed significantly in virtually every group in the market, with some being buoyed by investors favoring so-called “COVID trades”—i.e., internet-related businesses and food delivery, by and large.

We pared some of our larger technology-related holdings (including, for this purpose, the e-commerce and broader online space), some of which had held up better than other parts of the Portfolio.

We exited energy entirely. Despite the rebound that has occurred in oil and gas since our sale, our view was that the longer-term outlook for the fossil fuel industry could become far more difficult both operationally and, even more, financially over the coming decade and perhaps beyond. Between regulation, taxation and changing social and political attitudes towards drilling, it is yet to be seen whether the recent run in this sector has a sustainable path looking out years, and we have decided for now to avoid the area for fundamental reasons, rather than any outlook on the commodity price.

In terms of what we purchased, we initiated a position in Alibaba and we added to a number of our financial positions that, based on both our internal stress tests and the Federal Reserve’s years of stress tests for banks, seemed to us like a very attractive risk/reward opportunity set. Our view was that the amount of capital required to foot the bill, even in the case of a deep economic crisis scenario, was in place precisely as a counter-cyclical buffer. Between very high capital ratios going into COVID with a substantial sum of earnings still coming in the door—aided in no small part by stimulus checks—we felt comfortable adding to select financial businesses, and that decision, as noted earlier, has been beneficial to this year’s results thus far. A representative holding in the Portfolio is Berkshire Hathaway.

1Holdings 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 SMA 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.

Conclusion

Given the strong performance enjoyed by many investors this year in stocks, a legitimate question is to ask whether there are still appealing opportunities. We would encourage investors to look very much individually at companies throughout different areas of the economy and markets. A detailed search should reveal that many fine businesses still represent good value, particularly considering that conditions for most sectors are improving. Owning durable compounding machines with the potential for free cash flow growth over many years is a core part of our discipline. We feel it is a sensible and perennial way to invest as stewards of both our and others’ savings—pre-COVID, through COVID and after.

At Davis Advisors, we seek to purchase durable businesses at value prices and hold them for the long term. The more than $2 billion Davis Advisors, the Davis family and Foundation, 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.2 We are grateful for your continued confidence in us.

2As of 6/30/21.

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 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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