Davis International ADR SMA
Portfolio Commentary
Spring Update 2023

Market Perspectives
Headlines during the quarter highlighted issues in the banking sector both at home and abroad. We believe the specific financial services businesses we own are strong and represent good value at today’s prices.

In first quarter 2023 the MSCI ACWI (All Country World Index) ex US returned 6.87%. Davis International ADR SMA portfolio underperformed the benchmark during the period.

Headlines during the quarter highlighted issues in the banking sector both at home and abroad that saw the collapse of a commercial bank in the U.S. and the emergency takeover of a global investment bank in Switzerland.

While historically, the exact circumstances of bank failures have tended to be unique, we believe the common thread running through this year’s regional banking crisis in general is that excessive risk taking by aggressive managements led to outright failure. In our opinion, this appears for the time being to be a predominantly micro, company-specific phenomenon even though there may be some macro implications such as heightened sector volatility and internal dispersion insofar as stock prices are concerned. In addition, the lending appetite of certain financial businesses may be reduced for the time being.

The market has been volatile in response to evolving policy guidance from central banks in different regions of the world. In the U.S., the U.K., continental Europe and Japan, interest rates have moved up steadily based on central bank measures to tamp down inflation. Central bank policy in the U.S. and elsewhere could, of course, evolve differently in the future depending on banking stresses caused by rising interest rates. But for the time being credit conditions are poised to tighten by policy.

We have long regarded higher interest rates as probable, as we are coming off the heels of the longest ultra-low interest rate environment in modern history, and have been experiencing above-trend inflation. This expectation has influenced our positioning of Davis International ADR SMA portfolio. For instance, the portfolio’s largest sector exposure currently is well-researched financials, which may benefit overall from a higher rate environment.

That stated, inflation and rising interest rates tend to suppress economic growth and could function as a headwind in the near term. Our businesses can weather choppy conditions, in our view, and likely could continue to build on their competitive strengths even if revenues slow. They could also trim down their cost structure—a “shrink to greatness” strategy—to set up a more favorable margin structure when business eventually resumes at a faster pace.

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 gross and as of 3/31/23. 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
Through bottom-up research, the portfolio holds a collection of exceptionally strong, durable and growing businesses primarily in the financial services and technology sectors.

We like the overall positioning of Davis International ADR SMA portfolio currently and prospectively. In our view, the companies we own can reach significantly higher levels of earnings power over the long term. Meanwhile, they are trading at relatively low valuations on balance when compared with the risk-free rate, peers and historical levels.

The table below shows that our portfolio combines the growth potential and very attractive valuations of carefully researched businesses. We believe this favorable starting point positions us well for the future.

We manage Davis International ADR SMA portfolio with various market environments in mind. Our priority is to focus on the durability of business models. Crises and periods of stress are unpleasant but importantly, they provide a real-world sense of just how resilient certain companies can be. We are generally encouraged by the way our portfolio companies are weathering volatile conditions at the business level.

A company’s leadership is always critically important. But arguably, strong managements are even more vital when the economy is facing greater headwinds than tailwinds. Companies can either create or destroy enormous value in lean times, as managements must work within tighter financial constraints when deciding where to allocate capital for optimal shareholder benefit.

Reinvesting for growth, where it is mission-critical, is prudent but so is managing balance sheet strength and liquidity. If those two priorities are satisfied, then some of our companies should be able to return capital to us in the form of dividends and/or share buybacks. In short, the intelligent use of funds and the quality of decisions made in these times can prove decisive, even transformational, in determining which companies will likely pull ahead over the next cycle.

We invest on a bottom-up, company-by-company basis and fully exercise our right to own certain businesses but not others. The portfolio holds exceptionally strong businesses primarily in the financial, technology and industrial sectors. We believe we own very strong companies that, given their deep resources and know-how, likely could become much stronger in their respective industries through any downturn. Whether or not short-term share price changes or bottom-line results reflect this path immediately, we expect these competitive features could enable better profit generation over the next several years, all else equal.

The portfolio’s financial holdings—such as Copenhagen-based Danske Bank—are built to withstand the current set of crises, in our opinion. We apply our knowledge of financial business models to global markets and own financial enterprises in multiple jurisdictions including banks and insurers in Singapore, Switzerland, Bermuda and Hong Kong.

In the broadly defined technology space—in which we include communication services, some consumer discretionary (e.g., e-commerce), and online food delivery companies, our holdings canvass segments of the sector that we believe should experience more durable and attractive growth than the market in the coming decade, yet are trading at reasonable valuations. These areas encompass cloud computing, e-commerce, online search and advertising, online food delivery, and semi-conductors—all of which are large, growing and fertile markets for expansion in the coming decade. During the quarter we added Baidu, a leading online search company in China, to the portfolio’s holdings.

One of our prominent holdings is Meituan, a technology-based food delivery company in China. Our research team likes this food delivery giant because we believe its business model only gets better with scale, both financially and competitively. Moreover, in China, as in other major regions, food delivery tends to favor the larger players, as they benefit from economies of scale and networking effects. In a sense, the behind-the-scenes logistics of food delivery may be a key differentiator between the long-run winners and losers in that industry.

On the other side of the globe, a distribution company called Ferguson is the largest distributor of heating, plumbing and water supplies in the U.S. but is based in the United Kingdom. Ferguson’s brand strength among contractors, coupled with a strong network effect in logistics, explains why this company in a seemingly mundane industry is, in our view, capable of remaining a relatively durable, high return-on-capital business as it has been historically.

Outside of financials and technology, we own select industrial and materials companies, which in our opinion, likely could see their incremental returns on capital rise in coming years. This compounding—the dynamic of iteratively reinvesting recycled capital and earnings over many future periods—is at the heart of our expectations for certain businesses to grow in value given time. Schneider Electric, a global multinational headquartered in France, is an example of the businesses we favor in the industrial space. The company is a leader in electrical equipment, particularly in the low voltage market, and we believe it can earn relatively high returns on capital over the coming decade. Furthermore, Schneider Electric is a truly global company with a strong brand and operations in both developed and emerging markets.

Overall, we have built the portfolio for inclement times but have also positioned it well for fairer conditions ahead.

1Five-year EPS Growth Rate (5-year EPS) is the average annualized earnings per share growth for a company over the past 5 years. The values shown are the weighted average of the 5-year EPS of the stocks in the Portfolio or Index. Approximately 17.00% of the assets of the Portfolio are not accounted for in the calculation of 5-year EPS as relevant information on certain companies is not available to the Advisor’s data provider. 2Forward Price/Earnings (Forward P/E) Ratio is a stock’s price at the date indicated divided by the company’s forecasted earnings for the following 12 months based on estimates provided by the Advisor’s data provider. These values for both the Portfolio and the Index are the weighted average of the stocks in the portfolio or index.


The stock market has been volatile recently, vacillating within a wide trading range. It is not always the case that price “noise” in the short run accurately reveals which companies are stronger than their peers far into the future. We believe that distinctions can and should be made in this environment based on different business attributes and attractive valuations rather than stock price volatility.

We believe the portfolio reflects a thoughtful combination of companies with attractive earnings growth, low valuations and competitive advantages and believe further that we are well positioned for the decade ahead.

Above all, we never forget that we are stewards of our clients’ savings and that 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.3 This alignment with our clients is an uncommon advantage in our industry; our conviction in our portfolio of carefully selected companies is more than just words. While we do not welcome the pessimism and fear that have characterized our world recently, we are well prepared for it and, importantly, we are well positioned for the future.

We thank you for your confidence and look forward to continuing our investment journey together.

3As of 12/31/22, Davis Advisors, the Davis family and Foundation, and our employees have more than $2 billion invested alongside clients in similarly managed accounts and strategies.

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 International 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 International Fund or any other fund.

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.

This report discusses companies in conformance with Rule 206(4)-1 of the Investment Advisers Act of 1940 and guidance published thereunder. Six companies are discussed and are chosen as follows: (1-4) current holdings based on December 31 holdings; (5) the first new position; and (6) the first position that is completely closed out. Starting at the beginning of the year, the holdings from a International Companies 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, 6, 11, and 16 are selected and discussed. For the second quarter, holdings numbered 2, 7, 12, and 17 are selected and discussed. This pattern then repeats itself for the following quarters. If a holding is no longer in the portfolio then the next holding listed is discussed. Each of these holdings must come from a different country. None of these holdings can be discussed if they were discussed in the previous three quarters. 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. Other than the recent buy and sell, any company discussed must constitute at least 1% of the portfolio as of December 31.

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 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: China risk, common stock risk, depositary receipts risk, emerging markets risk, exposure to industry or sector 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.

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

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.

Item #3850 3/23 Davis Advisors, LLC, 2949 East Elvira Road, Suite 101, Tucson, AZ 85756, 800-717-3477