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Portfolio > Mutual Funds

Fund in Focus: Davis Opportunity Fund

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Oct. 26, 2004 — Like other Davis Funds, Davis Opportunity/A (RPEAX) seeks companies with competitive advantages and attractive stock valuations. Central to the fund’s goals are finding companies with shareholder-friendly managements. “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 somewhat of a “buzz word,” so you have to look at management’s actions rather than their rhetoric, Whitaker says. Despite the hype, Whitaker says he’s not sure if shareholder-friendly behavior has increased, so investors should be careful. “You have to look around,” he says.

To find shareholder-friendly companies, Davis Opportunity looks at management compensation, share repurchase plans, and how corporations allocate capital. Central to these activities is a company’s business model. “Great business models tend to generate competitive returns on capital,” says Chip Tucker, another member of the fund’s team.

The fund selects its holdings in a somewhat atypical manner. Davis Opportunity is run by a team of analysts, who each decide on a portion of the portfolio. “We make individual decisions,” says Tucker. Along with Whitaker and Tucker, the fund’s team includes Christopher Davis and Kenneth Feinberg , who also manage other Davis funds.

Each analyst is responsible for about eight holdings. The fund currently holds just over 60 stocks. A year and a half ago, the fund’s team was finding more attractive valuations among large-cap stocks, but the fund has been focusing more recently on mid-cap stocks. The team won’t automatically sell a mid-cap holding that appreciates to large-cap status.

The fund’s 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 team is aiming for an annual turnover of about 10%, which is very low.

Davis Opportunity’s largest sectors include consumer discretionary (20.9%) and information technology (20.8%). The fund also has some foreign holdings, primarily international companies with U.S. sales. Foreign positions include Heineken N.V. and Hunter Douglas N.V., a Dutch window covering producer.

The fund’s returns have been impressive. For the five-year period through last month, it rose 9.9%, on average, versus a 0.02% increase for mid-cap growth funds. This year through Friday, the fund gained 1.1%, versus 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.

The largest holdings in this buy-and-hold portfolio include AutoZone Inc. (AZO), Hunter Douglas, and Golden West Financial (GDW). AutoZone is poised for considerable margin expansion, according to Tucker.

Contact Bob Keane with questions or comments at [email protected].


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