Key Takeaways
- The first quarter of 2025 was marked by uncertainty and volatility, and by mostly negative stock market performance, although certain market sectors were up.
- Among the most pressing uncertainties was whether the initial round of tariffs the U.S. announced would lead to normal negotiations with other nations to determine terms of trade, and whether the uncertainty itself would be anti-stimulative, shocking the economy and causing a contraction.
- In the current investment environment, despite the drama, we remain fully committed to equities and continue to actively allocate capital on the assumption that some number of American businesses should do very well given time.
Market Perspectives:
Lines of Defense
In the first quarter of 2025, the major stock indexes were marked by volatility, and most indexes declined by single-digit percentages. The S&P 1500 Index returned -4.49% over the quarter while Davis All-Cap SMA portfolio returned -0.68%.
The quarter coincided with the start of a new presidential administration. The heightened market volatility reflected uncertainty about how key policy changes such as tariffs might impact the domestic and global economies, and how consumers and businesses could best adjust.
Among the most pressing uncertainties, then and now, was whether the initial round of tariffs imposed by the U.S. marked the start or the conclusion of what is normally a multi-stage negotiation process with other nations to determine major changes to terms of trade.
Without clarity on trade, businesses have difficulty making long-range and even short-term business plans for purchase orders and inventory, not to mention bigger picture investments in capital and people.
Beyond the specifics of the tariffs themselves, uncertainty and confusion in general can be anti-stimulative. They make businesses and consumers prone to retrench in their spending, at least for a time. That can shock economies and cause them to slow or even contract temporarily.
Without making hard predictions, we are prepared for a number of scenarios including but not limited to: (1) a gradual, extended workout process whereby the U.S. and major trading partners ultimately agree on and clarify terms of trade—a process that may end well but in the interim could result in further volatility in the capital markets; (2) the possibility of a short-term slowdown or even recession given the uncertainty; or (3) a resumption of activity in the relatively near term provided production capacity and trade routes, which can both be affected by changing trade terms, do not need to be moved in major and structural ways.
Whichever path the future takes, our view is that the best first line of defense in an uncertain time is to be selective and to know what one owns. A second line of defense is to pay lower price-to-earnings (P/E) multiples for businesses that have been thoroughly vetted for durability and resilience through past cycles. Last but not least, we believe active management may have an advantage over indexing insofar as active portfolio managers can take unique positions and act opportunistically in the right circumstances.
Daily swings are a permanent and unavoidable part of investing. We have steered through many different environments since our founding in 1969. We have learned that near-term volatility is the enemy of the forced seller but can be a meaningful benefit to longer-term buyers. Many of the best opportunities for multi-year and sometimes multi-decade prospective holding periods materialize in market downturns and periods of pronounced volatility in security prices. In short, we do not relish price swings per se. However, when they become extreme, we look to use volatility to further our long-term objective of building wealth for clients in resilient, attractive companies.
Net average annual total returns as of March 31, 2025, for Davis Multi-Cap Equity SMA Composite with a 3% maximum wrap fee: 1 year, -1.20%; 5 years, 16.14%; 10 years, 7.74%. The performance presented represents past performance and is not a guarantee of future results. Total return assumes reinvestment of dividends. Investment return and principal 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 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. Davis Advisors fee schedules are described in Part 2 of its Form ADV. The strategies herein may not be suitable or appropriate for all investors depending on their specific investment objectives and financial situation. Potential investors should consult with their financial professional before determining whether to invest in a strategy.
This material includes candid statements and observations regarding investment strategies, individual securities, a This material 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 3/31/25. 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:
Navigating the New Environment
Davis All-Cap SMA portfolio’s positioning today relative to the S&P 1500 Index can be described according to the three axes shown below, namely: a selectively chosen and focused list of vetted companies, a lower forward P/E multiple than the benchmark, and a five-year earnings per share growth rate that, while not predictive, shows that companies in the portfolio are capable of growing earnings power over time.
Selective, Attractive Growth, Undervalued1
| Portfolio | Index | |
| Holdings | 30 | 1,506 |
| EPS Growth (5 year) | 17.4% | 14.7% |
| P/E (Forward) | 13.8x | 20.9x |
The composition of the portfolio includes major weights in a select group of financial companies, an array of healthcare services-related businesses (managed care insurance, medical supply, and lab diagnostics), a handful of leading technology companies whose valuations are full but not overly so in our estimation, and a small number of industrial and commodity-related businesses.
Each company in the portfolio has gone through thorough, firsthand research vetting.
In the current investment environment, despite the drama playing out in the media, we remain 100% committed to equities. We continue to actively allocate capital to long-range investment ideas. There are several plausible scenarios about future slowdowns or economic downturns. However, these do not negate or contradict our long-term assumption that some number of American businesses should do very well given time.
That said, we believe the market environment we have entered is more likely an opportunistic stock-picker’s market than one which might favor very broad, top-down, infrequently balanced portfolios like the major stock indexes.
We are very consciously managing the relationship between our assessments of risk and potential reward. We do this first by owning companies in a very selective fashion that have stood the test of time and proven they are battle-worthy, at least historically. Second, we have consciously built and structured the portfolio so that it currently trades at a much lower multiple than the broader market proxy, the S&P 1500 Index. Paying lower multiples in a moment of heightened uncertainty makes sense to us, all else equal.
Presently, as the portfolio’s holdings reflect, there are dozens of companies we currently feel very comfortable owning for the long term, even through various headwinds that could emerge. At the same time, we are being very cautious on the multiples we are paying today as well as factoring in what we believe are conservative estimates for future earnings growth.
The key in our view is to be realistic about the new environment. Given the facts, it is possible that corporate profits could vary widely from industry to industry in the near term. Different industries rely in their own ways on the inputs and supply chains originating in, or passing through, other countries where cross-border frictional costs are subject to change.
With our financial and healthcare services companies, we believe that most of the value in these businesses currently is derived from the United States. In that sense, they are somewhat insulated from the direct impact of changing tariffs. For example, among our healthcare businesses we hold Cigna, a diversified health insurer, and Solventum, a spin-off from 3M that specializes in healthcare supplies. In the broader financial sector we hold a major multi-industry conglomerate that regularly invests enormous amounts of capital into equities as well as private businesses. We feel that this conglomerate is extremely well-built for longevity as well as holding a war chest of cash for potential redeployment.
The technology-related companies in our portfolio emphasize our continued confidence in social media and online search—in reality, extraordinarily valuable modern-day media and advertising businesses. We also have positions in cloud computing leaders and select semiconductor companies, among other areas. Our technology businesses include some of the market darlings, a subset of the Magnificent Seven, where we feel the multiples are justified and appropriate (like Meta, for instance), but not others because of their still-rich valuations.
We also have a small number of holdings in other sectors, including industrial, commodity-related and services businesses. One example is MGM Resorts, a hospitality and gaming enterprise that is predominantly driven by business activity in Las Vegas where we have seen a secular uptick in events, most notably in professional sports.
Outside of those areas, we are actively evaluating potential new ideas as market prices change. For example, during the first quarter we took a new position in AppLovin, a company that helps developers market and monetize their apps through its mobile platforms.
Outlook:
Durable Value
In our view, the key question in investing is not whether to be invested or not. Rather, it is what steps must be taken to mitigate certain types of risks (e.g., valuation) while remaining invested in order to participate in the future success of many of America’s finest businesses. At Davis Advisors, our strategy is to purchase durable businesses at value prices and hold them for the long term.
For more than 50 years we have navigated a constantly changing investment landscape guided by one North Star: to grow the value of the funds entrusted to us. We are pleased to have achieved strong results thus far and look forward to the decades ahead. With more than $2 billion of our own money invested in our portfolios, we stand shoulder to shoulder with our clients on this long journey.2 We are grateful for your trust and are well-positioned for the future.
Five-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 5.80% 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 Advisors’ data provider. Forward 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 Fund’s data provider. These values for both the Fund and the Index are the weighted average of the stocks in the portfolio or Index.
As of 3/31/25, 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.
*As of 3/31/25. Includes Davis Advisors, Davis family and Foundation, and our employees. † The Attractive Growth and Undervalued reference in this piece relates to underlying characteristics of the portfolio holdings. There is no guarantee that the Portfolio’s performance will be positive as equity markets are volatile and an investor may lose money. Past performance is not a guarantee of future returns. Five-Year EPS Growth Rate is the average annualized earning per share growth for a company over the past five years. The value for the portfolio is the weighted average of the five-year EPS Growth Rates of the stocks in the portfolio. Approximately 5.80% 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 Portfolio’s data provider. The 5-year EPS of the S&P 1500 is 14.7%. Forward 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 Forward P/E of the S&P 1500 is 20.9x. ‡ For information purposes only. Not a recommendation to buy or sell any security. **Sources: Davis Advisors and Wilshire Atlas. § Net of fees. As of 3/31/25.
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 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.
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,” or similar expressions. You should not place undue reliance on forward-looking statements, which are current as of the date of this material. 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 material, 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 material 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 Large-Cap Value 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. No more than two of these holdings can come from the same sector per piece. 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 material. If there were multiple purchases and/ or sales, the purchase and sale discussed shall be the earliest to occur. As this is primarily a domestic equity strategy, no more than one foreign holding will be discussed in any material. If more than one foreign holding would be discussed based on the criteria above, the holding with the largest percent of assets in the model portfolio would be chosen. However, if the model portfolio has an aggregate foreign holding percentage that is greater than 15% the commentary would include a discussion of the largest foreign holding in the model portfolio that has not been discussed in the previous three quarters. 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 material 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 material 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 portfolio 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.
The ranges reflected for large, mid, and small cap reflect the current ranges utilized by the S&P Composite 1500 Market Cap Guidelines, as may be amended from time to time. The current ranges are: large-capitalization, over $20.5 billion; mid-capitalization, between $7.4 billion and $20.5 billion; small-capitalization, under $7.4 billion.
We gather our index data from a combination of reputable sources, including, but not limited to, Wilshire, Lipper, 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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All-Cap SMA Portfolio
Spring Update 2025