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DNYC

DNYC

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Published by fwallstreet

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Published by: fwallstreet on Apr 07, 2009
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06/16/2009

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The table below summarizes the results of theDavis New York Venture Fund compared withthe S&P 500
®
Index against which myco-man-ager Ken Charles Feinberg,our colleagues andIjudge ourselves.Our objective is to outperformthis Index after fees over the long term as wehave done in every rolling 10 year period sinceour inception in 1969.
1
 While we achieved thisobjective over the last 10 year period,we do notconsider the Fund’s absolute return of 1.2% per year much to celebrate despite its advantageover the 1.4% per year decline of the S&P 500
®
Index.
2
 As for results over shorter time periods, we will not mince words.They are poor on bothan absolute and relative basis.In the pages that follow,we will provide moreperspective to put these results in context but we will not tryto excuse them.You have a rightto expect more from us.The first part of thereport will be a review of the past year,covering the market and economy in general and ourPortfolio in particular.As always,this revie will include an accounting of our biggest mis-takes.The second part will be forward-looking and explain whyan environment characterizedby fear and uncertainty creates enormousopportunity for long-term investors.By outlin-ing this opportunity,our goal is to provide datathat will help investors stay the course at a time when many feel like giving up.This feeling isunderstandable considering that investors havesuffered through the second worst decade forstocks on record–a record that includes theCrash of 1929 as well as the Great Depression.In fact,even if the market produces satisfactory returns for 2009 (and it is certainly not off to agood start),it is highly likely that the 10 yearperiod ending this coming December will proveto be the worst decade ever,as it will no longer
1
The performance presented represents past performance and is not a guarantee of future results.
Total return assumes reinvestment of dividends and capital gain distributions. Investment return andprincipal value will vary so that, when redeemed, an investor’sshares may be worth more or less thantheir original cost. The total annual operating expense ratio for Class Ashares as of the most recentprospectus was 0.85%. The total annual operating expense ratio may vary in future years. Returns andexpenses for other classes of shares will vary.Current performance may be higher or lower than the per- formance quoted. For most recent month-end performance, visit davisfunds.com or call 800-279-0279.
1
Class A shares, not including a sales charge. Returns are from 2/17/69–12/31/08. Returns would be lower in some periods if a salescharge wereincluded. See endnotes for a description of our rolling 10 year performance and a definition of the S&P 500
®
Index.
Pastperformance is not a guarantee of future results.
2
Class A shares, not including a sales charge.
Past performance is not a guar-antee of future results.
An Update from
Christopher C. Davis and Kenneth C. FeinbergPortfolio Managers
Annualized Total Returns 1 5 7 10 15 20 25 30 35 Inceptionas of December 31, 2008 Year Years Years Years Years Years Years Years Years (2/17/69)DNYVF Class A
without a sales charge
-40.03% -2.05% -0.17% 1.24% 7.66% 10.41% 11.51%13.74% 12.93% 11.42%
with a maximum4.75% sales charge
-42.88 -3.00 -0.86 0.75 7.31 10.14 11.29 13.55 12.77 11.28S&P 500
®
Index -37.00 -2.19 -1.53 -1.38 6.46 8.43 9.77 11.00 10.02 9.05
 
2
include the 21% return of 1999.Given that themarket has lost 3.6% per year for the last nine years versus the 1.7% annual loss sufferedbetween 1928–1938,currently the worst decadeon record,this is not a bold prediction.Sowhy should such data give investors confi-dence? The answer is that low prices may increase future returns.
3
Because investors arebuyers,they should welcome the opportunity to buy the same businesses at lower prices,asdoing so raises their returns.Consider a busi-ness that generates $100,000 of income.In goodtimes,such a business might be priced at morethan $2 million,leaving the buyer with only a5% return on investment.But if the price fallsby half,the return doubles to 10%.This samemath applies at the level of the stock market, which is after all simply a collection of busi-nesses,the majority of which will be earning more money 10 years from now than they dotoday.The data shows that it has always beenprofitable to invest in the stock market after adecade of poor returns.
3
Specifically,there pre- viously have been ten rolling 10 year periodssince 1928 when the S&P 500
®
Index (and beforethat the Dow Jones Industrial Average) returnedless than 5% per year.In
every
case,the 10 yearsthat followed produced satisfactory returns aver-aging approximately 13% per year and ranging from a low of 7% per year to a high of 18% per year.
3
 While we cannot know for surewhat thenext decade holds,it is highly likely to be farbetter than what we have suffered through inthe last 10 years as we are starting at much moreattractive valuations.We are hopeful that ourshareholders who have endured these hardtimes will be there with us for the rebound.
The Year 2008
4
 While capital market downturns are nothing new,the dislocation and panic that swept throughthe markets in 2008 were unique in scale,sever-ity and pace.The vast majority of major financialinstitutions collapsed,were taken over,raiseddilutive capital,and/or required some sort of government intervention.The combined marketcapitalization of the top 25 financial institutionsin the United States (excluding Berkshire Hath-away,which we do not consider a pure financialinstitution) fell 75% during the last two yearsfrom $2 trillion to less than $500 billion (as of  January 22,2009).The loss to shareholders hasbeen even greater than these numbers indicateas most of these companies now have meaning-fully moreshares outstanding,including war-rants held by the U.S.government.The amount of direct investments,pledges andguarantees announced bythe federal governmentnow approaches $5 trillion.Toput this sum inperspective,previously the most expensivefinancial debacle in U.S.history,the savings andloan (S&L) crisis,cost the government about$185 billion in today’s dollars,about 1/27thas much.The long-term consequences of thegovernment’s ownership interest in privatebusinesses are unlikely to be positive and theextension of such vast amounts of credit mustalmost certainly lead to higher inflation.Turning to the economy,as is often the case,the capital markets have been leading indica-tors.What began as a financial crisis tied tofalling real estate prices is swiftly becoming abroad-based economic crisis.Consumer andcorporate spending are in a free fall.Auto sales,
3
Thereis no guarantee that low priced securities will appreciate. Equity markets are volatile and an investor may lose money.
Past per-formance is not a guarantee of future results.
4
Individual securities are discussed in this piece. While we believe we have a reason-able basis for our appraisals and we have confidence in our opinions, actual results may differ materially from those we anticipate. Thereturnof a security to a portfolio will vary based on weighting and timing of purchase. This is not a recommendation to buy or sell anyspecific security.
Past performance is not a guarantee of future results.
 
3
for example,fell a staggering 35% in the fourthquarter alone.Unemployment is increasing sharply as are virtually all other negative indi-cators.As these metrics deteriorate,however,it is worth remembering that the front side of arecession is always the scariest.To understand why,consider this simple example.Suppose adistributor who normally sells 10 widgets permonth sells only eight in a given month.Whenit is time to reorder,the distributor needs toorder only six widgets as there are two left ininventory from the previous month.Thus,a 20%decline in sales leads to a 40% decline in orders.This inventory effect is a painful magnifier thatthings areslowing but is not permanent and will reverse when sales stabilize. Another unsettling aspect of 2008 was thatmany fundamental tenets of sound investing didnot help.For example,it is generally (and rightly)believed that diversification among differentasset classes should reduce the volatility of aninvestor’s returns,as often one type of invest-ment goes up while others are going down.However,this did not hold true in 2008.As oneexasperated institutional investor put it,Allcorrelations have gone to one.”In other words, virtually every asset class except governmentbonds performed badly: domestic stocks,foreignstocks,commodities,hedge funds,private equity,corporate bonds,real estate,and so on.Only 6% of the stocks in the S&P 500
®
Index wereuplast year,the lowest percentage on record.
5
In addition,manyso-called value investors(a category in which we are generally included)have fared poorly at a time when they wouldhave been expected to do far better than theaverage.The reason for this expectation is that value investors tend to focus their investmentsin companies whose businesses are not con-sidered highly speculative in nature and whose valuations relative to current earnings and share-holders’equity are comparatively low.As a result,their stock prices tend to hold up better in timesof trouble compared to more speculative compa-nies whose prospects are less secure.For example,in the bear market that began in March 2000 andcontinued through 2002,when the stock marketfell almost 50%,many value investors outper-formed dramatically as speculative tech andtelecom companies collapsed,while companiesin mundane sectors such as raw materials,utili-ties,retail,and banking held up relatively well.In the last couple of years,though,many of these well-regarded managers,including us,haveunderperformed.Some portion of this under-performance can be attributed to the managers’mistaken appraisals and declines in the valueof the underlying businesses they owned.Wehad our share of such mistakes,which we willdiscuss later in this report.However,anotherportion of this underperformance is simply attributable to the unpredictability and vagariesof short-term results.It is the nature of marketsthat value and price can diverge for long periodsof time.In euphoric times,such as during theInternet bubble,the stock prices of many com-panies exceed their value.In times of panicand dislocation,the value of many companiesexceeds their prices.In such periods,poorreported results mayindicate deferred returnsrather than permanent losses.For example,acompany purchased at $10 per share that hasan intrinsic value of $20 is a good investment
5
Source: Davis Advisors. Percentage is from 1/1/2008–12/31/08.

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