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Long-Term Investing Is Bred in This Firm's Bones

Davis heritage provides grounding; research and discipline does the rest.

Dan Culloton, 08/04/2010

Few firms that tout long-term investing can also claim that the approach is bred in its bones. Davis Advisors, which runs the Davis Funds, Selected Funds, and Clipper Fund CFIMX, can.

The Davis family has shaped its investment philosophy over three generations. The firm was founded in 1969 by Shelby M.C. Davis but has antecedents in the 1940s when the founder's father, Shelby Cullom Davis, used some savvy financial stock picks to lay the foundation of a fortune. Though the fund family, now run by the Shelbys' son and grandson Christopher Davis, has evolved its methods with each generation, its commitment to long-term investing and investors has been constant.

Direct Evidence
The firm has demonstrated this in a number of ways. It has strived to keep fees reasonable and makes clear, detailed articles on the firm's history, philosophy, process, and portfolio positioning available to shareholders. Those communications often include candid dissections of managers' mistakes, as well as their successes. Virtually all of the firm's commentary and its modicum of marketing stress long-term investing rather than short-term returns. Indeed, the fund family's board closely monitors the firm's efforts to keep investors focused on the long run.

Davis plays on both sides of the distribution fence. The Davis and Selected fund families include 12 funds; the Davis funds carry loads and Selected funds don't. In 2004, the Selected funds began offering shareholders a lower expense share class if they purchased directly from the advisor. That's because investors who buy directly from fund companies effectively end up subsidizing those who may go through a fund supermarket. By splitting the two groups, Selected funds took a hit to its own profitability by giving fundholders the option of investing without the middlemen at a cheaper price. In 2009, the firm unilaterally lowered the management fees on its funds.

Retention Bonus
Turnover among investment personnel has been low over the years. In fact, as other firms were forced to reduce staff during and after the severe 2007-09 bear market, Davis attracted and hired additional analysts, which reflects well on its corporate culture and its financial viability. The family's five-year retention rate is higher than all but four of the biggest 20 fund firms. Davis is family- and employee-owned and has no debt, so it is the master of its own destiny. Its clear, value-oriented identity helps it attract and retain talented investors. So does its policy of compensating people based on long-term performance. Without the pressure to immediately produce results, analysts and managers can focus on in-depth research and investing with conviction in opportunities that may take time to pan out.PAGEBREAK

In addition to running its own funds, the firm also subadvises all or part of 11 other funds, including the no-load Clipper. While it has not been shy about accepting outside business, it has been cautious about introducing its own new funds. It takes its time to make sure any new fund can add value for shareholders over the long term before making it available to investors. For example, some of the firm's senior analysts have been running an international stock fund with the firm's own capital for several years. As of this writing, the firm has no immediate plans to roll it out to the outside world.

Work to Do
No firm is perfect and this one, like all others, has cultural risks to monitor. The fund family's assets have shrunk from their 2007 peak, but the family still has a still a lot of money to run, most of which is in large-cap stocks. The firm's low-turnover, somewhat contrarian style lends itself to running large sums. Still, the firm's size could make it harder to significantly outpace its peers and benchmarks in the future. In recent years managers, Chris Davis and Ken Feinberg also have struggled to duplicate the consistent success they've achieved elsewhere at Clipper, which they took over in 2006. In the future, it also may be hard to pass the firm's ethos and process down to succeeding generations of managers who may not be named Davis.

Difficult doesn't mean doomed, though. The firm's commitment to long-term investing, attracting and retaining talented people, and serving shareholders gives it a good shot at clearing these hurdles. It has been, and should continue to be, an exemplary steward.

Dan Culloton is an associate director of fund analysis for Morningstar.

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