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October 28, 2004 at 08:00 PM
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.
