) seeks companies with competitive advantages and attractive stock valuations. Central to the fund's goals: "We like to align ourselves with shareholder-oriented management teams," says Kent Whitaker, a member of the fund's investment team.
Unfortunately, shareholder-orientation has become something of a buzz word, so you have to examine management's actions rather than their rhetoric, Whitaker says. Despite the hype, he's not sure if shareholder-friendly behavior has increased, so investors should be careful. "You have to look around," he says.
MODEL BUSINESS MODEL. To find shareholder-friendly companies, Davis Opportunity reviews management compensation, share repurchase plans, and how corporations allocate capital. Most important is the company's business model. "Great business models tend to generate competitive returns on capital," says Chip Tucker, another member of the fund's team.
Davis Opportunity selects its holdings in a somewhat atypical manner. It's run by a team of analysts who each decide on a portion of the portfolio. Along with Whitaker and Tucker, the team includes Christopher Davis and Kenneth Feinberg, who also manage other Davis funds.
Each analyst is responsible for about eight holdings. The fund now includes just over 60 stocks. A year-and-a-half ago the fund's team was finding more attractive valuations among large-cap stocks, but recently it has been focusing more on mid-cap stocks. The team won't automatically sell a mid-cap holding that appreciates to large-cap status.
BEER AND BLINDS. The fund's returns have been impressive. For the five-year period through last month, it rose 9.9%, on average, vs. a 0.02% increase for mid-cap growth funds. This year through Oct. 22, Davis Opportunity gained 1.1%, vs. a 0.9% rise for the S&P MidCap 400/Barra Growth index. The fund's sector positions have helped boost its returns, says Tucker.
Davis Opportunity's largest sectors include consumer discretionary and info tech, each of which make up about 21% of the portfolio. The fund also has some foreign holdings, primarily international companies with U.S. sales. Foreign positions include Heineken (HINKY
) and Hunter Douglas (HDUGF
), a Dutch window-covering producer.
The largest holdings in this buy-and-hold portfolio include AutoZone (AZO
), Hunter Douglas, and Golden West Financial (GDW
). AutoZone is poised for considerable margin expansion, according to Tucker.
turnover is about 40% annually, which is "higher than we'd like to see," says Tucker. About five years ago, Davis Funds took over running the portfolio, and since then, the team has gradually reshaped it. The managers are now aiming for an annual turnover of about 10%, which is very low. Gerdes is a reporter for Standard & Poor's Fund Advisor