Key Takeaways
- Davis All-Cap SMA delivered relatively strong performance in the first half of 2025, substantially outperforming the S&P 1500 Index.
- The market delivered a positive performance during the period, but not in a straight-line fashion, falling close to 20% from the high before rebounding. This illustrates the very real difference between volatility and risk, which has implications for investors, as we discuss below.
- Following our investment discipline, the portfolio is selectively focused on a small number of businesses that are growing earnings faster than the benchmark, on average, while trading at lower valuations. We are comfortable with our positioning and we believe these businesses’ values will become more widely apparent to the capital markets over time.
Net Average Annual Total returns as of June 30, 2025, for Davis Multi-Cap Equity SMA Composite with a 3% maximum wrap fee: 1 year, 10.35%; 5 years, 13.54%; 10 years, 8.70%. The performance presented represents past performance and is not a guarantee of future results. Total return assumes reinvestment of dividends. Investment return and principal value will vary so that an investor may lose money. For current, quarterly returns, please ask your financial advisor to contact Davis Advisors. Current performance may be higher or lower. 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. 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, 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 6/30/25. 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.
Market Perspectives:
Volatility vs. Risk
In the first half of 2025, Davis All-Cap SMA strategy returned +9.85% compared with a return of +5.61% for its benchmark, the S&P 1500 Index.
While the market’s performance was positive for the year-to-date period, those results did not occur in a straight-line fashion. Indeed, from late February through early April the market indexes fell close to 20% from high to low before rebounding by more than 20% (albeit off a lower base) to their current levels in positive territory.
In other words, despite a very strong long-term record of appreciating, stock prices can be volatile in the short run, and the first half of 2025 was no different in that respect.
The market’s behavior over this period highlights the very real difference between stock price volatility and risk. Volatility, by definition, consists of both up and down price movements. We think that investors tacitly seek and expect volatility as long as the overall path produces a satisfactory return over time and is skewed to the positive. Given the market’s rise over the last century, this seems a reasonable expectation for stocks. On the other hand, risk implies a permanent and significant loss of capital. This could be due to a real decline in the intrinsic worth of the businesses in a portfolio (as measured by earnings power) or to a meaningful contraction in their stock price-to-earnings multiples, or both.
It seems nearly inconceivable to us that the businesses making up the broader market could lose nearly 20% of their intrinsic worth, then quickly recover that value and more, all in the span of a six-month period. (In fact, earnings growth rates for the first half of 2025 have not even been determined given the quarterly reporting cycle of most U.S. public corporations.)
What have changed in the short run are news headlines and the daily pricing and repricing of uncertainties. These uncertainties range from mixed U.S. domestic economic data, including a modest contraction in the first quarter, to geopolitical events around the world like ongoing tariff negotiations and two major conflicts overseas.
Our view is that what will matter most to the market’s progress in the long run is whether businesses experience growth in raw earnings power. The uncertainties of the moment make near-term predictions hard at best. However, our research suggests that many businesses are becoming more valuable over time based on their economic models, strategies, market demand and execution, even though their stock prices may decline at times.
As for the new macro environment, it is being shaped by three transitions underway that we describe below. In this environment, investors need to be open-minded, flexible and vigilant, with the willingness to adapt as circumstances evolve.
The first transition is that money now has a cost in terms of interest rates, whereas for most of the past decade that was not the case. Money was either very cheap or entirely free in the years following the 2008–2009 financial crisis. Higher rates means that interest expenses for businesses that rely on a significant amount of debt may be greater now and can eat into profit margins. All else equal, if revenues remain constant for a company with a material debt burden, its profit margins might suffer due to the now-higher interest expense.
“We believe we are operating in an environment with even greater uncertainty than usual, one where the range of potential outcomes is wide relative to the decades of the 1990s and 2000s.”
The second transition underway is geopolitical in nature. It includes tariff uncertainty as well as the conflicts in Ukraine and the Middle East. This type of geopolitical uncertainty is always unpredictable. However, we believe we are operating in an environment with even greater uncertainty than usual, one where the range of potential outcomes is quite wide relative to the decades of the 1990s and 2000s, for example.
The third transition is the reversal in the drive towards globalization which had been in place since World War II. It is unlikely to revert anytime soon, in our opinion. America’s age-old alliances with European countries and with Canada and Mexico are in flux. Domestic tensions have boiled to the surface in the area of immigration. The rise of China as an economic and military superpower is a tectonic shift in the global balance of power compared to what it was through most of the last half century.
All three transitions amount to a great uncertainty factor. It is all the more important for investors to remain flexible and willing to adapt while also being reasonably conservative in the types of businesses they own and the prices they pay. Above all, they should understand and appreciate the businesses they invest in, consistent with the “know what you own” principle.
A lower P/E multiple can theoretically compensate equity investors for added uncertainty. In the value investing paradigm, investors need to build in a margin of safety before proceeding.
Meanwhile, the S&P 1500 Index still trades at a forward P/E multiple of 22.5x which we regard as a rather aggressive valuation given the unknowns, not to mention the index’s lackluster earnings per share growth rate over the last five years of about 15% per annum. By contrast, the businesses in Davis All-Cap SMA portfolio trade at a forward P/E of 14x on average while having grown earnings per share over the last five years at an average annual rate of 20.3%.1
With only 32 holdings in the portfolio (versus over 1,500 securities in the benchmark) we feel we know every one of our businesses well enough to understand their principal pros and cons. That is, we seek always to maintain a standard of “knowing what we own.” When constructing portfolios, we weight positions both on business strength and attractiveness looking out several years, and on the relative merits of each company’s valuation. Over a typical year we will likely make several changes to the portfolio, given the market’s dynamism and the need for active repositioning. By contrast, index rebalances are rules-based and calendar-driven.
We seek businesses with attractive earnings growth. All else equal, they are worth more than those with flat or declining earnings growth. As noted, Davis All-Cap SMA portfolio’s average five-year earnings per share growth rate of more than 20% per annum substantially exceeds the benchmark’s 15.1%.2 Despite the higher earnings growth, the portfolio’s multiple is meaningfully lower than the index’s, reflecting our conservative posture in the face of current events and the transitions we discussed above.
As an active manager with a 56-year history of bottom-up stock picking, our firm has the ability to be flexible, adapt to change, make conscious decisions around risk and reward, and apply a deliberative portfolio construction process. This is in sharp contrast to rules-based passive alternatives.
Portfolio Review:
Capital Allocation
We select the portfolio’s holdings on an individual basis according to the Davis Investment Discipline—that is, we seek to purchase durable, well-managed businesses at value prices and hold them for the long term. This bottom-up process has served us well over the life of the strategy. It allows us to allocate capital rather surgically into specific businesses at specific prices and lets us structure and shape the portfolio in a conscious fashion—with risk and reward both equally important.
The overall positioning of Davis All-Cap SMA portfolio can be described by its contrast with the S&P 1500 Index in terms of number of portfolio holdings, historical earnings per share growth, and forward price-to-earnings (P/E) multiples as follows:
Selective, Attractive Growth, Undervalued1
Portfolio | Index | |
Holdings | 32 | 1,506 |
EPS Growth (5 year) | 20.3% | 15.1% |
P/E (Forward) | 14.0x | 22.5x |
The portfolio’s current focus is on businesses in these areas of the economy: (1) dominant healthcare companies (predominantly healthcare services that are both cheap and underestimated in our view), (2) durable financial services, and (3) a mix of technology-related companies and industrials.
Within healthcare, our holdings range over managed insurance, lab and diagnostics services, generic pharmaceuticals and medical supply businesses. Representative holdings include CVS, a leading diversified health insurer, and Viatris, a pharmaceuticals producer. What these businesses have in common is that they all participate in the large profit pool of the U.S. healthcare sector, with total healthcare spend representing close to 20% of our country’s gross domestic product. As the population ages, we expect aggregate healthcare spend in absolute terms will continue to climb over the coming decade. The healthcare areas where we have invested are relatively cheap, by our analysis, and we believe their growth potential is underestimated.
Financials mean different things to different people. Many investors see the financial sector as primarily banking. This is one facet of the industry but there are many others. These include credit cards and payments companies, global insurers and reinsurers, and various businesses driven by the capital markets—for example, investment banks, trust and custody institutions, or conglomerates with a financial arm.
“We look forward to witnessing the strengths of these businesses over the next five to 10 years and measuring the results as they become more widely apparent to the capital markets.”
Technology-related companies3 have been a meaningful allocation in Davis All-Cap SMA portfolio for decades. Among our holdings is Alphabet, parent of Google and an innovative next-generation search and advertising company that dominates its marketplace.
Industrial businesses in the portfolio currently include Wesco International, which provides B2B distribution, logistics and supply chain solutions, and AGCO, a farm equipment manufacturer.
Our remaining holdings balance out and diversify the portfolio. They range from Teck Resources, a diversified mining and mineral development company, to consumer-focused Angi Inc. to businesses that produce and distribute building materials. During the most recent quarter we sold our stake in Clear Secure, a technology company that provides biometric document verification at major venues like airports and stadiums.
Overall, we are very comfortable with our positioning in Davis All-Cap SMA. As noted earlier, the portfolio has a forward P/E of 14x and a five-year EPS growth rate of 20.3% which we regard as an attractive combination of attributes. We look forward to witnessing the strengths of these businesses over the next five to 10 years and measuring the results as they become more widely apparent to the capital markets.
Outlook:
Balancing Risk and Reward
The equity market is really a vast market of individual stocks tied to thousands of individual businesses. In our experience, striking the right balance between risk and reward and consciously repositioning as circumstances change are critical to long-run success. We look forward to continuing our investment journey with our shareholders.
For more than 50 years at Davis Advisors 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.4 We are grateful for your trust and are well-positioned for the future.
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 Portfolio’s data provider. These values for both the Portfolio and the Index are the weighted average of the stocks in the portfolio or Index.
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 4.20% 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.
Includes information technology and communication services companies.
As of 6/30/25, 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 6/30/25. 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 4.20% 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 15.1%. 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 22.5x. ‡For information purposes only. Not a recommendation to buy or sell any security. **Sources: Davis Advisors and Clearwater Wilshire Atlas. § Net of fees. As of 6/30/25.
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, Clearwater Wilshire Atlas, 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
Summer Update 2025