Davis International ADR Portfolio Commentary
Spring Update 2021

Market Perspectives

In the first quarter of 2021, we saw a continuation of the market’s advance, which gained momentum in earnest starting in the second half of last year. We have noted the strong performance of value stocks, including financials, that had been heavily discounted and out of favor for much of 2020. The S&P 500 Growth Index has underperformed the S&P 500 Value Index this year, and while we do not know whether that is the start of a trend, there is rationality in this reversal of fortunes, in our view, given the valuation gulf that had emerged between growth and value.

Indeed, we have often referred to the “tale of two markets” paradigm of the last several years. Value, like water, however, tends to seek its own level over time in our experience, and we own many cash flow machines in the Portfolio that are worth far more in our estimation than the market has given them credit. For this reason, despite an overall market that contains some large holdings that carry very high valuation risk to our eye, we have a bullish view with respect to companies that we have thoroughly researched for long-term resiliency and growth potential that continue to trade at reasonable valuations. It is one reason that we prefer a benchmark-agnostic, bottom-up approach (with an appreciation, of course, for the macro); it tends to move us away from high valuations that can cause risks to build in segments of the broader market, as is currently the case, in our opinion.

It is somewhat incredible that within about a year’s time, vaccines to treat the COVID-19 virus have been developed and are already in the process of wide-scale distribution. This is welcome news, and we are in the camp that a restarting of the economy is entirely feasible, however uneven and lumpy the recovery process may be, industry by industry and even geography by geography.

One advantage of having an increasingly services-driven global economy is that it takes relatively little capital to get back into the swing of things because the physical infrastructure is intact. It matters then most of all that workers show up for work and enough customers walk through the door to transact. Household savings rates in certain geographies have gone up, not down. Hence, we cannot guess the timescale over which this path to normalcy of sorts will occur, but we are confident that the global economy at large has the right resiliency and flexibility to restart in a relatively healthy fashion over time.

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 3/31/21. 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 first quarter of 2021, our International ADR SMA Portfolio outperformed the broad index. The MSCI ACWI (All Country World Index) ex US delivered a 3.49% return while our results slightly surpassed this.

Performance within the Portfolio was driven by financials, certain information technology businesses, and industrials, such as China Index Holdings. Meanwhile, laggards tended to cluster in the communication services and consumer discretionary businesses that had delivered strong performance overall in the previous year. In other words, we saw some rotation occur during this most recent period.

High-grade financials can be a wonderful way to participate in, and benefit from, economic expansions. First, credit costs—i.e., the most substantial cost to financial lenders over a full cycle typically—should diminish with improving household and business financial conditions. Second, an economic expansion can boost aggregate demand for loans, as well as a host of other financial services, from investment banking and brokerage to wealth management.

Last but not least, in our estimation, financial lenders with exceptionally strong balance sheets and sticky competitive positions can also benefit should the yield curve—and therefore the net interest margin of banks—improve to their favor by sloping up more than in recent years. There is no certainty about interest rate forecasts, but we believe there is optionality within a number of interest rate-sensitive financials in the Portfolio that is not reflected in current valuations. Owning these “free options” can mean the difference between good results versus great results over time in the investment business. Representative financial holdings in the Portfolio include durable and resilient companies, such as Julius Baer Group in Switzerland and AIA Group in Hong Kong.1

While shares of many financial businesses have rebounded strongly from their recent low in first half 2020, we believe they are much closer still to the start of an expanding earnings cycle than to the end.

Recent changes to the Portfolio include a new position in Tal Education Group, a leading Chinese education and technology company that offers after-school tutoring services for students in primary and secondary school.

1 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 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.

Outlook

The stock market is a market composed of stocks. Some are expensive by any measure—and those that are large weightings in the MSCI ACWI ex US are so expensive today that they are skewing the Index’s valuation up and to a riskier level in our view—while many other companies remain attractively valued. We are positioned heavily in value names in financials and beaten-up industrials, but overall diversified in the sense that we also hold investments in juggernaut technology businesses with still-justifiable multiples and scale-advantaged consumer discretionary players.

We note that the tale of two markets is still the setup in today’s market. While market conditions vary over time, we try to populate the Portfolio with a wide array of strikingly varied businesses that are joined by the common threads of durability, high cash earnings potential, and attractive valuations, as we believe that is a sensible, effective approach for building wealth over the long term.

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

2As of 12/31/20.

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.

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.

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 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 both United States and 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.

We gather our index data from a combination of reputable sources, including, but not limited to, Thomson Financial, 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. The S&P 500 Value Index represents the value companies of the S&P 500 Index. The S&P 500 Growth Index represents the growth companies of the S&P 500 Index. Investments cannot be made directly in an index.

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