UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANANGEMENT INVESTMENT COMPANY
Investment Company Act file number 811-09293
DAVIS VARIABLE ACCOUNT FUND, INC.
(Exact name of registrant as specified in charter)
2949 East Elvira Road, Suite 101
Tucson, AZ 85706
(Address of principal executive offices)
Thomas D. Tays
Davis Selected Advisers, L.P.
2949 East Elvira Road, Suite 101
Tucson, AZ 85706
(Name and address of agent for service)
Registrant’s telephone number, including area code: 520-806-7600
Date of fiscal year end: December 31, 2007
Date of reporting period: December 31, 2007
____________________
ITEM 1. REPORT TO STOCKHOLDERS
Table of Contents
Management’s Discussion and Analysis: | |
Davis Value Portfolio | 2 |
Davis Financial Portfolio | 3 |
Davis Real Estate Portfolio | 4 |
| |
Fund Performance and Supplementary Information: | |
Davis Value Portfolio | 8 |
Davis Financial Portfolio | 11 |
Davis Real Estate Portfolio | 14 |
| |
Schedule of Investments: | |
Davis Value Portfolio | 19 |
Davis Financial Portfolio | 24 |
Davis Real Estate Portfolio | 26 |
| |
Statements of Assets and Liabilities | 29 |
| |
Statements of Operations | 30 |
| |
Statements of Changes in Net Assets | 31 |
| |
Notes to Financial Statements | 33 |
| |
Financial Highlights: | |
Davis Value Portfolio | 39 |
Davis Financial Portfolio | 40 |
Davis Real Estate Portfolio | 41 |
| |
Report of Independent Registered Public Accounting Firm | 42 |
| |
Fund Information | 43 |
| |
Directors and Officers | 44 |
DAVIS VARIABLE ACCOUNT FUND, INC.
2949 East Elvira Road, Suite 101
Management’s Discussion and Analysis
Davis Value Portfolio
Davis Value Portfolio delivered a total return on net asset value of 4.64% for the year ended December 31, 20071. Over the same time period, the Standard & Poor’s 500® Index2 (“Index”) returned 5.49%. Eight of the ten sectors3 within the Index had positive returns, with financial and consumer discretionary companies turning in negative returns. The sectors that turned in the strongest performance were energy, materials, and utilities.
Key Contributors to Performance
The energy sector was the top-performing group of the Index. Energy companies were also the most important contributors4 to the Portfolio’s performance over the year. The Portfolio’s energy companies out-performed the corresponding sector within the Index (up 47% versus 34% for the Index) and the Portfolio also benefited from a higher relative average weighting in this sector (13% versus 11% for the Index). Occidental Petroleum5, ConocoPhillips, China Coal Energy, EOG Resources, Devon Energy, and Transocean were among the top contributors to performance.
The Portfolio made a significant investment in consumer staple companies and they were the second most important contributors to performance. The Portfolio’s consumer staple companies out-performed the sector within the Index (up 22% versus 14% for the Index) and the Portfolio also benefited from a higher relative weighting in this sector (15% versus 10% for the Index). Costco Wholesale and Altria were among the top contributors to performance.
The Portfolio managers have identified a number of investment opportunities in foreign companies. The Portfolio ended the period with approximately 13% of its assets invested in foreign companies. As a group, the foreign companies owned by the Portfolio out-performed the Index over the period.
Key Detractors from Performance
Key detractors from the Portfolio’s performance relative to the Index over the year were that the Portfolio had a higher weighting in financial companies (37% versus 21% for the Index), which was a poorly performing sector, a lower weighting in technology companies (6% versus 16% for the Index), which was a strongly performing sector, and poor stock selection among material companies.
The financial sector was the worst performing sector of the Index. The Portfolio’s financial companies out-performed the corresponding sector within the Index (down 8% versus down 19% for the Index), but were still the largest detractors from performance. A higher relative average weighting in this sector detracted from both absolute and relative performance. While Berkshire Hathaway was among the top contributors to performance, Citigroup, American International Group, Wachovia, American Express, Moody’s, and Ambac Financial Group were among the top detractors from performance.
The weak performance of the Portfolio’s consumer discretionary companies (down 16% versus down 13% for the Index), along with a higher relative average weighting in this sector (12% versus 10% for the Index) detracted from both absolute and relative performance. While Amazon.com was among the top contributors to performance, Comcast and Harley-Davidson were among the top detractors from performance.
2
DAVIS VARIABLE ACCOUNT FUND, INC.
2949 East Elvira Road, Suite 101
Management’s Discussion and Analysis – (Continued)
Davis Financial Portfolio
Davis Financial Portfolio delivered a negative return on net asset value of 6.05% for the year ended December 31, 20071. Over the same time period, the Standard & Poor’s 500® Index2 (“Index”) returned 5.49%. Financial companies as a whole turned in the weakest performance of the sectors3 within the Index. The banking, diversified financial, real estate, and insurance industry groups of the Index all turned in negative performance.
Key Contributors to Performance
Insurance companies were the most important contributors4 to the Portfolio’s performance, out-performing the corresponding industry group within the Index (up 9% versus down 6% for the Index). China Life5, Loews, and Transatlantic Holdings were among the top contributors to performance. American International Group, Progressive, and MBIA were among the top detractors from performance.
Banking companies were the second most important contributors to performance, out-performing the corresponding industry group within the Index (up 13% versus down 30% for the Index). State Bank of India, Commerce Bancorp, and ICICI Bank were among the top contributors to performance. Wells Fargo was among the top detractors from performance.
The Portfolio managers have identified a number of investment opportunities in foreign companies. The Portfolio ended the period with approximately 19% of its assets invested in foreign companies. As a group, the foreign companies owned by the Portfolio out-performed the Index over the period.
Key Detractors from Performance
Diversified financial companies represented the Portfolio’s second largest holdings over the year and were the most important detractors from performance. The Portfolio’s diversified financial companies under-performed the corresponding industry group within the Index (down 25% versus down 19% for the Index). Bank of New York Mellon and Mellon Financial (merged with Bank of New York in July 2007) were among the top contributors to performance. First Marblehead, Moody’s, American Express, and JPMorgan Chase were among the top detractors from performance.
The Portfolio’s non-financial holdings overall detracted from performance. Sealed Air and H&R Block were among the top detractors from performance.
3
DAVIS VARIABLE ACCOUNT FUND, INC.
2949 East Elvira Road, Suite 101
Management’s Discussion and Analysis – (Continued)
Davis Real Estate Portfolio
Davis Real Estate Portfolio delivered a negative return on net asset value of 15.48% for the year ended December 31, 20071. Over the same time period, the Dow Jones Wilshire Real Estate Securities Index2 (“Index”) declined 17.66%. Seven of the eight sub-industries3 within the Index delivered negative returns, including diversified REITs, residential REITs, real estate management & development, and office REITs, all down 20% or more.
Key Contributors to Performance
Transportation companies were the most important contributors4 to the Portfolio’s performance. Florida East Coast Industries5, Alexander & Baldwin, and Burlington Northern Santa Fe were among the top contributors to performance. The Portfolio no longer owns Florida East Coast Industries.
The Portfolio maintained a cash position over the year and this aided relative performance during the weak market for real estate companies.
Other key contributors to the Portfolio’s performance included Ventas, ProLogis, and Macerich. The Portfolio no longer owns Macerich.
Key Detractors from Performance
Office REITs represented the Portfolio’s largest holdings over the year and were the most important detractors from performance. The Portfolio’s office REITs performed in line with the corresponding sub-industry within the Index (both down 20%). Alexandria Real Estate Equities was among the top contributors to performance. Corporate Office Properties, Duke Realty, Derwent London, and SL Green Realty were among the top detractors from performance. The Portfolio no longer owns Duke Realty.
Real estate management & development companies were the second most important detractors from performance. The Portfolio’s real estate management & development companies under-performed the corresponding sub-industry within the Index (down 34% versus down 24% for the Index). Forest City Enterprises and Minerva were among the top detractors from performance.
The Portfolio managers have identified a number of investment opportunities in foreign companies. The Portfolio ended the period with approximately 6% of its assets invested in foreign companies. As a group, the foreign companies owned by the Portfolio under-performed the Index over the period.
Other individual companies detracting from performance included Cousins Properties, Brixton, and Kimco Realty.
_________________________________
This Annual Report is authorized for use by existing shareholders. Prospective shareholders must receive a current Davis Variable Account Funds prospectus, which contains more information about investment strategies, risks, charges, and expenses. Please read the prospectus carefully before investing or sending money.
4
DAVIS VARIABLE ACCOUNT FUND, INC.
2949 East Elvira Road, Suite 101
Management’s Discussion and Analysis – (Continued)
Davis Value Portfolio’s investment objective is long-term growth of capital. There can be no assurance that the Portfolio will achieve its objective. The primary risks of an investment in Davis Value Portfolio are: (1) market risk, (2) company risk, (3) financial services risk, (4) foreign country risk, (5) headline risk, and (6) selection risk. See the prospectus for a full description of each risk.
Davis Financial Portfolio’s investment objective is long-term growth of capital. There can be no assurance that the Portfolio will achieve its objective. The primary risks of an investment in Davis Financial Portfolio are: (1) market risk, (2) company risk, (3) concentrated financial services portfolio risk, (4) foreign country risk, (5) headline risk, and (6) selection risk. See the prospectus for a full description of each risk.
Davis Financial Portfolio concentrates its investments in the financial sector, and it may be subject to greater risks than a portfolio that does not concentrate its investments in a particular sector. The Portfolio’s investment performance, both good and bad, is expected to reflect the economic performance of the financial sector more than a portfolio that does not concentrate its portfolio.
Davis Real Estate Portfolio’s investment objective is total return through a combination of growth and income. There can be no assurance that the Portfolio will achieve its objective. The primary risks of an investment in Davis Real Estate Portfolio are: (1) market risk, (2) company risk, (3) concentrated real estate portfolio risk, (4) focused portfolio risk, (5) small- and medium-capitalization risk, (6) foreign country risk, (7) headline risk, and (8) selection risk. See the prospectus for a full description of each risk.
Davis Real Estate Portfolio concentrates its investments in the real estate sector, and it may be subject to greater risks than a portfolio that does not concentrate its investments in a particular sector. The Portfolio’s investment performance, both good and bad, is expected to reflect the economic performance of the real estate sector much more than a portfolio that does not concentrate its portfolio.
Davis Real Estate Portfolio is allowed to focus its investments in fewer companies, and it may be subject to greater risks than a more diversified portfolio that is not allowed to focus its investments in a few companies. Should the portfolio manager determine that it is prudent to focus the Portfolio’s portfolio in a few companies, the Portfolio’s investment performance, both good and bad, is expected to reflect the economic performance of its more focused portfolio.
5
DAVIS VARIABLE ACCOUNT FUND, INC.
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
Management’s Discussion and Analysis – (Continued)
1 Total return assumes reinvestment of dividends and capital gain distributions. Past performance is not a guarantee of future results. Investment return and principal value will vary, so that when redeemed, an investor’s shares may be worth more or less than when purchased. The following tables list the average annual total returns for the periods ended December 31, 2007 and the annual gross operating expense ratios for the year ended December 31, 2007:
| | | INCEPTION | EXPENSE |
PORTFOLIO NAME | 1-YEAR | 5-YEAR | (July 1, 1999) | RATIO |
Davis Value Portfolio | 4.64% | 13.93% | 5.81% | 0.81% |
Davis Financial Portfolio | (6.05)% | 11.96% | 5.64% | 0.85% |
Davis Real Estate Portfolio | (15.48)% | 18.57% | 13.25% | 0.88% |
| | | PORTFOLIOS’ |
BENCHMARK INDEX | 1-YEAR | 5-YEAR | INCEPTION |
| | | (July 1, 1999) |
Standard & Poor’s 500® Index | 5.49% | 12.82% | 2.38% |
Dow Jones Wilshire Real Estate Securities Index | (17.66)% | 18.63% | 14.49% |
Portfolio performance numbers are net of all portfolio operating expenses, but do not include any insurance charges imposed by your insurance company’s separate account. If performance information included the effect of these additional charges, the total return would be lower.
Portfolio performance changes over time and current performance may be higher or lower than stated. The annual operating expense ratio may vary in future years. For more current information please call Davis Funds Investor Services at 1-800-279-0279.
2 | The definitions of indices quoted in this report appear below. Investments cannot be made directly in the indices. |
I. The S&P 500® Index is an unmanaged index of 500 selected common stocks, most of which are listed on the New York Stock Exchange. The Index is adjusted for dividends, weighted towards stocks with large market capitalizations, and represents approximately two-thirds of the total market value of all domestic common stocks.
II. The Dow Jones Wilshire Real Estate Securities Index is a broad measure of the performance of publicly traded real estate securities, such as Real Estate Investment Trusts (REITs) and Real Estate Operating Companies (REOCs). The Index is capitalization-weighted. The beginning date was January 1, 1978, and the Index is rebalanced monthly and returns are calculated on a buy and hold basis.
3 The companies included in the S&P 500® Index are divided into ten sectors. One or more industry groups make up a sector. The companies included in the Dow Jones Wilshire Real Estate Securities Index are divided into eight sub-industries.
6
DAVIS VARIABLE ACCOUNT FUND, INC.
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
Management’s Discussion and Analysis – (Continued)
4 A company’s or sector’s contribution to the Portfolio’s performance is a product both of its appreciation or depreciation and its weighting within the portfolio. For example, a 5% holding that rises 20% has twice as much impact as a 1% holding that rises 50%.
5 This Management Discussion & Analysis discusses a number of individual companies. The information provided in this report does not provide information reasonably sufficient upon which to base an investment decision and should not be considered a recommendation to purchase or sell any particular security. The Schedule of Investments lists each Portfolio’s holdings of each company discussed.
Shares of the Davis Variable Account Funds are not deposits or obligations of any bank, are not guaranteed by any bank, are not insured by the FDIC or any other agency, and involve investment risks, including possible loss of the principal amount invested.
7
DAVIS VARIABLE ACCOUNT FUND, INC.
FUND OVERVIEW
DAVIS VALUE PORTFOLIO
At December 31, 2007
Portfolio Composition | | Sector Weightings |
(% of Fund’s Net Assets) | | (% of Long Term Portfolio) |
| | | | | |
| | | | Fund | S&P 500® |
Common Stock (U.S.) | 85.30% | | Energy | 16.31% | 12.86% |
Common Stock (Foreign) | 13.14% | | Insurance | 15.69% | 4.31% |
Convertible Bonds | 0.28% | | Diversified Financials | 13.47% | 8.55% |
Short Term Investments | 0.46% | | Technology | 8.89% | 16.78% |
Other Assets & Liabilities | 0.82% | | Food & Staples Retailing | 7.71% | 2.37% |
| 100.00% | | Food, Beverage & Tobacco | 6.37% | 5.31% |
| | | Media | 5.67% | 2.81% |
| | | Banks | 4.63% | 3.69% |
| | | Materials | 4.12% | 3.33% |
| | | Health Care | 4.02% | 11.97% |
| | | Transportation | 2.97% | 1.77% |
| | | Other | 2.26% | 7.63% |
| | | Retailing | 2.15% | 2.63% |
| | | Household & Personal Products | 1.62% | 2.55% |
| | | Telecommunication Services | 1.56% | 3.63% |
| | | Capital Goods | 1.30% | 9.28% |
| | | Automobiles & Components | 1.26% | 0.53% |
| | | | 100.00% | 100.00% |
Top 10 Holdings
| | % of Fund’s |
Security | Industry | Net Assets |
Costco Wholesale Corp. | Food & Staples Retailing | 4.63% |
ConocoPhillips | Energy | 4.58% |
American Express Co. | Consumer Finance | 3.95% |
Berkshire Hathaway Inc., Class A | Property & Casualty Insurance | 3.87% |
Altria Group, Inc. | Food, Beverage & Tobacco | 3.63% |
American International Group, Inc. | Multi-Line Insurance | 3.51% |
JPMorgan Chase & Co. | Diversified Financial Services | 3.48% |
Occidental Petroleum Corp. | Energy | 3.13% |
Devon Energy Corp. | Energy | 2.63% |
Microsoft Corp. | Software & Services | 2.47% |
8
DAVIS VARIABLE ACCOUNT FUND, INC.
PORTFOLIO ACTIVITY
DAVIS VALUE PORTFOLIO
January 1, 2007 through December 31, 2007
New Positions Added (01/01/07 - 12/31/07) |
(Highlighted positions are those greater than 0.50% of 12/31/07 total net assets)
| | | % of 12/31/07 |
| | Date of 1st | Fund |
Security | Industry | Purchase | Net Assets |
Agilent Technologies, Inc. | Technology Hardware & Equipment | 03/26/07 | 0.58% |
China Shipping Development Co. Ltd. - H | Transportation | 07/19/07 | 0.33% |
E*TRADE Financial Corp. | Capital Markets | 02/15/07 | 0.02% |
Google Inc., Class A | Software & Services | 06/27/07 | 0.56% |
Grupo Televisa S.A., ADR | Media | 10/02/07 | 0.36% |
Hang Lung Group Ltd. | Real Estate | 04/30/07 | 0.38% |
MBIA Inc. | Property & Casualty Insurance | 12/07/07 | 0.13% |
Merrill Lynch & Co., Inc., Private Placement | Capital Markets | 12/24/07 | 1.32% |
Millea Holdings, Inc. | Property & Casualty Insurance | 03/27/07 | 0.87% |
NIPPONKOA Insurance Co., Ltd. | Property & Casualty Insurance | 06/01/07 | 0.51% |
Sino-Forest Corp. | Materials | 09/05/07 | 0.29% |
Texas Instruments Inc. | Semiconductors & Semiconductor Equipment | 09/12/07 | 0.67% |
Toll Holdings Ltd. | Transportation | 05/01/07 | 0.15% |
| | | |
Positions Closed (01/01/07 - 12/31/07) |
(Gains and losses greater than $500,000 are highlighted)
| | Date of | Realized |
Security | Industry | Final Sale | Gain (Loss) |
Apollo Group, Inc., Class A | Consumer Services | 07/06/07 | $ | 218,852 | |
Chubb Corp. | Property & Casualty Insurance | 11/09/07 | | 722,231 | |
Expedia, Inc. | Retailing | 11/13/07 | | 483,102 | |
Gannett Co., Inc. | Media | 12/17/07 | | (722,896 | ) |
IAC/InterActiveCorp | Retailing | 09/25/07 | | 153,547 | |
Kraft Foods Inc., Class A | Food, Beverage & Tobacco | 05/31/07 | | 4,516,490 | |
Nokia Oyj, ADR | Technology Hardware & Equipment | 09/18/07 | | 1,454,243 | |
| | | | | |
9
DAVIS VARIABLE ACCOUNT FUND, INC.
FUND PERFORMANCE
DAVIS VALUE PORTFOLIO
Average Annual Total Return | | Expense Example | | | |
for the periods ended December 31, 2007 | | | Beginning | Ending | Expenses Paid |
| | | Account Value | Account Value | During Period* |
One-Year | 4.64% | | (07/01/07) | (12/31/07) | (07/01/07-12/31/07) |
Five-Year | 13.93% | Actual | $1,000.00 | $976.70 | $4.09 |
Life of Fund (July 1, 1999 through | | Hypothetical (5% return | | | |
December 31, 2007) | 5.81% | before expenses) | $1,000.00 | $1,021.07 | $4.18 |
*Expenses are equal to the Fund’s annualized expense ratio (0.82%), multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). The expense ratio reflects the impact, if any, of the reduction of expenses paid indirectly and of certain reimbursements from the adviser. See Notes to Performance on page 18 for a description of the “Expense Example”.
$10,000 invested at commencement of operations. Let’s say you invested $10,000 in Davis Value Portfolio on July 1, 1999 (commencement of operations). As the chart below shows, by December 31, 2007 the value of your investment would have grown to $16,159 – a 61.59% increase on your initial investment. For comparison, look at how the Standard & Poor’s 500® Stock Index did over the same period. With dividends reinvested, the same $10,000 investment would have grown to $12,214 – a 22.14% increase.
The Standard & Poor’s 500® Stock Index is an unmanaged index of 500 selected common stocks, most of which are listed on the New York Stock Exchange. The Index is adjusted for dividends, weighted towards stocks with large market capitalizations, and represents approximately two-thirds of the total market value of all domestic common stocks.
The performance data for Davis Value Portfolio contained in this report represents past performance and assumes that all distributions were reinvested, and should not be considered as an indication of future performance from an investment in the Fund today. The investment return and principal value will fluctuate so that shares may be worth more or less than their original cost when redeemed.
10
DAVIS VARIABLE ACCOUNT FUND, INC.
FUND OVERVIEW
DAVIS FINANCIAL PORTFOLIO
At December 31, 2007
Portfolio Composition | | Sector Weightings |
(% of Fund’s Net Assets) | | (% of Stock Holdings) |
| | | | | |
| | | | Fund | S&P 500® |
Common Stock (U.S.) | 80.37% | | Insurance | 39.69% | 4.31% |
Common Stock (Foreign) | 18.98% | | Diversified Financials | 34.94% | 8.55% |
Other Assets & Liabilities | 0.65% | | Banks | 12.81% | 3.69% |
| 100.00% | | Energy | 5.09% | 12.86% |
| | | Commercial Services & Supplies | 3.36% | 0.46% |
| | | Materials | 2.43% | 3.33% |
| | | Consumer Services | 1.68% | 1.55% |
| | | Technology | – | 16.78% |
| | | Health Care | – | 11.97% |
| | | Capital Goods | – | 9.28% |
| | | Food, Beverage & Tobacco | – | 5.31% |
| | | Other | – | 21.91% |
| | | | 100.00% | 100.00% |
Top 10 Holdings
| | % of Fund’s |
Security | Industry | Net Assets |
Transatlantic Holdings, Inc. | Reinsurance | 10.80% |
American Express Co. | Consumer Finance | 9.93% |
Loews Corp. | Multi-Line Insurance | 8.00% |
State Bank of India Ltd., GDR | Commercial Banks | 6.50% |
Bank of New York Mellon Corp. | Capital Markets | 5.43% |
JPMorgan Chase & Co. | Diversified Financial Services | 5.07% |
Canadian Natural Resources Ltd. | Energy | 5.05% |
Markel Corp. | Property & Casualty Insurance | 4.96% |
American International Group, Inc. | Multi-Line Insurance | 4.80% |
Merrill Lynch & Co., Inc., Private Placement | Capital Markets | 4.42% |
11
DAVIS VARIABLE ACCOUNT FUND, INC.
PORTFOLIO ACTIVITY
DAVIS FINANCIAL PORTFOLIO
January 1, 2007 through December 31, 2007
New Positions Added (01/01/07 - 12/31/07) |
(Highlighted positions are those greater than 1.00% of 12/31/07 total net assets)
| | | % of 12/31/07 |
| | Date of 1st | Fund |
Security | Industry | Purchase | Net Assets |
Ambac Financial Group, Inc. | Property & Casualty Insurance | 11/06/07 | 0.52% |
Canadian Natural Resources Ltd. | Energy | 11/21/07 | 5.05% |
MBIA Inc. | Property & Casualty Insurance | 11/06/07 | 0.49% |
Merrill Lynch & Co., Inc., Private Placement | Capital Markets | 12/24/07 | 4.42% |
Oaktree Capital Group, LLC, Class A | Diversified Financial Services | 05/21/07 | 0.39% |
RHJ International | Capital Markets | 05/30/07 | 0.87% |
Positions Closed (01/01/07 - 12/31/07) |
(Gains and losses greater than $500,000 are highlighted)
| | Date of | Realized |
Security | Industry | Final Sale | Gain (Loss) |
Altria Group, Inc. | Food, Beverage & Tobacco | 03/06/07 | $ | 2,050,578 | |
Covidien Ltd. | Health Care Equipment & Services | 11/26/07 | | 330,093 | |
Tyco Electronics Ltd. | Technology Hardware & Equipment | 12/24/07 | | 345,839 | |
Tyco International Ltd. | Capital Goods | 11/28/07 | | (17,449 | ) |
Wachovia Corp. | Commercial Banks | 06/01/07 | | 1,589,024 | |
| | | | | |
12
DAVIS VARIABLE ACCOUNT FUND, INC.
FUND PERFORMANCE
DAVIS FINANCIAL PORTFOLIO
Average Annual Total Return | | Expense Example | | | |
for the periods ended December 31, 2007 | | | Beginning | Ending | Expenses Paid |
| | | Account Value | Account Value | During Period* |
One-Year | (6.05)% | | (07/01/07) | (12/31/07) | (07/01/07-12/31/07) |
Five-Year | 11.96% | Actual | $1,000.00 | $908.84 | $4.09 |
Life of Fund (July 1, 1999 through | | Hypothetical (5% return | | | |
December 31, 2007) | 5.64% | before expenses) | $1,000.00 | $1,020.92 | $4.33 |
*Expenses are equal to the Fund’s annualized expense ratio (0.85%), multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). The expense ratio reflects the impact, if any, of the reduction of expenses paid indirectly and of certain reimbursements from the adviser. See Notes to Performance on page 18 for a description of the “Expense Example”.
$10,000 invested at commencement of operations. Let’s say you invested $10,000 in Davis Financial Portfolio on July 1, 1999 (commencement of operations). As the chart below shows, by December 31, 2007 the value of your investment would have grown to $15,941 – a 59.41% increase on your initial investment. For comparison, look at how the Standard & Poor’s 500® Stock Index did over the same period. With dividends reinvested, the same $10,000 investment would have grown to $12,214 – a 22.14% increase.
The Standard & Poor’s 500® Stock Index is an unmanaged index of 500 selected common stocks, most of which are listed on the New York Stock Exchange. The Index is adjusted for dividends, weighted towards stocks with large market capitalizations, and represents approximately two-thirds of the total market value of all domestic common stocks.
The performance data for Davis Financial Portfolio contained in this report represents past performance and assumes that all distributions were reinvested, and should not be considered as an indication of future performance from an investment in the Fund today. The investment return and principal value will fluctuate so that shares may be worth more or less than their original cost when redeemed.
13
DAVIS VARIABLE ACCOUNT FUND, INC.
FUND OVERVIEW
DAVIS REAL ESTATE PORTFOLIO
At December 31, 2007
Portfolio Composition | | Sector Weightings | |
(% of Fund’s Net Assets) | | (% of Long Term Portfolio) | |
| | | | | | |
| | | | | Dow Jones Wilshire Real Estate Securities Index | |
Common Stock (U.S.) | 83.16% | | | | |
Common Stock (Foreign) | 6.30% | | | Fund | |
Convertible Bonds | 6.22% | | Office REITS | 27.29% | 16.71% | |
Preferred Stock | 0.17% | | Retail REITS | 16.34% | 27.54% | |
Short Term Investments | 3.23% | | Industrial REITS | 10.34% | 10.59% | |
Other Assets & Liabilities | 0.92% | | Real Estate Management & Development | 9.87% | 1.55% | |
| 100.00% | | Residential REITS | 8.49% | 14.64% | |
| | | Specialized REITS | 8.00% | 21.39% | |
| | | Transportation | 7.87% | – | |
| | | Diversified REITS | 6.21% | 7.58% | |
| | | Capital Goods | 2.80% | – | |
| | | Insurance | 2.42% | – | |
| | | Mortgage REITS | 0.33% | – | |
| | | Homebuilding | 0.04% | – | |
| | | | 100.00% | 100.00% | |
| | | | | | | |
Top 10 Holdings
| | % of Fund’s |
Security | Industry | Net Assets |
Forest City Enterprises, Inc., Class A | Real Estate Management & Development | 7.89% |
Ventas, Inc. | Specialized REITS | 7.67% |
Alexandria Real Estate Equities, Inc. | Office REITS | 7.65% |
Kimco Realty Corp. | Retail REITS | 4.53% |
Boston Properties, Inc. | Office REITS | 4.48% |
Digital Realty Trust, Inc. | Office REITS | 4.44% |
Cousins Properties, Inc. | Diversified REITS | 3.98% |
Regency Centers Corp. | Retail REITS | 3.97% |
Derwent London PLC | Office REITS | 3.84% |
Burlington Northern Santa Fe Corp. | Transportation | 3.83% |
14
DAVIS VARIABLE ACCOUNT FUND, INC.
PORTFOLIO ACTIVITY
DAVIS REAL ESTATE PORTFOLIO
January 1, 2007 through December 31, 2007
New Positions Added (01/01/07 - 12/31/07) |
(Highlighted positions are those greater than 2.50% of 12/31/07 total net assets)
| | | % of 12/31/07 |
| | Date of 1st | Fund |
Security | Industry | Purchase | Net Assets |
Ambac Financial Group, Inc. | Property & Casualty Insurance | 11/01/07 | 2.32% |
Archstone-Smith Trust | Residential REITS | 08/21/07 | – |
AvalonBay Communities, Inc. | Residential REITS | 06/12/07 | 2.34% |
Burlington Northern Santa Fe Corp. | Transportation | 02/08/07 | 3.83% |
Digital Realty Trust, Inc. | Office REITS | 10/12/07 | 4.44% |
Essex Property Trust, Inc. | Residential REITS | 06/20/07 | 3.07% |
General Electric Co. | Capital Goods | 05/29/07 | 2.69% |
General Growth Properties, Inc., Ser. | | | |
144A Conv. Sr. Notes, 3.98%, 4/15/27 | Retail REITS | 04/11/07 | 2.55% |
Minerva PLC | Real Estate Management & Development | 06/21/07 | 0.57% |
Mitsui Fudosan Co., Ltd. | Real Estate Management & Development | 12/17/07 | 1.00% |
ProLogis, Ser. 144A Conv. Sr. Notes, | | | |
2.25%, 4/1/37 | Industrial REITS | 03/20/07 | 3.49% |
Public Storage, Inc. | Specialized REITS | 01/05/07 | – |
SL Green Realty Corp., Ser. 144A | | | |
Conv. Sr. Notes, 3.00%, 3/30/27 | Office REITS | 03/21/07 | 0.18% |
Toll Brothers, Inc. | Homebuilding | 11/21/07 | 0.04% |
Vornado Realty Trust | Diversified REITS | 08/16/07 | 1.97% |
15
DAVIS VARIABLE ACCOUNT FUND, INC.
PORTFOLIO ACTIVITY – (Continued)
DAVIS REAL ESTATE PORTFOLIO
January 1, 2007 through December 31, 2007
Positions Closed (01/01/07 - 12/31/07) |
(Gains and losses greater than $200,000 are highlighted)
| | Date of | Realized |
Security | Industry | Final Sale | Gain (Loss) |
Archstone-Smith Trust | Residential REITS | 10/05/07 | $ | 17,446 | |
Capital & Regional PLC | Real Estate Management & Development | 03/06/07 | | 327,807 | |
Columbia Equity Trust, Inc. | Office REITS | 01/23/07 | | 194,843 | |
Developers Diversified Realty Corp. | Retail REITS | 06/27/07 | | 1,454,598 | |
Duke Realty Corp. | Office REITS | 12/17/07 | | 35,501 | |
Equity Residential, 8.60%, Series D, | | | | | |
Cum. Pfd. | Residential REITS | 07/16/07 | | (23 | ) |
Florida East Coast Industries, Inc. | Transportation | 07/27/07 | | 840,082 | |
Hammerson PLC | Retail REITS | 10/09/07 | | 259,930 | |
Host Hotels & Resorts Inc. | Specialized REITS | 11/29/07 | | (123,987 | ) |
Macerich Co. | Retail REITS | 03/20/07 | | 474,007 | |
ProLogis | Industrial REITS | 03/21/07 | | 1,092,980 | |
Public Storage, Inc. | Specialized REITS | 06/14/07 | | (295,080 | ) |
Slough Estates PLC | Industrial REITS | 01/30/07 | | 181,460 | |
Spirit Finance Corp. | Diversified REITS | 01/09/07 | | 57,950 | |
St. Joe Co. | Real Estate Management & Development | 12/24/07 | | (636,242 | ) |
U-Store-It Trust | Specialized REITS | 03/28/07 | | 91,457 | |
UDR, Inc. | Residential REITS | 08/08/07 | | 806,032 | |
Vornado Realty Trust, Conv. Sr. Deb., | | | | | |
3.625%, 11/15/26 | Diversified REITS | 08/16/07 | | (198,803 | ) |
16
DAVIS VARIABLE ACCOUNT FUND, INC.
FUND PERFORMANCE
DAVIS REAL ESTATE PORTFOLIO
Average Annual Total Return | | Expense Example | | | |
for the periods ended December 31, 2007 | | | Beginning | Ending | Expenses Paid |
| | | Account Value | Account Value | During Period* |
One-Year | (15.48)% | | (07/01/07) | (12/31/07) | (07/01/07-12/31/07) |
Five-Year | 18.57% | Actual | $1,000.00 | $890.01 | $4.24 |
Life of Fund (July 1, 1999 | | Hypothetical (5% return | | | |
through December 31, 2007) | 13.25% | before expenses) | $1,000.00 | $1,020.72 | $4.53 |
*Expenses are equal to the Fund’s annualized expense ratio (0.89%), multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). The expense ratio reflects the impact, if any, of the reduction of expenses paid indirectly and of certain reimbursements from the adviser. See Notes to Performance on page 18 for a description of the “Expense Example”.
$10,000 invested at commencement of operations. Let’s say you invested $10,000 in Davis Real Estate Portfolio on July 1, 1999 (commencement of operations). As the chart shows, by December 31, 2007 the value of your investment would have grown to $28,805 – a 188.05% increase on your initial investment. For comparison, the Dow Jones Wilshire Real Estate Securities Index and the Standard & Poor’s 500® Stock Index are also presented on the chart below.
The Dow Jones Wilshire Real Estate Securities Index is a broad measure of the performance of publicly traded real estate securities, such as Real Estate Investment Trusts (REITs) and Real Estate Operating Companies (REOCs). Investments cannot be made directly in the Index. The index used includes net dividends reinvested.
The Standard & Poor’s 500® Stock Index is an unmanaged index of 500 selected common stocks, most of which are listed on the New York Stock Exchange. The Index is adjusted for dividends, weighted towards stocks with large market capitalizations, and represents approximately two-thirds of the total market value of all domestic common stocks.
The performance data for Davis Real Estate Portfolio contained in this report represents past performance and assumes that all distributions were reinvested, and should not be considered as an indication of future performance from an investment in the Fund today. The investment return and principal value will fluctuate so that shares may be worth more or less than their original cost when redeemed.
17
DAVIS VARIABLE ACCOUNT FUND, INC.
NOTES TO PERFORMANCE
The following disclosure provides important information regarding the Funds’ Expense Example, which appears in each Fund’s Performance section of this Annual Report. Please refer to this information when reviewing the Expense Example for each Fund.
Example
As a shareholder of the Fund, you incur ongoing costs only, including advisory and administrative fees and other Fund expenses. The Expense Example is intended to help you understand your ongoing costs (in dollars) of investing in each Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Expense Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period indicated, which for each Fund is from 07/01/07 to 12/31/07. Please note that the Expense Example is general and does not reflect charges imposed by your insurance company’s separate account or account specific costs, which may increase your total costs of investing in the Funds. If these charges or account specific costs were included in the Expense Example, the expenses would have been higher.
Actual Expenses
The information represented in the row entitled “Actual” provides information about actual account values and actual expenses. You may use the information in this row, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then, multiply the result by the number under the heading “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The information represented in the row entitled “Hypothetical” provides information about hypothetical account values and hypothetical expenses based on each Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only. Therefore, the information in the row entitled “Hypothetical” is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds.
18
DAVIS VARIABLE ACCOUNT FUND, INC.
DAVIS VALUE PORTFOLIO
December 31, 2007
| | Value | |
Shares | Security | (Note 1 | ) |
COMMON STOCK – (98.44%) |
AUTOMOBILES & COMPONENTS – (1.24%) | | | |
| 175,400 | | Harley-Davidson, Inc. | $ | 8,192,934 | |
CAPITAL GOODS – (1.29%) | | | |
| 214,114 | | Tyco International Ltd. | | 8,489,620 | |
CAPITAL MARKETS – (4.30%) | | | |
| 118,070 | | Ameriprise Financial, Inc. | | 6,506,838 | |
| 178,700 | | Bank of New York Mellon Corp. | | 8,713,412 | |
| 37,470 | | E*TRADE Financial Corp.* | | 131,707 | |
| 185,700 | | Merrill Lynch & Co., Inc., Private Placement (b) | | 8,672,487 | |
| 54,650 | | Morgan Stanley | | 2,902,461 | |
| 17,330 | | State Street Corp. | | 1,407,196 | |
| | | | | 28,334,101 | |
COMMERCIAL BANKS – (4.58%) | | | |
| 102,770 | | Commerce Bancorp, Inc. | | 3,919,648 | |
| 195,260 | | HSBC Holdings PLC (United Kingdom) | | 3,272,725 | |
| 259,744 | | Wachovia Corp. | | 9,878,064 | |
| 432,900 | | Wells Fargo & Co. | | 13,069,251 | |
| | | | | 30,139,688 | |
COMMERCIAL SERVICES & SUPPLIES – (0.88%) | | | |
| 65,400 | | D&B Corp. | | 5,796,402 | |
CONSUMER DURABLES & APPAREL – (0.20%) | | | |
| 17,799 | | Hunter Douglas NV (Netherlands) | | 1,318,847 | |
CONSUMER FINANCE – (4.01%) | | | |
| 499,850 | | American Express Co. | | 26,002,197 | |
| 27,350 | | Discover Financial Services | | 412,438 | |
| | | | | 26,414,635 | |
CONSUMER SERVICES – (0.77%) | | | |
| 273,940 | | H&R Block, Inc. | | 5,087,066 | |
DIVERSIFIED FINANCIAL SERVICES – (4.98%) | | | |
| 193,043 | | Citigroup Inc. | | 5,683,186 | |
| 525,048 | | JPMorgan Chase & Co. | | 22,918,345 | |
| 118,200 | | Moody’s Corp. | | 4,219,740 | |
| | | | | 32,821,271 | |
ENERGY – (16.10%) | | | |
| 114,200 | | Canadian Natural Resources Ltd. (Canada) | | 8,352,588 | |
| 2,659,900 | | China Coal Energy Co. - H (China) | | 8,374,656 | |
| 341,522 | | ConocoPhillips | | 30,156,393 | |
| 194,870 | | Devon Energy Corp. | | 17,325,892 | |
| 166,820 | | EOG Resources, Inc. | | 14,888,685 | |
19
DAVIS VARIABLE ACCOUNT FUND, INC.
DAVIS VALUE PORTFOLIO – (Continued)
December 31, 2007
| | Value | |
Shares | Security | (Note 1 | ) |
COMMON STOCK – (Continued) |
ENERGY – (Continued) | | | |
| 267,800 | | Occidental Petroleum Corp. | $ | 20,617,922 | |
| 44,144 | | Transocean Inc.* | | 6,319,214 | |
| | | | | 106,035,350 | |
FOOD & STAPLES RETAILING – (7.61%) | | | |
| 436,600 | | Costco Wholesale Corp. | | 30,479,046 | |
| 230,971 | | CVS Caremark Corp. | | 9,181,097 | |
| 220,200 | | Wal-Mart Stores, Inc. | | 10,466,106 | |
| | | | | 50,126,249 | |
FOOD, BEVERAGE & TOBACCO – (6.28%) | | | |
| 316,400 | | Altria Group, Inc. | | 23,913,512 | |
| 102,900 | | Diageo PLC, ADR (United Kingdom) | | 8,831,907 | |
| 133,806 | | Heineken Holding NV (Netherlands) | | 7,576,793 | |
| 27,300 | | Hershey Co. | | 1,075,620 | |
| | | | | 41,397,832 | |
HEALTH CARE EQUIPMENT & SERVICES – (3.97%) | | | |
| 84,900 | | Cardinal Health, Inc. | | 4,902,975 | |
| 213,414 | | Covidien Ltd. | | 9,452,106 | |
| 64,580 | | Express Scripts, Inc.* | | 4,707,882 | |
| 121,200 | | UnitedHealth Group Inc. | | 7,053,840 | |
| | | | | 26,116,803 | |
HOUSEHOLD & PERSONAL PRODUCTS – (1.60%) | | | |
| 72,500 | | Avon Products, Inc. | | 2,865,925 | |
| 104,100 | | Procter & Gamble Co. | | 7,643,022 | |
| | | | | 10,508,947 | |
INSURANCE BROKERS – (0.62%) | | | |
| 85,400 | | Aon Corp. | | 4,072,726 | |
LIFE & HEALTH INSURANCE – (0.54%) | | | |
| 34,680 | | Principal Financial Group, Inc. | | 2,387,371 | |
| 21,100 | | Sun Life Financial Inc. (Canada) | | 1,180,334 | |
| | | | | 3,567,705 | |
MATERIALS – (4.07%) | | | |
| 71,300 | | BHP Billiton PLC (United Kingdom) | | 2,194,235 | |
| 49,180 | | Martin Marietta Materials, Inc. | | 6,521,268 | |
| 25,800 | | Rio Tinto PLC (United Kingdom) | | 2,730,678 | |
| 414,010 | | Sealed Air Corp. | | 9,580,191 | |
| 87,300 | | Sino-Forest Corp.* (Canada) | | 1,896,461 | |
| 48,790 | | Vulcan Materials Co. | | 3,858,801 | |
| | | | | 26,781,634 | |
20
DAVIS VARIABLE ACCOUNT FUND, INC.
DAVIS VALUE PORTFOLIO – (Continued)
December 31, 2007
| | Value | |
Shares | Security | (Note 1 | ) |
COMMON STOCK – (Continued) |
MEDIA – (5.59%) | | | |
| 747,581 | | Comcast Corp., Special Class A* | $ | 13,568,595 | |
| 99,800 | | Grupo Televisa S.A., ADR (Mexico) | | 2,372,246 | |
| 50,500 | | Lagardere S.C.A. (France) | | 3,786,922 | |
| 18,290 | | Liberty Media Corp. - Capital, Series A* | | 2,134,717 | |
| 494,300 | | News Corp., Class A | | 10,128,207 | |
| 114,682 | | Virgin Media Inc. | | 1,961,636 | |
| 45,100 | | WPP Group PLC, ADR (United Kingdom) | | 2,899,704 | |
| | | | | 36,852,027 | |
MULTI-LINE INSURANCE – (5.87%) | | | |
| 396,997 | | American International Group, Inc. | | 23,144,925 | |
| 308,000 | | Loews Corp. | | 15,504,720 | |
| | | | | 38,649,645 | |
PROPERTY & CASUALTY INSURANCE – (7.47%) | | | |
| 52,440 | | Ambac Financial Group, Inc. | | 1,351,379 | |
| 180 | | Berkshire Hathaway Inc., Class A* | | 25,488,000 | |
| 331 | | Berkshire Hathaway Inc., Class B* | | 1,567,616 | |
| 1,150 | | Markel Corp.* | | 564,765 | |
| 46,800 | | MBIA Inc. | | 871,884 | |
| 170,100 | | Millea Holdings, Inc. (Japan) | | 5,740,294 | |
| 366,100 | | NIPPONKOA Insurance Co., Ltd. (Japan) | | 3,332,799 | |
| 537,600 | | Progressive Corp. (Ohio) | | 10,300,416 | |
| | | | | 49,217,153 | |
REAL ESTATE – (0.38%) | | | |
| 457,000 | | Hang Lung Group Ltd. (Hong Kong) | | 2,511,408 | |
REINSURANCE – (0.99%) | | | |
| 89,977 | | Transatlantic Holdings, Inc. | | 6,538,629 | |
RETAILING – (2.12%) | | | |
| 23,700 | | Amazon.com, Inc.* | | 2,197,227 | |
| 107,100 | | Bed Bath & Beyond Inc.* | | 3,148,204 | |
| 191,700 | | CarMax, Inc.* | | 3,786,075 | |
| 91,150 | | Liberty Media Corp. - Interactive, Series A* | | 1,739,598 | |
| 97,470 | | Lowe’s Cos, Inc. | | 2,204,771 | |
| 8,900 | | Sears Holdings Corp.* | | 908,957 | |
| | | | | 13,984,832 | |
21
DAVIS VARIABLE ACCOUNT FUND, INC.
DAVIS VALUE PORTFOLIO – (Continued)
December 31, 2007
| | Value | |
Shares/Principal | Security | (Note 1 | ) |
COMMON STOCK – (Continued) |
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT – (0.67%) | | | |
| 133,000 | | Texas Instruments Inc. | $ | 4,442,200 | |
SOFTWARE & SERVICES – (4.62%) | | | |
| 5,380 | | Google Inc., Class A* | | 3,719,813 | |
| 281,499 | | Iron Mountain Inc.* | | 10,421,093 | |
| 457,630 | | Microsoft Corp. | | 16,289,340 | |
| | | | | 30,430,246 | |
TECHNOLOGY HARDWARE & EQUIPMENT – (3.48%) | | | |
| 104,850 | | Agilent Technologies, Inc.* | | 3,852,189 | |
| 265,400 | | Dell Inc.* | | 6,508,935 | |
| 96,970 | | Hewlett-Packard Co. | | 4,895,046 | |
| 206,214 | | Tyco Electronics Ltd. | | 7,656,726 | |
| | | | | 22,912,896 | |
TELECOMMUNICATION SERVICES – (1.27%) | | | |
| 121,650 | | SK Telecom Co., Ltd., ADR (South Korea) | | 3,630,036 | |
| 359,400 | | Sprint Nextel Corp. | | 4,718,922 | |
| | | | | 8,348,958 | |
TRANSPORTATION – (2.94%) | | | |
| 71,600 | | Asciano Group (Australia) | | 440,079 | |
| 1,240,900 | | China Merchants Holdings International Co., Ltd. (China) | | 7,734,340 | |
| 824,000 | | China Shipping Development Co. Ltd. - H (China) | | 2,176,931 | |
| 939,200 | | Cosco Pacific Ltd. (China) | | 2,481,278 | |
| 29,000 | | Kuehne & Nagel International AG, Registered (Switzerland) | | 2,779,225 | |
| 96,057 | | Toll Holdings Ltd. (Australia) | | 965,726 | |
| 38,950 | | United Parcel Service, Inc., Class B | | 2,754,544 | |
| | | | | 19,332,123 | |
| | | | | | |
| | | Total Common Stock – (identified cost $417,767,333) | | 648,421,927 | |
CONVERTIBLE BONDS – (0.28%) |
|
TELECOMMUNICATION SERVICES – (0.28%) | | | |
$ | 1,600,000 | | Level 3 Communications, Inc., Conv. Sr. Notes, 10.00%, 05/01/11 | | | |
| | | (identified cost $1,600,000) | | 1,822,000 | |
22
DAVIS VARIABLE ACCOUNT FUND, INC.
DAVIS VALUE PORTFOLIO – (Continued)
December 31, 2007
| | Value | |
Principal | Security | (Note 1 | ) |
SHORT TERM INVESTMENTS – (0.46%) |
|
$ | 1,113,000 | | ABN AMRO Inc. Joint Repurchase Agreement, 4.70%, | | | |
| | | 01/02/08, dated 12/31/07, repurchase value of $1,113,291 | | | |
| | | (collateralized by: U.S. Government agency mortgages and obligations | | | |
| | | in a pooled cash account, 4.125%-7.00%, 02/15/08-05/01/37, | | | |
| | | total market value $1,135,260) | $ | 1,113,000 | |
| 964,000 | | Banc of America Securities LLC Joint Repurchase Agreement, 4.50%, | | | |
| | | 01/02/08, dated 12/31/07, repurchase value of $964,241 | | | |
| | | (collateralized by: U.S. Government agency mortgage | | | |
| | | in a pooled cash account, 5.00%, 08/01/33, | | | |
| | | total market value $983,280) | | 964,000 | |
| 297,000 | | Goldman, Sachs & Co. Joint Repurchase Agreement, 4.75%, | | | |
| | | 01/02/08, dated 12/31/07, repurchase value of $297,078 | | | |
| | | (collateralized by: U.S. Government agency mortgages | | | |
| | | in a pooled cash account, 4.00%-9.50%, 12/01/14-12/01/37, | | | |
| | | total market value $302,940) | | 297,000 | |
| 664,000 | | UBS Securities LLC Joint Repurchase Agreement, 4.64%, | | | |
| | | 01/02/08, dated 12/31/07, repurchase value of $664,171 | | | |
| | | (collateralized by: U.S. Government agency mortgages | | | |
| | | in a pooled cash account, 5.00%-8.00%, 07/01/08-11/01/47, | | | |
| | | total market value $677,280) | | 664,000 | |
| | | | | | |
| | | Total Short Term Investments – (identified cost $3,038,000) | | 3,038,000 | |
| | | | | | |
| | | Total Investments – (99.18%) – (identified cost $422,405,333) – (a) | | 653,281,927 | |
| | | Other Assets Less Liabilities – (0.82%) | | 5,417,007 | |
| | | Net Assets – (100%) | $ | 658,698,934 | |
| | | | | | | |
*Non-Income Producing Security.
ADR: American Depositary Receipt
(a) Aggregate cost for Federal Income Tax purposes is $422,698,810. At December 31, 2007 unrealized appreciation (depreciation) of securities for Federal Income Tax purposes is as follows:
| | | Unrealized appreciation | $ | 245,984,732 | |
| | | Unrealized depreciation | | (15,401,615 | ) |
| | | Net unrealized appreciation | $ | 230,583,117 | |
(b) | Illiquid & Restricted Security – See Note 7 of the Notes to Financial Statements. |
See Notes to Financial Statements
23
DAVIS VARIABLE ACCOUNT FUND, INC.
DAVIS FINANCIAL PORTFOLIO
December 31, 2007
| | Value | |
Shares | Security | (Note 1 | ) |
COMMON STOCK – (99.35%) |
CAPITAL MARKETS – (13.19%) | | | |
| 52,360 | | Ameriprise Financial, Inc. | $ | 2,885,559 | |
| 130,000 | | Bank of New York Mellon Corp. | | 6,338,800 | |
| 110,500 | | Merrill Lynch & Co., Inc., Private Placement (b)(c) | | 5,160,527 | |
| 62,000 | | RHJ International* (Belgium) | | 1,015,248 | |
| | | | | 15,400,134 | |
COMMERCIAL BANKS – (12.73%) | | | |
| 18,600 | | Commerce Bancorp, Inc. | | 709,404 | |
| 215,699 | | HSBC Holdings PLC (United Kingdom) | | 3,615,300 | |
| 10,500 | | ICICI Bank Ltd., ADR (India) | | 645,750 | |
| 62,148 | | State Bank of India Ltd., GDR (India) | | 7,582,056 | |
| 76,400 | | Wells Fargo & Co. | | 2,306,516 | |
| | | | | 14,859,026 | |
COMMERCIAL SERVICES & SUPPLIES – (3.34%) | | | |
| 44,000 | | D&B Corp. | | 3,899,720 | |
CONSUMER FINANCE – (12.39%) | | | |
| 222,800 | | American Express Co. | | 11,590,056 | |
| 188,050 | | First Marblehead Corp. | | 2,877,165 | |
| | | | | 14,467,221 | |
CONSUMER SERVICES – (1.67%) | | | |
| 105,000 | | H&R Block, Inc. | | 1,949,850 | |
DIVERSIFIED FINANCIAL SERVICES – (9.13%) | | | |
| 135,548 | | JPMorgan Chase & Co. | | 5,916,670 | |
| 119,900 | | Moody’s Corp. | | 4,280,430 | |
| 14,000 | | Oaktree Capital Group, LLC, Class A (b) | | 458,500 | |
| | | | | 10,655,600 | |
ENERGY – (5.05%) | | | |
| 80,600 | | Canadian Natural Resources Ltd. (Canada) | | 5,895,084 | |
LIFE & HEALTH INSURANCE – (2.92%) | | | |
| 44,533 | | China Life Insurance Co., Ltd., ADR (China) | | 3,406,774 | |
MATERIALS – (2.42%) | | | |
| 121,900 | | Sealed Air Corp. | | 2,820,766 | |
MULTI-LINE INSURANCE – (12.80%) | | | |
| 96,187 | | American International Group, Inc. | | 5,607,702 | |
| 185,400 | | Loews Corp. | | 9,333,036 | |
| | | | | 14,940,738 | |
24
DAVIS VARIABLE ACCOUNT FUND, INC.
DAVIS FINANCIAL PORTFOLIO – (Continued)
December 31, 2007
| | Value | |
Shares | Security | (Note 1 | ) |
COMMON STOCK – (Continued) |
PROPERTY & CASUALTY INSURANCE – (10.34%) | | | |
| 23,700 | | Ambac Financial Group, Inc. | $ | 610,749 | |
| 44,800 | | FPIC Insurance Group, Inc.* | | 1,923,936 | |
| 11,800 | | Markel Corp.* | | 5,794,980 | |
| 30,600 | | MBIA Inc. | | 570,078 | |
| 165,300 | | Progressive Corp. (Ohio) | | 3,167,148 | |
| | | | | 12,066,891 | |
REINSURANCE – (13.37%) | | | |
| 29,900 | | Everest Re Group, Ltd. | | 3,001,960 | |
| 173,437 | | Transatlantic Holdings, Inc. | | 12,603,667 | |
| | | | | 15,605,627 | |
| | | | | | |
| | | Total Common Stock – (identified cost $87,359,051) | | 115,967,431 | |
| | | Total Investments – (99.35%) – (identified cost $87,359,051) – (a) | | 115,967,431 | |
| | | Other Assets Less Liabilities – (0.65%) | | 757,869 | |
| | | Net Assets – (100%) | $ | 116,725,300 | |
*Non-Income Producing Security.
ADR: | American Depositary Receipt |
GDR: | Global Depositary Receipt |
(a) Aggregate cost for Federal Income Tax purposes is $87,410,333. At December 31, 2007 unrealized appreciation (depreciation) of securities for Federal Income Tax purposes is as follows:
| | | Unrealized appreciation | $ | 31,652,195 | |
| | | Unrealized depreciation | | (3,095,097 | ) |
| | | Net unrealized appreciation | $ | 28,557,098 | |
(b) | Illiquid Security – See Note 7 of the Notes to Financial Statements. |
(c) | Restricted Security – See Note 7 of the Notes to Financial Statements. |
See Notes to Financial Statements
25
DAVIS VARIABLE ACCOUNT FUND, INC.
DAVIS REAL ESTATE PORTFOLIO
December 31, 2007
| | | Value | |
Shares | | Security | (Note 1 | ) |
COMMON STOCK – (89.46%) |
CAPITAL GOODS – (2.69%) | | | |
| 35,900 | | General Electric Co. | $ | 1,330,813 | |
DIVERSIFIED REITS – (5.95%) | | | |
| 89,200 | | Cousins Properties, Inc. | | 1,971,320 | |
| 11,100 | | Vornado Realty Trust | | 976,245 | |
| | | | | 2,947,565 | |
HOMEBUILDING – (0.04%) | | | |
| 1,000 | | Toll Brothers, Inc.* | | 20,060 | |
INDUSTRIAL REITS – (6.42%) | | | |
| 18,100 | | AMB Property Corp. | | 1,041,836 | |
| 74,900 | | Brixton PLC (United Kingdom) | | 439,460 | |
| 104,100 | | DCT Industrial Trust Inc. | | 969,171 | |
| 42,300 | | First Potomac Realty Trust | | 731,367 | |
| | | | | 3,181,834 | |
MORTGAGE REITS – (0.31%) | | | |
| 6,400 | | Gramercy Capital Corp. | | 155,584 | |
OFFICE REITS – (25.98%) | | | |
| 37,300 | | Alexandria Real Estate Equities, Inc. | | 3,792,291 | |
| 24,200 | | Boston Properties, Inc. | | 2,221,802 | |
| 57,300 | | Corporate Office Properties Trust | | 1,804,950 | |
| 67,600 | | Derwent London PLC (United Kingdom) | | 1,902,743 | |
| 57,300 | | Digital Realty Trust, Inc. | | 2,198,601 | |
| 10,170 | | SL Green Realty Corp. | | 950,488 | |
| | | | | 12,870,875 | |
PROPERTY & CASUALTY INSURANCE – (2.32%) | | | |
| 44,600 | | Ambac Financial Group, Inc. | | 1,149,342 | |
REAL ESTATE MANAGEMENT & DEVELOPMENT – (9.46%) | | | |
| 88,000 | | Forest City Enterprises, Inc., Class A | | 3,910,720 | |
| 105,840 | | Minerva PLC* (United Kingdom) | | 283,372 | |
| 22,700 | | Mitsui Fudosan Co., Ltd. (Japan) | | 493,765 | |
| | | | | 4,687,857 | |
RESIDENTIAL REITS – (7.97%) | | | |
| 47,300 | | American Campus Communities, Inc. | | 1,270,005 | |
| 12,300 | | AvalonBay Communities, Inc. | | 1,157,922 | |
| 15,600 | | Essex Property Trust, Inc. | | 1,520,844 | |
| | | | | 3,948,771 | |
26
DAVIS VARIABLE ACCOUNT FUND, INC.
DAVIS REAL ESTATE PORTFOLIO – (Continued)
December 31, 2007
| | | Value | |
Shares/Principal | | Security | (Note 1 | ) |
COMMON STOCK – (Continued) | |
RETAIL REITS – (13.10%) | | | |
| 15,942 | | General Growth Properties, Inc. | $ | 656,492 | |
| 61,704 | | Kimco Realty Corp. | | 2,246,026 | |
| 30,500 | | Regency Centers Corp. | | 1,966,945 | |
| 33,000 | | Taubman Centers, Inc. | | 1,623,270 | |
| | | | | 6,492,733 | |
SPECIALIZED REITS – (7.67%) | | | |
| 84,000 | | Ventas, Inc. | | 3,801,000 | |
TRANSPORTATION – (7.55%) | | | |
| 35,700 | | Alexander & Baldwin, Inc. | | 1,842,477 | |
| 22,800 | | Burlington Northern Santa Fe Corp. | | 1,897,644 | |
| | | | | 3,740,121 | |
| | | Total Common Stock – (identified cost $44,161,975) | | 44,326,555 | |
PREFERRED STOCK – (0.17%) |
RESIDENTIAL REITS – (0.17%) | | | |
| 2,000 | | Equity Residential, 7.00%, Series E, Cum. Conv. Pfd. – (identified | | | |
| | | cost $60,342) | | 82,945 | |
CONVERTIBLE BONDS – (6.22%) |
INDUSTRIAL REITS – (3.49%) | | | |
$ | 1,747,000 | | ProLogis, Ser. 144A Conv. Sr. Notes, 2.25%, 4/1/37 (b) | | 1,729,530 | |
OFFICE REITS – (0.18%) | | | |
| 104,000 | | SL Green Realty Corp., Ser. 144A Conv. Sr. Notes, | | | |
| | | 3.00%, 3/30/27 (b) | | 88,400 | |
RETAIL REITS – (2.55%) | | | |
| 1,558,000 | | General Growth Properties, Inc., Ser. 144A Conv. Sr. Notes, | | | |
| | | 3.98%, 4/15/27 (b) | | 1,265,875 | |
| | | | | | |
| | | Total Convertible Bonds – (identified cost $3,353,030) | | 3,083,805 | |
27
DAVIS VARIABLE ACCOUNT FUND, INC.
DAVIS REAL ESTATE PORTFOLIO – (Continued)
December 31, 2007
| | | Value | |
Principal | | Security | (Note 1 | ) |
SHORT TERM INVESTMENTS – (3.23%) |
| | | | | |
$ | 586,000 | | ABN AMRO Inc. Joint Repurchase Agreement, 4.70%, | | | |
| | | 01/02/08, dated 12/31/07, repurchase value of $586,153 | | | |
| | | (collateralized by: U.S. Government agency mortgages and obligations | | | |
| | | in a pooled cash account, 4.125%-7.00%, 02/15/08-05/01/37, | | | |
| | | total market value $597,720) | $ | 586,000 | |
| 508,000 | | Banc of America Securities LLC Joint Repurchase Agreement, 4.50%, | | | |
| | | 01/02/08, dated 12/31/07, repurchase value of $508,127 | | | |
| | | (collateralized by: U.S. Government agency mortgage | | | |
| | | in a pooled cash account, 5.00%, 08/01/33, | | | |
| | | total market value $518,160) | | 508,000 | |
| 156,000 | | Goldman, Sachs & Co. Joint Repurchase Agreement, 4.75%, | | | |
| | | 01/02/08, dated 12/31/07, repurchase value of $156,041 | | | |
| | | (collateralized by: U.S. Government agency mortgages | | | |
| | | in a pooled cash account, 4.00%-9.50%, 12/01/14-12/01/37, | | | |
| | | total market value $159,120) | | 156,000 | |
| 350,000 | | UBS Securities LLC Joint Repurchase Agreement, 4.64%, | | | |
| | | 01/02/08, dated 12/31/07, repurchase value of $350,090 | | | |
| | | (collateralized by: U.S. Government agency mortgages | | | |
| | | in a pooled cash account, 5.00%-8.00%, 07/01/08-11/01/47, | | | |
| | | total market value $357,000) | | 350,000 | |
| | | Total Short Term Investments – (identified cost $1,600,000) | | 1,600,000 | |
| | | Total Investments – (99.08%) – (identified cost $49,175,347) – (a) | | 49,093,305 | |
| | | Other Assets Less Liabilities – (0.92%) | | 454,655 | |
| | | Net Assets – (100%) | $ | 49,547,960 | |
*Non-Income Producing Security.
(a) Aggregate cost for Federal Income Tax purposes is $49,175,398. At December 31, 2007 unrealized appreciation (depreciation) of securities for Federal Income Tax purposes is as follows:
| | | Unrealized appreciation | $ | 3,871,977 | |
| | | Unrealized depreciation | | (3,954,070 | ) |
| | | Net unrealized depreciation | $ | (82,093 | ) |
(b)These securities are subject to Rule 144A. The Board of Directors of the Fund has determined that there is sufficient liquidity in these securities to realize current valuations. These securities amounted to $3,083,805 or 6.22% of the Fund’s net assets, as of December 31, 2007.
See Notes to Financial Statements
28
DAVIS VARIABLE ACCOUNT FUND, INC.
STATEMENTS OF ASSETS AND LIABILITIES
At December 31, 2007
| Davis Value | | Davis Financial | | Davis Real Estate | |
| Portfolio | | Portfolio | | Portfolio | |
ASSETS: | | | | | | | | | |
Investments in securities, at value* (see | | | | | | | | | |
accompanying Schedules of Investments) | $ | 653,281,927 | | $ | 115,967,431 | | $ | 49,093,305 | |
Cash | | 195,333 | | | – | | | 2,550 | |
Receivables: | | | | | | | | | |
Dividends and interest | | 708,008 | | | 75,776 | | | 388,426 | |
Capital stock sold | | 6,198,392 | | | 35,358 | | | 172,692 | |
Investment securities sold | | 483,264 | | | 2,916,416 | | | 30,375 | |
Prepaid expenses | | 7,521 | | | 1,423 | | | 725 | |
Total assets | | 660,874,445 | | | 118,996,404 | | | 49,688,073 | |
| | | | | | | | | |
LIABILITIES: | | | | | | | | | |
Cash overdraft | | – | | | 2,116,301 | | | – | |
Payables: | | | | | | | | | |
Capital stock redeemed | | 1,044,796 | | | 47,240 | | | 80,275 | |
Investment securities purchased | | 617,531 | | | – | | | – | |
Accrued audit fees | | 13,000 | | | 11,200 | | | 11,200 | |
Accrued custodian fees | | 50,860 | | | 12,429 | | | 8,179 | |
Accrued management fees | | 433,978 | | | 77,668 | | | 34,628 | |
Other accrued expenses | | 15,346 | | | 6,266 | | | 5,831 | |
Total liabilities | | 2,175,511 | | | 2,271,104 | | | 140,113 | |
| | | | | | | | | |
NET ASSETS | $ | 658,698,934 | | $ | 116,725,300 | | $ | 49,547,960 | |
| | | | | | | | | |
SHARES OUTSTANDING (NOTE 4) | | 45,505,090 | | | 8,182,387 | | | 4,326,330 | |
| | | | | | | | | |
NET ASSET VALUE, offering, and | | | | | | | | | |
redemption price per share | $ | 14.48 | | $ | 14.27 | | $ | 11.45 | |
| | | | | | | | | |
NET ASSETS CONSIST OF: | | | | | | | | | |
Par value of shares of capital stock | $ | 45,505 | | $ | 8,182 | | $ | 4,326 | |
Additional paid-in capital | | 419,982,209 | | | 84,848,327 | | | 49,106,505 | |
Undistributed net investment income | | 277,201 | | | – | | | 151,050 | |
Accumulated net realized gains from | | | | | | | | | |
investments and foreign currency transactions | | 7,515,586 | | | 3,260,271 | | | 368,124 | |
Net unrealized appreciation (depreciation) on | | | | | | | | | |
investments and foreign currency transactions | | 230,878,433 | | | 28,608,520 | | | (82,045 | ) |
Net Assets | $ | 658,698,934 | | $ | 116,725,300 | | $ | 49,547,960 | |
| | | | | | | | | |
| | | | | | | | | |
* Including cost of | $ | 422,405,333 | | $ | 87,359,051 | | $ | 49,175,347 | |
See Notes to Financial Statements
29
DAVIS VARIABLE ACCOUNT FUND, INC.
STATEMENTS OF OPERATIONS
For the year ended December 31, 2007
| Davis Value | | Davis Financial | | Davis Real Estate | |
| Portfolio | | Portfolio | | Portfolio | |
INVESTMENT INCOME: | | | | | | | | | |
Income: | | | | | | | | | |
Dividends* | $ | 12,927,717 | | $ | 2,337,866 | | $ | 1,797,384 | |
Interest | | 581,778 | | | 243,599 | | | 313,955 | |
Total income | | 13,509,495 | | | 2,581,465 | | | 2,111,339 | |
Expenses: | | | | | | | | | |
Management fees (Note 2) | | 5,281,313 | | | 1,068,776 | | | 567,310 | |
Custodian fees | | 197,939 | | | 50,196 | | | 38,605 | |
Transfer agent fees | | 15,119 | | | 8,841 | | | 7,810 | |
Audit fees | | 19,200 | | | 16,800 | | | 16,800 | |
Accounting fees (Note 2) | | 6,000 | | | 6,000 | | | 6,000 | |
Legal fees | | 15,740 | | | 3,126 | | | 1,593 | |
Reports to shareholders | | 59,323 | | | 19,613 | | | 1,725 | |
Directors’ fees and expenses | | 112,983 | | | 26,726 | | | 16,449 | |
Registration and filing fees | | 1,082 | | | 162 | | | 119 | |
Miscellaneous | | 15,351 | | | 7,725 | | | 6,740 | |
Total expenses | | 5,724,050 | | | 1,207,965 | | | 663,151 | |
Expenses paid indirectly (Note 5) | | (796 | ) | | (1,715 | ) | | (2,492 | ) |
Net expenses | | 5,723,254 | | | 1,206,250 | | | 660,659 | |
Net investment income | | 7,786,241 | | | 1,375,215 | | | 1,450,680 | |
| | | | | | | | | |
REALIZED AND UNREALIZED GAIN | | | | | | | | | |
(LOSS) ON INVESTMENTS: | | | | | | | | | |
Net realized gain (loss) from: | | | | | | | | | |
Investment transactions | | 43,031,156 | | | 10,449,299 | | | 13,885,406 | |
Foreign currency transactions | | (29,210 | ) | | (2,193 | ) | | (398 | ) |
Net change in unrealized appreciation | | | | | | | | | |
(depreciation) on investments and foreign | | | | | | | | | |
currency transactions | | (19,413,272 | ) | | (19,591,174 | ) | | (26,189,367 | ) |
Net realized and unrealized gain (loss) on | | | | | | | | | |
investments and foreign currency | | 23,588,674 | | | (9,144,068 | ) | | (12,304,359 | ) |
Net increase (decrease) in net assets resulting | | | | | | | | | |
from operations | $ | 31,374,915 | | $ | (7,768,853 | ) | $ | (10,853,679 | ) |
| | | | | | | | | |
| | | | | | | | | |
* Net of foreign taxes withheld as follows | $ | 98,520 | | $ | 1,017 | | $ | 1,423 | |
See Notes to Financial Statements
30
DAVIS VARIABLE ACCOUNT FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
For the year ended December 31, 2007
| Davis Value | | Davis Financial | | Davis Real Estate | |
| Portfolio | | Portfolio | | Portfolio | |
OPERATIONS: | | | | | | | | | |
Net investment income | $ | 7,786,241 | | $ | 1,375,215 | | $ | 1,450,680 | |
Net realized gain from investments and foreign | | | | | | | | | |
currency transactions | | 43,001,946 | | | 10,447,106 | | | 13,885,008 | |
Net change in unrealized appreciation | | | | | | | | | |
(depreciation) on investments and foreign | | | | | | | | | |
currency transactions | | (19,413,272 | ) | | (19,591,174 | ) | | (26,189,367 | ) |
Net increase (decrease) in net assets resulting | | | | | | | | | |
from operations | | 31,374,915 | | | (7,768,853 | ) | | (10,853,679 | ) |
| | | | | | | | | |
DIVIDENDS AND DISTRIBUTIONS | | | | | | | | | |
TO SHAREHOLDERS FROM: | | | | | | | | | |
Net investment income | | (7,607,743 | ) | | (1,377,873 | ) | | (2,429,289 | ) |
Realized gains from investment transactions | | (26,368,633 | ) | | (6,877,870 | ) | | (15,952,803 | ) |
| | | | | | | | | |
CAPITAL SHARES TRANSACTIONS | | | | | | | | | |
(NOTE 4) | | (110,527,933 | ) | | (23,057,164 | ) | | (10,954,364 | ) |
| | | | | | | | | |
Total decrease in net assets | | (113,129,394 | ) | | (39,081,760 | ) | | (40,190,135 | ) |
| | | | | | | | | |
NET ASSETS: | | | | | | | | | |
Beginning of year | | 771,828,328 | | | 155,807,060 | | | 89,738,095 | |
End of year* | $ | 658,698,934 | | $ | 116,725,300 | | $ | 49,547,960 | |
| | | | | | | | | |
| | | | | | | | | |
* Including undistributed net investment income of | $ | 277,201 | | $ | – | | $ | 151,050 | |
| | | | | | | | | |
See Notes to Financial Statements
31
DAVIS VARIABLE ACCOUNT FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
For the year ended December 31, 2006
| Davis Value | | Davis Financial | | Davis Real Estate | |
| Portfolio | | Portfolio | | Portfolio | |
OPERATIONS: | | | | | | | | | |
Net investment income | $ | 5,722,122 | | $ | 844,169 | | $ | 1,243,199 | |
Net realized gain from investments and foreign | | | | | | | | | |
currency transactions | | 14,151,661 | | | 2,407,878 | | | 11,308,050 | |
Net increase in unrealized appreciation | | | | | | | | | |
on investments and foreign currency | | | | | | | | | |
transactions | | 80,121,104 | | | 19,346,243 | | | 9,914,836 | |
Net increase in net assets resulting from | | | | | | | | | |
operations | | 99,994,887 | | | 22,598,290 | | | 22,466,085 | |
| | | | | | | | | |
DIVIDENDS AND DISTRIBUTIONS | | | | | | | | | |
TO SHAREHOLDERS FROM: | | | | | | | | | |
Net investment income | | (5,581,446 | ) | | (842,056 | ) | | (2,403,658 | ) |
Realized gains from investment transactions | | – | | | (98,309 | ) | | (8,766,221 | ) |
| | | | | | | | | |
CAPITAL SHARE TRANSACTIONS | | | | | | | | | |
(NOTE 4) | | 57,046,031 | | | 10,089,243 | | | 13,885,472 | |
| | | | | | | | | |
Total increase in net assets | | 151,459,472 | | | 31,747,168 | | | 25,181,678 | |
| | | | | | | | | |
NET ASSETS: | | | | | | | | | |
Beginning of year | | 620,368,856 | | | 124,059,892 | | | 64,556,417 | |
End of year* | $ | 771,828,328 | | $ | 155,807,060 | | $ | 89,738,095 | |
| | | | | | | | | |
* Including undistributed net investment income of | $ | 127,913 | | $ | 779 | | $ | 205,756 | |
| | | | | | | | | |
See Notes to Financial Statements
32
DAVIS VARIABLE ACCOUNT FUND, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Davis Variable Account Fund, Inc. (a Maryland corporation), consists of three series of funds, Davis Value Portfolio, Davis Financial Portfolio, and Davis Real Estate Portfolio (collectively “the Funds”). Davis Value Portfolio and Davis Financial Portfolio are registered under the Investment Company Act of 1940, as amended, as diversified, open-end management investment companies. Davis Real Estate Portfolio is registered under the Investment Company Act of 1940, as amended, as a non-diversified, open-end management investment company. Insurance companies, for the purpose of funding variable annuity or variable life insurance contracts, may only purchase shares of the Funds. The Funds account separately for the assets, liabilities and operations of each series. The following is a summary of significant accounting policies followed by the Funds in the preparation of financial statements.
A. VALUATION OF SECURITIES - The Funds calculate the net asset value of their shares as of the close of the New York Stock Exchange (“Exchange”), normally 4:00 P.M. Eastern time, on each day the Exchange is open for business. Securities listed on the Exchange (and other national exchanges) are valued at the last reported sales price on the day of valuation. Securities traded in the over-the-counter market (e.g. NASDAQ) and listed securities for which no sale was reported on that date are stated at the average of closing bid and asked prices. Securities traded on foreign exchanges are valued based upon the last sales price on the principal exchange on which the security is traded prior to the time when the Funds’ assets are valued. Securities (including restricted securities) for which market quotations are not readily available are valued at their fair value. Foreign and domestic securities whose values have been materially affected by what Davis Advisors, the Funds’ investment adviser (“Adviser”), identifies as a significant event occurring before the Funds’ assets are valued but after the close of their respective exchanges will be fair valued. Fair value is determined in good faith using consistently applied procedures under the supervision of the Board of Directors. Short-term securities purchased within 60 days to maturity are valued at amortized cost, which approximates market value. These valuation procedures are reviewed and subject to approval by the Board of Directors.
B. MASTER REPURCHASE AGREEMENTS - The Funds, along with other affiliated funds, may transfer uninvested cash balances into one or more master repurchase agreement accounts. These balances are invested in one or more repurchase agreements, secured by U.S. Government securities. A custodian bank holds securities pledged as collateral for repurchase agreements until the agreements mature. Each agreement requires that the market value of the collateral be sufficient to cover payments of interest and principal; however, in the event of default by the other party to the agreement, retention of the collateral may be subject to legal proceedings.
C. CURRENCY TRANSLATION - The market values of all assets and liabilities denominated in foreign currencies are recorded in the financial statements after translation to the U.S. Dollar based upon the mean between the bid and offered quotations of the currencies against U.S. Dollars on the date of valuation. The cost basis of such assets and liabilities is determined based upon historical exchange rates. Income and expenses are translated at average exchange rates in effect as accrued or incurred.
33
DAVIS VARIABLE ACCOUNT FUND, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
December 31, 2007
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
D. FOREIGN CURRENCY - The Funds may enter into forward purchases or sales of foreign currencies to hedge certain foreign currency denominated assets and liabilities against declines in market value relative to the U.S. Dollar. Forward currency contracts are marked-to-market daily and the change in market value is recorded by the Funds as an unrealized gain or loss. When the forward currency contract is closed, the Funds record a realized gain or loss equal to the difference between the value of the forward currency contract at the time it was opened and value at the time it was closed. Investments in forward currency contracts may expose the Funds to risks resulting from unanticipated movements in foreign currency exchange rates or failure of the counter-party to the agreement to perform in accordance with the terms of the contract.
Reported net realized foreign exchange gains or losses arise from the sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions, the difference between the amounts of dividends, interest and foreign withholding taxes recorded on the Funds’ books, and the U.S. Dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the value of assets and liabilities other than investments in securities at fiscal year end, resulting from changes in the exchange rate. The Funds include foreign currency gains and losses realized on the sale of investments together with market gains and losses on such investments in the statement of operations.
E. FEDERAL INCOME TAXES - It is each Fund’s policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies, and to distribute substantially all of its taxable income, including any net realized gains on investments not offset by loss carryovers, to shareholders. Therefore, no provision for Federal Income or Excise Tax is required. The Adviser has analyzed the Funds’ tax positions taken on federal income tax returns for all open tax years and has concluded that as of December 31, 2007, no provision for income tax would be required in the Funds’ financial statements. The Funds’ federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue. During the year ended December 31, 2007, Davis Value Portfolio utilized approximately $7,115,000 of capital loss carryforward from prior years. At December 31, 2007, Davis Value Portfolio had no capital loss carryforwards available to offset future gains.
F. USE OF ESTIMATES IN FINANCIAL STATEMENTS - In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of income and expenses during the reporting period. Actual results may differ from these estimates.
G. INDEMNIFICATION - Under the Funds’ organizational documents, its officers and directors are indemnified against certain liabilities arising out of the performance of their duties to the Funds. In addition, some of the Funds’ contracts with its service providers contain general indemnification clauses. The Funds’ maximum exposure under these arrangements is unknown since the amount of any future claims that may be made against the Fund cannot be determined and the Funds have no historical basis for predicting the likelihood of any such claims.
34
DAVIS VARIABLE ACCOUNT FUND, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
December 31, 2007
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
H. SECURITIES TRANSACTIONS AND RELATED INVESTMENT INCOME - Securities transactions are accounted for on the trade date (date the order to buy or sell is executed) with realized gain or loss on the sale of securities being determined based upon identified cost. Dividend income is recorded on the ex-dividend date. Dividend income from REIT securities may include return of capital. Upon notification from the issuer, the amount of the return of capital is reclassified to adjust dividend income, reduce the cost basis, and/or adjust realized gain. Interest income, which includes accretion of discount and amortization of premium, is accrued as earned.
I. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS - Dividends and distributions to shareholders are recorded on the ex-dividend date. Net investment income (loss), net realized gains (losses), and net unrealized appreciation (depreciation) on investments may differ for financial statement and tax purposes primarily due to differing treatments of wash sales, foreign currency transactions, and net operating losses. The character of dividends and distributions made during the fiscal year from net investment income and net realized securities gains may differ from their ultimate characterization for Federal Income Tax purposes. Also, due to the timing of dividends and distributions, the fiscal year in which amounts are distributed may differ from the fiscal year in which income or realized gain was recorded by the Funds. The Funds adjust the classification of distributions to shareholders to reflect the differences between financial statement amounts and distributions determined in accordance with income tax regulations. Accordingly, during the year ended December 31, 2007, for Davis Value Portfolio, amounts have been reclassified to reflect a decrease in undistributed net investment income of $29,210 and a corresponding increase in accumulated net realized gains; for Davis Financial Portfolio, amounts have been reclassified to reflect a decrease in undistributed net investment loss of $1,879 and a corresponding decrease in accumulated net realized gains; for Davis Real Estate Portfolio, amounts have been reclassified to reflect a decrease in undistributed net investment loss of $923,903 and a corresponding decrease in accumulated net realized gains. The Funds’ net assets have not been affected by the reclassifications.
The tax character of distributions paid during the years ended December 31, 2007 and 2006 was as follows:
| Ordinary Income | | Long-Term Capital Gain | | Return of Capital | | Total | |
Davis Value Portfolio | | | | | | | | | | | | |
2007 | $ | 7,607,743 | | $ | 26,368,633 | | $ | – | | $ | 33,976,376 | |
2006 | | 5,581,446 | | | – | | | – | | | 5,581,446 | |
| | | | | | | | | | | | |
Davis Financial Portfolio | | | | | | | | | | | | |
2007 | | 1,710,294 | | | 6,545,449 | | | – | | | 8,255,743 | |
2006 | | 842,056 | | | 98,309 | | | – | | | 940,365 | |
| | | | | | | | | | | | |
Davis Real Estate Portfolio | | | | | | | | | | | | |
2007 | | 1,521,297 | | | 16,860,795 | | | – | | | 18,382,092 | |
2006 | | 1,887,906 | | | 9,281,973 | | | – | | | 11,169,879 | |
35
DAVIS VARIABLE ACCOUNT FUND, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
December 31, 2007
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
I. | DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS - (Continued) |
As of December 31, 2007, the components of distributable earnings (accumulated losses) on a tax basis were as follows:
| DAVIS VALUE PORTFOLIO | | DAVIS FINANCIAL PORTFOLIO | | DAVIS REAL ESTATE PORTFOLIO | |
Undistributed net investment income | $ | 277,201 | | $ | – | | $ | – | |
Accumulated net realized gains from | | | | | | | | | |
investments and foreign currency | | | | | | | | | |
transactions | | 7,809,063 | | | 3,311,553 | | | 368,177 | |
Net unrealized appreciation (depreciation) | | | | | | | | | |
on investments | | 230,584,956 | | | 28,557,238 | | | (82,097 | ) |
Total | $ | 238,671,220 | | $ | 31,868,791 | | $ | 286,080 | |
| | | | | | | | | | |
J. NEW ACCOUNTING PRONOUNCEMENT - In September 2006, FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements. This standard establishes a single authoritative definition of fair value, sets out a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 applies to fair value measurements already required or permitted by existing standards. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal periods. As of December 31, 2007, the Adviser does not believe the adoption of SFAS No. 157 will materially impact the financial statement amounts; however, additional disclosures may be required about the inputs used to develop the measurements and the effect of certain measurements on changes in net assets for the period.
NOTE 2 - INVESTMENT ADVISORY FEES
Advisory fees are paid monthly to the Adviser. The fee for each of the Davis Value Portfolio, Davis Financial Portfolio, and Davis Real Estate Portfolio is 0.75% of the respective Fund’s average net assets.
Boston Financial Data Services, Inc. (“BFDS”) is the Funds’ primary transfer agent. State Street Bank and Trust Company (“State Street Bank”) is the Funds’ primary accounting provider. Fees for such services are included in the custodian fee as State Street Bank also serves as the Funds’ custodian. The Adviser is also paid for certain accounting services. The fee for the year ended December 31, 2007 for Davis Value Portfolio, Davis Financial Portfolio, and Davis Real Estate Portfolio amounted to $6,000 for each fund. Certain directors and officers of the Funds are also directors and officers of the general partner of the Adviser.
Davis Selected Advisers – NY, Inc. (“DSA-NY”), a wholly-owned subsidiary of the Adviser, acts as sub-adviser to the Funds. The Funds pay no fees directly to DSA-NY.
36
DAVIS VARIABLE ACCOUNT FUND, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
December 31, 2007
NOTE 3 - PURCHASES AND SALES OF SECURITIES
Purchases and sales of investment securities (excluding short-term securities) for the year ended December 31, 2007 were as follows:
| DAVIS | | DAVIS | | DAVIS | |
| VALUE | | FINANCIAL | | REAL ESTATE | |
| PORTFOLIO | | PORTFOLIO | | PORTFOLIO | |
Cost of purchases | $ | 64,497,379 | | $ | 22,716,011 | | $ | 35,143,893 | |
Proceeds of sales | $ | 167,158,052 | | $ | 42,342,665 | | $ | 57,748,618 | |
NOTE 4 - CAPITAL STOCK
At December 31, 2007, there were 5 billion shares of capital stock ($0.001 par value per share) authorized. Transactions in capital stock were as follows:
| Year ended December 31, 2007 |
| Davis Value | | Davis Financial | | Davis Real Estate | |
| Portfolio | | Portfolio | | Portfolio | |
Shares sold | | 4,802,313 | | | 950,667 | | | 530,769 | |
Shares issued in reinvestment of distributions | | 2,317,607 | | | 555,626 | | | 1,491,866 | |
| | 7,119,920 | | | 1,506,293 | | | 2,022,635 | |
Shares redeemed | | (14,556,411 | ) | | (2,886,560 | ) | | (2,087,935 | ) |
Net decrease | | (7,436,491 | ) | | (1,380,267 | ) | | (65,300 | ) |
| | | | | | | | | |
Proceeds from shares sold | $ | 73,108,317 | | $ | 15,342,280 | | $ | 10,811,044 | |
Proceeds from shares issued in reinvestment of | | | | | | | | | |
distributions | | 33,976,494 | | | 8,255,743 | | | 18,382,092 | |
| | 107,084,811 | | | 23,598,023 | | | 29,193,136 | |
Cost of shares redeemed | | (217,612,744 | ) | | (46,655,187 | ) | | (40,147,500 | ) |
Net decrease | $ | (110,527,933 | ) | $ | (23,057,164 | ) | $ | (10,954,364 | ) |
| Year ended December 31, 2006 |
| Davis Value | | Davis Financial | | Davis Real Estate | |
| Portfolio | | Portfolio | | Portfolio | |
Shares sold | | 11,945,395 | | | 2,006,880 | | | 919,623 | |
Shares issued in reinvestment of distributions | | 380,703 | | | 57,524 | | | 539,914 | |
| | 12,326,098 | | | 2,064,404 | | | 1,459,537 | |
Shares redeemed | | (7,955,715 | ) | | (1,474,873 | ) | | (793,313 | ) |
Net increase | | 4,370,383 | | | 589,531 | | | 666,224 | |
| | | | | | | | | |
Proceeds from shares sold | $ | 157,592,888 | | $ | 30,212,476 | | $ | 18,459,121 | |
Proceeds from shares issued in reinvestment of | | | | | | | | | |
distributions | | 5,581,115 | | | 940,365 | | | 11,169,879 | |
| | 163,174,003 | | | 31,152,841 | | | 29,629,000 | |
Cost of shares redeemed | | (106,127,972 | ) | | (21,063,598 | ) | | (15,743,528 | ) |
Net increase | $ | 57,046,031 | | $ | 10,089,243 | | $ | 13,885,472 | |
37
DAVIS VARIABLE ACCOUNT FUND, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
December 31, 2007
NOTE 5 - EXPENSES PAID INDIRECTLY
Under an agreement with State Street Bank, custodian fees are reduced for earnings on cash balances maintained at the custodian by the Funds. Such reductions amounted to $796, $1,715, and $2,492 for Davis Value Portfolio, Davis Financial Portfolio, and Davis Real Estate Portfolio, respectively, during the year ended December 31, 2007.
NOTE 6 - BANK BORROWINGS
Each Fund may borrow up to 5% of its assets from a bank to purchase portfolio securities or for temporary and emergency purposes. The purchase of securities with borrowed funds creates leverage in the Fund. Each Fund has entered into an agreement, which enables it to participate with certain other funds managed by the Adviser in an unsecured line of credit with a bank, which permits borrowings up to $50 million, collectively. Interest is charged based on its borrowings, at a rate equal to the overnight Federal Funds Rate plus 0.75%. The Funds had no borrowings outstanding for the year ended December 31, 2007.
NOTE 7 - ILLIQUID AND RESTRICTED SECURITIES
Securities may be considered illiquid if they lack a readily available market or if valuation has not changed for a certain period of time. Restricted securities are not registered under the Securities Act of 1933 and may have contractual restrictions on resale. They are valued under methods approved by the Board of Directors as reflecting fair value. The aggregate value of illiquid and restricted securities in Davis Value Portfolio amounted to $8,672,487 or 1.32% of the Fund’s net assets as of December 31, 2007. The aggregate value of illiquid securities in Davis Financial Portfolio amounted to $5,619,027 or 4.81% of the Fund’s net assets as of December 31, 2007. The aggregate value of restricted securities in Davis Financial Portfolio amounted to $5,160,527 or 4.42% of the Fund’s net assets as of December 31, 2007. Information concerning illiquid and restricted securities is as follows:
Fund | | Security | | Acquisition Date | | Shares | | Cost per Share | | Valuation per Share as of December 31, 2007 |
| | | | | | | | | | | | |
Davis Value Portfolio | | Merrill Lynch & Co., Inc., Private Placement | | 12/24/07 | | 185,700 | | $ | 48.00 | | $ | 46.7016 |
Davis Financial Portfolio | | Merrill Lynch & Co., Inc., Private Placement | | 12/24/07 | | 110,500 | | $ | 48.00 | | $ | 46.7016 |
Davis Financial Portfolio | | Oaktree Capital Group, LLC, Class A | | 05/21/07 | | 14,000 | | $ | 44.00 | | $ | 32.7500 |
38
DAVIS VARIABLE ACCOUNT FUND, INC.
FINANCIAL HIGHLIGHTS
DAVIS VALUE PORTFOLIO
Financial Highlights for a share of capital stock outstanding throughout each period:
| | |
| | |
| Year ended December 31, | |
| 2007 | | 2006 | | 2005 | | 2004 | | 2003 | |
| | | | | | | | | |
| | | | | | | | | | | | | | | |
Net Asset Value, Beginning of Period | $ | 14.58 | | $ | 12.77 | | $ | 11.78 | | $ | 10.57 | | $ | 8.20 | |
| | | | | | | | | | | | | | | |
Income from Investment Operations: | | | | | | | | | | | | | | | |
Net Investment Income | | 0.17 | | | 0.11 | | | 0.12 | | | 0.09 | | | 0.07 | |
Net Realized and Unrealized Gains | | 0.51 | | | 1.81 | | | 0.99 | | | 1.21 | | | 2.37 | |
Total from Investment Operations | | 0.68 | | | 1.92 | | | 1.11 | | | 1.30 | | | 2.44 | |
| | | | | | | | | | | | | | | |
Dividends and Distributions: | | | | | | | | | | | | | | | |
Dividends from Net Investment Income | | (0.17 | ) | | (0.11 | ) | | (0.11 | ) | | (0.09 | ) | | (0.07 | ) |
Distributions from Realized Gains | | (0.61 | ) | | – | | | – | | | – | | | – | |
Return of Capital | | – | | | – | | | – | | | – | 4 | | – | |
Distributions in Excess of Net | | | | | | | | | | | | | | | |
Investment Income | | – | | | – | | | (0.01 | ) | | – | | | – | |
Total Dividends and Distributions | | (0.78 | ) | | (0.11 | ) | | (0.12 | ) | | (0.09 | ) | | (0.07 | ) |
| | | | | | | | | | | | | | | |
Net Asset Value, End of Period | $ | 14.48 | | $ | 14.58 | | $ | 12.77 | | $ | 11.78 | | $ | 10.57 | |
| | | | | | | | | | | | | | | |
Total Return1 | | 4.64% | | | 15.00% | | | 9.44% | | | 12.33% | | | 29.76% | |
| | | | | | | | | | | | | | | |
Ratios/Supplemental Data: | | | | | | | | | | | | | | | |
Net Assets, End of Period | | | | | | | | | | | | | | | |
(000 omitted) | $ | 658,699 | | $ | 771,828 | | $ | 620,369 | | $ | 684,723 | | $ | 485,002 | |
Ratio of Expenses to Average Net Assets: | | | | | | | | | | | | | | | |
Gross | | 0.81% | | | 0.81% | | | 0.81% | | | 0.81% | | | 0.82% | |
Net3 | | 0.81% | | | 0.81% | | | 0.81% | | | 0.81% | | | 0.82% | |
Ratio of Net Investment Income | | | | | | | | | | | | | | | |
to Average Net Assets | | 1.11% | | | 0.83% | | | 0.87% | | | 0.87% | | | 0.90% | |
Portfolio Turnover Rate2 | | 9% | | | 19% | | | 14% | | | 4% | | | 7% | |
1 Assumes hypothetical initial investment on the business day before the first day of the fiscal period, with all dividends and distributions reinvested in additional shares on the reinvestment date, and redemption at the net asset value calculated on the last business day of the fiscal period. Total returns do not reflect charges attributable to your insurance company’s separate account. Inclusion of these charges would reduce the total returns shown.
2 The lesser of purchases or sales of portfolio securities for a period, divided by the monthly average of the market value of portfolio securities owned during the period. Securities with a maturity or expiration date at the time of acquisition of one year or less are excluded from the calculation.
3 The Net ratio of expenses to average net assets reflects the impact, if any, of the reduction of expenses paid indirectly and of certain reimbursements from the Adviser.
4 | Less than $0.005 per share. |
See Notes to Financial Statements
39
DAVIS VARIABLE ACCOUNT FUND, INC.
FINANCIAL HIGHLIGHTS
DAVIS FINANCIAL PORTFOLIO
Financial Highlights for a share of capital stock outstanding throughout each period:
| | |
| | |
| Year ended December 31, | |
| 2007 | | 2006 | | 2005 | | 2004 | | 2003 | |
| | | | | | | | | |
| | | | | | | | | | | | | | | |
Net Asset Value, Beginning of Period | $ | 16.29 | | $ | 13.83 | | $ | 12.82 | | $ | 11.66 | | $ | 8.85 | |
| | | | | | | | | | | | | | | |
Income (Loss) from Investment Operations: | | | | | | | | | | | | | | | |
Net Investment Income | | 0.17 | | | 0.09 | | | 0.07 | | | 0.04 | | | 0.04 | |
Net Realized and Unrealized Gains (Losses) | | (1.12 | ) | | 2.47 | | | 1.00 | | | 1.16 | | | 2.81 | |
Total from Investment Operations | | (0.95 | ) | | 2.56 | | | 1.07 | | | 1.20 | | | 2.85 | |
| | | | | | | | | | | | | | | |
Dividends and Distributions: | | | | | | | | | | | | | | | |
Dividends from Net Investment Income | | (0.17 | ) | | (0.09 | ) | | (0.06 | ) | | (0.04 | ) | | (0.04 | ) |
Distributions from Realized Gains | | (0.90 | ) | | (0.01 | ) | | – | | | – | | | – | |
Total Dividends and | | | | | | | | | | | | | | | |
Distributions | | (1.07 | ) | | (0.10 | ) | | (0.06 | ) | | (0.04 | ) | | (0.04 | ) |
| | | | | | | | | | | | | | | |
Net Asset Value, End of Period | $ | 14.27 | | $ | 16.29 | | $ | 13.83 | | $ | 12.82 | | $ | 11.66 | |
| | | | | | | | | | | | | | | |
Total Return1 | | (6.05)% | | | 18.50% | | | 8.38% | | | 10.32% | | | 32.15% | |
| | | | | | | | | | | | | | | |
Ratios/Supplemental Data: | | | | | | | | | | | | | | | |
Net Assets, End of Period | | | | | | | | | | | | | | | |
(000 omitted) | $ | 116,725 | | $ | 155,807 | | $ | 124,060 | | $ | 109,274 | | $ | 71,179 | |
Ratio of Expenses to Average Net Assets: | | | | | | | | | | | | | | | |
Gross | | 0.85% | | | 0.84% | | | 0.85% | | | 0.85% | | | 0.90% | |
Net3 | | 0.85% | | | 0.84% | | | 0.85% | | | 0.85% | | | 0.90% | |
Ratio of Net Investment Income | | | | | | | | | | | | | | | |
to Average Net Assets | | 0.97% | | | 0.66% | | | 0.52% | | | 0.40% | | | 0.48% | |
Portfolio Turnover Rate2 | | 17% | | | 9% | | | 21% | | | 6% | | | 10% | |
1 Assumes hypothetical initial investment on the business day before the first day of the fiscal period, with all dividends and distributions reinvested in additional shares on the reinvestment date, and redemption at the net asset value calculated on the last business day of the fiscal period. Total returns do not reflect charges attributable to your insurance company’s separate account. Inclusion of these charges would reduce the total returns shown.
2 The lesser of purchases or sales of portfolio securities for a period, divided by the monthly average of the market value of portfolio securities owned during the period. Securities with a maturity or expiration date at the time of acquisition of one year or less are excluded from the calculation.
3 The Net ratio of expenses to average net assets reflects the impact, if any, of the reduction of expenses paid indirectly and of certain reimbursements from the Adviser.
See Notes to Financial Statements
40
DAVIS VARIABLE ACCOUNT FUND, INC.
FINANCIAL HIGHLIGHTS
DAVIS REAL ESTATE PORTFOLIO
Financial Highlights for a share of capital stock outstanding throughout each period:
| | |
| | |
| Year ended December 31, | |
| 2007 | | 2006 | | 2005 | | 2004 | | 2003 | |
| | | | | | | | | |
| | | | | | | | | | | | | | | |
Net Asset Value, Beginning of Period | $ | 20.43 | | $ | 17.33 | | $ | 16.80 | | $ | 13.47 | | $ | 10.49 | |
| | | | | | | | | | | | | | | |
Income (Loss) from Investment Operations: | | | | | | | | | | | | | | | |
Net Investment Income | | 0.42 | ) | | 0.34 | | | 0.30 | | | 0.34 | | | 0.44 | |
Net Realized and Unrealized Gains (Losses) | | (3.40 | ) | | 5.58 | | | 1.86 | | | 4.07 | | | 3.34 | |
Total from Investment Operations | | (2.98 | ) | | 5.92 | | | 2.16 | | | 4.41 | | | 3.78 | |
| | | | | | | | | | | | | | | |
Dividends and Distributions: | | | | | | | | | | | | | | | |
Dividends from Net Investment Income | | (0.64 | ) | | (0.60 | ) | | (0.54 | ) | | (0.48 | ) | | (0.55 | ) |
Distributions from Realized Gains | | (5.36 | ) | | (2.22 | ) | | (1.09 | ) | | (0.60 | ) | | (0.25 | ) |
Total Dividends and Distributions | | (6.00 | ) | | (2.82 | ) | | (1.63 | ) | | (1.08 | ) | | (0.80 | ) |
| | | | | | | | | | | | | | | |
Net Asset Value, End of Period | $ | 11.45 | | $ | 20.43 | | $ | 17.33 | | $ | 16.80 | | $ | 13.47 | |
| | | | | | | | | | | | | | | |
Total Return1 | | (15.48)% | | | 34.37% | | | 13.14% | | | 33.35% | | | 36.79% | |
| | | | | | | | | | | | | | | |
Ratios/Supplemental Data: | | | | | | | | | | | | | | | |
Net Assets, End of Period | | | | | | | | | | | | | | | |
(000 omitted) | $ | 49,548 | | $ | 89,738 | | $ | 64,556 | | $ | 58,279 | | $ | 35,663 | |
Ratio of Expenses to Average Net Assets: | | | | | | | | | | | | | | | |
Gross | | 0.88% | | | 0.86% | | | 0.87% | | | 0.89% | | | 0.98% | |
Net3 | | 0.87% | | | 0.86% | | | 0.87% | | | 0.89% | | | 0.98% | |
Ratio of Net Investment Income | | | | | | | | | | | | | | | |
to Average Net Assets | | 1.92% | | | 1.63% | | | 1.71% | | | 2.30% | | | 3.74% | |
Portfolio Turnover Rate2 | | 49% | | | 38% | | | 28% | | | 32% | | | 22% | |
1 Assumes hypothetical initial investment on the business day before the first day of the fiscal period, with all dividends and distributions reinvested in additional shares on the reinvestment date, and redemption at the net asset value calculated on the last business day of the fiscal period. Total returns do not reflect charges attributable to your insurance company’s separate account. Inclusion of these charges would reduce the total returns shown.
2 The lesser of purchases or sales of portfolio securities for a period, divided by the monthly average of the market value of portfolio securities owned during the period. Securities with a maturity or expiration date at the time of acquisition of one year or less are excluded from the calculation.
3 The Net ratio of expenses to average net assets reflects the impact, if any, of the reduction of expenses paid indirectly and of certain reimbursements from the Adviser.
See Notes to Financial Statements
41
DAVIS VARIABLE ACCOUNT FUND, INC.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
of Davis Variable Account Fund, Inc.:
We have audited the accompanying statements of assets and liabilities of Davis Value Portfolio, Davis Financial Portfolio, and Davis Real Estate Portfolio (comprising the Davis Variable Account Fund, Inc.), including the schedules of investments as of December 31, 2007 and the related statements of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Funds’ management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2007, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Davis Value Portfolio, Davis Financial Portfolio, and Davis Real Estate Portfolio as of December 31, 2007, the results of their operations for the year then ended, the changes in their net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.
KPMG LLP
Denver, Colorado
February 8, 2008
42
DAVIS VARIABLE ACCOUNT FUND, INC.
FUND INFORMATION
Federal Income Tax Information (Unaudited)
During the calendar year ended 2007 the Fund declared and paid long-term capital gain distributions in the amount of $26,368,633.
Income dividends paid by the Fund during the calendar year ended 2007 should be multiplied by 100% to arrive at the net amount eligible for the corporate dividends received deduction.
| Davis Financial Portfolio |
During the calendar year ended 2007 the Fund declared and paid long-term capital gain distributions in the amount of $6,545,449.
Income dividends paid by the Fund during the calendar year ended 2007 should be multiplied by 100% to arrive at the net amount eligible for the corporate dividends-received deduction.
| Davis Real Estate Portfolio |
During the calendar year ended 2007 the Fund declared and paid long-term capital gain distributions in the amount of $16,860,795.
Dividends paid by the Fund during the calendar year ended 2007, which are not designated as capital gain distributions, should be multiplied by 42% to arrive at the net amount eligible for the corporate dividends-received deduction.
Portfolio Proxy Voting Policies and Procedures
The Funds have adopted Portfolio Proxy Voting Policies and Procedures under which the Funds vote proxies relating to securities held by the Funds. A description of the Funds’ Portfolio Proxy Voting Policies and Procedures is available (i) without charge, upon request, by calling the Funds toll-free at 1-800-279-0279, (ii) on the Funds’ website at www.davisfunds.com, and (iii) on the SEC’s website at www.sec.gov.
In addition, the Funds are required to file Form N-PX, with their complete proxy voting record for the 12 months ended June 30th, no later than August 31st of each year. The Funds’ Form N-PX filing is available (i) without charge, upon request, by calling the Funds toll-free at 1-800-279-0279, (ii) on the Funds’ website at www.davisfunds.com, and (iii) on the SEC’s website at www.sec.gov.
Form N-Q
The Funds file their complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The Funds’ Form N-Q is available without charge, upon request by calling 1-800-279-0279, or on the Funds’ website at www.davisfunds.com, or on the SEC’s website at www.sec.gov. The Funds’ Form N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington, DC, and that information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
43
DAVIS VARIABLE ACCOUNT FUND, INC.
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
DIRECTORS
For the purposes of their service as directors to the Davis Funds, the business address for each of the directors is 2949 E. Elvira Road, Suite 101, Tucson, AZ 85706. Each Director serves until their retirement, resignation, death or removal. Subject to exceptions and exemptions, which may be granted by the Independent Directors, Directors must retire at the close of business on the last day of the calendar year in which the Director attains age seventy-four (74).
| | | | Number of | |
| | Term of | | Portfolios in | |
| | Office and | | Fund | |
| Position(s) | Length of | | Complex | |
Name | Held With | Time | Principal Occupation(s) | Overseen by | Other Directorships |
(birthdate) | Fund | Served | During Past Five Years | Director | Held by Director |
Independent Directors
| | | | | |
Marc P. Blum (9/9/42) | Director | Director since 1986 | Chief Executive Officer, World Total Return Fund, LLLP; of Counsel to Gordon, Feinblatt, Rothman, Hoffberger and Hollander, LLC (law firm). | 13 | Director, Legg Mason Investment Counsel & Trust Company, N.A. (asset management company) and Rodney Trust Company (Delaware). |
| | | | | |
John S. Gates, Jr. (8/2/53) | Director | Director since 2007 | Chairman and Chief Executive Officer of PortaeCo LLC, a private investment company (beginning in 2006); Co-founder of Centerpoint Properties Trust (REIT) and former Co-chairman and Chief Executive Officer for the last 22 years (until 2006). | 13 | Director, DCT Industrial Trust (a REIT). |
| | | | | |
Thomas S. Gayner (12/16/61) | Director | Director since 2004 | Executive Vice President and Chief Investment Officer, Markel Corporation (insurance company). | 13 | Director, First Market Bank; Director, Washington Post Co. (newspaper publisher). |
| | | | | |
Jerry D. Geist (5/23/34) | Director | Director since 1986 | Chairman, Santa Fe Center Enterprises (energy project development). | 13 | Director, CH2M-Hill, Inc. (engineering); Member, Investment Committee for Microgeneration Technology Fund; UTECH Funds. |
44
DAVIS VARIABLE ACCOUNT FUND, INC.
2949 East Elvira Road, Suite 101
DIRECTORS – (Continued)
| | | | Number of | |
| | Term of | | Portfolios in | |
| | Office and | | Fund | |
| Position(s) | Length of | | Complex | |
Name | Held With | Time | Principal Occupation(s) | Overseen by | Other Directorships |
(birthdate) | Fund | Served | During Past Five Years | Director | Held by Director |
Independent Directors – (Continued)
| | | | | |
G. Bernard Hamilton (3/18/37) | Director | Director since 1978 | Managing General Partner, Avanti Partners, L.P. (investment partnership), retired 2005. | 13 | none |
| | | | | |
Samuel H. Iapalucci (7/19/52) | Director | Director since 2006 | Executive Vice President and Chief Financial Officer, CH2M-Hill, Inc., (engineering). | 13 | none |
| | | | | |
Robert P. Morgenthau (3/22/57) | Director | Director since 2002 | Chairman, NorthRoad Capital Management, LLC (an investment management firm) since June 2002. | 13 | none |
| | | | | |
Christian R. Sonne (5/6/36) | Director | Director since 1990 | General Partner, Tuxedo Park Associates (land holding and development firm). | 13 | none |
| | | | | |
Marsha Williams (3/28/51) | Director | Director since 1999 | Senior Vice President and Chief Financial Officer, Orbitz Worldwide, Inc. (travel-service provider); former Executive Vice President and Chief Financial Officer, Equity Office Properties Trust (a real estate investment trust). | 16 | Director, the Selected Funds (consisting of three portfolios) since 1996; Director, Modine Manufacturing, Inc. (heat transfer technology); Director, Chicago Bridge & Iron Company, N.V. (industrial construction and engineering). |
45
DAVIS VARIABLE ACCOUNT FUND, INC.
2949 East Elvira Road, Suite 101
DIRECTORS – (Continued)
| | | | Number of | |
| | Term of | | Portfolios in | |
| | Office and | | Fund | |
| Position(s) | Length of | | Complex | |
Name | Held With | Time | Principal Occupation(s) | Overseen by | Other Directorships |
(birthdate) | Fund | Served | During Past Five Years | Director | Held by Director |
Inside Directors*
| | | | | |
Jeremy H. Biggs (8/16/35) | Director/ Chairman | Director since 1994 | Vice Chairman, Member of the Audit Committee and Member of the International Investment Committee, former Chief Investment Officer (1980 through 2005), all for Fiduciary Trust Company International (money management firm); Consultant to Davis Selected Advisers, L.P. | 13 | none |
| | | | | |
Andrew A. Davis (6/25/63) | Director | Director since 1997 | President or Vice President of each Davis Fund and Selected Fund; President, Davis Selected Advisers, L.P., and also serves as an executive officer in certain companies affiliated with the Adviser. | 16 | Director, the Selected Funds (consisting of three portfolios) since 1998. |
| | | | | |
Christopher C. Davis (7/13/65) | Director | Director since 1997 | President or Vice President of each Davis Fund, Selected Fund, and Clipper Fund; Chairman, Davis Selected Advisers, L.P., and also serves as an executive officer in certain companies affiliated with the Adviser, including sole Member of the Adviser’s general partner, Davis Investments, LLC; Employee of Shelby Cullom Davis & Co. (registered broker/dealer). | 16 | Director, the Selected Funds (consisting of three portfolios) since 1998; Director, Washington Post Co. (newspaper publisher). |
* Jeremy H. Biggs, Andrew A. Davis, and Christopher C. Davis own partnership units (directly, indirectly, or both) of the Adviser and are considered to be “interested persons” of the Funds as defined in the Investment Company Act of 1940. Andrew A. Davis and Christopher C. Davis are brothers.
46
DAVIS VARIABLE ACCOUNT FUND, INC.
2949 East Elvira Road, Tucson, Arizona 85706
| Directors | Officers |
| Jeremy H. Biggs | Jeremy H. Biggs |
| Marc P. Blum | Chairman |
| Andrew A. Davis | Christopher C. Davis |
| Christopher C. Davis | President – Davis Value Portfolio, Davis Financial |
| John S. Gates, Jr. | Portfolio, & Vice President – Davis Real Estate Portfolio |
| Thomas S. Gayner | Andrew A. Davis |
| Jerry D. Geist | President – Davis Real Estate Portfolio, |
| G. Bernard Hamilton | Vice President – Davis Value Portfolio, Davis Financial |
| Samuel H. Iapalucci | Portfolio |
| Robert P. Morgenthau | Kenneth C. Eich |
| Christian R. Sonne | Executive Vice President & Principal |
| Marsha Williams | Executive Officer |
| | Sharra L. Haynes |
| | Vice President & Chief Compliance Officer |
| | Douglas A. Haines |
| | Vice President & Principal Accounting Officer |
| Thomas D. Tays |
| Vice President & Secretary |
| |
Investment Adviser | |
Davis Selected Advisers, L.P. (Doing business as “Davis Advisors”) | |
2949 East Elvira Road, Suite 101 | |
Tucson, Arizona 85706 | |
(800) 279-0279 | |
| |
Distributor | |
Davis Distributors, LLC | |
2949 East Elvira Road, Suite 101 | |
Tucson, Arizona 85706 | |
| |
Transfer Agent | |
Boston Financial Data Services, Inc. | |
c/o The Davis Funds | |
P.O. Box 8406 | |
Boston, Massachusetts 02266-8406 | |
| |
Custodian | |
State Street Bank and Trust Co. | |
One Lincoln Street | |
Boston, Massachusetts 02111 | |
| |
Counsel | |
Seyfarth Shaw LLP | |
131 South Dearborn Street, Suite 2400 | |
Chicago, Illinois 60603-5577 | |
| |
Independent Registered Public Accounting Firm | |
KPMG LLP | |
707 Seventeenth Street, Suite 2700 | |
Denver, Colorado 80202 | |
| | | |
For more information about Davis Variable Account Fund, Inc. including management fee, charges and expenses, see the current prospectus, which must precede or accompany this report. The Funds’ Statement of Additional Information contains additional information about the Funds’ Directors and is available without charge upon request by calling 1-800-279-0279, or on the Funds’ website at www.davisfunds.com. Quarterly Fact sheets are available on the Funds’ website at www.davisfunds.com.
47
Table of Contents
Management’s Discussion and Analysis | 2 |
| |
Fund Overview | 5 |
| |
Fund Performance | 7 |
| |
Schedule of Investments | 9 |
| |
Statement of Assets and Liabilities | 14 |
| |
Statement of Operations | 15 |
| |
Statements of Changes in Net Assets | 16 |
| |
Notes to Financial Statements | 17 |
| |
Financial Highlights | 22 |
| |
Report of Independent Registered Public Accounting Firm | 23 |
| |
Fund Information | 24 |
| |
Directors and Officers | 25 |
| |
DAVIS VALUE PORTFOLIO
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
Management’s Discussion and Analysis
Davis Value Portfolio
Davis Value Portfolio delivered a total return on net asset value of 4.64% for the year ended December 31, 20071. Over the same time period, the Standard & Poor’s 500® Index2 (“Index”) returned 5.49%. Eight of the ten sectors3 within the Index had positive returns, with financial and consumer discretionary companies turning in negative returns. The sectors that turned in the strongest performance were energy, materials, and utilities.
Key Contributors to Performance
The energy sector was the top-performing group of the Index. Energy companies were also the most important contributors4 to the Portfolio’s performance over the year. The Portfolio’s energy companies out-performed the corresponding sector within the Index (up 47% versus 34% for the Index) and the Portfolio also benefited from a higher relative average weighting in this sector (13% versus 11% for the Index). Occidental Petroleum5, ConocoPhillips, China Coal Energy, EOG Resources, Devon Energy, and Transocean were among the top contributors to performance.
The Portfolio made a significant investment in consumer staple companies and they were the second most important contributors to performance. The Portfolio’s consumer staple companies out-performed the sector within the Index (up 22% versus 14% for the Index) and the Portfolio also benefited from a higher relative weighting in this sector (15% versus 10% for the Index). Costco Wholesale and Altria were among the top contributors to performance.
The Portfolio managers have identified a number of investment opportunities in foreign companies. The Portfolio ended the period with approximately 13% of its assets invested in foreign companies. As a group, the foreign companies owned by the Portfolio out-performed the Index over the period.
Key Detractors from Performance
Key detractors from the Portfolio’s performance relative to the Index over the year were that the Portfolio had a higher weighting in financial companies (37% versus 21% for the Index), which was a poorly performing sector, a lower weighting in technology companies (6% versus 16% for the Index), which was a strongly performing sector, and poor stock selection among material companies.
The financial sector was the worst performing sector of the Index. The Portfolio’s financial companies out-performed the corresponding sector within the Index (down 8% versus down 19% for the Index), but were still the largest detractors from performance. A higher relative average weighting in this sector detracted from both absolute and relative performance. While Berkshire Hathaway was among the top contributors to performance, Citigroup, American International Group, Wachovia, American Express, Moody’s, and Ambac Financial Group were among the top detractors from performance.
The weak performance of the Portfolio’s consumer discretionary companies (down 16% versus down 13% for the Index), along with a higher relative average weighting in this sector (12% versus 10% for the Index) detracted from both absolute and relative performance. While Amazon.com was among the top contributors to performance, Comcast and Harley-Davidson were among the top detractors from performance.
2
DAVIS VALUE PORTFOLIO
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
Management’s Discussion and Analysis – (Continued)
This Annual Report is authorized for use by existing shareholders. Prospective shareholders must receive a current Davis Value Portfolio prospectus, which contains more information about investment strategies, risks, charges, and expenses. Please read the prospectus carefully before investing or sending money.
Davis Value Portfolio’s investment objective is long-term growth of capital. There can be no assurance that the Portfolio will achieve its objective. The primary risks of an investment in Davis Value Portfolio are: (1) market risk, (2) company risk, (3) financial services risk, (4) foreign country risk, (5) headline risk, and (6) selection risk. See the prospectus for a full description of each risk.
1 Total return assumes reinvestment of dividends and capital gain distributions. Past performance is not a guarantee of future results. Investment return and principal value will vary, so that when redeemed, an investor’s shares may be worth more or less than when purchased. The annual gross operating expense ratio for the year ended December 31, 2007 was 0.81%. The following table lists the average annual total returns for the periods ended December 31, 2007.
| | | PORTFOLIO'S |
| | | INCEPTION |
| 1-YEAR | 5-YEAR | (July 1, 1999) |
Davis Value Portfolio | 4.64% | 13.93% | 5.81% |
Standard & Poor’s 500® Index | 5.49% | 12.82% | 2.38% |
Portfolio performance numbers are net of all portfolio operating expenses, but do not include any insurance charges imposed by your insurance company’s separate account. If performance information included the effect of these additional charges, the total return would be lower.
Portfolio performance changes over time and current performance may be higher or lower than stated. The annual operating expense ratio may vary in future years. For more current information please call Davis Funds Investor Services at 1-800-279-0279.
2 The S&P 500® Index is an unmanaged index of 500 selected common stocks, most of which are listed on the New York Stock Exchange. The Index is adjusted for dividends, weighted towards stocks with large market capitalizations, and represents approximately two-thirds of the total market value of all domestic common stocks. Investments cannot be made directly in the Index.
3 The companies included in the S&P 500® Index are divided into ten sectors. One or more industry groups make up a sector.
4 A company’s or sector’s contribution to the Portfolio’s performance is a product both of its appreciation or depreciation and its weighting within the portfolio. For example, a 5% holding that rises 20% has twice as much impact as a 1% holding that rises 50%.
3
DAVIS VALUE PORTFOLIO
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
Management’s Discussion and Analysis – (Continued)
5 This Management Discussion & Analysis discusses a number of individual companies. The information provided in this report does not provide information reasonably sufficient upon which to base an investment decision and should not be considered a recommendation to purchase or sell any particular security. The Schedule of Investments lists the Portfolio’s holdings of each company discussed.
Shares of the Davis Value Portfolio are not deposits or obligations of any bank, are not guaranteed by any bank, are not insured by the FDIC or any other agency, and involve investment risks, including possible loss of the principal amount invested.
4
DAVIS VALUE PORTFOLIO
FUND OVERVIEW
At December 31, 2007
Portfolio Composition | | Sector Weightings |
(% of Fund’s Net Assets) | | (% of Long Term Portfolio) |
| | | | | |
| | | | Fund | S&P 500® |
Common Stock (U.S.) | 85.30% | | Energy | 16.31% | 12.86% |
Common Stock (Foreign) | 13.14% | | Insurance | 15.69% | 4.31% |
Convertible Bonds | 0.28% | | Diversified Financials | 13.47% | 8.55% |
Short Term Investments | 0.46% | | Technology | 8.89% | 16.78% |
Other Assets & Liabilities | 0.82% | | Food & Staples Retailing | 7.71% | 2.37% |
| 100.00% | | Food, Beverage & Tobacco | 6.37% | 5.31% |
| | | Media | 5.67% | 2.81% |
| | | Banks | 4.63% | 3.69% |
| | | Materials | 4.12% | 3.33% |
| | | Health Care | 4.02% | 11.97% |
| | | Transportation | 2.97% | 1.77% |
| | | Other | 2.26% | 7.63% |
| | | Retailing | 2.15% | 2.63% |
| | | Household & Personal Products | 1.62% | 2.55% |
| | | Telecommunication Services | 1.56% | 3.63% |
| | | Capital Goods | 1.30% | 9.28% |
| | | Automobiles & Components | 1.26% | 0.53% |
| | | | 100.00% | 100.00% |
Top 10 Holdings
| | % of Fund’s |
Security | Industry | Net Assets |
Costco Wholesale Corp. | Food & Staples Retailing | 4.63% |
ConocoPhillips | Energy | 4.58% |
American Express Co. | Consumer Finance | 3.95% |
Berkshire Hathaway Inc., Class A | Property & Casualty Insurance | 3.87% |
Altria Group, Inc. | Food, Beverage & Tobacco | 3.63% |
American International Group, Inc. | Multi-Line Insurance | 3.51% |
JPMorgan Chase & Co. | Diversified Financial Services | 3.48% |
Occidental Petroleum Corp. | Energy | 3.13% |
Devon Energy Corp. | Energy | 2.63% |
Microsoft Corp. | Software & Services | 2.47% |
5
DAVIS VALUE PORTFOLIO
FUND OVERVIEW - (Continued)
January 1, 2007 through December 31, 2007
New Positions Added (01/01/07 - 12/31/07) |
(Highlighted positions are those greater than 0.50% of 12/31/07 total net assets)
| | | % of 12/31/07 |
| | Date of 1st | Fund |
Security | Industry | Purchase | Net Assets |
Agilent Technologies, Inc. | Technology Hardware & Equipment | 03/26/07 | 0.58% |
China Shipping Development Co. Ltd. - H | Transportation | 07/19/07 | 0.33% |
E*TRADE Financial Corp. | Capital Markets | 02/15/07 | 0.02% |
Google Inc., Class A | Software & Services | 06/27/07 | 0.56% |
Grupo Televisa S.A., ADR | Media | 10/02/07 | 0.36% |
Hang Lung Group Ltd. | Real Estate | 04/30/07 | 0.38% |
MBIA Inc. | Property & Casualty Insurance | 12/07/07 | 0.13% |
Merrill Lynch & Co., Inc., Private Placement | Capital Markets | 12/24/07 | 1.32% |
Millea Holdings, Inc. | Property & Casualty Insurance | 03/27/07 | 0.87% |
NIPPONKOA Insurance Co., Ltd. | Property & Casualty Insurance | 06/01/07 | 0.51% |
Sino-Forest Corp. | Materials | 09/05/07 | 0.29% |
Texas Instruments Inc. | Semiconductors & Semiconductor Equipment | 09/12/07 | 0.67% |
Toll Holdings Ltd. | Transportation | 05/01/07 | 0.15% |
| | | |
Positions Closed (01/01/07 - 12/31/07) |
(Gains and losses greater than $500,000 are highlighted)
| | Date of | Realized |
Security | Industry | Final Sale | Gain (Loss) |
Apollo Group, Inc., Class A | Consumer Services | 07/06/07 | $ | 218,852 | |
Chubb Corp. | Property & Casualty Insurance | 11/09/07 | | 722,231 | |
Expedia, Inc. | Retailing | 11/13/07 | | 483,102 | |
Gannett Co., Inc. | Media | 12/17/07 | | (722,896 | ) |
IAC/InterActiveCorp | Retailing | 09/25/07 | | 153,547 | |
Kraft Foods Inc., Class A | Food, Beverage & Tobacco | 05/31/07 | | 4,516,490 | |
Nokia Oyj, ADR | Technology Hardware & Equipment | 09/18/07 | | 1,454,243 | |
| | | | | |
6
DAVIS VALUE PORTFOLIO
FUND PERFORMANCE
Average Annual Total Return | | Expense Example | | | |
for the periods ended December 31, 2007 | | | Beginning | Ending | Expenses Paid |
| | | Account Value | Account Value | During Period* |
One-Year | 4.64% | | (07/01/07) | (12/31/07) | (07/01/07-12/31/07) |
Five-Year | 13.93% | Actual | $1,000.00 | $976.70 | $4.09 |
Life of Fund (July 1, 1999 through | | Hypothetical (5% return | | | |
December 31, 2007) | 5.81% | before expenses) | $1,000.00 | $1,021.07 | $4.18 |
*Expenses are equal to the Fund’s annualized expense ratio (0.82%), multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). The expense ratio reflects the impact, if any, of the reduction of expenses paid indirectly and of certain reimbursements from the adviser. See Notes to Performance on page 8 for a description of the “Expense Example”.
$10,000 invested at commencement of operations. Let’s say you invested $10,000 in Davis Value Portfolio on July 1, 1999 (commencement of operations). As the chart below shows, by December 31, 2007 the value of your investment would have grown to $16,159 – a 61.59% increase on your initial investment. For comparison, look at how the Standard & Poor’s 500® Stock Index did over the same period. With dividends reinvested, the same $10,000 investment would have grown to $12,214 – a 22.14% increase.
The Standard & Poor’s 500® Stock Index is an unmanaged index of 500 selected common stocks, most of which are listed on the New York Stock Exchange. The Index is adjusted for dividends, weighted towards stocks with large market capitalizations, and represents approximately two-thirds of the total market value of all domestic common stocks.
The performance data for Davis Value Portfolio contained in this report represents past performance and assumes that all distributions were reinvested, and should not be considered as an indication of future performance from an investment in the Fund today. The investment return and principal value will fluctuate so that shares may be worth more or less than their original cost when redeemed.
7
DAVIS VALUE PORTFOLIO
NOTES TO PERFORMANCE
The following disclosure provides important information regarding the Fund’s Expense Example, which appears in the Fund’s Performance section of this Annual Report. Please refer to this information when reviewing the Expense Example for the Fund.
Example
As a shareholder of the Fund, you incur ongoing costs only, including advisory and administrative fees and other Fund expenses. The Expense Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Expense Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period indicated, which for the Fund is from 07/01/07 to 12/31/07. Please note that the Expense Example is general and does not reflect charges imposed by your insurance company’s separate account or account specific costs, which may increase your total costs of investing in the Fund. If these charges or account specific costs were included in the Expense Example, the expenses would have been higher.
Actual Expenses
The information represented in the row entitled “Actual” provides information about actual account values and actual expenses. You may use the information in this row, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then, multiply the result by the number under the heading “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The information represented in the row entitled “Hypothetical” provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only. Therefore, the information in the row entitled “Hypothetical” is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds.
8
DAVIS VALUE PORTFOLIO
December 31, 2007
| | Value | |
Shares | Security | (Note 1 | ) |
COMMON STOCK – (98.44%) |
AUTOMOBILES & COMPONENTS – (1.24%) | | | |
| 175,400 | | Harley-Davidson, Inc. | $ | 8,192,934 | |
CAPITAL GOODS – (1.29%) | | | |
| 214,114 | | Tyco International Ltd. | | 8,489,620 | |
CAPITAL MARKETS – (4.30%) | | | |
| 118,070 | | Ameriprise Financial, Inc. | | 6,506,838 | |
| 178,700 | | Bank of New York Mellon Corp. | | 8,713,412 | |
| 37,470 | | E*TRADE Financial Corp.* | | 131,707 | |
| 185,700 | | Merrill Lynch & Co., Inc., Private Placement (b) | | 8,672,487 | |
| 54,650 | | Morgan Stanley | | 2,902,461 | |
| 17,330 | | State Street Corp. | | 1,407,196 | |
| | | | | 28,334,101 | |
COMMERCIAL BANKS – (4.58%) | | | |
| 102,770 | | Commerce Bancorp, Inc. | | 3,919,648 | |
| 195,260 | | HSBC Holdings PLC (United Kingdom) | | 3,272,725 | |
| 259,744 | | Wachovia Corp. | | 9,878,064 | |
| 432,900 | | Wells Fargo & Co. | | 13,069,251 | |
| | | | | 30,139,688 | |
COMMERCIAL SERVICES & SUPPLIES – (0.88%) | | | |
| 65,400 | | D&B Corp. | | 5,796,402 | |
CONSUMER DURABLES & APPAREL – (0.20%) | | | |
| 17,799 | | Hunter Douglas NV (Netherlands) | | 1,318,847 | |
CONSUMER FINANCE – (4.01%) | | | |
| 499,850 | | American Express Co. | | 26,002,197 | |
| 27,350 | | Discover Financial Services | | 412,438 | |
| | | | | 26,414,635 | |
CONSUMER SERVICES – (0.77%) | | | |
| 273,940 | | H&R Block, Inc. | | 5,087,066 | |
DIVERSIFIED FINANCIAL SERVICES – (4.98%) | | | |
| 193,043 | | Citigroup Inc. | | 5,683,186 | |
| 525,048 | | JPMorgan Chase & Co. | | 22,918,345 | |
| 118,200 | | Moody’s Corp. | | 4,219,740 | |
| | | | | 32,821,271 | |
ENERGY – (16.10%) | | | |
| 114,200 | | Canadian Natural Resources Ltd. (Canada) | | 8,352,588 | |
| 2,659,900 | | China Coal Energy Co. - H (China) | | 8,374,656 | |
| 341,522 | | ConocoPhillips | | 30,156,393 | |
| 194,870 | | Devon Energy Corp. | | 17,325,892 | |
| 166,820 | | EOG Resources, Inc. | | 14,888,685 | |
9
DAVIS VALUE PORTFOLIO
SCHEDULE OF INVESTMENTS – (Continued) |
December 31, 2007
| | Value | |
Shares | Security | (Note 1 | ) |
COMMON STOCK – (Continued) |
ENERGY – (Continued) | | | |
| 267,800 | | Occidental Petroleum Corp. | $ | 20,617,922 | |
| 44,144 | | Transocean Inc.* | | 6,319,214 | |
| | | | | 106,035,350 | |
FOOD & STAPLES RETAILING – (7.61%) | | | |
| 436,600 | | Costco Wholesale Corp. | | 30,479,046 | |
| 230,971 | | CVS Caremark Corp. | | 9,181,097 | |
| 220,200 | | Wal-Mart Stores, Inc. | | 10,466,106 | |
| | | | | 50,126,249 | |
FOOD, BEVERAGE & TOBACCO – (6.28%) | | | |
| 316,400 | | Altria Group, Inc. | | 23,913,512 | |
| 102,900 | | Diageo PLC, ADR (United Kingdom) | | 8,831,907 | |
| 133,806 | | Heineken Holding NV (Netherlands) | | 7,576,793 | |
| 27,300 | | Hershey Co. | | 1,075,620 | |
| | | | | 41,397,832 | |
HEALTH CARE EQUIPMENT & SERVICES – (3.97%) | | | |
| 84,900 | | Cardinal Health, Inc. | | 4,902,975 | |
| 213,414 | | Covidien Ltd. | | 9,452,106 | |
| 64,580 | | Express Scripts, Inc.* | | 4,707,882 | |
| 121,200 | | UnitedHealth Group Inc. | | 7,053,840 | |
| | | | | 26,116,803 | |
HOUSEHOLD & PERSONAL PRODUCTS – (1.60%) | | | |
| 72,500 | | Avon Products, Inc. | | 2,865,925 | |
| 104,100 | | Procter & Gamble Co. | | 7,643,022 | |
| | | | | 10,508,947 | |
INSURANCE BROKERS – (0.62%) | | | |
| 85,400 | | Aon Corp. | | 4,072,726 | |
LIFE & HEALTH INSURANCE – (0.54%) | | | |
| 34,680 | | Principal Financial Group, Inc. | | 2,387,371 | |
| 21,100 | | Sun Life Financial Inc. (Canada) | | 1,180,334 | |
| | | | | 3,567,705 | |
MATERIALS – (4.07%) | | | |
| 71,300 | | BHP Billiton PLC (United Kingdom) | | 2,194,235 | |
| 49,180 | | Martin Marietta Materials, Inc. | | 6,521,268 | |
| 25,800 | | Rio Tinto PLC (United Kingdom) | | 2,730,678 | |
| 414,010 | | Sealed Air Corp. | | 9,580,191 | |
| 87,300 | | Sino-Forest Corp.* (Canada) | | 1,896,461 | |
| 48,790 | | Vulcan Materials Co. | | 3,858,801 | |
| | | | | 26,781,634 | |
10
DAVIS VALUE PORTFOLIO
SCHEDULE OF INVESTMENTS – (Continued)
December 31, 2007
| | Value | |
Shares | Security | (Note 1 | ) |
COMMON STOCK – (Continued) |
MEDIA – (5.59%) | | | |
| 747,581 | | Comcast Corp., Special Class A* | $ | 13,568,595 | |
| 99,800 | | Grupo Televisa S.A., ADR (Mexico) | | 2,372,246 | |
| 50,500 | | Lagardere S.C.A. (France) | | 3,786,922 | |
| 18,290 | | Liberty Media Corp. - Capital, Series A* | | 2,134,717 | |
| 494,300 | | News Corp., Class A | | 10,128,207 | |
| 114,682 | | Virgin Media Inc. | | 1,961,636 | |
| 45,100 | | WPP Group PLC, ADR (United Kingdom) | | 2,899,704 | |
| | | | | 36,852,027 | |
MULTI-LINE INSURANCE – (5.87%) | | | |
| 396,997 | | American International Group, Inc. | | 23,144,925 | |
| 308,000 | | Loews Corp. | | 15,504,720 | |
| | | | | 38,649,645 | |
PROPERTY & CASUALTY INSURANCE – (7.47%) | | | |
| 52,440 | | Ambac Financial Group, Inc. | | 1,351,379 | |
| 180 | | Berkshire Hathaway Inc., Class A* | | 25,488,000 | |
| 331 | | Berkshire Hathaway Inc., Class B* | | 1,567,616 | |
| 1,150 | | Markel Corp.* | | 564,765 | |
| 46,800 | | MBIA Inc. | | 871,884 | |
| 170,100 | | Millea Holdings, Inc. (Japan) | | 5,740,294 | |
| 366,100 | | NIPPONKOA Insurance Co., Ltd. (Japan) | | 3,332,799 | |
| 537,600 | | Progressive Corp. (Ohio) | | 10,300,416 | |
| | | | | 49,217,153 | |
REAL ESTATE – (0.38%) | | | |
| 457,000 | | Hang Lung Group Ltd. (Hong Kong) | | 2,511,408 | |
REINSURANCE – (0.99%) | | | |
| 89,977 | | Transatlantic Holdings, Inc. | | 6,538,629 | |
RETAILING – (2.12%) | | | |
| 23,700 | | Amazon.com, Inc.* | | 2,197,227 | |
| 107,100 | | Bed Bath & Beyond Inc.* | | 3,148,204 | |
| 191,700 | | CarMax, Inc.* | | 3,786,075 | |
| 91,150 | | Liberty Media Corp. - Interactive, Series A* | | 1,739,598 | |
| 97,470 | | Lowe’s Cos, Inc. | | 2,204,771 | |
| 8,900 | | Sears Holdings Corp.* | | 908,957 | |
| | | | | 13,984,832 | |
11
DAVIS VALUE PORTFOLIO
SCHEDULE OF INVESTMENTS – (Continued)
December 31, 2007
| | Value | |
Shares/Principal | Security | (Note 1 | ) |
COMMON STOCK – (Continued) |
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT – (0.67%) | | | |
| 133,000 | | Texas Instruments Inc. | $ | 4,442,200 | |
SOFTWARE & SERVICES – (4.62%) | | | |
| 5,380 | | Google Inc., Class A* | | 3,719,813 | |
| 281,499 | | Iron Mountain Inc.* | | 10,421,093 | |
| 457,630 | | Microsoft Corp. | | 16,289,340 | |
| | | | | 30,430,246 | |
TECHNOLOGY HARDWARE & EQUIPMENT – (3.48%) | | | |
| 104,850 | | Agilent Technologies, Inc.* | | 3,852,189 | |
| 265,400 | | Dell Inc.* | | 6,508,935 | |
| 96,970 | | Hewlett-Packard Co. | | 4,895,046 | |
| 206,214 | | Tyco Electronics Ltd. | | 7,656,726 | |
| | | | | 22,912,896 | |
TELECOMMUNICATION SERVICES – (1.27%) | | | |
| 121,650 | | SK Telecom Co., Ltd., ADR (South Korea) | | 3,630,036 | |
| 359,400 | | Sprint Nextel Corp. | | 4,718,922 | |
| | | | | 8,348,958 | |
TRANSPORTATION – (2.94%) | | | |
| 71,600 | | Asciano Group (Australia) | | 440,079 | |
| 1,240,900 | | China Merchants Holdings International Co., Ltd. (China) | | 7,734,340 | |
| 824,000 | | China Shipping Development Co. Ltd. - H (China) | | 2,176,931 | |
| 939,200 | | Cosco Pacific Ltd. (China) | | 2,481,278 | |
| 29,000 | | Kuehne & Nagel International AG, Registered (Switzerland) | | 2,779,225 | |
| 96,057 | | Toll Holdings Ltd. (Australia) | | 965,726 | |
| 38,950 | | United Parcel Service, Inc., Class B | | 2,754,544 | |
| | | | | 19,332,123 | |
| | | | | | |
| | | Total Common Stock – (identified cost $417,767,333) | | 648,421,927 | |
CONVERTIBLE BONDS – (0.28%) |
|
TELECOMMUNICATION SERVICES – (0.28%) | | | |
$ | 1,600,000 | | Level 3 Communications, Inc., Conv. Sr. Notes, 10.00%, 05/01/11 | | | |
| | | (identified cost $1,600,000) | | 1,822,000 | |
12
DAVIS VALUE PORTFOLIO
SCHEDULE OF INVESTMENTS – (Continued)
December 31, 2007
| | Value | |
Principal | Security | (Note 1 | ) |
SHORT TERM INVESTMENTS – (0.46%) |
|
$ | 1,113,000 | | ABN AMRO Inc. Joint Repurchase Agreement, 4.70%, | | | |
| | | 01/02/08, dated 12/31/07, repurchase value of $1,113,291 | | | |
| | | (collateralized by: U.S. Government agency mortgages and obligations | | | |
| | | in a pooled cash account, 4.125%-7.00%, 02/15/08-05/01/37, | | | |
| | | total market value $1,135,260) | $ | 1,113,000 | |
| 964,000 | | Banc of America Securities LLC Joint Repurchase Agreement, 4.50%, | | | |
| | | 01/02/08, dated 12/31/07, repurchase value of $964,241 | | | |
| | | (collateralized by: U.S. Government agency mortgage | | | |
| | | in a pooled cash account, 5.00%, 08/01/33, | | | |
| | | total market value $983,280) | | 964,000 | |
| 297,000 | | Goldman, Sachs & Co. Joint Repurchase Agreement, 4.75%, | | | |
| | | 01/02/08, dated 12/31/07, repurchase value of $297,078 | | | |
| | | (collateralized by: U.S. Government agency mortgages | | | |
| | | in a pooled cash account, 4.00%-9.50%, 12/01/14-12/01/37, | | | |
| | | total market value $302,940) | | 297,000 | |
| 664,000 | | UBS Securities LLC Joint Repurchase Agreement, 4.64%, | | | |
| | | 01/02/08, dated 12/31/07, repurchase value of $664,171 | | | |
| | | (collateralized by: U.S. Government agency mortgages | | | |
| | | in a pooled cash account, 5.00%-8.00%, 07/01/08-11/01/47, | | | |
| | | total market value $677,280) | | 664,000 | |
| | | | | | |
| | | Total Short Term Investments – (identified cost $3,038,000) | | 3,038,000 | |
| | | | | | |
| | | Total Investments – (99.18%) – (identified cost $422,405,333) – (a) | | 653,281,927 | |
| | | Other Assets Less Liabilities – (0.82%) | | 5,417,007 | |
| | | Net Assets – (100%) | $ | 658,698,934 | |
| | | | | | | |
*Non-Income Producing Security.
ADR: American Depositary Receipt
(a) Aggregate cost for Federal Income Tax purposes is $422,698,810. At December 31, 2007 unrealized appreciation (depreciation) of securities for Federal Income Tax purposes is as follows:
| | | Unrealized appreciation | $ | 245,984,732 | |
| | | Unrealized depreciation | | (15,401,615 | ) |
| | | Net unrealized appreciation | $ | 230,583,117 | |
(b) | Illiquid & Restricted Security – See Note 7 of the Notes to Financial Statements. |
See Notes to Financial Statements
13
DAVIS VALUE PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
At December 31, 2007
ASSETS: | | | |
| Investments in securities, at value (see accompanying Schedule of Investments) | | | |
| (identified cost $422,405,333) | $ | 653,281,927 | |
| Cash | | 195,333 | |
| Receivables: | | | |
| Dividends and interest | | 708,008 | |
| Capital stock sold | | 6,198,392 | |
| Investment securities sold | | 483,264 | |
| Prepaid expenses | | 7,521 | |
| Total assets | | 660,874,445 | |
LIABILITIES: | | | |
| Payables: | | | |
| Capital stock redeemed | | 1,044,796 | |
| Investment securities purchased | | 617,531 | |
| Accrued expenses | | 79,206 | |
| Accrued management fees | | 433,978 | |
| Total liabilities | | 2,175,511 | |
| | | |
NET ASSETS | $ | 658,698,934 | |
| | | | |
SHARES OUTSTANDING (NOTE 4) | | 45,505,090 | |
| | | |
NET ASSET VALUE, offering, and redemption price per share | | | |
(Net Assets ÷ Shares Outstanding) | $ | 14.48 | |
| | | |
NET ASSETS CONSIST OF: | | | |
| Par value of shares of capital stock | $ | 45,505 | |
| Additional paid-in capital | | 419,982,209 | |
| Undistributed net investment income | | 277,201 | |
| Accumulated net realized gains from investments and foreign currency transactions | | 7,515,586 | |
| Net unrealized appreciation on investments and foreign currency transactions | | 230,878,433 | |
| Net Assets | $ | 658,698,934 | |
| | | | |
See Notes to Financial Statements
14
DAVIS VALUE PORTFOLIO
STATEMENT OF OPERATIONS
For the year ended December 31, 2007
INVESTMENT INCOME: | | | |
| Income: | | | |
| Dividends (Net of foreign withholding taxes of $98,520) | $ | 12,927,717 | |
| Interest | | 581,778 | |
| Total income | | 13,509,495 | |
| | | | | | |
| Expenses: | | | | | |
| Management fees (Note 2) | $ | 5,281,313 | | | |
| Custodian fees | | 197,939 | | | |
| Transfer agent fees | | 15,119 | | | |
| Audit fees | | 19,200 | | | |
| Accounting fees (Note 2) | | 6,000 | | | |
| Legal fees | | 15,740 | | | |
| Reports to shareholders | | 59,323 | | | |
| Directors’ fees and expenses | | 112,983 | | | |
| Registration and filing fees | | 1,082 | | | |
| Miscellaneous | | 15,351 | | | |
| Total expenses | | 5,724,050 | |
| Expenses paid indirectly (Note 5) | | (796 | ) |
| Net expenses | | 5,723,254 | |
| Net investment income | | 7,786,241 | |
| | | | |
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: | | | |
| Net realized gain (loss) from: | | | |
| Investment transactions | | 43,031,156 | |
| Foreign currency transactions | | (29,210 | ) |
| Net decrease in unrealized appreciation on investments and foreign currency | | | |
| transactions | | (19,413,272 | ) |
| Net realized and unrealized gain on investments and foreign currency | | | |
| transactions | | 23,588,674 | |
| Net increase in net assets resulting from operations | $ | 31,374,915 | |
| | | | |
| | | | |
| | | | |
| | | | | | | |
See Notes to Financial Statements
15
DAVIS VALUE PORTFOLIO
STATEMENTS OF CHANGES IN NET ASSETS
| Year ended December 31, | |
| 2007 | | 2006 | |
OPERATIONS: | | | | | | |
Net investment income | $ | 7,786,241 | | $ | 5,722,122 | |
Net realized gain from investments and foreign | | | | | | |
currency transactions | | 43,001,946 | | | 14,151,661 | |
Net increase (decrease) in unrealized appreciation on | | | | | | |
investments and foreign currency transactions | | (19,413,272 | ) | | 80,121,104 | |
Net increase in net assets resulting from operations | | 31,374,915 | | | 99,994,887 | |
| | | | | | |
DIVIDENDS AND DISTRIBUTIONS TO | | | | | | |
SHAREHOLDERS FROM: | | | | | | |
Net investment income | | (7,607,743 | ) | | (5,581,446 | ) |
Realized gains from investment transactions | | (26,368,633 | ) | | – | |
| | | | | | |
CAPITAL SHARE TRANSACTIONS (NOTE 4) | | (110,527,933 | ) | | 57,046,031 | |
| | | | | | |
Total increase (decrease) in net assets | | (113,129,394 | ) | | 151,459,472 | |
| | | | | | |
NET ASSETS: | | | | | | |
Beginning of year | | 771,828,328 | | | 620,368,856 | |
End of year* | $ | 658,698,934 | | $ | 771,828,328 | |
| | | | | | |
| | | | | | |
* Including undistributed net investment income of | $ | 277,201 | | $ | 127,913 | |
| | | | | | |
| | | | | | |
| | | | | | |
See Notes to Financial Statements
16
DAVIS VALUE PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Fund is a separate series of Davis Variable Account Fund, Inc. (a Maryland corporation), which is registered under the Investment Company Act of 1940, as amended, as a diversified, open-end management investment company. Insurance companies, for the purpose of funding variable annuity or variable life insurance contracts, may only purchase shares of the Fund. The following is a summary of significant accounting policies followed by the Fund in the preparation of financial statements.
A. VALUATION OF SECURITIES - The Fund calculates the net asset value of its shares as of the close of the New York Stock Exchange (“Exchange”), normally 4:00 P.M. Eastern time, on each day the Exchange is open for business. Securities listed on the Exchange (and other national exchanges) are valued at the last reported sales price on the day of valuation. Securities traded in the over-the-counter market (e.g. NASDAQ) and listed securities for which no sale was reported on that date are stated at the average of closing bid and asked prices. Securities traded on foreign exchanges are valued based upon the last sales price on the principal exchange on which the security is traded prior to the time when the Fund’s assets are valued. Securities (including restricted securities) for which market quotations are not readily available are valued at their fair value. Foreign and domestic securities whose values have been materially affected by what Davis Advisors, the Fund’s investment adviser (“Adviser”), identifies as a significant event occurring before the Fund’s assets are valued but after the close of their respective exchanges will be fair valued. Fair value is determined in good faith using consistently applied procedures under the supervision of the Board of Directors. Short-term securities purchased within 60 days to maturity are valued at amortized cost, which approximates market value. These valuation procedures are reviewed and subject to approval by the Board of Directors.
B. MASTER REPURCHASE AGREEMENTS - The Fund, along with other affiliated funds, may transfer uninvested cash balances into one or more master repurchase agreement accounts. These balances are invested in one or more repurchase agreements, secured by U.S. Government securities. A custodian bank holds securities pledged as collateral for repurchase agreements until the agreements mature. Each agreement requires that the market value of the collateral be sufficient to cover payments of interest and principal; however, in the event of default by the other party to the agreement, retention of the collateral may be subject to legal proceedings.
C. CURRENCY TRANSLATION - The market values of all assets and liabilities denominated in foreign currencies are recorded in the financial statements after translation to the U.S. Dollar based upon the mean between the bid and offered quotations of the currencies against U.S. Dollars on the date of valuation. The cost basis of such assets and liabilities is determined based upon historical exchange rates. Income and expenses are translated at average exchange rates in effect as accrued or incurred.
D. FOREIGN CURRENCY - The Fund may enter into forward purchases or sales of foreign currencies to hedge certain foreign currency denominated assets and liabilities against declines in market value relative to the U.S. Dollar. Forward currency contracts are marked-to-market daily and the change in market value is recorded by the Fund as an unrealized gain or loss. When the forward currency contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the forward currency contract at the time it was opened and value at the time it was closed. Investments in forward currency contracts may expose the Fund to risks resulting from unanticipated movements in foreign currency exchange rates or failure of the counter-party to the agreement to perform in accordance with the terms of the contract.
17
DAVIS VALUE PORTFOLIO
NOTES TO FINANCIAL STATEMENTS - (Continued)
December 31, 2007
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
D. | FOREIGN CURRENCY - (Continued) |
Reported net realized foreign exchange gains or losses arise from the sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions, the difference between the amounts of dividends, interest and foreign withholding taxes recorded on the Fund’s books, and the U.S. Dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the value of assets and liabilities other than investments in securities at fiscal year end, resulting from changes in the exchange rate. The Fund includes foreign currency gains and losses realized on the sale of investments together with market gains and losses on such investments in the statement of operations.
E. FEDERAL INCOME TAXES - It is the Fund’s policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies, and to distribute substantially all of its taxable income, including any net realized gains on investments not offset by loss carryovers, to shareholders. Therefore, no provision for Federal Income or Excise Tax is required. The Adviser has analyzed the Fund’s tax positions taken on federal income tax returns for all open tax years and has concluded that as of December 31, 2007, no provision for income tax would be required in the Fund’s financial statements. The Fund’s federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue. During the year ended December 31, 2007, Davis Value Portfolio utilized approximately $7,115,000 of capital loss carryforward from prior years. At December 31, 2007, Davis Value Portfolio had no capital loss carryforwards available to offset future gains.
F. USE OF ESTIMATES IN FINANCIAL STATEMENTS - In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of income and expenses during the reporting period. Actual results may differ from these estimates.
G. INDEMNIFICATION - Under the Fund’s organizational documents, its officers and directors are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, some of the Fund’s contracts with its service providers contain general indemnification clauses. The Fund’s maximum exposure under these arrangements is unknown since the amount of any future claims that may be made against the Fund cannot be determined and the Fund has no historical basis for predicting the likelihood of any such claims.
H. SECURITIES TRANSACTIONS AND RELATED INVESTMENT INCOME - Securities transactions are accounted for on the trade date (date the order to buy or sell is executed) with realized gain or loss on the sale of securities being determined based upon identified cost. Dividend income is recorded on the ex-dividend date. Interest income, which includes accretion of discount and amortization of premium, is accrued as earned.
18
DAVIS VALUE PORTFOLIO
NOTES TO FINANCIAL STATEMENTS - (Continued)
December 31, 2007
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
I. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS - Dividends and distributions to shareholders are recorded on the ex-dividend date. Net investment income (loss), net realized gains (losses), and net unrealized appreciation (depreciation) on investments may differ for financial statement and tax purposes primarily due to differing treatments of wash sales, foreign currency transactions, and net operating losses. The character of dividends and distributions made during the fiscal year from net investment income and net realized securities gains may differ from their ultimate characterization for Federal Income Tax purposes. Also, due to the timing of dividends and distributions, the fiscal year in which amounts are distributed may differ from the fiscal year in which income or realized gain was recorded by the Fund. The Fund adjusts the classification of distributions to shareholders to reflect the differences between financial statement amounts and distributions determined in accordance with income tax regulations. During the year ended December 31, 2007, amounts have been reclassified to reflect a decrease in undistributed net investment income of $29,210 and a corresponding increase in accumulated net realized gains. Net assets have not been affected by this reclassification.
The tax character of distributions paid during the years ended December 31, 2007 and 2006, was as follows:
| 2007 | | 2006 | |
Ordinary income | $ | 7,607,743 | | $ | 5,581,446 | |
Long-term capital gain | | 26,368,633 | | | – | |
Total | $ | 33,976,376 | | $ | 5,581,446 | |
As of December 31, 2007, the components of distributable earnings on a tax basis were as follows:
Undistributed net investment income | $ | 277,201 | |
Accumulated net realized gain from investments and foreign currency transactions | | 7,809,063 | |
Net unrealized appreciation on investments | | 230,584,956 | |
Total | $ | 238,671,220 | |
J. NEW ACCOUNTING PRONOUNCEMENT - In September 2006, FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements. This standard establishes a single authoritative definition of fair value, sets out a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 applies to fair value measurements already required or permitted by existing standards. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal periods. As of December 31, 2007, the Adviser does not believe the adoption of SFAS No. 157 will materially impact the financial statement amounts; however, additional disclosures may be required about the inputs used to develop the measurements and the effect of certain measurements on changes in net assets for the period.
19
DAVIS VALUE PORTFOLIO
NOTES TO FINANCIAL STATEMENTS - (Continued)
December 31, 2007
NOTE 2 - INVESTMENT ADVISORY FEES
| Advisory fees are paid monthly to the Adviser at an annual rate of 0.75% of the Fund’s average net assets. |
Boston Financial Data Services, Inc. (“BFDS”) is the Fund’s primary transfer agent. State Street Bank and Trust Company (“State Street Bank”) is the Fund’s primary accounting provider. Fees for such services are included in the custodian fee as State Street Bank also serves as the Fund’s custodian. The Adviser is also paid for certain accounting services. The fee for the year ended December 31, 2007 amounted to $6,000. Certain directors and officers of the Fund are also directors and officers of the general partner of the Adviser.
Davis Selected Advisers – NY, Inc. (“DSA-NY”), a wholly-owned subsidiary of the Adviser, acts as sub-adviser to the Fund. The Fund pays no fees directly to DSA-NY.
NOTE 3 - PURCHASES AND SALES OF SECURITIES
Purchases and sales of investment securities (excluding short-term securities) for the year ended December 31, 2007 were $64,497,379 and $167,158,052, respectively.
NOTE 4 - CAPITAL STOCK
At December 31, 2007, there were 500 million shares of capital stock ($0.001 par value per share) authorized. Transactions in capital stock were as follows:
| Year ended December 31, | |
| 2007 | | 2006 | |
Shares sold | | 4,802,313 | | | 11,945,395 | |
Shares issued in reinvestment of distributions | | 2,317,607 | | | 380,703 | |
| | 7,119,920 | | | 12,326,098 | |
Shares redeemed | | (14,556,411 | ) | | (7,955,715 | ) |
Net increase (decrease) | | (7,436,491 | ) | | 4,370,383 | |
| | | | | | |
Proceeds from shares sold | $ | 73,108,317 | �� | $ | 157,592,888 | |
Proceeds from shares issued in reinvestment of distributions | | 33,976,494 | | | 5,581,115 | |
| | 107,084,811 | | | 163,174,003 | |
Cost of shares redeemed | | (217,612,744 | ) | | (106,127,972 | ) |
Net increase (decrease) | $ | (110,527,933 | ) | $ | 57,046,031 | |
NOTE 5 - EXPENSES PAID INDIRECTLY
Under an agreement with State Street Bank, custodian fees are reduced for earnings on cash balances maintained at the custodian by the Fund. Such reductions amounted to $796 during the year ended December 31, 2007.
20
DAVIS VALUE PORTFOLIO
NOTES TO FINANCIAL STATEMENTS - (Continued)
December 31, 2007
NOTE 6 - BANK BORROWINGS
The Fund may borrow up to 5% of its assets from a bank to purchase portfolio securities or for temporary and emergency purposes. The purchase of securities with borrowed funds creates leverage in the Fund. The Fund has entered into an agreement, which enables it to participate with certain other funds managed by the Adviser in an unsecured line of credit with a bank, which permits borrowings up to $50 million, collectively. Interest is charged based on its borrowings, at a rate equal to the overnight Federal Funds Rate plus 0.75%. The Fund had no borrowings outstanding for the year ended December 31, 2007.
NOTE 7 - ILLIQUID AND RESTRICTED SECURITIES
Securities may be considered illiquid if they lack a readily available market or if valuation has not changed for a certain period of time. Restricted securities are not registered under the Securities Act of 1933 and may have contractual restrictions on resale. They are valued under methods approved by the Board of Directors as reflecting fair value. The aggregate value of illiquid and restricted securities in the Fund amounted to $8,672,487 or 1.32% of the Fund’s net assets as of December 31, 2007. Information concerning illiquid and restricted securities is as follows:
Security | | Acquisition Date | | Shares | | Cost per Share | | Valuation per Share as of December 31, 2007 |
| | | | | | | | | | |
Merrill Lynch & Co., Inc., Private Placement | | 12/24/07 | | 185,700 | | $ | 48.00 | | $ | 46.7016 |
21
DAVIS VALUE PORTFOLIO
FINANCIAL HIGHLIGHTS
Financial Highlights for a share of capital stock outstanding throughout each period:
| | |
| | |
| Year ended December 31, | |
| 2007 | | 2006 | | 2005 | | 2004 | | 2003 | |
| | | | | | | | | |
| | | | | | | | | | | | | | | |
Net Asset Value, Beginning of Period | $ | 14.58 | | $ | 12.77 | | $ | 11.78 | | $ | 10.57 | | $ | 8.20 | |
| | | | | | | | | | | | | | | |
Income from Investment Operations: | | | | | | | | | | | | | | | |
Net Investment Income | | 0.17 | | | 0.11 | | | 0.12 | | | 0.09 | | | 0.07 | |
Net Realized and Unrealized Gains | | 0.51 | | | 1.81 | | | 0.99 | | | 1.21 | | | 2.37 | |
Total from Investment Operations | | 0.68 | | | 1.92 | | | 1.11 | | | 1.30 | | | 2.44 | |
| | | | | | | | | | | | | | | |
Dividends and Distributions: | | | | | | | | | | | | | | | |
Dividends from Net Investment Income | | (0.17 | ) | | (0.11 | ) | | (0.11 | ) | | (0.09 | ) | | (0.07 | ) |
Distributions from Realized Gains | | (0.61 | ) | | – | | | – | | | – | | | – | |
Return of Capital | | – | | | – | | | – | | | – | 4 | | – | |
Distributions in Excess of Net | | | | | | | | | | | | | | | |
Investment Income | | – | | | – | | | (0.01 | ) | | – | | | – | |
Total Dividends and Distributions | | (0.78 | ) | | (0.11 | ) | | (0.12 | ) | | (0.09 | ) | | (0.07 | ) |
| | | | | | | | | | | | | | | |
Net Asset Value, End of Period | $ | 14.48 | | $ | 14.58 | | $ | 12.77 | | $ | 11.78 | | $ | 10.57 | |
| | | | | | | | | | | | | | | |
Total Return1 | | 4.64% | | | 15.00% | | | 9.44% | | | 12.33% | | | 29.76% | |
| | | | | | | | | | | | | | | |
Ratios/Supplemental Data: | | | | | | | | | | | | | | | |
Net Assets, End of Period (000 omitted) | $ | 658,699 | | $ | 771,828 | | $ | 620,369 | | $ | 684,723 | | $ | 485,002 | |
Ratio of Expenses to Average Net Assets: | | | | | | | | | | | | | | | |
Gross | | 0.81% | | | 0.81% | | | 0.81% | | | 0.81% | | | 0.82% | |
Net3 | | 0.81% | | | 0.81% | | | 0.81% | | | 0.81% | | | 0.82% | |
Ratio of Net Investment Income | | | | | | | | | | | | | | | |
to Average Net Assets | | 1.11% | | | 0.83% | | | 0.87% | | | 0.87% | | | 0.90% | |
Portfolio Turnover Rate2 | | 9% | | | 19% | | | 14% | | | 4% | | | 7% | |
1 Assumes hypothetical initial investment on the business day before the first day of the fiscal period, with all dividends and distributions reinvested in additional shares on the reinvestment date, and redemption at the net asset value calculated on the last business day of the fiscal period. Total returns do not reflect charges attributable to your insurance company’s separate account. Inclusion of these charges would reduce the total returns shown.
2 The lesser of purchases or sales of portfolio securities for a period, divided by the monthly average of the market value of portfolio securities owned during the period. Securities with a maturity or expiration date at the time of acquisition of one year or less are excluded from the calculation.
3 The Net ratio of expenses to average net assets reflects the impact, if any, of the reduction of expenses paid indirectly and of certain reimbursements from the Adviser.
4 Less than $0.005 per share.
See Notes to Financial Statements
22
DAVIS VALUE PORTFOLIO
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
of Davis Variable Account Fund, Inc.:
We have audited the accompanying statement of assets and liabilities of Davis Value Portfolio (a separate series of the Davis Variable Account Fund, Inc.), including the schedule of investments as of December 31, 2007, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2007, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Davis Value Portfolio as of December 31, 2007, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.
KPMG LLP
Denver, Colorado
February 8, 2008
23
DAVIS VALUE PORTFOLIO
FUND INFORMATION
Federal Income Tax Information (Unaudited)
During the calendar year ended 2007 the Fund declared and paid long-term capital gain distributions in the amount of $26,368,633.
Income dividends paid by the Fund during the calendar year ended 2007 should be multiplied by 100% to arrive at the net amount eligible for the corporate dividends received deduction.
Portfolio Proxy Voting Policies and Procedures
The Fund has adopted Portfolio Proxy Voting Policies and Procedures under which the Fund votes proxies relating to securities held by the Fund. A description of the Fund’s Portfolio Proxy Voting Policies and Procedures is available (i) without charge, upon request, by calling the Fund toll-free at 1-800-279-0279, (ii) on the Fund’s website at www.davisfunds.com, and (iii) on the SEC’s website at www.sec.gov.
In addition, the Fund is required to file Form N-PX, with its complete proxy voting record for the 12 months ended June 30th, no later than August 31st of each year. The Fund’s Form N-PX filing is available (i) without charge, upon request, by calling the Fund toll-free at 1-800-279-0279, (ii) on the Fund’s website at www.davisfunds.com, and (iii) on the SEC’s website at www.sec.gov.
Form N-Q
The Fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The Fund’s Form N-Q is available without charge upon request by calling 1-800-279-0279 or on the Fund’s website at www.davisfunds.com or on the SEC’s website at www.sec.gov. The Fund’s Form N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington, DC, and that information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
24
DAVIS VALUE PORTFOLIO
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
DIRECTORS
For the purposes of their service as directors to the Davis Funds, the business address for each of the directors is 2949 E. Elvira Road, Suite 101, Tucson, AZ 85706. Each Director serves until their retirement, resignation, death or removal. Subject to exceptions and exemptions, which may be granted by the Independent Directors, Directors must retire at the close of business on the last day of the calendar year in which the Director attains age seventy-four (74).
| | | | Number of | |
| | Term of | | Portfolios in | |
| | Office and | | Fund | |
| Position(s) | Length of | | Complex | |
Name | Held With | Time | Principal Occupation(s) | Overseen by | Other Directorships |
(birthdate) | Fund | Served | During Past Five Years | Director | Held by Director |
Independent Directors
| | | | | |
Marc P. Blum (9/9/42) | Director | Director since 1986 | Chief Executive Officer, World Total Return Fund, LLLP; of Counsel to Gordon, Feinblatt, Rothman, Hoffberger and Hollander, LLC (law firm). | 13 | Director, Legg Mason Investment Counsel & Trust Company, N.A. (asset management company) and Rodney Trust Company (Delaware). |
| | | | | |
John S. Gates, Jr. (8/2/53) | Director | Director since 2007 | Chairman and Chief Executive Officer of PortaeCo LLC, a private investment company (beginning in 2006); Co-founder of Centerpoint Properties Trust (REIT) and former Co-chairman and Chief Executive Officer for the last 22 years (until 2006). | 13 | Director, DCT Industrial Trust (a REIT). |
| | | | | |
Thomas S. Gayner (12/16/61) | Director | Director since 2004 | Executive Vice President and Chief Investment Officer, Markel Corporation (insurance company). | 13 | Director, First Market Bank; Director, Washington Post Co. (newspaper publisher). |
| | | | | |
Jerry D. Geist (5/23/34) | Director | Director since 1986 | Chairman, Santa Fe Center Enterprises (energy project development). | 13 | Director, CH2M-Hill, Inc. (engineering); Member, Investment Committee for Microgeneration Technology Fund; UTECH Funds. |
25
DAVIS VALUE PORTFOLIO
2949 East Elvira Road, Suite 101
DIRECTORS – (Continued)
| | | | Number of | |
| | Term of | | Portfolios in | |
| | Office and | | Fund | |
| Position(s) | Length of | | Complex | |
Name | Held With | Time | Principal Occupation(s) | Overseen by | Other Directorships |
(birthdate) | Fund | Served | During Past Five Years | Director | Held by Director |
Independent Directors – (Continued)
| | | | | |
G. Bernard Hamilton (3/18/37) | Director | Director since 1978 | Managing General Partner, Avanti Partners, L.P. (investment partnership), retired 2005. | 13 | none |
| | | | | |
Samuel H. Iapalucci (7/19/52) | Director | Director since 2006 | Executive Vice President and Chief Financial Officer, CH2M-Hill, Inc., (engineering). | 13 | none |
| | | | | |
Robert P. Morgenthau (3/22/57) | Director | Director since 2002 | Chairman, NorthRoad Capital Management, LLC (an investment management firm) since June 2002. | 13 | none |
| | | | | |
Christian R. Sonne (5/6/36) | Director | Director since 1990 | General Partner, Tuxedo Park Associates (land holding and development firm). | 13 | none |
| | | | | |
Marsha Williams (3/28/51) | Director | Director since 1999 | Senior Vice President and Chief Financial Officer, Orbitz Worldwide, Inc. (travel-service provider); former Executive Vice President and Chief Financial Officer, Equity Office Properties Trust (a real estate investment trust). | 16 | Director, the Selected Funds (consisting of three portfolios) since 1996; Director, Modine Manufacturing, Inc. (heat transfer technology); Director, Chicago Bridge & Iron Company, N.V. (industrial construction and engineering). |
26
DAVIS VALUE PORTFOLIO
2949 East Elvira Road, Suite 101
DIRECTORS – (Continued)
| | | | Number of | |
| | Term of | | Portfolios in | |
| | Office and | | Fund | |
| Position(s) | Length of | | Complex | |
Name | Held With | Time | Principal Occupation(s) | Overseen by | Other Directorships |
(birthdate) | Fund | Served | During Past Five Years | Director | Held by Director |
Inside Directors*
| | | | | |
Jeremy H. Biggs (8/16/35) | Director/ Chairman | Director since 1994 | Vice Chairman, Member of the Audit Committee and Member of the International Investment Committee, former Chief Investment Officer (1980 through 2005), all for Fiduciary Trust Company International (money management firm); Consultant to Davis Selected Advisers, L.P. | 13 | none |
| | | | | |
Andrew A. Davis (6/25/63) | Director | Director since 1997 | President or Vice President of each Davis Fund and Selected Fund; President, Davis Selected Advisers, L.P., and also serves as an executive officer in certain companies affiliated with the Adviser. | 16 | Director, the Selected Funds (consisting of three portfolios) since 1998. |
| | | | | |
Christopher C. Davis (7/13/65) | Director | Director since 1997 | President or Vice President of each Davis Fund, Selected Fund, and Clipper Fund; Chairman, Davis Selected Advisers, L.P., and also serves as an executive officer in certain companies affiliated with the Adviser, including sole Member of the Adviser’s general partner, Davis Investments, LLC; Employee of Shelby Cullom Davis & Co. (registered broker/dealer). | 16 | Director, the Selected Funds (consisting of three portfolios) since 1998; Director, Washington Post Co. (newspaper publisher). |
* Jeremy H. Biggs, Andrew A. Davis, and Christopher C. Davis own partnership units (directly, indirectly, or both) of the Adviser and are considered to be “interested persons” of the Funds as defined in the Investment Company Act of 1940. Andrew A. Davis and Christopher C. Davis are brothers.
27
DAVIS VALUE PORTFOLIO
2949 East Elvira Road, Tucson, Arizona 85706
| Directors | Officers |
| Jeremy H. Biggs | Jeremy H. Biggs |
| Marc P. Blum | Chairman |
| Andrew A. Davis | Christopher C. Davis |
| Christopher C. Davis | President |
| John S. Gates, Jr. | Andrew A. Davis |
| Thomas S. Gayner | Vice President |
| Jerry D. Geist | Kenneth C. Eich |
| G. Bernard Hamilton | Executive Vice President & Principal |
| Samuel H. Iapalucci | Executive Officer |
| Robert P. Morgenthau | Sharra L. Haynes |
| Christian R. Sonne | Vice President & Chief Compliance Officer |
| Marsha Williams | Douglas A. Haines |
| | Vice President & Principal Accounting Officer |
| | Thomas D. Tays |
| | Vice President & Secretary |
| | |
| |
Investment Adviser | |
Davis Selected Advisers, L.P. (Doing business as “Davis Advisors”) | |
2949 East Elvira Road, Suite 101 | |
Tucson, Arizona 85706 | |
(800) 279-0279 | |
| |
Distributor | |
Davis Distributors, LLC | |
2949 East Elvira Road, Suite 101 | |
Tucson, Arizona 85706 | |
| |
Transfer Agent | |
Boston Financial Data Services, Inc. | |
c/o The Davis Funds | |
P.O. Box 8406 | |
Boston, Massachusetts 02266-8406 | |
| |
Custodian | |
State Street Bank and Trust Co. | |
One Lincoln Street | |
Boston, Massachusetts 02111 | |
| |
Counsel | |
Seyfarth Shaw LLP | |
131 South Dearborn Street, Suite 2400 | |
Chicago, Illinois 60603-5577 | |
| |
Independent Registered Public Accounting Firm | |
KPMG LLP | |
707 Seventeenth Street, Suite 2700 | |
Denver, Colorado 80202 | |
| | | |
For more information about Davis Value Portfolio including management fee, charges and expenses, see the current prospectus, which must precede or accompany this report. The Fund’s Statement of Additional Information contains additional information about the Fund’s Directors and is available without charge upon request by calling 1-800-279-0279, or on the Fund’s website at www.davisfunds.com. Quarterly Fact sheets are available on the Fund’s website at www.davisfunds.com.
28
Table of Contents
Management’s Discussion and Analysis | 2 |
| |
Fund Overview | 5 |
| |
Fund Performance | 7 |
| |
Schedule of Investments | 9 |
| |
Statement of Assets and Liabilities | 11 |
| |
Statement of Operations | 12 |
| |
Statements of Changes in Net Assets | 13 |
| |
Notes to Financial Statements | 14 |
| |
Financial Highlights | 19 |
| |
Report of Independent Registered Public Accounting Firm | 20 |
| |
Fund Information | 21 |
| |
Directors and Officers | 22 |
| |
DAVIS FINANCIAL PORTFOLIO
2949 East Elvira Road, Suite 101
Management’s Discussion and Analysis
Davis Financial Portfolio
Davis Financial Portfolio delivered a negative return on net asset value of 6.05% for the year ended December 31, 20071. Over the same time period, the Standard & Poor’s 500® Index2 (“Index”) returned 5.49%. Financial companies as a whole turned in the weakest performance of the sectors3 within the Index. The banking, diversified financial, real estate, and insurance industry groups of the Index all turned in negative performance.
Key Contributors to Performance
Insurance companies were the most important contributors4 to the Portfolio’s performance, out-performing the corresponding industry group within the Index (up 9% versus down 6% for the Index). China Life5, Loews, and Transatlantic Holdings were among the top contributors to performance. American International Group, Progressive, and MBIA were among the top detractors from performance.
Banking companies were the second most important contributors to performance, out-performing the corresponding industry group within the Index (up 13% versus down 30% for the Index). State Bank of India, Commerce Bancorp, and ICICI Bank were among the top contributors to performance. Wells Fargo was among the top detractors from performance.
The Portfolio managers have identified a number of investment opportunities in foreign companies. The Portfolio ended the period with approximately 19% of its assets invested in foreign companies. As a group, the foreign companies owned by the Portfolio out-performed the Index over the period.
Key Detractors from Performance
Diversified financial companies represented the Portfolio’s second largest holdings over the year and were the most important detractors from performance. The Portfolio’s diversified financial companies under-performed the corresponding industry group within the Index (down 25% versus down 19% for the Index). Bank of New York Mellon and Mellon Financial (merged with Bank of New York in July 2007) were among the top contributors to performance. First Marblehead, Moody’s, American Express, and JPMorgan Chase were among the top detractors from performance.
The Portfolio’s non-financial holdings overall detracted from performance. Sealed Air and H&R Block were among the top detractors from performance.
2
DAVIS FINANCIAL PORTFOLIO
2949 East Elvira Road, Suite 101
Management’s Discussion and Analysis – (Continued)
This Annual Report is authorized for use by existing shareholders. Prospective shareholders must receive a current Davis Variable Account Funds (including Davis Financial Portfolio) prospectus, which contains more information about investment strategies, risks, charges, and expenses. Please read the prospectus carefully before investing or sending money.
Davis Financial Portfolio’s investment objective is long-term growth of capital. There can be no assurance that the Portfolio will achieve its objective. The primary risks of an investment in Davis Financial Portfolio are: (1) market risk, (2) company risk, (3) concentrated financial services portfolio risk, (4) foreign country risk, (5) headline risk, and (6) selection risk. See the prospectus for a full description of each risk.
Davis Financial Portfolio concentrates its investments in the financial sector, and it may be subject to greater risks than a portfolio that does not concentrate its investments in a particular sector. The Portfolio’s investment performance, both good and bad, is expected to reflect the economic performance of the financial sector more than a portfolio that does not concentrate its portfolio.
1 Total return assumes reinvestment of dividends and capital gain distributions. Past performance is not a guarantee of future results. Investment return and principal value will vary, so that when redeemed, an investor’s shares may be worth more or less than when purchased. The annual gross operating expense ratio for the year ended December 31, 2007 was 0.85%. The following table lists the average annual total returns for the periods ended December 31, 2007.
| | | PORTFOLIO’S |
| | | INCEPTION |
| 1-YEAR | 5-YEAR | (July 1, 1999) |
Davis Financial Portfolio | (6.05)% | 11.96% | 5.64% |
Standard & Poor’s 500® Index | 5.49% | 12.82% | 2.38% |
Portfolio performance numbers are net of all portfolio operating expenses, but do not include any insurance charges imposed by your insurance company’s separate account. If performance information included the effect of these additional charges, the total return would be lower.
Portfolio performance changes over time and current performance may be higher or lower than stated. The annual operating expense ratio may vary in future years. For more current information please call Davis Funds Investor Services at 1-800-279-0279.
2 The S&P 500® Index is an unmanaged index of 500 selected common stocks, most of which are listed on the New York Stock Exchange. The Index is adjusted for dividends, weighted towards stocks with large market capitalizations, and represents approximately two-thirds of the total market value of all domestic common stocks. Investments cannot be made directly in the Index.
3 The companies included in the S&P 500® Index are divided into ten sectors. One or more industry groups make up a sector.
3
DAVIS FINANCIAL PORTFOLIO
2949 East Elvira Road, Suite 101
Management’s Discussion and Analysis – (Continued)
4 A company’s or sector’s contribution to the Portfolio’s performance is a product both of its appreciation or depreciation and its weighting within the portfolio. For example, a 5% holding that rises 20% has twice as much impact as a 1% holding that rises 50%.
5 This Management Discussion & Analysis discusses a number of individual companies. The information provided in this report does not provide information reasonably sufficient upon which to base an investment decision and should not be considered a recommendation to purchase or sell any particular security. The Schedule of Investments lists the Portfolio’s holdings of each company discussed.
Shares of the Davis Financial Portfolio are not deposits or obligations of any bank, are not guaranteed by any bank, are not insured by the FDIC or any other agency, and involve investment risks, including possible loss of the principal amount invested.
4
DAVIS FINANCIAL PORTFOLIO
FUND OVERVIEW
At December 31, 2007
Portfolio Composition | | Sector Weightings |
(% of Fund’s Net Assets) | | (% of Stock Holdings) |
| | | | | |
| | | | Fund | S&P 500® |
Common Stock (U.S.) | 80.37% | | Insurance | 39.69% | 4.31% |
Common Stock (Foreign) | 18.98% | | Diversified Financials | 34.94% | 8.55% |
Other Assets & Liabilities | 0.65% | | Banks | 12.81% | 3.69% |
| 100.00% | | Energy | 5.09% | 12.86% |
| | | Commercial Services & Supplies | 3.36% | 0.46% |
| | | Materials | 2.43% | 3.33% |
| | | Consumer Services | 1.68% | 1.55% |
| | | Technology | – | 16.78% |
| | | Health Care | – | 11.97% |
| | | Capital Goods | – | 9.28% |
| | | Food, Beverage & Tobacco | – | 5.31% |
| | | Other | – | 21.91% |
| | | | 100.00% | 100.00% |
Top 10 Holdings
| | % of Fund’s |
Security | Industry | Net Assets |
Transatlantic Holdings, Inc. | Reinsurance | 10.80% |
American Express Co. | Consumer Finance | 9.93% |
Loews Corp. | Multi-Line Insurance | 8.00% |
State Bank of India Ltd., GDR | Commercial Banks | 6.50% |
Bank of New York Mellon Corp. | Capital Markets | 5.43% |
JPMorgan Chase & Co. | Diversified Financial Services | 5.07% |
Canadian Natural Resources Ltd. | Energy | 5.05% |
Markel Corp. | Property & Casualty Insurance | 4.96% |
American International Group, Inc. | Multi-Line Insurance | 4.80% |
Merrill Lynch & Co., Inc., Private Placement | Capital Markets | 4.42% |
5
DAVIS FINANCIAL PORTFOLIO
FUND OVERVIEW - (Continued)
January 1, 2007 through December 31, 2007
New Positions Added (01/01/07 - 12/31/07) |
(Highlighted positions are those greater than 1.00% of 12/31/07 total net assets)
| | | % of 12/31/07 |
| | Date of 1st | Fund |
Security | Industry | Purchase | Net Assets |
Ambac Financial Group, Inc. | Property & Casualty Insurance | 11/06/07 | 0.52% |
Canadian Natural Resources Ltd. | Energy | 11/21/07 | 5.05% |
MBIA Inc. | Property & Casualty Insurance | 11/06/07 | 0.49% |
Merrill Lynch & Co., Inc., Private Placement | Capital Markets | 12/24/07 | 4.42% |
Oaktree Capital Group, LLC, Class A | Diversified Financial Services | 05/21/07 | 0.39% |
RHJ International | Capital Markets | 05/30/07 | 0.87% |
Positions Closed (01/01/07 - 12/31/07) |
(Gains and losses greater than $500,000 are highlighted)
| | Date of | Realized |
Security | Industry | Final Sale | Gain (Loss) |
Altria Group, Inc. | Food, Beverage & Tobacco | 03/06/07 | $ | 2,050,578 | |
Covidien Ltd. | Health Care Equipment & Services | 11/26/07 | | 330,093 | |
Tyco Electronics Ltd. | Technology Hardware & Equipment | 12/24/07 | | 345,839 | |
Tyco International Ltd. | Capital Goods | 11/28/07 | | (17,449 | ) |
Wachovia Corp. | Commercial Banks | 06/01/07 | | 1,589,024 | |
| | | | | |
6
DAVIS FINANCIAL PORTFOLIO
FUND PERFORMANCE
Average Annual Total Return | | Expense Example | | | |
for the periods ended December 31, 2007 | | | Beginning | Ending | Expenses Paid |
| | | Account Value | Account Value | During Period* |
One-Year | (6.05)% | | (07/01/07) | (12/31/07) | (07/01/07-12/31/07) |
Five-Year | 11.96% | Actual | $1,000.00 | $908.84 | $4.09 |
Life of Fund (July 1, 1999 through | | Hypothetical (5% return | | | |
December 31, 2007) | 5.64% | before expenses) | $1,000.00 | $1,020.92 | $4.33 |
*Expenses are equal to the Fund’s annualized expense ratio (0.85%), multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). The expense ratio reflects the impact, if any, of the reduction of expenses paid indirectly and of certain reimbursements from the adviser. See Notes to Performance on page 8 for a description of the “Expense Example”.
$10,000 invested at commencement of operations. Let’s say you invested $10,000 in Davis Financial Portfolio on July 1, 1999 (commencement of operations). As the chart below shows, by December 31, 2007 the value of your investment would have grown to $15,941 – a 59.41% increase on your initial investment. For comparison, look at how the Standard & Poor’s 500® Stock Index did over the same period. With dividends reinvested, the same $10,000 investment would have grown to $12,214 – a 22.14% increase.
The Standard & Poor’s 500® Stock Index is an unmanaged index of 500 selected common stocks, most of which are listed on the New York Stock Exchange. The Index is adjusted for dividends, weighted towards stocks with large market capitalizations, and represents approximately two-thirds of the total market value of all domestic common stocks.
The performance data for Davis Financial Portfolio contained in this report represents past performance and assumes that all distributions were reinvested, and should not be considered as an indication of future performance from an investment in the Fund today. The investment return and principal value will fluctuate so that shares may be worth more or less than their original cost when redeemed.
7
DAVIS FINANCIAL PORTFOLIO
NOTES TO PERFORMANCE
The following disclosure provides important information regarding the Fund’s Expense Example, which appears in the Fund’s Performance section of this Annual Report. Please refer to this information when reviewing the Expense Example for the Fund.
Example
As a shareholder of the Fund, you incur ongoing costs only, including advisory and administrative fees and other Fund expenses. The Expense Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Expense Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period indicated, which for the Fund is from 07/01/07 to 12/31/07. Please note that the Expense Example is general and does not reflect charges imposed by your insurance company’s separate account or account specific costs, which may increase your total costs of investing in the Fund. If these charges or account specific costs were included in the Expense Example, the expenses would have been higher.
Actual Expenses
The information represented in the row entitled “Actual” provides information about actual account values and actual expenses. You may use the information in this row, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then, multiply the result by the number under the heading “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The information represented in the row entitled “Hypothetical” provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only. Therefore, the information in the row entitled “Hypothetical” is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds.
8
DAVIS FINANCIAL PORTFOLIO
SCHEDULE OF INVESTMENTS
December 31, 2007
| | Value | |
Shares | Security | (Note 1 | ) |
COMMON STOCK – (99.35%) |
CAPITAL MARKETS – (13.19%) | | | |
| 52,360 | | Ameriprise Financial, Inc. | $ | 2,885,559 | |
| 130,000 | | Bank of New York Mellon Corp. | | 6,338,800 | |
| 110,500 | | Merrill Lynch & Co., Inc., Private Placement (b)(c) | | 5,160,527 | |
| 62,000 | | RHJ International* (Belgium) | | 1,015,248 | |
| | | | | 15,400,134 | |
COMMERCIAL BANKS – (12.73%) | | | |
| 18,600 | | Commerce Bancorp, Inc. | | 709,404 | |
| 215,699 | | HSBC Holdings PLC (United Kingdom) | | 3,615,300 | |
| 10,500 | | ICICI Bank Ltd., ADR (India) | | 645,750 | |
| 62,148 | | State Bank of India Ltd., GDR (India) | | 7,582,056 | |
| 76,400 | | Wells Fargo & Co. | | 2,306,516 | |
| | | | | 14,859,026 | |
COMMERCIAL SERVICES & SUPPLIES – (3.34%) | | | |
| 44,000 | | D&B Corp. | | 3,899,720 | |
CONSUMER FINANCE – (12.39%) | | | |
| 222,800 | | American Express Co. | | 11,590,056 | |
| 188,050 | | First Marblehead Corp. | | 2,877,165 | |
| | | | | 14,467,221 | |
CONSUMER SERVICES – (1.67%) | | | |
| 105,000 | | H&R Block, Inc. | | 1,949,850 | |
DIVERSIFIED FINANCIAL SERVICES – (9.13%) | | | |
| 135,548 | | JPMorgan Chase & Co. | | 5,916,670 | |
| 119,900 | | Moody’s Corp. | | 4,280,430 | |
| 14,000 | | Oaktree Capital Group, LLC, Class A (b) | | 458,500 | |
| | | | | 10,655,600 | |
ENERGY – (5.05%) | | | |
| 80,600 | | Canadian Natural Resources Ltd. (Canada) | | 5,895,084 | |
LIFE & HEALTH INSURANCE – (2.92%) | | | |
| 44,533 | | China Life Insurance Co., Ltd., ADR (China) | | 3,406,774 | |
MATERIALS – (2.42%) | | | |
| 121,900 | | Sealed Air Corp. | | 2,820,766 | |
MULTI-LINE INSURANCE – (12.80%) | | | |
| 96,187 | | American International Group, Inc. | | 5,607,702 | |
| 185,400 | | Loews Corp. | | 9,333,036 | |
| | | | | 14,940,738 | |
9
DAVIS FINANCIAL PORTFOLIO
SCHEDULE OF INVESTMENTS – (Continued)
December 31, 2007
| | Value | |
Shares | Security | (Note 1 | ) |
COMMON STOCK – (Continued) |
PROPERTY & CASUALTY INSURANCE – (10.34%) | | | |
| 23,700 | | Ambac Financial Group, Inc. | $ | 610,749 | |
| 44,800 | | FPIC Insurance Group, Inc.* | | 1,923,936 | |
| 11,800 | | Markel Corp.* | | 5,794,980 | |
| 30,600 | | MBIA Inc. | | 570,078 | |
| 165,300 | | Progressive Corp. (Ohio) | | 3,167,148 | |
| | | | | 12,066,891 | |
REINSURANCE – (13.37%) | | | |
| 29,900 | | Everest Re Group, Ltd. | | 3,001,960 | |
| 173,437 | | Transatlantic Holdings, Inc. | | 12,603,667 | |
| | | | | 15,605,627 | |
| | | | | | |
| | | Total Common Stock – (identified cost $87,359,051) | | 115,967,431 | |
| | | Total Investments – (99.35%) – (identified cost $87,359,051) – (a) | | 115,967,431 | |
| | | Other Assets Less Liabilities – (0.65%) | | 757,869 | |
| | | Net Assets – (100%) | $ | 116,725,300 | |
*Non-Income Producing Security.
ADR: | American Depositary Receipt |
GDR: | Global Depositary Receipt |
(a) Aggregate cost for Federal Income Tax purposes is $87,410,333. At December 31, 2007 unrealized appreciation (depreciation) of securities for Federal Income Tax purposes is as follows:
| | | Unrealized appreciation | $ | 31,652,195 | |
| | | Unrealized depreciation | | (3,095,097 | ) |
| | | Net unrealized appreciation | $ | 28,557,098 | |
(b) | Illiquid Security – See Note 7 of the Notes to Financial Statements. |
(c) | Restricted Security – See Note 7 of the Notes to Financial Statements. |
See Notes to Financial Statements
10
DAVIS FINANCIAL PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
At December 31, 2007
ASSETS: | | | |
| Investments in securities, at value (see accompanying Schedule of Investments) | | | |
| (identified cost $87,359,051) | $ | 115,967,431 | |
| Receivables: | | | |
| Dividends and interest | | 75,776 | |
| Capital stock sold | | 35,358 | |
| Investment securities sold | | 2,916,416 | |
| Prepaid expenses | | 1,423 | |
| Total assets | | 118,996,404 | |
LIABILITIES: | | | |
| Cash overdraft | | 2,116,301 | |
| Payables: | | | |
| Capital stock redeemed | | 47,240 | |
| Accrued expenses | | 29,895 | |
| Accrued management fees | | 77,668 | |
| Total liabilities | | 2,271,104 | |
| | | |
NET ASSETS | $ | 116,725,300 | |
| | | | |
SHARES OUTSTANDING (NOTE 4) | | 8,182,387 | |
| | | |
NET ASSET VALUE, offering, and redemption price per share | | | |
(Net Assets ÷ Shares Outstanding) | $ | 14.27 | |
| | | |
NET ASSETS CONSIST OF: | | | |
| Par value of shares of capital stock | $ | 8,182 | |
| Additional paid-in capital | | 84,848,327 | |
| Accumulated net realized gains from investments and foreign currency transactions | | 3,260,271 | |
| Net unrealized appreciation on investments and foreign currency transactions | | 28,608,520 | |
| Net Assets | $ | 116,725,300 | |
| | | | |
See Notes to Financial Statements
11
DAVIS FINANCIAL PORTFOLIO
STATEMENT OF OPERATIONS
For the year ended December 31, 2007
INVESTMENT INCOME: | | | |
| Income: | | | |
| Dividends (Net of foreign withholding taxes of $1,017) | $ | 2,337,866 | |
| Interest | | 243,599 | |
| Total income | | 2,581,465 | |
| | | | | | |
| Expenses: | | | | | |
| Management fees (Note 2) | $ | 1,068,776 | | | |
| Custodian fees | | 50,196 | | | |
| Transfer agent fees | | 8,841 | | | |
| Audit fees | | 16,800 | | | |
| Accounting fees (Note 2) | | 6,000 | | | |
| Legal fees | | 3,126 | | | |
| Reports to shareholders | | 19,613 | | | |
| Directors’ fees and expenses | | 26,726 | | | |
| Registration and filing fees | | 162 | | | |
| Miscellaneous | | 7,725 | | | |
| Total expenses | | 1,207,965 | |
| Expenses paid indirectly (Note 5) | | (1,715 | ) |
| Net expenses | | 1,206,250 | |
| Net investment income | | 1,375,215 | |
| | | | |
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: | | | |
| Net realized gain (loss) from: | | | |
| Investment transactions | | 10,449,299 | |
| Foreign currency transactions | | (2,193 | ) |
| Net decrease in unrealized appreciation on investments and foreign currency | | | |
| transactions | | (19,591,174 | ) |
| Net realized and unrealized loss on investments and foreign currency | | | |
| transactions | | (9,144,068 | ) |
| Net decrease in net assets resulting from operations | $ | (7,768,853 | ) |
| | | | |
| | | | |
| | | | |
| | | | | | | |
See Notes to Financial Statements
12
DAVIS FINANCIAL PORTFOLIO
STATEMENTS OF CHANGES IN NET ASSETS
| Year ended December 31, | |
| 2007 | | 2006 | |
OPERATIONS: | | | | | | |
Net investment income | $ | 1,375,215 | | $ | 844,169 | |
Net realized gain from investments and foreign | | | | | | |
currency transactions | | 10,447,106 | | | 2,407,878 | |
Net increase (decrease) in unrealized appreciation on | | | | | | |
investments and foreign currency transactions | | (19,591,174 | ) | | 19,346,243 | |
Net increase (decrease) in net assets resulting from | | | | | | |
operations | | (7,768,853 | ) | | 22,598,290 | |
| | | | | | |
DIVIDENDS AND DISTRIBUTIONS TO | | | | | | |
SHAREHOLDERS FROM: | | | | | | |
Net investment income | | (1,377,873 | ) | | (842,056 | ) |
Realized gains from investment transactions | | (6,877,870 | ) | | (98,309 | ) |
| | | | | | |
CAPITAL SHARE TRANSACTIONS (NOTE 4) | | (23,057,164 | ) | | 10,089,243 | |
| | | | | | |
Total increase (decrease) in net assets | | (39,081,760 | ) | | 31,747,168 | |
| | | | | | |
NET ASSETS: | | | | | | |
Beginning of year | | 155,807,060 | | | 124,059,892 | |
End of year* | $ | 116,725,300 | | $ | 155,807,060 | |
| | | | | | |
*Including undistributed net investment income of | $ | – | | $ | 779 | |
| | | | | | |
| | | | | | |
| | | | | | |
See Notes to Financial Statements
13
DAVIS FINANCIAL PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Fund is a separate series of Davis Variable Account Fund, Inc. (a Maryland corporation), which is registered under the Investment Company Act of 1940, as amended, as a diversified, open-end management investment company. Insurance companies, for the purpose of funding variable annuity or variable life insurance contracts, may only purchase shares of the Fund. The following is a summary of significant accounting policies followed by the Fund in the preparation of financial statements.
A. VALUATION OF SECURITIES - The Fund calculates the net asset value of shares as of the close of the New York Stock Exchange (“Exchange”), normally 4:00 P.M. Eastern time, on each day the Exchange is open for business. Securities listed on the Exchange (and other national exchanges) are valued at the last reported sales price on the day of valuation. Securities traded in the over-the-counter market (e.g. NASDAQ) and listed securities for which no sale was reported on that date are stated at the average of closing bid and asked prices. Securities traded on foreign exchanges are valued based upon the last sales price on the principal exchange on which the security is traded prior to the time when the Fund’s assets are valued. Securities (including restricted securities) for which market quotations are not readily available are valued at their fair value. Foreign and domestic securities whose values have been materially affected by what Davis Advisors, the Fund’s investment adviser (“Adviser”), identifies as a significant event occurring before the Fund’s assets are valued but after the close of their respective exchanges will be fair valued. Fair value is determined in good faith using consistently applied procedures under the supervision of the Board of Directors. Short-term securities purchased within 60 days to maturity are valued at amortized cost, which approximates market value. These valuation procedures are reviewed and subject to approval by the Board of Directors.
B. MASTER REPURCHASE AGREEMENTS - The Fund, along with other affiliated funds, may transfer uninvested cash balances into one or more master repurchase agreement accounts. These balances are invested in one or more repurchase agreements, secured by U.S. Government securities. A custodian bank holds securities pledged as collateral for repurchase agreements until the agreements mature. Each agreement requires that the market value of the collateral be sufficient to cover payments of interest and principal; however, in the event of default by the other party to the agreement, retention of the collateral may be subject to legal proceedings.
C. CURRENCY TRANSLATION - The market values of all assets and liabilities denominated in foreign currencies are recorded in the financial statements after translation to the U.S. Dollar based upon the mean between the bid and offered quotations of the currencies against U.S. Dollars on the date of valuation. The cost basis of such assets and liabilities is determined based upon historical exchange rates. Income and expenses are translated at average exchange rates in effect as accrued or incurred.
D. FOREIGN CURRENCY - The Fund may enter into forward purchases or sales of foreign currencies to hedge certain foreign currency denominated assets and liabilities against declines in market value relative to the U.S. Dollar. Forward currency contracts are marked-to-market daily and the change in market value is recorded by the Fund as an unrealized gain or loss. When the forward currency contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the forward currency contract at the time it was opened and value at the time it was closed. Investments in forward currency contracts may expose the Fund to risks resulting from unanticipated movements in foreign currency exchange rates or failure of the counter-party to the agreement to perform in accordance with the terms of the contract.
14
DAVIS FINANCIAL PORTFOLIO
NOTES TO FINANCIAL STATEMENTS - (Continued)
December 31, 2007
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
D. | FOREIGN CURRENCY - (Continued) |
Reported net realized foreign exchange gains or losses arise from the sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions, the difference between the amounts of dividends, interest and foreign withholding taxes recorded on the Fund’s books, and the U.S. Dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the value of assets and liabilities other than investments in securities at fiscal year end, resulting from changes in the exchange rate. The Fund includes foreign currency gains and losses realized on the sale of investments together with market gains and losses on such investments in the statement of operations.
E. FEDERAL INCOME TAXES - It is the Fund’s policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies, and to distribute substantially all of its taxable income, including any net realized gains on investments not offset by loss carryovers, to shareholders. Therefore, no provision for Federal Income or Excise Tax is required. The Adviser has analyzed the Fund’s tax positions taken on federal income tax returns for all open tax years and has concluded that as of December 31, 2007, no provision for income tax would be required in the Fund’s financial statements. The Fund’s federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue.
F. USE OF ESTIMATES IN FINANCIAL STATEMENTS - In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of income and expenses during the reporting period. Actual results may differ from these estimates.
G. INDEMNIFICATION - Under the Fund’s organizational documents, its officers and directors are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, some of the Fund’s contracts with its service providers contain general indemnification clauses. The Fund’s maximum exposure under these arrangements is unknown since the amount of any future claims that may be made against the Fund cannot be determined and the Fund has no historical basis for predicting the likelihood of any such claims.
H. SECURITIES TRANSACTIONS AND RELATED INVESTMENT INCOME - Securities transactions are accounted for on the trade date (date the order to buy or sell is executed) with realized gain or loss on the sale of securities being determined based upon identified cost. Dividend income is recorded on the ex-dividend date. Interest income, which includes accretion of discount and amortization of premium, is accrued as earned.
15
DAVIS FINANCIAL PORTFOLIO
NOTES TO FINANCIAL STATEMENTS - (Continued)
December 31, 2007
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
I. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS - Dividends and distributions to shareholders are recorded on the ex-dividend date. Net investment income (loss), net realized gains (losses), and net unrealized appreciation (depreciation) on investments may differ for financial statement and tax purposes primarily due to differing treatments of wash sales, foreign currency transactions, and net operating losses. The character of dividends and distributions made during the fiscal year from net investment income and net realized securities gains may differ from their ultimate characterization for Federal Income Tax purposes. Also, due to the timing of dividends and distributions, the fiscal year in which amounts are distributed may differ from the fiscal year in which income or realized gain was recorded by the Fund. The Fund adjusts the classification of distributions to shareholders to reflect the differences between financial statement amounts and distributions determined in accordance with income tax regulations. During the year ended December 31, 2007, amounts have been reclassified to reflect a decrease in undistributed net investment loss of $1,879 and a corresponding decrease in accumulated net realized gains. Net assets have not been affected by this reclassification.
The tax character of distributions paid during the years ended December 31, 2007 and 2006, was as follows:
| 2007 | | 2006 | |
Ordinary income | $ | 1,710,294 | | $ | 842,056 | |
Long-term capital gain | | 6,545,449 | | | 98,309 | |
Total | $ | 8,255,743 | | $ | 940,365 | |
As of December 31, 2007, the components of distributable earnings on a tax basis were as follows:
Accumulated net realized gains from investments and foreign currency transactions | $ | 3,311,553 | |
Net unrealized appreciation on investments | | 28,557,238 | |
Total | $ | 31,868,791 | |
J. NEW ACCOUNTING PRONOUNCEMENT - In September 2006, FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements. This standard establishes a single authoritative definition of fair value, sets out a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 applies to fair value measurements already required or permitted by existing standards. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal periods. As of December 31, 2007, the Adviser does not believe the adoption of SFAS No. 157 will materially impact the financial statement amounts; however, additional disclosures may be required about the inputs used to develop the measurements and the effect of certain measurements on changes in net assets for the period.
16
DAVIS FINANCIAL PORTFOLIO
NOTES TO FINANCIAL STATEMENTS - (Continued)
December 31, 2007
NOTE 2 - INVESTMENT ADVISORY FEES
| Advisory fees are paid monthly to the Adviser at an annual rate of 0.75% of the Fund’s average net assets. |
Boston Financial Data Services, Inc. (“BFDS”) is the Fund’s primary transfer agent. State Street Bank and Trust Company (“State Street Bank”) is the Fund’s primary accounting provider. Fees for such services are included in the custodian fee as State Street Bank also serves as the Fund’s custodian. The Adviser is also paid for certain accounting services. The fee for the year ended December 31, 2007 amounted to $6,000. Certain directors and officers of the Fund are also directors and officers of the general partner of the Adviser.
Davis Selected Advisers – NY, Inc. (“DSA-NY”), a wholly-owned subsidiary of the Adviser, acts as sub-adviser to the Fund. The Fund pays no fees directly to DSA-NY.
NOTE 3 - PURCHASES AND SALES OF SECURITIES
Purchases and sales of investment securities (excluding short-term securities) for the year ended December 31, 2007 were $22,716,011 and $42,342,665, respectively.
NOTE 4 - CAPITAL STOCK
At December 31, 2007, there were 500 million shares of capital stock ($0.001 par value per share) authorized. Transactions in capital stock were as follows:
| Year ended December 31, | |
| 2007 | | 2006 | |
Shares sold | | 950,667 | | | 2,006,880 | |
Shares issued in reinvestment of distributions | | 555,626 | | | 57,524 | |
| | 1,506,293 | | | 2,064,404 | |
Shares redeemed | | (2,886,560 | ) | | (1,474,873 | ) |
Net increase (decrease) | | (1,380,267 | ) | | 589,531 | |
| | | | | | |
Proceeds from shares sold | $ | 15,342,280 | | $ | 30,212,476 | |
Proceeds from shares issued in reinvestment of distributions | | 8,255,743 | | | 940,365 | |
| | 23,598,023 | | | 31,152,841 | |
Cost of shares redeemed | | (46,655,187 | ) | | (21,063,598 | ) |
Net increase (decrease) | $ | (23,057,164 | ) | $ | 10,089,243 | |
NOTE 5 - EXPENSES PAID INDIRECTLY
Under an agreement with State Street Bank, custodian fees are reduced for earnings on cash balances maintained at the custodian by the Fund. Such reductions amounted to $1,715 during the year ended December 31, 2007.
17
DAVIS FINANCIAL PORTFOLIO
NOTES TO FINANCIAL STATEMENTS - (Continued)
December 31, 2007
NOTE 6 - BANK BORROWINGS
The Fund may borrow up to 5% of its assets from a bank to purchase portfolio securities or for temporary and emergency purposes. The purchase of securities with borrowed funds creates leverage in the Fund. The Fund has entered into an agreement, which enables it to participate with certain other funds managed by the Adviser in an unsecured line of credit with a bank, which permits borrowings up to $50 million, collectively. Interest is charged based on its borrowings, at a rate equal to the overnight Federal Funds Rate plus 0.75%. The Fund had no borrowings outstanding for the year ended December 31, 2007.
NOTE 7 - ILLIQUID AND RESTRICTED SECURITIES
Securities may be considered illiquid if they lack a readily available market or if valuation has not changed for a certain period of time. Restricted securities are not registered under the Securities Act of 1933 and may have contractual restrictions on resale. They are valued under methods approved by the Board of Directors as reflecting fair value. The aggregate value of illiquid securities in the Fund amounted to $5,619,027 or 4.81% of the Fund’s net assets as of December 31, 2007. The aggregate value of restricted securities in the Fund amounted to $5,160,527 or 4.42% of the Fund’s net assets as of December 31, 2007. Information concerning illiquid and restricted securities is as follows:
Security | | Acquisition Date | | Shares | | Cost per Share | | Valuation per Share as of December 31, 2007 |
| | | | | | | | | | |
Merrill Lynch & Co., Inc., Private Placement | | 12/24/07 | | 110,500 | | $ | 48.00 | | $ | 46.7016 |
Oaktree Capital Group, LLC, Class A | | 05/21/07 | | 14,000 | | $ | 44.00 | | $ | 32.7500 |
18
DAVIS FINANCIAL PORTFOLIO
FINANCIAL HIGHLIGHTS
Financial Highlights for a share of capital stock outstanding throughout each period:
| | |
| | |
| Year ended December 31, | |
| 2007 | | 2006 | | 2005 | | 2004 | | 2003 | |
| | | | | | | | | |
| | | | | | | | | | | | | | | |
Net Asset Value, Beginning of Period | $ | 16.29 | | $ | 13.83 | | $ | 12.82 | | $ | 11.66 | | $ | 8.85 | |
| | | | | | | | | | | | | | | |
Income (Loss) from Investment Operations: | | | | | | | | | | | | | | | |
Net Investment Income | | 0.17 | | | 0.09 | | | 0.07 | | | 0.04 | | | 0.04 | |
Net Realized and Unrealized Gains (Losses) | | (1.12 | ) | | 2.47 | | | 1.00 | | | 1.16 | | | 2.81 | |
Total from Investment Operations | | (0.95 | ) | | 2.56 | | | 1.07 | | | 1.20 | | | 2.85 | |
| | | | | | | | | | | | | | | |
Dividends and Distributions: | | | | | | | | | | | | | | | |
Dividends from Net Investment Income | | (0.17 | ) | | (0.09 | ) | | (0.06 | ) | | (0.04 | ) | | (0.04 | ) |
Distributions from Realized Gains | | (0.90 | ) | | (0.01 | ) | | – | | | – | | | – | |
Total Dividends and | | | | | | | | | | | | | | | |
Distributions | | (1.07 | ) | | (0.10 | ) | | (0.06 | ) | | (0.04 | ) | | (0.04 | ) |
| | | | | | | | | | | | | | | |
Net Asset Value, End of Period | $ | 14.27 | | $ | 16.29 | | $ | 13.83 | | $ | 12.82 | | $ | 11.66 | |
| | | | | | | | | | | | | | | |
Total Return1 | | (6.05)% | | | 18.50% | | | 8.38% | | | 10.32% | | | 32.15% | |
| | | | | | | | | | | | | | | |
Ratios/Supplemental Data: | | | | | | | | | | | | | | | |
Net Assets, End of Period | | | | | | | | | | | | | | | |
(000 omitted) | $ | 116,725 | | $ | 155,807 | | $ | 124,060 | | $ | 109,274 | | $ | 71,179 | |
Ratio of Expenses to Average Net Assets: | | | | | | | | | | | | | | | |
Gross | | 0.85% | | | 0.84% | | | 0.85% | | | 0.85% | | | 0.90% | |
Net3 | | 0.85% | | | 0.84% | | | 0.85% | | | 0.85% | | | 0.90% | |
Ratio of Net Investment Income | | | | | | | | | | | | | | | |
to Average Net Assets | | 0.97% | | | 0.66% | | | 0.52% | | | 0.40% | | | 0.48% | |
Portfolio Turnover Rate2 | | 17% | | | 9% | | | 21% | | | 6% | | | 10% | |
1 Assumes hypothetical initial investment on the business day before the first day of the fiscal period, with all dividends and distributions reinvested in additional shares on the reinvestment date, and redemption at the net asset value calculated on the last business day of the fiscal period. Total returns do not reflect charges attributable to your insurance company’s separate account. Inclusion of these charges would reduce the total returns shown.
2 The lesser of purchases or sales of portfolio securities for a period, divided by the monthly average of the market value of portfolio securities owned during the period. Securities with a maturity or expiration date at the time of acquisition of one year or less are excluded from the calculation.
3 The Net ratio of expenses to average net assets reflects the impact, if any, of the reduction of expenses paid indirectly and of certain reimbursements from the Adviser.
See Notes to Financial Statements
19
DAVIS FINANCIAL PORTFOLIO
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
of Davis Variable Account Fund, Inc.:
We have audited the accompanying statement of assets and liabilities of Davis Financial Portfolio (a separate series of the Davis Variable Account Fund, Inc.), including the schedule of investments, as of December 31, 2007, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2007, by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Davis Financial Portfolio as of December 31, 2007, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.
KPMG LLP
Denver, Colorado
February 8, 2008
20
DAVIS FINANCIAL PORTFOLIO
FUND INFORMATION
Federal Income Tax Information (Unaudited)
During the calendar year ended 2007 the Fund declared and paid long-term capital gain distributions in the amount of $6,545,449.
Income dividends paid by the Fund during the calendar year ended 2007 should be multiplied by 100% to arrive at the net amount eligible for the corporate dividends-received deduction.
Portfolio Proxy Voting Policies and Procedures
The Fund has adopted Portfolio Proxy Voting Policies and Procedures under which the Fund votes proxies relating to securities held by the Fund. A description of the Fund’s Portfolio Proxy Voting Policies and Procedures is available (i) without charge, upon request, by calling the Fund toll-free at 1-800-279-0279, (ii) on the Fund’s website at www.davisfunds.com, and (iii) on the SEC’s website at www.sec.gov.
In addition, the Fund is required to file Form N-PX, with its complete proxy voting record for the 12 months ended June 30th, no later than August 31st of each year. The Fund’s Form N-PX filing is available (i) without charge, upon request, by calling the Fund toll-free at 1-800-279-0279, (ii) on the Fund’s website at www.davisfunds.com, and (iii) on the SEC’s website at www.sec.gov.
Form N-Q
The Fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The Fund’s Form N-Q is available without charge, upon request by calling 1-800-279-0279, or on the Fund’s website at www.davisfunds.com, or on the SEC’s website at www.sec.gov. The Fund’s Form N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington, DC, and that information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
21
DAVIS FINANCIAL PORTFOLIO
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
DIRECTORS
For the purposes of their service as directors to the Davis Funds, the business address for each of the directors is 2949 E. Elvira Road, Suite 101, Tucson, AZ 85706. Each Director serves until their retirement, resignation, death or removal. Subject to exceptions and exemptions, which may be granted by the Independent Directors, Directors must retire at the close of business on the last day of the calendar year in which the Director attains age seventy-four (74).
| | | | Number of | |
| | Term of | | Portfolios in | |
| | Office and | | Fund | |
| Position(s) | Length of | | Complex | |
Name | Held With | Time | Principal Occupation(s) | Overseen by | Other Directorships |
(birthdate) | Fund | Served | During Past Five Years | Director | Held by Director |
Independent Directors
| | | | | |
Marc P. Blum (9/9/42) | Director | Director since 1986 | Chief Executive Officer, World Total Return Fund, LLLP; of Counsel to Gordon, Feinblatt, Rothman, Hoffberger and Hollander, LLC (law firm). | 13 | Director, Legg Mason Investment Counsel & Trust Company, N.A. (asset management company) and Rodney Trust Company (Delaware). |
| | | | | |
John S. Gates, Jr. (8/2/53) | Director | Director since 2007 | Chairman and Chief Executive Officer of PortaeCo LLC, a private investment company (beginning in 2006); Co-founder of Centerpoint Properties Trust (REIT) and former Co-chairman and Chief Executive Officer for the last 22 years (until 2006). | 13 | Director, DCT Industrial Trust (a REIT). |
| | | | | |
Thomas S. Gayner (12/16/61) | Director | Director since 2004 | Executive Vice President and Chief Investment Officer, Markel Corporation (insurance company). | 13 | Director, First Market Bank; Director, Washington Post Co. (newspaper publisher). |
| | | | | |
Jerry D. Geist (5/23/34) | Director | Director since 1986 | Chairman, Santa Fe Center Enterprises (energy project development). | 13 | Director, CH2M-Hill, Inc. (engineering); Member, Investment Committee for Microgeneration Technology Fund; UTECH Funds. |
22
DAVIS FINANCIAL PORTFOLIO
2949 East Elvira Road, Suite 101
DIRECTORS – (Continued)
| | | | Number of | |
| | Term of | | Portfolios in | |
| | Office and | | Fund | |
| Position(s) | Length of | | Complex | |
Name | Held With | Time | Principal Occupation(s) | Overseen by | Other Directorships |
(birthdate) | Fund | Served | During Past Five Years | Director | Held by Director |
Independent Directors – (Continued)
| | | | | |
G. Bernard Hamilton (3/18/37) | Director | Director since 1978 | Managing General Partner, Avanti Partners, L.P. (investment partnership), retired 2005. | 13 | none |
| | | | | |
Samuel H. Iapalucci (7/19/52) | Director | Director since 2006 | Executive Vice President and Chief Financial Officer, CH2M-Hill, Inc., (engineering). | 13 | none |
| | | | | |
Robert P. Morgenthau (3/22/57) | Director | Director since 2002 | Chairman, NorthRoad Capital Management, LLC (an investment management firm) since June 2002. | 13 | none |
| | | | | |
Christian R. Sonne (5/6/36) | Director | Director since 1990 | General Partner, Tuxedo Park Associates (land holding and development firm). | 13 | none |
| | | | | |
Marsha Williams (3/28/51) | Director | Director since 1999 | Senior Vice President and Chief Financial Officer, Orbitz Worldwide, Inc. (travel-service provider); former Executive Vice President and Chief Financial Officer, Equity Office Properties Trust (a real estate investment trust). | 16 | Director, the Selected Funds (consisting of three portfolios) since 1996; Director, Modine Manufacturing, Inc. (heat transfer technology); Director, Chicago Bridge & Iron Company, N.V. (industrial construction and engineering). |
23
DAVIS FINANCIAL PORTFOLIO
2949 East Elvira Road, Suite 101
DIRECTORS – (Continued)
| | | | Number of | |
| | Term of | | Portfolios in | |
| | Office and | | Fund | |
| Position(s) | Length of | | Complex | |
Name | Held With | Time | Principal Occupation(s) | Overseen by | Other Directorships |
(birthdate) | Fund | Served | During Past Five Years | Director | Held by Director |
Inside Directors*
| | | | | |
Jeremy H. Biggs (8/16/35) | Director/ Chairman | Director since 1994 | Vice Chairman, Member of the Audit Committee and Member of the International Investment Committee, former Chief Investment Officer (1980 through 2005), all for Fiduciary Trust Company International (money management firm); Consultant to Davis Selected Advisers, L.P. | 13 | none |
| | | | | |
Andrew A. Davis (6/25/63) | Director | Director since 1997 | President or Vice President of each Davis Fund and Selected Fund; President, Davis Selected Advisers, L.P., and also serves as an executive officer in certain companies affiliated with the Adviser. | 16 | Director, the Selected Funds (consisting of three portfolios) since 1998. |
| | | | | |
Christopher C. Davis (7/13/65) | Director | Director since 1997 | President or Vice President of each Davis Fund, Selected Fund, and Clipper Fund; Chairman, Davis Selected Advisers, L.P., and also serves as an executive officer in certain companies affiliated with the Adviser, including sole Member of the Adviser’s general partner, Davis Investments, LLC; Employee of Shelby Cullom Davis & Co. (registered broker/dealer). | 16 | Director, the Selected Funds (consisting of three portfolios) since 1998; Director, Washington Post Co. (newspaper publisher). |
* Jeremy H. Biggs, Andrew A. Davis, and Christopher C. Davis own partnership units (directly, indirectly, or both) of the Adviser and are considered to be “interested persons” of the Funds as defined in the Investment Company Act of 1940. Andrew A. Davis and Christopher C. Davis are brothers.
24
DAVIS FINANCIAL PORTFOLIO
2949 East Elvira Road, Tucson, Arizona 85706
| Directors | Officers |
| Jeremy H. Biggs | Jeremy H. Biggs |
| Marc P. Blum | Chairman |
| Andrew A. Davis | Christopher C. Davis |
| Christopher C. Davis | President |
| John S. Gates, Jr. | Andrew A. Davis |
| Thomas S. Gayner | Vice President |
| Jerry D. Geist | Kenneth C. Eich |
| G. Bernard Hamilton | Executive Vice President & Principal |
| Samuel H. Iapalucci | Executive Officer |
| Robert P. Morgenthau | Sharra L. Haynes |
| Christian R. Sonne | Vice President & Chief Compliance Officer |
| Marsha Williams | Douglas A. Haines |
| | Vice President & Principal Accounting Officer |
| | Thomas D. Tays |
| | Vice President & Secretary |
| | |
| |
Investment Adviser | |
Davis Selected Advisers, L.P. (Doing business as “Davis Advisors”) | |
2949 East Elvira Road, Suite 101 | |
Tucson, Arizona 85706 | |
(800) 279-0279 | |
| |
Distributor | |
Davis Distributors, LLC | |
2949 East Elvira Road, Suite 101 | |
Tucson, Arizona 85706 | |
| |
Transfer Agent | |
Boston Financial Data Services, Inc. | |
c/o The Davis Funds | |
P.O. Box 8406 | |
Boston, Massachusetts 02266-8406 | |
| |
Custodian | |
State Street Bank and Trust Co. | |
One Lincoln Street | |
Boston, Massachusetts 02111 | |
| |
Counsel | |
Seyfarth Shaw LLP | |
131 South Dearborn Street, Suite 2400 | |
Chicago, Illinois 60603-5577 | |
| |
Independent Registered Public Accounting Firm | |
KPMG LLP | |
707 Seventeenth Street, Suite 2700 | |
Denver, Colorado 80202 | |
| | | |
For more information about Davis Financial Portfolio including management fee, charges and expenses, see the current Davis Variable Account Fund, Inc. (including Davis Financial Portfolio) prospectus, which must precede or accompany this report. The Davis Variable Account Fund, Inc. Statement of Additional Information contains additional information about the Fund’s Directors and is available without charge upon request by calling 1-800-279-0279, or on the Fund’s website at www.davisfunds.com. Quarterly Fact sheets are available on the Fund’s website at www.davisfunds.com.
25
Table of Contents
Management’s Discussion and Analysis | 2 |
| |
Fund Overview | 5 |
| |
Fund Performance | 8 |
| |
Schedule of Investments | 10 |
| |
Statement of Assets and Liabilities | 13 |
| |
Statement of Operations | 14 |
| |
Statements of Changes in Net Assets | 15 |
| |
Notes to Financial Statements | 16 |
| |
Financial Highlights | 21 |
| |
Report of Independent Registered Public Accounting Firm | 22 |
| |
Fund Information | 23 |
| |
Directors and Officers | 24 |
DAVIS REAL ESTATE PORTFOLIO
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
Management’s Discussion and Analysis
Davis Real Estate Portfolio
Davis Real Estate Portfolio delivered a negative return on net asset value of 15.48% for the year ended December 31, 20071. Over the same time period, the Dow Jones Wilshire Real Estate Securities Index2 (“Index”) declined 17.66%. Seven of the eight sub-industries3 within the Index delivered negative returns, including diversified REITs, residential REITs, real estate management & development, and office REITs, all down 20% or more.
Key Contributors to Performance
Transportation companies were the most important contributors4 to the Portfolio’s performance. Florida East Coast Industries5, Alexander & Baldwin, and Burlington Northern Santa Fe were among the top contributors to performance. The Portfolio no longer owns Florida East Coast Industries.
The Portfolio maintained a cash position over the year and this aided relative performance during the weak market for real estate companies.
Other key contributors to the Portfolio’s performance included Ventas, ProLogis, and Macerich. The Portfolio no longer owns Macerich.
Key Detractors from Performance
Office REITs represented the Portfolio’s largest holdings over the year and were the most important detractors from performance. The Portfolio’s office REITs performed in line with the corresponding sub-industry within the Index (both down 20%). Alexandria Real Estate Equities was among the top contributors to performance. Corporate Office Properties, Duke Realty, Derwent London, and SL Green Realty were among the top detractors from performance. The Portfolio no longer owns Duke Realty.
Real estate management & development companies were the second most important detractors from performance. The Portfolio’s real estate management & development companies under-performed the corresponding sub-industry within the Index (down 34% versus down 24% for the Index). Forest City Enterprises and Minerva were among the top detractors from performance.
The Portfolio managers have identified a number of investment opportunities in foreign companies. The Portfolio ended the period with approximately 6% of its assets invested in foreign companies. As a group, the foreign companies owned by the Portfolio under-performed the Index over the period.
Other individual companies detracting from performance included Cousins Properties, Brixton, and Kimco Realty.
2
DAVIS REAL ESTATE PORTFOLIO
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
Management’s Discussion and Analysis – (Continued)
This Annual Report is authorized for use by existing shareholders. Prospective shareholders must receive a current Davis Variable Account Funds (including Davis Real Estate Portfolio) prospectus, which contains more information about investment strategies, risks, charges, and expenses. Please read the prospectus carefully before investing or sending money.
Davis Real Estate Portfolio’s investment objective is total return through a combination of growth and income. There can be no assurance that the Portfolio will achieve its objective. The primary risks of an investment in Davis Real Estate Portfolio are: (1) market risk, (2) company risk, (3) concentrated real estate portfolio risk, (4) focused portfolio risk, (5) small- and medium-capitalization risk, (6) foreign country risk, (7) headline risk, and (8) selection risk. See the prospectus for a full description of each risk.
Davis Real Estate Portfolio concentrates its investments in the real estate sector, and it may be subject to greater risks than a portfolio that does not concentrate its investments in a particular sector. The Portfolio’s investment performance, both good and bad, is expected to reflect the economic performance of the real estate sector much more than a portfolio that does not concentrate its portfolio.
Davis Real Estate Portfolio is allowed to focus its investments in fewer companies, and it may be subject to greater risks than a more diversified portfolio that is not allowed to focus its investments in a few companies. Should the portfolio manager determine that it is prudent to focus the Portfolio’s portfolio in a few companies, the Portfolio’s investment performance, both good and bad, is expected to reflect the economic performance of its more focused portfolio.
1 Total return assumes reinvestment of dividends and capital gain distributions. Past performance is not a guarantee of future results. Investment return and principal value will vary, so that when redeemed, an investor’s shares may be worth more or less than when purchased. The annual gross operating expense ratio for the year ended December 31, 2007 was 0.88%. The following table lists the average annual total returns for the periods ended December 31, 2007.
| 1-YEAR | 5-YEAR | PORTFOLIO'S INCEPTION (July 1, 1999) |
Davis Real Estate Portfolio | (15.48)% | 18.57% | 13.25% |
Dow Jones Wilshire Real Estate Securities Index | (17.66)% | 18.63% | 14.49% |
Standard & Poor’s 500® Index | 5.49% | 12.82% | 2.38% |
Portfolio performance numbers are net of all portfolio operating expenses, but do not include any insurance charges imposed by your insurance company’s separate account. If performance information included the effect of these additional charges, the total return would be lower.
Portfolio performance changes over time and current performance may be higher or lower than stated. The annual operating expense ratio may vary in future years. For more current information please call Davis Funds Investor Services at 1-800-279-0279.
3
DAVIS REAL ESTATE PORTFOLIO
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
Management’s Discussion and Analysis – (Continued)
2 | The definitions of indices quoted in this report appear below. Investments cannot be made directly in the indices. |
I. The S&P 500® Index is an unmanaged index of 500 selected common stocks, most of which are listed on the New York Stock Exchange. The Index is adjusted for dividends, weighted towards stocks with large market capitalizations, and represents approximately two-thirds of the total market value of all domestic common stocks.
II. The Dow Jones Wilshire Real Estate Securities Index is a broad measure of the performance of publicly traded real estate securities, such as Real Estate Investment Trusts (REITs) and Real Estate Operating Companies (REOCs). The Index is capitalization-weighted. The beginning date was January 1, 1978, and the Index is rebalanced monthly and returns are calculated on a buy and hold basis.
3 The companies included in the Dow Jones Wilshire Real Estate Securities Index are divided into eight sub-industries.
4 A company’s or sector’s contribution to the Portfolio’s performance is a product both of its appreciation or depreciation and its weighting within the portfolio. For example, a 5% holding that rises 20% has twice as much impact as a 1% holding that rises 50%.
5 This Management Discussion & Analysis discusses a number of individual companies. The information provided in this report does not provide information reasonably sufficient upon which to base an investment decision and should not be considered a recommendation to purchase or sell any particular security. The Schedule of Investments lists the Portfolio’s holdings of each company discussed.
Shares of the Davis Real Estate Portfolio are not deposits or obligations of any bank, are not guaranteed by any bank, are not insured by the FDIC or any other agency, and involve investment risks, including possible loss of the principal amount invested.
4
DAVIS REAL ESTATE PORTFOLIO
FUND OVERVIEW
At December 31, 2007
Portfolio Composition | | Sector Weightings | |
(% of Fund’s Net Assets) | | (% of Long Term Portfolio) | |
| | | | | | |
| | | | | Dow Jones Wilshire Real Estate Securities Index | |
Common Stock (U.S.) | 83.16% | | | | |
Common Stock (Foreign) | 6.30% | | | Fund | |
Convertible Bonds | 6.22% | | Office REITS | 27.29% | 16.71% | |
Preferred Stock | 0.17% | | Retail REITS | 16.34% | 27.54% | |
Short Term Investments | 3.23% | | Industrial REITS | 10.34% | 10.59% | |
Other Assets & Liabilities | 0.92% | | Real Estate Management & Development | 9.87% | 1.55% | |
| 100.00% | | Residential REITS | 8.49% | 14.64% | |
| | | Specialized REITS | 8.00% | 21.39% | |
| | | Transportation | 7.87% | – | |
| | | Diversified REITS | 6.21% | 7.58% | |
| | | Capital Goods | 2.80% | – | |
| | | Insurance | 2.42% | – | |
| | | Mortgage REITS | 0.33% | – | |
| | | Homebuilding | 0.04% | – | |
| | | | 100.00% | 100.00% | |
| | | | | | | |
Top 10 Holdings
| | % of Fund’s |
Security | Industry | Net Assets |
Forest City Enterprises, Inc., Class A | Real Estate Management & Development | 7.89% |
Ventas, Inc. | Specialized REITS | 7.67% |
Alexandria Real Estate Equities, Inc. | Office REITS | 7.65% |
Kimco Realty Corp. | Retail REITS | 4.53% |
Boston Properties, Inc. | Office REITS | 4.48% |
Digital Realty Trust, Inc. | Office REITS | 4.44% |
Cousins Properties, Inc. | Diversified REITS | 3.98% |
Regency Centers Corp. | Retail REITS | 3.97% |
Derwent London PLC | Office REITS | 3.84% |
Burlington Northern Santa Fe Corp. | Transportation | 3.83% |
5
DAVIS REAL ESTATE PORTFOLIO
FUND OVERVIEW - (Continued)
January 1, 2007 through December 31, 2007
New Positions Added (01/01/07 - 12/31/07) |
(Highlighted positions are those greater than 2.50% of 12/31/07 total net assets)
| | | % of 12/31/07 |
| | Date of 1st | Fund |
Security | Industry | Purchase | Net Assets |
Ambac Financial Group, Inc. | Property & Casualty Insurance | 11/01/07 | 2.32% |
Archstone-Smith Trust | Residential REITS | 08/21/07 | – |
AvalonBay Communities, Inc. | Residential REITS | 06/12/07 | 2.34% |
Burlington Northern Santa Fe Corp. | Transportation | 02/08/07 | 3.83% |
Digital Realty Trust, Inc. | Office REITS | 10/12/07 | 4.44% |
Essex Property Trust, Inc. | Residential REITS | 06/20/07 | 3.07% |
General Electric Co. | Capital Goods | 05/29/07 | 2.69% |
General Growth Properties, Inc., Ser. | | | |
144A Conv. Sr. Notes, 3.98%, 4/15/27 | Retail REITS | 04/11/07 | 2.55% |
Minerva PLC | Real Estate Management & Development | 06/21/07 | 0.57% |
Mitsui Fudosan Co., Ltd. | Real Estate Management & Development | 12/17/07 | 1.00% |
ProLogis, Ser. 144A Conv. Sr. Notes, | | | |
2.25%, 4/1/37 | Industrial REITS | 03/20/07 | 3.49% |
Public Storage, Inc. | Specialized REITS | 01/05/07 | – |
SL Green Realty Corp., Ser. 144A | | | |
Conv. Sr. Notes, 3.00%, 3/30/27 | Office REITS | 03/21/07 | 0.18% |
Toll Brothers, Inc. | Homebuilding | 11/21/07 | 0.04% |
Vornado Realty Trust | Diversified REITS | 08/16/07 | 1.97% |
6
DAVIS REAL ESTATE PORTFOLIO
FUND OVERVIEW - (Continued)
January 1, 2007 through December 31, 2007
Positions Closed (01/01/07 - 12/31/07) |
(Gains and losses greater than $200,000 are highlighted)
| | Date of | Realized |
Security | Industry | Final Sale | Gain (Loss) |
Archstone-Smith Trust | Residential REITS | 10/05/07 | $ | 17,446 | |
Capital & Regional PLC | Real Estate Management & Development | 03/06/07 | | 327,807 | |
Columbia Equity Trust, Inc. | Office REITS | 01/23/07 | | 194,843 | |
Developers Diversified Realty Corp. | Retail REITS | 06/27/07 | | 1,454,598 | |
Duke Realty Corp. | Office REITS | 12/17/07 | | 35,501 | |
Equity Residential, 8.60%, Series D, | | | | | |
Cum. Pfd. | Residential REITS | 07/16/07 | | (23 | ) |
Florida East Coast Industries, Inc. | Transportation | 07/27/07 | | 840,082 | |
Hammerson PLC | Retail REITS | 10/09/07 | | 259,930 | |
Host Hotels & Resorts Inc. | Specialized REITS | 11/29/07 | | (123,987 | ) |
Macerich Co. | Retail REITS | 03/20/07 | | 474,007 | |
ProLogis | Industrial REITS | 03/21/07 | | 1,092,980 | |
Public Storage, Inc. | Specialized REITS | 06/14/07 | | (295,080 | ) |
Slough Estates PLC | Industrial REITS | 01/30/07 | | 181,460 | |
Spirit Finance Corp. | Diversified REITS | 01/09/07 | | 57,950 | |
St. Joe Co. | Real Estate Management & Development | 12/24/07 | | (636,242 | ) |
U-Store-It Trust | Specialized REITS | 03/28/07 | | 91,457 | |
UDR, Inc. | Residential REITS | 08/08/07 | | 806,032 | |
Vornado Realty Trust, Conv. Sr. Deb., | | | | | |
3.625%, 11/15/26 | Diversified REITS | 08/16/07 | | (198,803 | ) |
7
DAVIS REAL ESTATE PORTFOLIO
FUND PERFORMANCE
Average Annual Total Return | | Expense Example | | | |
for the periods ended December 31, 2007 | | | Beginning | Ending | Expenses Paid |
| | | Account Value | Account Value | During Period* |
One-Year | (15.48)% | | (07/01/07) | (12/31/07) | (07/01/07-12/31/07) |
Five-Year | 18.57% | Actual | $1,000.00 | $890.01 | $4.24 |
Life of Fund (July 1, 1999 | | Hypothetical (5% return | | | |
through December 31, 2007) | 13.25% | before expenses) | $1,000.00 | $1,020.72 | $4.53 |
*Expenses are equal to the Fund’s annualized expense ratio (0.89%), multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). The expense ratio reflects the impact, if any, of the reduction of expenses paid indirectly and of certain reimbursements from the adviser. See Notes to Performance on page 9 for a description of the “Expense Example”.
$10,000 invested at commencement of operations. Let’s say you invested $10,000 in Davis Real Estate Portfolio on July 1, 1999 (commencement of operations). As the chart shows, by December 31, 2007 the value of your investment would have grown to $28,805 – a 188.05% increase on your initial investment. For comparison, the Dow Jones Wilshire Real Estate Securities Index and the Standard & Poor’s 500® Stock Index are also presented on the chart below.
The Dow Jones Wilshire Real Estate Securities Index is a broad measure of the performance of publicly traded real estate securities, such as Real Estate Investment Trusts (REITs) and Real Estate Operating Companies (REOCs). Investments cannot be made directly in the Index. The index used includes net dividends reinvested.
The Standard & Poor’s 500® Stock Index is an unmanaged index of 500 selected common stocks, most of which are listed on the New York Stock Exchange. The Index is adjusted for dividends, weighted towards stocks with large market capitalizations, and represents approximately two-thirds of the total market value of all domestic common stocks.
The performance data for Davis Real Estate Portfolio contained in this report represents past performance and assumes that all distributions were reinvested, and should not be considered as an indication of future performance from an investment in the Fund today. The investment return and principal value will fluctuate so that shares may be worth more or less than their original cost when redeemed.
8
DAVIS REAL ESTATE PORTFOLIO
NOTES TO PERFORMANCE
The following disclosure provides important information regarding the Fund’s Expense Example, which appears in the Fund’s Performance section of this Annual Report. Please refer to this information when reviewing the Expense Example for the Fund.
Example
As a shareholder of the Fund, you incur ongoing costs only, including advisory and administrative fees and other Fund expenses. The Expense Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Expense Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period indicated, which for the Fund is from 07/01/07 to 12/31/07. Please note that the Expense Example is general and does not reflect charges imposed by your insurance company’s separate account or account specific costs, which may increase your total costs of investing in the Fund. If these charges or account specific costs were included in the Expense Example, the expenses would have been higher.
Actual Expenses
The information represented in the row entitled “Actual” provides information about actual account values and actual expenses. You may use the information in this row, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then, multiply the result by the number under the heading “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The information represented in the row entitled “Hypothetical” provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only. Therefore, the information in the row entitled “Hypothetical” is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds.
9
DAVIS REAL ESTATE PORTFOLIO
December 31, 2007
| | | Value | |
Shares | | Security | (Note 1 | ) |
COMMON STOCK – (89.46%) |
CAPITAL GOODS – (2.69%) | | | |
| 35,900 | | General Electric Co. | $ | 1,330,813 | |
DIVERSIFIED REITS – (5.95%) | | | |
| 89,200 | | Cousins Properties, Inc. | | 1,971,320 | |
| 11,100 | | Vornado Realty Trust | | 976,245 | |
| | | | | 2,947,565 | |
HOMEBUILDING – (0.04%) | | | |
| 1,000 | | Toll Brothers, Inc.* | | 20,060 | |
INDUSTRIAL REITS – (6.42%) | | | |
| 18,100 | | AMB Property Corp. | | 1,041,836 | |
| 74,900 | | Brixton PLC (United Kingdom) | | 439,460 | |
| 104,100 | | DCT Industrial Trust Inc. | | 969,171 | |
| 42,300 | | First Potomac Realty Trust | | 731,367 | |
| | | | | 3,181,834 | |
MORTGAGE REITS – (0.31%) | | | |
| 6,400 | | Gramercy Capital Corp. | | 155,584 | |
OFFICE REITS – (25.98%) | | | |
| 37,300 | | Alexandria Real Estate Equities, Inc. | | 3,792,291 | |
| 24,200 | | Boston Properties, Inc. | | 2,221,802 | |
| 57,300 | | Corporate Office Properties Trust | | 1,804,950 | |
| 67,600 | | Derwent London PLC (United Kingdom) | | 1,902,743 | |
| 57,300 | | Digital Realty Trust, Inc. | | 2,198,601 | |
| 10,170 | | SL Green Realty Corp. | | 950,488 | |
| | | | | 12,870,875 | |
PROPERTY & CASUALTY INSURANCE – (2.32%) | | | |
| 44,600 | | Ambac Financial Group, Inc. | | 1,149,342 | |
REAL ESTATE MANAGEMENT & DEVELOPMENT – (9.46%) | | | |
| 88,000 | | Forest City Enterprises, Inc., Class A | | 3,910,720 | |
| 105,840 | | Minerva PLC* (United Kingdom) | | 283,372 | |
| 22,700 | | Mitsui Fudosan Co., Ltd. (Japan) | | 493,765 | |
| | | | | 4,687,857 | |
RESIDENTIAL REITS – (7.97%) | | | |
| 47,300 | | American Campus Communities, Inc. | | 1,270,005 | |
| 12,300 | | AvalonBay Communities, Inc. | | 1,157,922 | |
| 15,600 | | Essex Property Trust, Inc. | | 1,520,844 | |
| | | | | 3,948,771 | |
10
DAVIS REAL ESTATE PORTFOLIO
SCHEDULE OF INVESTMENTS – (Continued) |
December 31, 2007
| | | Value | |
Shares/Principal | | Security | (Note 1 | ) |
COMMON STOCK – (Continued) | |
RETAIL REITS – (13.10%) | | | |
| 15,942 | | General Growth Properties, Inc. | $ | 656,492 | |
| 61,704 | | Kimco Realty Corp. | | 2,246,026 | |
| 30,500 | | Regency Centers Corp. | | 1,966,945 | |
| 33,000 | | Taubman Centers, Inc. | | 1,623,270 | |
| | | | | 6,492,733 | |
SPECIALIZED REITS – (7.67%) | | | |
| 84,000 | | Ventas, Inc. | | 3,801,000 | |
TRANSPORTATION – (7.55%) | | | |
| 35,700 | | Alexander & Baldwin, Inc. | | 1,842,477 | |
| 22,800 | | Burlington Northern Santa Fe Corp. | | 1,897,644 | |
| | | | | 3,740,121 | |
| | | Total Common Stock – (identified cost $44,161,975) | | 44,326,555 | |
PREFERRED STOCK – (0.17%) |
RESIDENTIAL REITS – (0.17%) | | | |
| 2,000 | | Equity Residential, 7.00%, Series E, Cum. Conv. Pfd. – (identified | | | |
| | | cost $60,342) | | 82,945 | |
CONVERTIBLE BONDS – (6.22%) |
INDUSTRIAL REITS – (3.49%) | | | |
$ | 1,747,000 | | ProLogis, Ser. 144A Conv. Sr. Notes, 2.25%, 4/1/37 (b) | | 1,729,530 | |
OFFICE REITS – (0.18%) | | | |
| 104,000 | | SL Green Realty Corp., Ser. 144A Conv. Sr. Notes, | | | |
| | | 3.00%, 3/30/27 (b) | | 88,400 | |
RETAIL REITS – (2.55%) | | | |
| 1,558,000 | | General Growth Properties, Inc., Ser. 144A Conv. Sr. Notes, | | | |
| | | 3.98%, 4/15/27 (b) | | 1,265,875 | |
| | | | | | |
| | | Total Convertible Bonds – (identified cost $3,353,030) | | 3,083,805 | |
11
DAVIS REAL ESTATE PORTFOLIO
SCHEDULE OF INVESTMENTS – (Continued)
December 31, 2007
| | | Value | |
Principal | | Security | (Note 1 | ) |
SHORT TERM INVESTMENTS – (3.23%) |
| | | | | |
$ | 586,000 | | ABN AMRO Inc. Joint Repurchase Agreement, 4.70%, | | | |
| | | 01/02/08, dated 12/31/07, repurchase value of $586,153 | | | |
| | | (collateralized by: U.S. Government agency mortgages and obligations | | | |
| | | in a pooled cash account, 4.125%-7.00%, 02/15/08-05/01/37, | | | |
| | | total market value $597,720) | $ | 586,000 | |
| 508,000 | | Banc of America Securities LLC Joint Repurchase Agreement, 4.50%, | | | |
| | | 01/02/08, dated 12/31/07, repurchase value of $508,127 | | | |
| | | (collateralized by: U.S. Government agency mortgage | | | |
| | | in a pooled cash account, 5.00%, 08/01/33, | | | |
| | | total market value $518,160) | | 508,000 | |
| 156,000 | | Goldman, Sachs & Co. Joint Repurchase Agreement, 4.75%, | | | |
| | | 01/02/08, dated 12/31/07, repurchase value of $156,041 | | | |
| | | (collateralized by: U.S. Government agency mortgages | | | |
| | | in a pooled cash account, 4.00%-9.50%, 12/01/14-12/01/37, | | | |
| | | total market value $159,120) | | 156,000 | |
| 350,000 | | UBS Securities LLC Joint Repurchase Agreement, 4.64%, | | | |
| | | 01/02/08, dated 12/31/07, repurchase value of $350,090 | | | |
| | | (collateralized by: U.S. Government agency mortgages | | | |
| | | in a pooled cash account, 5.00%-8.00%, 07/01/08-11/01/47, | | | |
| | | total market value $357,000) | | 350,000 | |
| | | Total Short Term Investments – (identified cost $1,600,000) | | 1,600,000 | |
| | | Total Investments – (99.08%) – (identified cost $49,175,347) – (a) | | 49,093,305 | |
| | | Other Assets Less Liabilities – (0.92%) | | 454,655 | |
| | | Net Assets – (100%) | $ | 49,547,960 | |
*Non-Income Producing Security.
(a) Aggregate cost for Federal Income Tax purposes is $49,175,398. At December 31, 2007 unrealized appreciation (depreciation) of securities for Federal Income Tax purposes is as follows:
| | | Unrealized appreciation | $ | 3,871,977 | |
| | | Unrealized depreciation | | (3,954,070 | ) |
| | | Net unrealized depreciation | $ | (82,093 | ) |
(b)These securities are subject to Rule 144A. The Board of Directors of the Fund has determined that there is sufficient liquidity in these securities to realize current valuations. These securities amounted to $3,083,805 or 6.22% of the Fund’s net assets, as of December 31, 2007.
See Notes to Financial Statements
12
DAVIS REAL ESTATE PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
At December 31, 2007
ASSETS: | | | |
| Investments in securities, at value | | | |
| (see accompanying Schedule of Investments) (identified cost $49,175,347) | $ | 49,093,305 | |
| Cash | | 2,550 | |
| Receivables: | | | |
| Dividends and interest | | 388,426 | |
| Capital stock sold | | 172,692 | |
| Investment securities sold | | 30,375 | |
| Prepaid expenses | | 725 | |
| Total assets | | 49,688,073 | |
LIABILITIES: | | | |
| Payables: | | | |
| Capital stock redeemed | | 80,275 | |
| Accrued audit fees | | 11,200 | |
| Accrued custodian fees | | 8,179 | |
| Accrued management fees | | 34,628 | |
| Other accrued expenses | | 5,831 | |
| Total liabilities | | 140,113 | |
| | | |
NET ASSETS | $ | 49,547,960 | |
| | | | |
SHARES OUTSTANDING (NOTE 4) | | 4,326,330 | |
| | | |
NET ASSET VALUE, offering, and redemption price per share | | | |
| (Net Assets ÷ Shares Outstanding) | $ | 11.45 | |
| | | |
NET ASSETS CONSIST OF: | | | |
| Par value of shares of capital stock | $ | 4,326 | |
| Additional paid-in capital | | 49,106,505 | |
| Undistributed net investment income | | 151,050 | |
| Accumulated net realized gains from investments and foreign currency transactions | | 368,124 | |
| Net unrealized depreciation on investments and foreign currency transactions | | (82,045 | ) |
| Net Assets | $ | 49,547,960 | |
| | | | |
See Notes to Financial Statements
13
DAVIS REAL ESTATE PORTFOLIO
STATEMENT OF OPERATIONS
For the year ended December 31, 2007
INVESTMENT INCOME: | | | |
| Income: | | | |
| Dividends (Net of foreign withholding taxes of $1,423) | $ | 1,797,384 | |
| Interest | | 313,955 | |
| Total income | | 2,111,339 | |
| | | | | | |
| Expenses: | | | | | |
| Management fees (Note 2) | $ | 567,310 | | | |
| Custodian fees | | 38,605 | | | |
| Transfer agent fees | | 7,810 | | | |
| Audit fees | | 16,800 | | | |
| Accounting fees (Note 2) | | 6,000 | | | |
| Legal fees | | 1,593 | | | |
| Reports to shareholders | | 1,725 | | | |
| Directors’ fees and expenses | | 16,449 | | | |
| Registration and filing fees | | 119 | | | |
| Miscellaneous | | 6,740 | | | |
| Total expenses | | 663,151 | |
| Expenses paid indirectly (Note 5) | | (2,492 | ) |
| Net expenses | | 660,659 | |
| Net investment income | | 1,450,680 | |
| | | | |
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: | | | |
| Net realized gain (loss) from: | | | |
| Investment transactions | | 13,885,406 | |
| Foreign currency transactions | | (398 | ) |
| Net change in unrealized appreciation (depreciation) on investments and foreign | | | |
| currency transactions | | (26,189,367 | ) |
| Net realized and unrealized loss on investments and foreign currency | | | |
| transactions | | (12,304,359 | ) |
| Net decrease in net assets resulting from operations | $ | (10,853,679 | ) |
| | | | |
| | | | | | | |
��
See Notes to Financial Statements
14
DAVIS REAL ESTATE PORTFOLIO
STATEMENTS OF CHANGES IN NET ASSETS
| Year ended December 31, | |
| 2007 | | 2006 | |
OPERATIONS: | | | | | | |
Net investment income | $ | 1,450,680 | | $ | 1,243,199 | |
Net realized gain from investments and foreign currency | | | | | | |
transactions | | 13,885,008 | | | 11,308,050 | |
Net change in unrealized appreciation (depreciation) on | | | | | | |
investments and foreign currency transactions | | (26,189,367 | ) | | 9,914,836 | |
Net increase (decrease) in net assets resulting | | | | | | |
from operations | | (10,853,679 | ) | | 22,466,085 | |
| | | | | | |
DIVIDENDS AND DISTRIBUTIONS TO | | | | | | |
SHAREHOLDERS FROM: | | | | | | |
Net investment income | | (2,429,289 | ) | | (2,403,658 | ) |
Realized gains from investment transactions | | (15,952,803 | ) | | (8,766,221 | ) |
| | | | | | |
CAPITAL SHARE TRANSACTIONS (NOTE 4) | | (10,954,364 | ) | | 13,885,472 | |
| | | | | | |
Total increase (decrease) in net assets | | (40,190,135 | ) | | 25,181,678 | |
| | | | | | |
NET ASSETS: | | | | | | |
Beginning of year | | 89,738,095 | | | 64,556,417 | |
End of year* | $ | 49,547,960 | | $ | 89,738,095 | |
| | | | | | |
| | | | | | |
*Including undistributed net investment income of | $ | 151,050 | | $ | 205,756 | |
See Notes to Financial Statements
15
DAVIS REAL ESTATE PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
December 31, 2007
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Fund is a separate series of Davis Variable Account Fund, Inc. (a Maryland corporation), which is registered under the Investment Company Act of 1940, as amended, as a non-diversified, open-end management investment company. Insurance companies, for the purpose of funding variable annuity or variable life insurance contracts, may only purchase shares of the Fund. The following is a summary of significant accounting policies followed by the Fund in the preparation of financial statements.
A. VALUATION OF SECURITIES - The Fund calculates the net asset value of its shares as of the close of the New York Stock Exchange (“Exchange”), normally 4:00 P.M. Eastern time, on each day the Exchange is open for business. Securities listed on the Exchange (and other national exchanges) are valued at the last reported sales price on the day of valuation. Securities traded in the over-the-counter market (e.g. NASDAQ) and listed securities for which no sale was reported on that date are stated at the average of closing bid and asked prices. Securities traded on foreign exchanges are valued based upon the last sales price on the principal exchange on which the security is traded prior to the time when the Fund’s assets are valued. Securities (including restricted securities) for which market quotations are not readily available are valued at their fair value. Foreign and domestic securities whose values have been materially affected by what Davis Advisors, the Fund’s investment adviser (“Adviser”), identifies as a significant event occurring before the Fund’s assets are valued but after the close of their respective exchanges will be fair valued. Fair value is determined in good faith using consistently applied procedures under the supervision of the Board of Directors. Short-term securities purchased within 60 days to maturity are valued at amortized cost, which approximates market value. These valuation procedures are reviewed and subject to approval by the Board of Directors.
B. MASTER REPURCHASE AGREEMENTS - The Fund, along with other affiliated funds, may transfer uninvested cash balances into one or more master repurchase agreement accounts. These balances are invested in one or more repurchase agreements, secured by U.S. Government securities. A custodian bank holds securities pledged as collateral for repurchase agreements until the agreements mature. Each agreement requires that the market value of the collateral be sufficient to cover payments of interest and principal; however, in the event of default by the other party to the agreement, retention of the collateral may be subject to legal proceedings.
C. CURRENCY TRANSLATION - The market values of all assets and liabilities denominated in foreign currencies are recorded in the financial statements after translation to the U.S. Dollar based upon the mean between the bid and offered quotations of the currencies against U.S. Dollars on the date of valuation. The cost basis of such assets and liabilities is determined based upon historical exchange rates. Income and expenses are translated at average exchange rates in effect as accrued or incurred.
D. FOREIGN CURRENCY - The Fund may enter into forward purchases or sales of foreign currencies to hedge certain foreign currency denominated assets and liabilities against declines in market value relative to the U.S. Dollar. Forward currency contracts are marked-to-market daily and the change in market value is recorded by the Fund as an unrealized gain or loss. When the forward currency contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the forward currency contract at the time it was opened and value at the time it was closed. Investments in forward currency contracts may expose the Fund to risks resulting from unanticipated movements in foreign currency exchange rates or failure of the counter-party to the agreement to perform in accordance with the terms of the contract.
16
DAVIS REAL ESTATE PORTFOLIO
NOTES TO FINANCIAL STATEMENTS - (Continued)
December 31, 2007
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
D. | FOREIGN CURRENCY - (Continued) |
Reported net realized foreign exchange gains or losses arise from the sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions, the difference between the amounts of dividends, interest and foreign withholding taxes recorded on the Fund’s books, and the U.S. Dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the value of assets and liabilities other than investments in securities at fiscal year end, resulting from changes in the exchange rate. The Fund includes foreign currency gains and losses realized on the sale of investments together with market gains and losses on such investments in the statement of operations.
E. FEDERAL INCOME TAXES - It is the Fund’s policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies, and to distribute substantially all of its taxable income, including any net realized gains on investments not offset by loss carryovers, to shareholders. Therefore, no provision for Federal Income or Excise Tax is required. The Adviser has analyzed the Fund’s tax positions taken on federal income tax returns for all open tax years and has concluded that as of December 31, 2007, no provision for income tax would be required in the Fund’s financial statements. The Fund’s federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue.
F. USE OF ESTIMATES IN FINANCIAL STATEMENTS - In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of income and expenses during the reporting period. Actual results may differ from these estimates.
G. INDEMNIFICATION - Under the Fund’s organizational documents, its officers and directors are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, some of the Fund’s contracts with its service providers contain general indemnification clauses. The Fund’s maximum exposure under these arrangements is unknown since the amount of any future claims that may be made against the Fund cannot be determined and the Fund has no historical basis for predicting the likelihood of any such claims.
H. SECURITIES TRANSACTIONS AND RELATED INVESTMENT INCOME - Securities transactions are accounted for on the trade date (date the order to buy or sell is executed) with realized gain or loss on the sale of securities being determined based upon identified cost. Dividend income is recorded on the ex-dividend date. Dividend income from REIT securities may include return of capital. Upon notification from the issuer, the amount of the return of capital is reclassified to adjust dividend income, reduce the cost basis, and/or adjust realized gain. Interest income, which includes accretion of discount and amortization of premium, is accrued as earned.
17
DAVIS REAL ESTATE PORTFOLIO
NOTES TO FINANCIAL STATEMENTS - (Continued)
December 31, 2007
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
I. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS - Dividends and distributions to shareholders are recorded on the ex-dividend date. Net investment income (loss), net realized gains (losses), and net unrealized appreciation (depreciation) on investments may differ for financial statement and tax purposes primarily due to differing treatments of wash sales, foreign currency transactions, and net operating losses. The character of dividends and distributions made during the fiscal year from net investment income and net realized securities gains may differ from their ultimate characterization for Federal Income Tax purposes. Also, due to the timing of dividends and distributions, the fiscal year in which amounts are distributed may differ from the fiscal year in which income or realized gain was recorded by the Fund. The Fund adjusts the classification of distributions to shareholders to reflect the differences between financial statement amounts and distributions determined in accordance with income tax regulations. During the year ended December 31, 2007 amounts have been reclassified to reflect a decrease in undistributed net investment loss of $923,903 and a corresponding decrease in accumulated net realized gains. Net assets have not been affected by this reclassification.
The tax character of distributions paid during the years ended December 31, 2007 and 2006, was as follows:
| 2007 | | 2006 | |
Ordinary income | $ | 1,521,297 | | $ | 1,887,906 | |
Long-term capital gain | | 16,860,795 | | | 9,281,973 | |
Total | $ | 18,382,092 | | $ | 11,169,879 | |
As of December 31, 2007, the components of distributable earnings (accumulated losses) on a tax basis were as follows:
Accumulated net realized gains from investments and foreign | | | |
currency transactions | $ | 368,177 | |
Net unrealized depreciation on investments | | (82,097 | ) |
Total | $ | 286,080 | |
J. NEW ACCOUNTING PRONOUNCEMENT - In September 2006, FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements. This standard establishes a single authoritative definition of fair value, sets out a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 applies to fair value measurements already required or permitted by existing standards. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal periods. As of December 31, 2007, the Adviser does not believe the adoption of SFAS No. 157 will materially impact the financial statement amounts; however, additional disclosures may be required about the inputs used to develop the measurements and the effect of certain measurements on changes in net assets for the period.
18
DAVIS REAL ESTATE PORTFOLIO
NOTES TO FINANCIAL STATEMENTS - (Continued)
December 31, 2007
NOTE 2 - INVESTMENT ADVISORY FEES
| Advisory fees are paid monthly to the Adviser at an annual rate of 0.75% of the Fund’s average net assets. |
Boston Financial Data Services, Inc. (“BFDS”) is the Fund’s primary transfer agent. State Street Bank and Trust Company (“State Street Bank”) is the Fund’s primary accounting provider. Fees for such services are included in the custodian fee as State Street Bank also serves as the Fund’s custodian. The Adviser is also paid for certain accounting services. The fee for the year ended December 31, 2007 amounted to $6,000. Certain directors and officers of the Fund are also directors and officers of the general partner of the Adviser.
Davis Selected Advisers – NY, Inc. (“DSA-NY”), a wholly-owned subsidiary of the Adviser, acts as sub-adviser to the Fund. The Fund pays no fees directly to DSA-NY.
NOTE 3 - PURCHASES AND SALES OF SECURITIES
Purchases and sales of investment securities (excluding short-term securities) for the year ended December 31, 2007 were $35,143,893 and $57,748,618, respectively.
NOTE 4 - CAPITAL STOCK
At December 31, 2007, there were 500 million shares of capital stock ($0.001 par value per share) authorized. Transactions in capital stock were as follows:
| Year ended December 31, | |
| 2007 | | 2006 | |
Shares sold | | 530,769 | | | 919,623 | |
Shares issued in reinvestment of distributions | | 1,491,866 | | | 539,914 | |
| | 2,022,635 | | | 1,459,537 | |
Shares redeemed | | (2,087,935 | ) | | (793,313 | ) |
Net increase (decrease) | | (65,300 | ) | | 666,224 | |
| | | | | | |
Proceeds from shares sold | $ | 10,811,044 | | $ | 18,459,121 | |
Proceeds from shares issued in reinvestment of distributions | | 18,382,092 | | | 11,169,879 | |
| | 29,193,136 | | | 29,629,000 | |
Cost of shares redeemed | | (40,147,500 | ) | | (15,743,528 | ) |
Net increase (decrease) | $ | (10,954,364 | ) | $ | 13,885,472 | |
NOTE 5 - EXPENSES PAID INDIRECTLY
Under an agreement with State Street Bank, custodian fees are reduced for earnings on cash balances maintained at the custodian by the Fund. Such reductions amounted to $2,492 during the year ended December 31, 2007.
19
DAVIS REAL ESTATE PORTFOLIO
NOTES TO FINANCIAL STATEMENTS - (Continued)
December 31, 2007
NOTE 6 - BANK BORROWINGS
The Fund may borrow up to 5% of its assets from a bank to purchase portfolio securities or for temporary and emergency purposes. The purchase of securities with borrowed funds creates leverage in the Fund. The Fund has entered into an agreement, which enables it to participate with certain other funds managed by the Adviser in an unsecured line of credit with a bank, which permits borrowings up to $50 million, collectively. Interest is charged based on its borrowings, at a rate equal to the overnight Federal Funds Rate plus 0.75%. The Fund had no borrowings outstanding for the year ended December 31, 2007.
20
DAVIS REAL ESTATE PORTFOLIO
FINANCIAL HIGHLIGHTS
Financial Highlights for a share of capital stock outstanding throughout each period:
| | |
| | |
| Year ended December 31, | |
| 2007 | | 2006 | | 2005 | | 2004 | | 2003 | |
| | | | | | | | | |
| | | | | | | | | | | | | | | |
Net Asset Value, Beginning of Period | $ | 20.43 | | $ | 17.33 | | $ | 16.80 | | $ | 13.47 | | $ | 10.49 | |
| | | | | | | | | | | | | | | |
Income (Loss) from Investment Operations: | | | | | | | | | | | | | | | |
Net Investment Income | | 0.42 | ) | | 0.34 | | | 0.30 | | | 0.34 | | | 0.44 | |
Net Realized and Unrealized Gains (Losses) | | (3.40 | ) | | 5.58 | | | 1.86 | | | 4.07 | | | 3.34 | |
Total from Investment Operations | | (2.98 | ) | | 5.92 | | | 2.16 | | | 4.41 | | | 3.78 | |
| | | | | | | | | | | | | | | |
Dividends and Distributions: | | | | | | | | | | | | | | | |
Dividends from Net Investment Income | | (0.64 | ) | | (0.60 | ) | | (0.54 | ) | | (0.48 | ) | | (0.55 | ) |
Distributions from Realized Gains | | (5.36 | ) | | (2.22 | ) | | (1.09 | ) | | (0.60 | ) | | (0.25 | ) |
Total Dividends and Distributions | | (6.00 | ) | | (2.82 | ) | | (1.63 | ) | | (1.08 | ) | | (0.80 | ) |
| | | | | | | | | | | | | | | |
Net Asset Value, End of Period | $ | 11.45 | | $ | 20.43 | | $ | 17.33 | | $ | 16.80 | | $ | 13.47 | |
| | | | | | | | | | | | | | | |
Total Return1 | | (15.48)% | | | 34.37% | | | 13.14% | | | 33.35% | | | 36.79% | |
| | | | | | | | | | | | | | | |
Ratios/Supplemental Data: | | | | | | | | | | | | | | | |
Net Assets, End of Period | | | | | | | | | | | | | | | |
(000 omitted) | $ | 49,548 | | $ | 89,738 | | $ | 64,556 | | $ | 58,279 | | $ | 35,663 | |
Ratio of Expenses to Average Net Assets: | | | | | | | | | | | | | | | |
Gross | | 0.88% | | | 0.86% | | | 0.87% | | | 0.89% | | | 0.98% | |
Net3 | | 0.87% | | | 0.86% | | | 0.87% | | | 0.89% | | | 0.98% | |
Ratio of Net Investment Income | | | | | | | | | | | | | | | |
to Average Net Assets | | 1.92% | | | 1.63% | | | 1.71% | | | 2.30% | | | 3.74% | |
Portfolio Turnover Rate2 | | 49% | | | 38% | | | 28% | | | 32% | | | 22% | |
1 Assumes hypothetical initial investment on the business day before the first day of the fiscal period, with all dividends and distributions reinvested in additional shares on the reinvestment date, and redemption at the net asset value calculated on the last business day of the fiscal period. Total returns do not reflect charges attributable to your insurance company’s separate account. Inclusion of these charges would reduce the total returns shown.
2 The lesser of purchases or sales of portfolio securities for a period, divided by the monthly average of the market value of portfolio securities owned during the period. Securities with a maturity or expiration date at the time of acquisition of one year or less are excluded from the calculation.
3 The Net ratio of expenses to average net assets reflects the impact, if any, of the reduction of expenses paid indirectly and of certain reimbursements from the Adviser.
See Notes to Financial Statements
21
DAVIS REAL ESTATE PORTFOLIO
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
of Davis Variable Account Fund, Inc.:
We have audited the accompanying statement of assets and liabilities of Davis Real Estate Portfolio (a separate series of the Davis Variable Account Fund, Inc.), including the schedule of investments, as of December 31, 2007, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2007, by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Davis Real Estate Portfolio as of December 31, 2007, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.
KPMG LLP
Denver, Colorado
February 8, 2008
22
DAVIS REAL ESTATE PORTFOLIO
FUND INFORMATION
Federal Income Tax Information (Unaudited)
| Davis Real Estate Portfolio |
During the calendar year ended 2007 the Fund declared and paid long-term capital gain distributions in the amount of $16,860,795.
Dividends paid by the Fund during the calendar year ended 2007, which are not designated as capital gain distributions, should be multiplied by 42% to arrive at the net amount eligible for the corporate dividends-received deduction.
Portfolio Proxy Voting Policies and Procedures
The Fund has adopted Portfolio Proxy Voting Policies and Procedures under which the Fund votes proxies relating to securities held by the Fund. A description of the Fund’s Portfolio Proxy Voting Policies and Procedures is available (i) without charge, upon request, by calling the Fund toll-free at 1-800-279-0279, (ii) on the Fund’s website at www.davisfunds.com, and (iii) on the SEC’s website at www.sec.gov.
In addition, the Fund is required to file Form N-PX, with its complete proxy voting record for the 12 months ended June 30th, no later than August 31st of each year. The Fund’s Form N-PX filing is available (i) without charge, upon request, by calling the Fund toll-free at 1-800-279-0279, (ii) on the Fund’s website at www.davisfunds.com, and (iii) on the SEC’s website at www.sec.gov.
Form N-Q
The Fund files its complete schedule of portfolio holdings with the SEC for the first and third quarter of each fiscal year on Form N-Q. The Fund’s Form N-Q is available without charge, upon request by calling 1-800-279-0279 or on the Fund’s website at www.davisfunds.com or on the SEC’s website at www.sec.gov. The Fund’s Form N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington, DC, and that information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
23
DAVIS REAL ESTATE PORTFOLIO
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
DIRECTORS
For the purposes of their service as directors to the Davis Funds, the business address for each of the directors is 2949 E. Elvira Road, Suite 101, Tucson, AZ 85706. Each Director serves until their retirement, resignation, death or removal. Subject to exceptions and exemptions, which may be granted by the Independent Directors, Directors must retire at the close of business on the last day of the calendar year in which the Director attains age seventy-four (74).
| | | | Number of | |
| | Term of | | Portfolios in | |
| | Office and | | Fund | |
| Position(s) | Length of | | Complex | |
Name | Held With | Time | Principal Occupation(s) | Overseen by | Other Directorships |
(birthdate) | Fund | Served | During Past Five Years | Director | Held by Director |
Independent Directors
| | | | | |
Marc P. Blum (9/9/42) | Director | Director since 1986 | Chief Executive Officer, World Total Return Fund, LLLP; of Counsel to Gordon, Feinblatt, Rothman, Hoffberger and Hollander, LLC (law firm). | 13 | Director, Legg Mason Investment Counsel & Trust Company, N.A. (asset management company) and Rodney Trust Company (Delaware). |
| | | | | |
John S. Gates, Jr. (8/2/53) | Director | Director since 2007 | Chairman and Chief Executive Officer of PortaeCo LLC, a private investment company (beginning in 2006); Co-founder of Centerpoint Properties Trust (REIT) and former Co-chairman and Chief Executive Officer for the last 22 years (until 2006). | 13 | Director, DCT Industrial Trust (a REIT). |
| | | | | |
Thomas S. Gayner (12/16/61) | Director | Director since 2004 | Executive Vice President and Chief Investment Officer, Markel Corporation (insurance company). | 13 | Director, First Market Bank; Director, Washington Post Co. (newspaper publisher). |
| | | | | |
Jerry D. Geist (5/23/34) | Director | Director since 1986 | Chairman, Santa Fe Center Enterprises (energy project development). | 13 | Director, CH2M-Hill, Inc. (engineering); Member, Investment Committee for Microgeneration Technology Fund; UTECH Funds. |
24
DAVIS REAL ESTATE PORTFOLIO
2949 East Elvira Road, Suite 101
DIRECTORS – (Continued)
| | | | Number of | |
| | Term of | | Portfolios in | |
| | Office and | | Fund | |
| Position(s) | Length of | | Complex | |
Name | Held With | Time | Principal Occupation(s) | Overseen by | Other Directorships |
(birthdate) | Fund | Served | During Past Five Years | Director | Held by Director |
Independent Directors – (Continued)
| | | | | |
G. Bernard Hamilton (3/18/37) | Director | Director since 1978 | Managing General Partner, Avanti Partners, L.P. (investment partnership), retired 2005. | 13 | none |
| | | | | |
Samuel H. Iapalucci (7/19/52) | Director | Director since 2006 | Executive Vice President and Chief Financial Officer, CH2M-Hill, Inc., (engineering). | 13 | none |
| | | | | |
Robert P. Morgenthau (3/22/57) | Director | Director since 2002 | Chairman, NorthRoad Capital Management, LLC (an investment management firm) since June 2002. | 13 | none |
| | | | | |
Christian R. Sonne (5/6/36) | Director | Director since 1990 | General Partner, Tuxedo Park Associates (land holding and development firm). | 13 | none |
| | | | | |
Marsha Williams (3/28/51) | Director | Director since 1999 | Senior Vice President and Chief Financial Officer, Orbitz Worldwide, Inc. (travel-service provider); former Executive Vice President and Chief Financial Officer, Equity Office Properties Trust (a real estate investment trust). | 16 | Director, the Selected Funds (consisting of three portfolios) since 1996; Director, Modine Manufacturing, Inc. (heat transfer technology); Director, Chicago Bridge & Iron Company, N.V. (industrial construction and engineering). |
25
DAVIS REAL ESTATE PORTFOLIO
2949 East Elvira Road, Suite 101
DIRECTORS – (Continued)
| | | | Number of | |
| | Term of | | Portfolios in | |
| | Office and | | Fund | |
| Position(s) | Length of | | Complex | |
Name | Held With | Time | Principal Occupation(s) | Overseen by | Other Directorships |
(birthdate) | Fund | Served | During Past Five Years | Director | Held by Director |
Inside Directors*
| | | | | |
Jeremy H. Biggs (8/16/35) | Director/ Chairman | Director since 1994 | Vice Chairman, Member of the Audit Committee and Member of the International Investment Committee, former Chief Investment Officer (1980 through 2005), all for Fiduciary Trust Company International (money management firm); Consultant to Davis Selected Advisers, L.P. | 13 | none |
| | | | | |
Andrew A. Davis (6/25/63) | Director | Director since 1997 | President or Vice President of each Davis Fund and Selected Fund; President, Davis Selected Advisers, L.P., and also serves as an executive officer in certain companies affiliated with the Adviser. | 16 | Director, the Selected Funds (consisting of three portfolios) since 1998. |
| | | | | |
Christopher C. Davis (7/13/65) | Director | Director since 1997 | President or Vice President of each Davis Fund, Selected Fund, and Clipper Fund; Chairman, Davis Selected Advisers, L.P., and also serves as an executive officer in certain companies affiliated with the Adviser, including sole Member of the Adviser’s general partner, Davis Investments, LLC; Employee of Shelby Cullom Davis & Co. (registered broker/dealer). | 16 | Director, the Selected Funds (consisting of three portfolios) since 1998; Director, Washington Post Co. (newspaper publisher). |
* Jeremy H. Biggs, Andrew A. Davis, and Christopher C. Davis own partnership units (directly, indirectly, or both) of the Adviser and are considered to be “interested persons” of the Funds as defined in the Investment Company Act of 1940. Andrew A. Davis and Christopher C. Davis are brothers.
26
DAVIS REAL ESTATE PORTFOLIO
2949 East Elvira Road, Tucson, Arizona 85706
| Directors | Officers |
| Jeremy H. Biggs | Jeremy H. Biggs |
| Marc P. Blum | Chairman |
| Andrew A. Davis | Andrew A. Davis |
| Christopher C. Davis | President |
| John S. Gates, Jr. | Christopher C. Davis |
| Thomas S. Gayner | Vice President |
| Jerry D. Geist | Kenneth C. Eich |
| G. Bernard Hamilton | Executive Vice President & Principal |
| Samuel H. Iapalucci | Executive Officer |
| Robert P. Morgenthau | Sharra L. Haynes |
| Christian R. Sonne | Vice President & Chief Compliance Officer |
| Marsha Williams | Douglas A. Haines |
| | Vice President & Principal Accounting Officer |
| | Thomas D. Tays |
| | Vice President & Secretary |
| | |
| |
| |
| |
Investment Adviser | |
Davis Selected Advisers, L.P. (Doing business as “Davis Advisors”) | |
2949 East Elvira Road, Suite 101 | |
Tucson, Arizona 85706 | |
(800) 279-0279 | |
| |
Distributor | |
Davis Distributors, LLC | |
2949 East Elvira Road, Suite 101 | |
Tucson, Arizona 85706 | |
| |
Transfer Agent | |
Boston Financial Data Services, Inc. | |
c/o The Davis Funds | |
P.O. Box 8406 | |
Boston, Massachusetts 02266-8406 | |
| |
Custodian | |
State Street Bank and Trust Co. | |
One Lincoln Street | |
Boston, Massachusetts 02111 | |
| |
Counsel | |
Seyfarth Shaw LLP | |
131 South Dearborn Street, Suite 2400 | |
Chicago, Illinois 60603-5577 | |
| |
Independent Registered Public Accounting Firm | |
KPMG LLP | |
707 Seventeenth Street, Suite 2700 | |
Denver, Colorado 80202 | |
| | | |
For more information about Davis Real Estate Portfolio including management fee, charges and expenses, see the current Davis Variable Account Fund, Inc. (including Davis Real Estate Portfolio) prospectus, which must precede or accompany this report. The Davis Variable Account Fund, Inc. Statement of Additional Information contains additional information about the Fund’s Directors and is available without charge upon request by calling 1-800-279-0279, or on the Fund’s website at www.davisfunds.com. Quarterly Fact sheets are available on the Fund’s website at www.davisfunds.com.
27
ITEM 2. CODE OF ETHICS
The registrant has adopted a code of ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions.
A copy of the code of ethics is filed as an exhibit to this form N-CSR.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT
The registrant’s board of directors has determined that independent trustee Marsha Williams qualifies as the “audit committee financial expert”, as defined in Item 3 of form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES
| (a) | Audit Fees. The aggregate Audit Fees billed by KPMP LLP (“KPMG”) for professional services rendered for the audits of the audits of the financial statements, or services that are normally provided in connection with statutory and regulatory filings or engagements for the fiscal year ends December 31, 2007 and December 31, 2006 were $52,800 and $43,200, respectively. |
| (b) | Audit-Related Fees. The aggregate Audit-Related Fees billed by KPMG for services rendered for assurance and related services that are not reasonably related to the performance of the audit or review of the fund financial statements, but not reported as Audit Fees fore fiscal year ends December 31, 2007 and December 31, 2006 were $0 and $0, respectively. |
| (c) | Tax Fees. The aggregate Tax Fees billed by KPMG for professional services rendered for tax compliance, tax advise and tax planning for the fiscal year ends December 31, 2007 and December 31, 2006 were $18,900 and $17,280, respectively. |
Fees included in the Tax Fee category comprise all services performed by professional staff in the independent accountant’s tax division except those services related to the audit. These services include preparation of tax returns, tax advice related to mergers and a review of the fund income and capital gain distributions.
| (d) | All Other Fees. The aggregate Other Fees billed by KPMG for all other non-audit services rendered to the fund for the fiscal year ends December 31, 2007 and December 31, 2006 were $0 and $0, respectively. |
(e)(1) Audit Committee Pre-Approval Policies and Procedures.
The fund Audit Committee must pre-approve all audit and non-audit services provided by the independent accountant relating to the operations or financial reporting of the funds. Prior to the commencement of any audit or non-audit services to a fund, the Audit Committee reviews the services to determine whether they are appropriate and permissible under applicable law.
The fund Audit Committee has adopted a policy whereby audit and non-audit services performed by the fund independent accountant require pre-approval in advance at regularly scheduled Audit Committee meetings. If such a service is required between regularly scheduled Audit Committee meetings, pre-approval may be authorized by the Audit Committee Chairperson with ratification at the next scheduled audit committee meeting.
| (2) | No services included in (b) – (d) above were approved pursuant to paragraph (c)(7)(i)(C) of |
Rule 2-01 of Regulation S-X.
| (g) | The Funds’ independent accountant did not provide any services to the investment advisor or any affiliate for the fiscal years ended October 31, 2006 and October 31, 2005. The fund has not paid any fees for non-audit not previously disclosed in items 4 (b) – (d). |
| (h) | The registrant’s audit committee of the board of trustees has considered whether the provision of non-audit services that were rendered to the registrant’s investment adviser, and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant’s independence. No such services were rendered. |
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS
Not Applicable
ITEM 6. SCHEDULE OF INVESTMENTS
Not Applicable. The complete Schedule of Investments is included in Item 1 of this for N-CSR
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES
Not Applicable
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES
Not Applicable
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANIES AND AFFILIATED PURCHASERS
Not Applicable
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There have been no changes to the procedure by which shareholders may recommend nominees to the registrant’s Board of Trustees.
ITEM 11. CONTROLS AND PROCUDURES
| (a) | The registrant’s principal executive officer and principal financial officer have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a-2 (c) under the Investment Company Act of 1940, as amended) are effective as of a date within 90 days of the filing date of this report. |
| (b) | There have been no significant changes in the registrant’s internal controls or in other factors that could significantly affect these controls. |
ITEM 12. EXHIBITS
(a)(1) The registrant’s code of ethics pursuant to Item 2 of Form N-CSR is filed as an exhibit to this form N-CSR.
(a)(2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 are attached.
(a)(3) Not applicable
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 are attached.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DAVIS VARIABLE ACCOUNT FUND, INC.
| Principal Executive Officer |
Date: February 20, 2008
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Principal Executive Officer |
Date: February 20, 2008
| Principal Financial Officer |
Date: February 20, 2008
