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 "Funds"). Davis Value Portfolio and Davis Financial Portfolio are registered under the Investment Company Act of 1940 ("40 Act"), as amended, as diversified, open-end management investment companies. Davis Real Estate Portfolio is registered under the 40 Act, as amended, as a non-diversified, open-end management investment company. Only insurance companies, for the purpose of funding variable annuity or variable life insurance contracts, may 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 their financial statements.
Short-term securities purchased within 60 days to maturity are valued at amortized cost, which approximates market value.
The Funds' valuation procedures are reviewed and subject to approval by the Board of Directors. There have been no significant changes to the fair valuation procedures during the period.
The inputs or methodologies used for valuing securities are not necessarily an indication of the risks associated with investing in those securities nor can it be assured that the Funds can obtain the fair value assigned to a security if they were to sell the security.
The following is a summary of the inputs used as of June 30, 2014 in valuing each Fund's investments carried at value:
There were no transfers of investments between Level 1 and Level 2 of the fair value hierarchy during the six months ended June 30, 2014.
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 security 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 or 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 sales of investments together with market gains and losses on such investments in the Statements of Operations.
The cost of purchases and proceeds from sales of investment securities (excluding short-term securities) during the six months ended June 30, 2014 were as follow:
Davis Selected Advisers-NY, Inc. ("DSA-NY"), a wholly-owned subsidiary of the Adviser, acts as sub-adviser to the Funds. DSA-NY performs research and portfolio management services for the Funds under a Sub-Advisory Agreement with the Adviser. The Funds pay no fees directly to DSA-NY.
Certain directors and officers of the Funds are also directors and officers of the general partner of the Adviser.
At June 30, 2014, there were 5 billion shares of capital stock ($0.001 par value per share) authorized. Transactions in capital stock were as follows:
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 higher of the Federal Funds Rate or the Overnight Libor Rate, plus 1.25%. The Funds had no borrowings during the six months ended June 30, 2014.
Davis Value Portfolio has entered into a securities lending arrangement with State Street Bank. Under the terms of the agreement, the Fund receives fee income from lending transactions; in exchange for such fees, State Street Bank is authorized to loan securities on behalf of the Fund, against receipt of collateral at least equal to the value of the securities loaned. As of June 30, 2014, the Fund had on loan:
The Fund bears the risk of any deficiency in the amount of the collateral available for return to a borrower due to a loss in an approved investment.
The Board of Directors of the Davis Funds oversees the management of each Davis Fund and, as required by law, determines annually whether to approve the continuance of each Davis Fund's advisory agreement with Davis Selected Advisers, L.P. and sub-advisory agreement with Davis Selected Advisers-NY, Inc. (jointly "Davis Advisors" and "Advisory Agreements").
As a part of this process the Independent Directors, with the assistance of counsel for the Independent Directors, prepared questions submitted to Davis Advisors in anticipation of the annual contract review. The Independent Directors were provided with responsive background material (including recent investment performance data), and their counsel provided guidance, prior to a separate contract review meeting held in March 2014 where the Independent Directors reviewed and evaluated all information which they deemed reasonably necessary in the circumstances. In reaching their decision the Independent Directors also took into account information furnished to them throughout the year and otherwise provided to them. Upon completion of this review, the Independent Directors found that the terms of the Advisory Agreements were fair and reasonable and that continuation of the Advisory Agreements was in the best interest of Davis Value Portfolio, Davis Financial Portfolio, and Davis Real Estate Portfolio and their shareholders.
Reasons the Independent Directors Approved Continuation of the Advisory Agreements
The Independent Directors' determinations were based upon a comprehensive consideration of all information provided to the Independent Directors and they did not identify any single item or piece of information as the controlling factor. Each Independent Director did not necessarily attribute the same weight to each factor. The following facts and conclusions were important, but not exclusive, in the Independent Directors' recommendation to renew the Advisory Agreements.
The Independent Directors considered not only the investment performance of each Fund, but also the full range and quality of services provided by Davis Advisors to each Fund and its shareholders, including whether it:
Davis Advisors is reimbursed a portion of its costs in providing some, but not all, of these services.
A shareholder's ultimate return is the product of a fund's results as well as the shareholder's behavior, specifically in selecting when to invest or redeem. The Independent Directors concluded that, through its actions and communications, Davis Advisors has attempted to have a meaningful, positive impact on investor behavior.
The Independent Directors noted the importance of reviewing quantitative measures, but also recognized that qualitative factors are also important in assessing whether Davis Funds' shareholders are likely to be well served by the renewal of the Advisory Agreements. They noted both the value and shortcomings of purely quantitative measures, including the data provided by independent service providers, and concluded that while such measures and data may be informative, the judgment of the Independent Directors must take many factors, including those listed below, into consideration in representing the shareholders of the Davis Funds. In connection with reviewing comparative performance information, the Independent Directors generally give greater weight to longer-term measurements.
The Independent Directors expect Davis Advisors to employ a disciplined, company-specific, research-driven, businesslike, long-term investment philosophy.
The Independent Directors recognized Davis Advisors' (a) efforts to minimize transaction costs by generally having a long-term time horizon and low portfolio turnover; (b) record of generally producing satisfactory results over the long-term; (c) efforts towards fostering healthy investor behavior by, among other things, providing informative and substantial educational material; and (d) efforts to promote shareholder interests by actively speaking out on corporate governance issues.
Reasons the Independent Directors Approved Continuation of the Advisory Agreements – (Continued)
The Independent Directors reviewed (a) comparative fee and expense information for other funds, as selected and analyzed by a nationally recognized independent service provider; (b) information regarding fees charged by Davis Advisors to other advisory clients, including funds which it sub-advises and private accounts, as well as the differences in the services provided to such other clients; and (c) the fee schedules of each of the Funds, including an assessment of competitive fee schedules.
The Independent Directors reviewed the fixed management fee for each Fund, profitability of each Fund to Davis Advisors, the extent to which economies of scale might be realized if the Funds' net assets increase, and whether the fixed fee reflected those potential economies of scale. The Independent Directors considered the nature, quality, and extent of the services being provided to each Fund and the costs incurred by Davis Advisors in providing such services. The Independent Directors considered various potential benefits that Davis Advisors may receive in connection with the services it provides under the Advisory Agreements with the Funds, including a review of portfolio brokerage practices. The Independent Directors noted that Davis Advisors does not use client commissions to pay for publications that are available to the general public or for third-party research services.
The Independent Directors compared the fees paid to Davis Advisors by the Davis Funds with those paid by Davis Advisors' sub-advised clients, private account clients, and managed money/wrap clients. To the extent sub-advised or private account fees were lower than fees paid by the Funds, the Independent Directors noted that the range of services provided to the Funds is more extensive and the risks associated with operating SEC registered, publicly traded mutual funds are greater. Serving as the primary adviser for mutual funds is more work because of the complex overlay of regulatory, tax and accounting issues which are unique to mutual funds. In addition, the operational work required to service shareholders is more extensive because of the significantly greater number of shareholders and managing trading is more complex because of more frequent fund flows. With respect to risk, not only has regulation become more complex and burdensome, but the scrutiny of regulators and shareholders has gotten more intense.
The Independent Directors noted that Davis Value Portfolio had under-performed its benchmark, the Standard & Poor's 500® Index, over the three-, five-, and ten-year time periods and out-performed over the one-year time period and since inception (July 1, 1999), all ended February 28, 2014. The Lipper Report (prepared by an independent service provider) indicated that the Fund out-performed the Lipper Performance Universe and Lipper Index over the one-year time period, but under-performed over the two-, three-, four-, five-, and ten-year time periods, all ended December 31, 2013. The Fund out-performed the Standard & Poor's 500® Index in 5 of the 10 rolling five-year time frames and the performance universe in 8 of the 10 rolling five-year time frames ended December 31 for each year from 2004 through 2013. The Fund out-performed the Index in 3 of the 5 rolling ten-year time frames and the performance universe in all 5 rolling ten-year time frames ended December 31 for each year from 2009 through 2013.
The Independent Directors considered Davis Value Portfolio's management fee and total expense ratio. Both were reasonable and below the average and median ratios of its peer group as determined by Lipper.
The Independent Directors noted that Davis Financial Portfolio had under-performed its benchmark, the Standard & Poor's 500® Index, over the one-, three-, five-, and ten-year time periods and out-performed since inception (July 1, 1999), all ended February 28, 2014. The Lipper Report (prepared by an independent service provider) indicated that the Fund out-performed the Lipper Performance Universe over the three-, four-, five-, and ten-year time periods, but under-performed over the one- and two-year time periods, all ended December 31, 2013. The Fund out-performed the Standard & Poor's 500® Index in 3 of the 10 rolling five-year time frames and the performance universe in all 10 rolling five-year time frames ended December 31 for each year from 2004 through 2013. The Fund out-performed the Index in 1 of the 5 rolling ten-year time frames and the performance universe in all 5 rolling ten-year time frames ended December 31 for each year from 2009 through 2013.
The Independent Directors considered Davis Financial Portfolio's management fee and total expense ratio. Both were reasonable and below the average ratios of its peer group as determined by Lipper.
The Independent Directors noted that Davis Real Estate Portfolio under-performed its benchmark, the Wilshire U.S. Real Estate Securities Index, over the one-, three-, five-, and ten-year time periods as well as since inception (July 1, 1999), all ended February 28, 2014. The Lipper Report (prepared by an independent service provider) indicated that the Fund under-performed the Lipper Performance Universe over the one-, two-, three-, four-, five-, and ten-year time periods ended December 31, 2013. The Fund out-performed the Lipper Category Index over the three-, four-, and five-year time periods, but under-performed over the one-, two-, and ten-year time periods, all ended December 31, 2013. The Independent Directors noted that the Fund out-performed the Wilshire U.S. Real Estate Securities Index in 1 of the 10 rolling five-year time frames and the performance universe in 4 of the 10 rolling five-year time frames ended December 31 for each year from 2004 through 2013. The Fund under-performed both the Index and the performance universe in all 5 of the rolling ten-year time frames ended December 31 for each year from 2009 through 2013.
The Independent Directors considered Davis Real Estate Portfolio's management fee and total expense ratio. Both were reasonable and below the average and median ratios of its peer group as determined by Lipper.
The Independent Directors concluded that Davis Advisors had provided Davis Value Portfolio, Davis Financial Portfolio, and Davis Real Estate Portfolio and their shareholders a reasonable level of both investment and non-investment services. The Independent Directors further concluded that shareholders have received a significant benefit from Davis Advisors' shareholder oriented approach, as well as the execution of its investment discipline.
The Independent Directors determined that the advisory fees for Davis Value Portfolio, Davis Financial Portfolio, and Davis Real Estate Portfolio were reasonable in light of the nature, quality, and extent of the services being provided to the Funds, the costs incurred by Davis Advisors in providing such service, and in comparison to the range of the average advisory fees of their peer groups as determined by an independent service provider. The Independent Directors found that the terms of the Advisory Agreements were fair and reasonable and that continuation of the Advisory Agreements was in the best interest of each Fund and its shareholders. The Independent Directors and the full Board of Directors therefore voted to continue the Advisory Agreements.
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 85756. 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).
*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.
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 and on the Funds' website at www.davisfunds.com. Quarterly Fact Sheets are available on the Funds' website at www.davisfunds.com.
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This Semi-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.
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.
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, on the Fund's website at www.davisfunds.com, and 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 information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
| Management's Discussion of Fund Performance |
Performance Overview
Davis Value Portfolio delivered a total return on net asset value of 5.12% for the six-month period ended June 30, 2014 (the "Period"). Over the Period, the Standard & Poor's 500® Index ("Index") returned 7.14%. The sectors1 within the Index that turned in the strongest performance over the Period were Utilities, Energy, and Health Care. The sectors within the Index that turned in the weakest (but still positive) performance over the Period were Consumer Discretionary, Industrials, and Telecommunication Services.
The Portfolio's Absolute Performance
Energy companies were the most important contributor2 to the Portfolio's absolute performance over the Period. EOG Resources3 and Canadian Natural Resources were among the most important contributors to performance.
Financial companies were the second most important contributor to the Portfolio's absolute performance. Wells Fargo, Bank of New York Mellon, American Express, and Berkshire Hathaway were among the most important contributors to performance. Julius Baer Group, Loews, and Progressive were among the most important detractors from performance. The Portfolio no longer owns Progressive.
Consumer Discretionary companies were the most important detractor from the Portfolio's absolute performance. Bed Bath & Beyond was the most important detractor from performance. The Portfolio no longer owns Bed Bath & Beyond.
Consumer Staple companies were the second most important detractor from the Portfolio's absolute performance. Costco Wholesale and Coca-Cola were among the most important detractors from performance. The Portfolio no longer owns Coca-Cola.
Other important contributors to the Portfolio's absolute performance included Air Products and Chemicals, Laboratory Corp. of America Holdings, and UnitedHealth Group. Other important detractors from the Portfolio's absolute performance included SouFun Holdings, China Merchants Holdings International, and Iron Mountain. The Portfolio no longer owns Iron Mountain.
The Portfolio had approximately 16% of its net assets invested in foreign companies at June 30, 2014. As a whole, those companies under-performed the domestic companies held by the Portfolio.
The Portfolio's Relative Performance
Consumer Staple companies were the most important detractor from the Portfolio's performance relative to the Index over the Period. The Portfolio's Consumer Staple companies under-performed the corresponding sector within the Index and had a higher average weighting.
Health Care companies were the second most important detractor from the Portfolio's relative performance. The Portfolio's Health Care companies under-performed the corresponding sector within the Index and had a lower average weighting.
Information Technology companies also detracted from the Portfolio's relative performance. The Portfolio's Information Technology companies under-performed the corresponding sector within the Index and had a lower average weighting.
Energy companies were the most important contributor to the Portfolio's relative performance. The Portfolio's Energy companies out-performed the corresponding sector within the Index and had a lower average weighting.
Davis Value Portfolio's investment objective is long-term growth of capital. There can be no assurance that the Portfolio will achieve its objective. Davis Value Portfolio's principal risks are: stock market risk, manager risk, common stock risk, large-capitalization companies risk, mid- and small-capitalization companies risk, headline risk, financial services risk, foreign country risk, emerging market risk, foreign currency risk, depositary receipts risk, and fees and expenses risk. See the prospectus for a full description of each risk.
1 The companies included in the Standard & Poor's 500® Index are divided into ten sectors. One or more industry groups make up a sector.
2 A company's or sector's contribution to or detraction from 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 This Management Discussion of Fund Performance 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, sell, or hold any particular security. The Schedule of Investments lists the Portfolio's holdings of each company discussed.
| DAVIS VALUE PORTFOLIO | Management's Discussion of Fund Performance – (Continued) |
Comparison of a $10,000 investment in Davis Value Portfolio versus the Standard & Poor's 500® Index
over 10 years for an investment made on June 30, 2004
Average Annual Total Return for periods ended June 30, 2014
| Fund & Benchmark Index | 1-Year | 5-Year | 10-Year | Since Fund's Inception (07/01/99) | Gross Expense Ratio | Net Expense Ratio |
| Davis Value Portfolio | 22.54% | 16.32% | 6.62% | 5.29% | 0.62% | 0.62% |
Standard & Poor's 500® Index | 24.61% | 18.83% | 7.78% | 4.30% | | |
The Standard & Poor's 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.
The performance data for Davis Value Portfolio contained in this report represents past performance, assumes that all distributions were reinvested, and should not be considered as an indication of future performance from an investment in the Portfolio today. The investment return and principal value will fluctuate so that shares may be worth more or less than their original cost when redeemed. Portfolio performance changes over time and current performance may be higher or lower than stated. The operating expense ratio may vary in future years. For more current information please call Davis Funds Investor Services at 1-800-279-0279.
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 included the effect of these additional charges, the return would be lower.
| Fund Overview |
| June 30, 2014 (Unaudited) |
| Portfolio Composition | | Industry Weightings |
| (% of Fund's 06/30/14 Net Assets) | | (% of 06/30/14 Long-Term Portfolio) |
| | | | | |
| | | | Fund | | S&P 500® |
| Common Stock (U.S.) | 81.29% | | Diversified Financials | 21.63% | | 5.02% |
| Common Stock (Foreign) | 16.47% | | Information Technology | 12.52% | | 18.82% |
| Corporate Bonds (Foreign) | 0.02% | | Health Care | 9.05% | | 13.30% |
| Short-Term Investments | 2.22% | | Banks | 8.59% | | 6.00% |
| Investment of Cash Collateral | | | Energy | 7.87% | | 10.85% |
| for Securities Loaned | 0.29% | | Food & Staples Retailing | 7.10% | | 2.26% |
| Other Assets & Liabilities | (0.29)% | | Materials | 6.90% | | 3.50% |
| 100.00% | | Retailing | 6.62% | | 4.03% |
| | | Insurance | 4.09% | | 2.86% |
| | | Food, Beverage & Tobacco | 4.08% | | 5.23% |
| | | Media | 3.29% | | 3.60% |
| | | Capital Goods | 2.52% | | 7.79% |
| | | Other | 2.39% | | 12.97% |
| | | Consumer Services | 1.97% | | 1.74% |
| | | Transportation | 1.38% | | 2.03% |
| | | | 100.00% | | 100.00% |
| Top 10 Long-Term Holdings |
| (% of Fund's 06/30/14 Net Assets) |
| | | |
American Express Co. | Consumer Finance | 7.31% |
Wells Fargo & Co. | Banks | 6.71% |
Google Inc.* | Software & Services | 5.84% |
Bank of New York Mellon Corp. | Capital Markets | 5.36% |
EOG Resources, Inc. | Energy | 4.29% |
Costco Wholesale Corp. | Food & Staples Retailing | 3.94% |
Berkshire Hathaway Inc., Class A | Diversified Financial Services | 3.33% |
UnitedHealth Group Inc. | Health Care Equipment & Services | 2.70% |
Canadian Natural Resources Ltd. | Energy | 2.41% |
Liberty Global PLC, Series C | Media | 2.18% |
*Google Inc. holding includes Class A and Class C. | | |
| Expense Example (Unaudited) |
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 for the six-month period ended June 30, 2014. 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.
| Beginning Account Value (01/01/14) | | Ending Account Value (06/30/14) | | Expenses Paid During Period* (01/01/14-06/30/14) |
| | | | | |
| Actual | $1,000.00 | | $1,051.19 | | $3.15 |
| Hypothetical | $1,000.00 | | $1,021.72 | | $3.11 |
Hypothetical assumes 5% annual return before expenses.
* Expenses are equal to the Fund's annualized operating expense ratio (0.62%)**, multiplied by the average account value over the period, multiplied by 181/365 (to reflect the one-half year period).
** The expense ratio reflects the impact, if any, of certain reimbursements from the Adviser.
| Schedule of Investments |
| June 30, 2014 (Unaudited) |
| | Shares | | Value
(Note 1) |
COMMON STOCK – (97.76%) |
| CONSUMER DISCRETIONARY – (12.91%) |
| | Automobiles & Components – (0.86%) |
| | Harley-Davidson, Inc. | | | 47,540 | | $ | 3,320,669 |
| Consumer Durables & Apparel – (0.44%) |
| Compagnie Financiere Richemont S.A., Unit A (Switzerland) | | | 8,900 | | | 933,858 |
| Hunter Douglas N.V. (Netherlands) | | | 16,499 | | | 790,723 |
| | | 1,724,581 |
| Consumer Services – (1.93%) |
| Las Vegas Sands Corp. | | | 98,060 | | | 7,474,133 |
| Media – (3.21%) |
| Liberty Global PLC, Series C * | | | 199,170 | | | 8,429,870 |
| Walt Disney Co. | | | 46,880 | | | 4,019,491 |
| | | 12,449,361 |
| Retailing – (6.47%) |
| Amazon.com, Inc. * | | | 22,970 | | | 7,460,311 |
| CarMax, Inc. * | | | 104,780 | | | 5,449,608 |
| Liberty Interactive Corp., Series A * | | | 96,334 | | | 2,828,848 |
| Liberty Ventures, Series A * | | | 12,958 | | | 956,041 |
| Netflix Inc. * | | | 5,030 | | | 2,216,671 |
| Priceline Group Inc. * | | | 5,120 | | | 6,161,229 |
| | | 25,072,708 |
| | | Total Consumer Discretionary | | | 50,041,452 |
| CONSUMER STAPLES – (10.93%) |
| Food & Staples Retailing – (6.94%) |
| Costco Wholesale Corp. | | | 132,580 | | | 15,269,239 |
| CVS Caremark Corp. | | | 101,468 | | | 7,647,643 |
| Sysco Corp. | | | 106,570 | | | 3,991,046 |
| | | 26,907,928 |
| Food, Beverage & Tobacco – (3.99%) |
| Diageo PLC, ADR (United Kingdom) | | | 63,733 | | | 8,111,299 |
| Heineken Holding N.V. (Netherlands) | | | 66,921 | | | 4,399,852 |
| Nestle S.A. (Switzerland) | | | 5,130 | | | 397,419 |
| Philip Morris International Inc. | | | 30,180 | | | 2,544,476 |
| | | 15,453,046 |
| Total Consumer Staples | | | 42,360,974 |
| ENERGY – (7.70%) |
| Canadian Natural Resources Ltd. (Canada) | | | 203,070 | | | 9,322,944 |
| EOG Resources, Inc. | | | 142,240 | | | 16,622,166 |
| Occidental Petroleum Corp. | | | 6,480 | | | 665,042 |
| Schlumberger Ltd. | | | 12,890 | | | 1,520,375 |
| Ultra Petroleum Corp. * | | | 57,140 | | | 1,696,487 |
| Total Energy | | | 29,827,014 |
| FINANCIALS – (34.37%) |
| Banks – (8.40%) |
| JPMorgan Chase & Co. | | | 113,528 | | | 6,541,483 |
| Wells Fargo & Co. | | | 494,944 | | | 26,014,257 |
| | | 32,555,740 |
| DAVIS VALUE PORTFOLIO | Schedule of Investments – (Continued) |
| June 30, 2014 (Unaudited) |
| | Shares | | Value
(Note 1) |
| COMMON STOCK – (CONTINUED) |
| FINANCIALS – (CONTINUED) |
| | Diversified Financials – (21.15%) |
| | Capital Markets – (8.96%) |
| | Bank of New York Mellon Corp. | | | 554,120 | | $ | 20,768,418 |
| Brookfield Asset Management Inc., Class A (Canada) | | | 86,700 | | | 3,816,534 |
| Charles Schwab Corp. | | | 158,970 | | | 4,281,062 |
| Julius Baer Group Ltd. (Switzerland) | | | 142,171 | | | 5,861,267 |
| | 34,727,281 |
| Consumer Finance – (7.31%) |
| American Express Co. | | | 298,359 | | | 28,305,318 |
| Diversified Financial Services – (4.88%) |
| Berkshire Hathaway Inc., Class A * | | | 68 | | | 12,913,234 |
| Moody's Corp. | | | 24,730 | | | 2,167,832 |
| Visa Inc., Class A | | | 18,240 | | | 3,843,350 |
| | | 18,924,416 |
| | | 81,957,015 |
| Insurance – (4.00%) |
| Multi-line Insurance – (2.43%) |
| Fairfax Financial Holdings Ltd. (Canada) | | | 4,230 | | | 2,006,606 |
| Fairfax Financial Holdings Ltd., 144A (Canada)(a) | | | 2,490 | | | 1,181,283 |
| Loews Corp. | | | 141,840 | | | 6,242,378 |
| | 9,430,267 |
| Property & Casualty Insurance – (1.21%) |
| ACE Ltd. | | | 36,920 | | | 3,828,604 |
| Markel Corp. * | | | 1,290 | | | 845,776 |
| | 4,674,380 |
| Reinsurance – (0.36%) |
| Alleghany Corp. * | | | 3,181 | | | 1,393,660 |
| | | 15,498,307 |
| Real Estate – (0.82%) |
| Hang Lung Group Ltd. (Hong Kong) | | | 583,410 | | | 3,157,779 |
| | | Total Financials | | | 133,168,841 |
| HEALTH CARE – (8.85%) |
| Health Care Equipment & Services – (7.31%) |
| Express Scripts Holding Co. * | | | 106,550 | | | 7,386,579 |
| Laboratory Corp. of America Holdings * | | | 68,290 | | | 6,992,896 |
| Quest Diagnostics Inc. | | | 59,320 | | | 3,481,491 |
| UnitedHealth Group Inc. | | | 128,150 | | | 10,476,262 |
| | | 28,337,228 |
| Pharmaceuticals, Biotechnology & Life Sciences – (1.54%) |
| Agilent Technologies, Inc. | | | 30,970 | | | 1,778,917 |
| Valeant Pharmaceuticals International, Inc. (Canada)* | | | 33,170 | | | 4,183,400 |
| | | | 5,962,317 |
| Total Health Care | | | 34,299,545 |
| INDUSTRIALS – (4.03%) |
| Capital Goods – (2.47%) |
| OCI N.V. (Netherlands)* | | | 29,250 | | | 1,141,483 |
| PACCAR Inc. | | | 67,620 | | | 4,248,226 |
| Schneider Electric SE (France) | | | 22,180 | | | 2,088,012 |
| DAVIS VALUE PORTFOLIO | Schedule of Investments – (Continued) |
| June 30, 2014 (Unaudited) |
| | Shares/Principal | | Value
(Note 1) |
| COMMON STOCK – (CONTINUED) |
| INDUSTRIALS – (CONTINUED) |
| | Capital Goods – (Continued) |
| | Textron Inc. | | | 54,500 | | $ | 2,086,805 |
| | | 9,564,526 |
| Commercial & Professional Services – (0.21%) |
| Experian PLC (United Kingdom) | | | 48,212 | | | 815,199 |
| Transportation – (1.35%) |
| China Merchants Holdings International Co., Ltd. (China) | | | 29,528 | | | 92,008 |
| Kuehne & Nagel International AG (Switzerland) | | | 34,733 | | | 4,621,667 |
| Wesco Aircraft Holdings, Inc. * | | | 25,330 | | | 505,587 |
| | | 5,219,262 |
| | | | | Total Industrials | | | 15,598,987 |
| INFORMATION TECHNOLOGY – (12.25%) |
| Semiconductors & Semiconductor Equipment – (2.09%) |
| Texas Instruments Inc. | | | 169,120 | | | 8,083,090 |
| Software & Services – (9.67%) |
| Activision Blizzard, Inc. | | | 182,970 | | | 4,081,146 |
| Google Inc., Class A * | | | 19,520 | | | 11,415,003 |
| Google Inc., Class C * | | | 19,520 | | | 11,232,686 |
| Microsoft Corp. | | | 88,210 | | | 3,678,798 |
| Oracle Corp. | | | 76,900 | | | 3,116,757 |
| Qihoo 360 Technology Co. Ltd., Class A, ADR (China)* | | | 23,090 | | | 2,125,204 |
| SouFun Holdings Ltd., Class A, ADR (China) | | | 133,840 | | | 1,310,294 |
| Twitter, Inc. * | | | 12,790 | | | 524,006 |
| | | 37,483,894 |
| Technology Hardware & Equipment – (0.49%) |
| Hewlett-Packard Co. | | | 56,061 | | | 1,888,135 |
| Total Information Technology | | | 47,455,119 |
| MATERIALS – (6.72%) |
| Air Products and Chemicals, Inc. | | | 57,980 | | | 7,457,388 |
| Ecolab Inc. | | | 42,700 | | | 4,754,218 |
| Emerald Plantation Holdings Ltd. (China)* | | | 112,030 | | | 19,605 |
| Holcim Ltd. (Switzerland) | | | 3,720 | | | 326,989 |
| Lafarge S.A. (France)(b) | | | 81,810 | | | 7,102,224 |
| Martin Marietta Materials, Inc. | | | 9,110 | | | 1,202,975 |
| Monsanto Co. | | | 26,990 | | | 3,366,733 |
| Praxair, Inc. | | | 13,670 | | | 1,815,923 |
| Total Materials | | | 26,046,055 |
| | TOTAL COMMON STOCK – (Identified cost $196,427,123) | | | 378,797,987 |
CORPORATE BONDS – (0.02%) |
| MATERIALS – (0.02%) |
| Emerald Plantation Holdings Ltd., Sr. Notes, 6.00%/8.00%, 01/30/20 (China)(c) | | $ | 103,832 | | | 82,027 |
| TOTAL CORPORATE BONDS – (Identified cost $70,593) | | | 82,027 |
| DAVIS VALUE PORTFOLIO | Schedule of Investments – (Continued) |
| June 30, 2014 (Unaudited) |
| Principal | | Value
(Note 1) |
| SHORT-TERM INVESTMENTS – (2.22%) |
| | | Mizuho Securities USA Inc. Joint Repurchase Agreement, 0.12%, 07/01/14, dated 06/30/14, repurchase value of $4,093,014 (collateralized by: U.S. Government agency mortgages and obligations in a pooled cash account, 0.00%-7.00%, 07/03/14-06/01/44, total market value $4,174,860) | | $ | 4,093,000 | | $ | 4,093,000 |
| Nomura Securities International, Inc. Joint Repurchase Agreement, 0.11%, 07/01/14, dated 06/30/14, repurchase value of $3,798,012 (collateralized by: U.S. Government agency mortgages in a pooled cash account, 2.50%-5.50%, 10/15/34-06/20/44, total market value $3,873,960) | | | 3,798,000 | | | 3,798,000 |
| SunTrust Robinson Humphrey, Inc. Joint Repurchase Agreement, 0.15%, 07/01/14, dated 06/30/14, repurchase value of $712,003 (collateralized by: U.S. Government agency mortgages in a pooled cash account, 0.00%-4.00%, 01/01/23-06/01/44, total market value $726,240) | | | 712,000 | | | 712,000 |
| TOTAL SHORT-TERM INVESTMENTS – (Identified cost $8,603,000) | | | 8,603,000 |
| INVESTMENT OF CASH COLLATERAL FORSECURITIES LOANED – (0.29%) |
| MONEY MARKET FUNDS – (0.29%) State Street Navigator Securities Lending Prime Portfolio | | | 1,116,023 | | | 1,116,023 |
| TOTAL INVESTMENT OF CASH COLLATERAL FOR SECURITIES LOANED – (Identified cost $1,116,023) | | | 1,116,023 |
| Total Investments – (100.29%) – (Identified cost $206,216,739) – (d) | | | 388,599,037 |
| Liabilities Less Other Assets – (0.29%) | | | (1,108,632) |
| | | | | Net Assets – (100.00%) | | $ | 387,490,405 |
| |
| ADR: American Depositary Receipt |
| | |
| * | Non-Income producing security. |
|
| (a) | This security is subject to Rule 144A. The Board of Directors of the Fund has determined that there is sufficient liquidity in this security to realize current valuations. This security amounted to $1,181,283 or 0.30% of the Fund's net assets as of June 30, 2014. |
| | | |
| (b) | Security is partially on loan – See Note 6 of the Notes to Financial Statements. |
|
| (c) | Represents a PIK Toggle Note: PIK (Pay-In-Kind) toggle notes pay interest in cash at one rate or, at the company's option, pay interest in additional PIK toggle notes. The interest paid in additional notes is set at a higher rate than the cash interest rate. |
|
| (d) | Aggregate cost for federal income tax purposes is $207,766,866. At June 30, 2014 unrealized appreciation (depreciation) of securities for federal income tax purposes is as follows: |
|
| Unrealized appreciation | | $ | 182,412,364 |
| Unrealized depreciation | | | (1,580,193) |
| Net unrealized appreciation | | $ | 180,832,171 |
See Notes to Financial Statements
| Statement of Assets and Liabilities |
| At June 30, 2014 (Unaudited) |
ASSETS: | | | | | |
| Investments in* (see accompanying Schedule of Investments): | | | |
| Securities at value | | $ | 387,483,014 |
| Collateral for securities loaned (Note 6) | | | 1,116,023 |
| Cash | | | 13,122 |
| Receivables: | | | |
| Capital stock sold | | | 123,060 |
| Dividends and interest | | | 295,386 |
| Investment securities sold | | | 502,344 |
| Prepaid expenses | | | 2,651 |
| | Total assets | | | 389,535,600 |
LIABILITIES: | | | |
| Return of collateral for securities loaned (Note 6) | | | 1,116,023 |
| Payables: | | | |
| Capital stock redeemed | | | 211,214 |
| Investment securities purchased | | | 493,809 |
| Accrued investment advisory fee | | | 186,036 |
| Other accrued expenses | | | 38,113 |
| Total liabilities | | | 2,045,195 |
NET ASSETS | | $ | 387,490,405 |
SHARES OUTSTANDING | | | 27,344,613 |
NET ASSET VALUE, offering, and redemption price per share (Net assets ÷ Shares outstanding) | | $ | 14.17 |
NET ASSETS CONSIST OF: | | | |
| Par value of shares of capital stock | | $ | 27,345 |
| Additional paid-in capital | | | 163,618,706 |
| Undistributed net investment income | | | 2,224,340 |
| Accumulated net realized gains from investments and foreign currency transactions | | | 39,235,262 |
| Net unrealized appreciation on investments and foreign currency transactions | | | 182,384,752 |
| Net Assets | | $ | 387,490,405 |
| | | | | |
| *Including: | | | |
| Cost of Investments | | $ | 205,100,716 |
| Cost of collateral for securities loaned | | | 1,116,023 |
| Market value of securities on loan | | | 1,060,602 |
| See Notes to Financial Statements |
| Statement of Operations |
| For the six months ended June 30, 2014 (Unaudited) |
| INVESTMENT INCOME: | | | | | | |
| Income: | | | |
| Dividends* | | $ | 3,139,081 |
| Interest | | | 8,260 |
| Net securities lending fees | | | 12,160 |
| Total income | | | | 3,159,501 |
| | | | | | | | | |
| Expenses: | | | |
| Investment advisory fees (Note 3) | | $ | 1,048,139 | | | |
| Custodian fees | | | 43,501 | | | |
| Transfer agent fees | | | 8,342 | | | |
| Audit fees | | | 10,920 | | | |
| Legal fees | | | 5,311 | | | |
| Accounting fees (Note 3) | | | 3,996 | | | |
| Reports to shareholders | | | 14,001 | | | |
| Directors' fees and expenses | | | 39,211 | | | |
| Registration and filing fees | | | 148 | | | |
| Miscellaneous | | | 9,577 | | | |
| Total expenses | | | | 1,183,146 |
| Net investment income | | | 1,976,355 |
| | | | | | | | | |
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS: | | | | | | |
| Net realized gain (loss) from: | | | |
| Investment transactions | | | 34,415,958 |
| Foreign currency transactions | | | (3,498) |
| Net realized gain | | | 34,412,460 |
| Net decrease in unrealized appreciation | | | (17,254,867) |
| | Net realized and unrealized gain on investments and foreign currency transactions | | | | 17,157,593 |
| Net increase in net assets resulting from operations | | $ | 19,133,948 |
| | | | | | | | | |
| *Net of foreign taxes withheld as follows | | $ | 85,078 |
| See Notes to Financial Statements |
| Statements of Changes in Net Assets |
| | Six months ended June 30, 2014 (Unaudited) | | Year ended December 31, 2013 | |
| OPERATIONS: | | | | | | | |
| Net investment income | | $ | 1,976,355 | | $ | 3,129,870 | |
| Net realized gain from investments and foreign currency transactions | | | 34,412,460 | | | 29,735,695 | |
Net increase (decrease) in unrealized appreciation on investments and foreign currency transactions | | | (17,254,867) | | | 74,418,963 | |
| Net increase in net assets resulting from operations | | | 19,133,948 | | | 107,284,528 | |
| | | | | | | | | |
| DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM: | | | | | | | |
| Net investment income | | | – | | | (3,160,869) | |
| | | | | | | |
| Realized gains from investment transactions | | | – | | | (26,731,139) | |
| | | | | | | | | |
| CAPITAL SHARE TRANSACTIONS: | | | | | | | |
| Net decrease in net assets resulting from capital share transactions (Note 4) | | | (27,894,663) | | | (26,697,277) | |
| Total increase (decrease) in net assets | | | (8,760,715) | | | 50,695,243 | |
| | | | | | | | | |
| NET ASSETS: | | | | | | | |
| Beginning of period | | | 396,251,120 | | | 345,555,877 | |
End of period* | | $ | 387,490,405 | | $ | 396,251,120 | |
| | | | | | | | | |
| *Including undistributed net investment income of | | $ | 2,224,340 | | $ | 247,985 | |
| | | | | | | | |
| | |
| See Notes to Financial Statements | |
| Notes to Financial Statements |
| June 30, 2014 (Unaudited) |
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. Only insurance companies, for the purpose of funding variable annuity or variable life insurance contracts, may purchase shares of the Fund. The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements.
Security Valuation - 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 valued 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. Fixed income securities with more than 60 days to maturity are generally valued using evaluated prices or matrix pricing methods determined by an independent pricing service which takes into consideration factors such as yield, maturity, liquidity, ratings, and traded prices in identical or similar securities. Securities (including restricted securities) for which market quotations are not readily available or securities whose values have been materially affected by what Davis Selected Advisers, L.P. ("Davis Advisors" or "Adviser"), the Fund's investment 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 using a standardized fair valuation methodology applicable to the security type or the significant event as previously approved by the Fund's Pricing Committee and Board of Directors. The Pricing Committee considers all facts it deems relevant that are reasonably available, through either public information or information available to the Adviser's portfolio management team, when determining the fair value of a security. To assess the continuing appropriateness of security valuations, the Adviser may compare prior day prices, prices of comparable securities, and sale prices to the prior or current day prices and challenge those prices exceeding certain tolerance levels with the third-party pricing service or broker source. Fair value determinations are subject to review, approval, and ratification by the Fund's Board of Directors at its next regularly scheduled meeting covering the period in which the fair valuation was determined.
Short-term securities purchased within 60 days to maturity are valued at amortized cost, which approximates market value.
The Fund's valuation procedures are reviewed and subject to approval by the Board of Directors. There have been no significant changes to the fair valuation procedures during the period.
Value Measurements - Fair value is defined as the price that the Fund would receive upon selling an investment in an orderly transaction to an independent buyer in the principal market for the investment. Various inputs are used to determine the fair value of the Fund's investments. These inputs are summarized in the three broad levels listed below.
| Level 1 – | quoted prices in active markets for identical securities |
| Level 2 – | other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.) |
| Level 3 – | significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments) |
The inputs or methodologies used for valuing securities are not necessarily an indication of the risks associated with investing in those securities nor can it be assured that the Fund can obtain the fair value assigned to a security if it were to sell the security.
| DAVIS VALUE PORTFOLIO | Notes to Financial Statements – (Continued) |
| June 30, 2014 (Unaudited) |
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (CONTINUED)
Value Measurements - (Continued)
The following is a summary of the inputs used as of June 30, 2014 in valuing the Fund's investments carried at value:
| Investments in Securities at Value |
| Valuation Inputs |
| | | Level 2: | | Level 3: | | |
| | | Other Significant | | Significant | | |
| Level 1: | | Observable | | Unobservable | | |
| Quoted Prices | | Inputs | | Inputs | | Total |
Equity securities: | | | | | | | | | | | |
| Consumer Discretionary | $ | 50,041,452 | | $ | – | | $ | – | | $ | 50,041,452 |
| Consumer Staples | | 42,360,974 | | | – | | | – | | | 42,360,974 |
| Energy | | 29,827,014 | | | – | | | – | | | 29,827,014 |
| Financials | | 133,168,841 | | | – | | | – | | | 133,168,841 |
| Health Care | | 34,299,545 | | | – | | | – | | | 34,299,545 |
| Industrials | | 15,598,987 | | | – | | | – | | | 15,598,987 |
| Information Technology | | 47,455,119 | | | – | | | – | | | 47,455,119 |
| Materials | | 26,026,450 | | | 19,605 | | | – | | | 26,046,055 |
| Corporate debt securities | | – | | | 82,027 | | | – | | | 82,027 |
| Short-term securities | | – | | | 8,603,000 | | | – | | | 8,603,000 |
| Investment of cash collateral for securities loaned | | – | | | 1,116,023 | | | – | | | 1,116,023 |
| Total Investments | $ | 378,778,382 | | $ | 9,820,655 | | $ | – | | $ | 388,599,037 |
There were no transfers of investments between Level 1 and Level 2 of the fair value hierarchy during the six months ended June 30, 2014.
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.
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.
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.
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 security 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 or 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 sales of investments together with market gains and losses on such investments in the Statement of Operations.
| DAVIS VALUE PORTFOLIO | Notes to Financial Statements – (Continued) |
| June 30, 2014 (Unaudited) |
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (CONTINUED)
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 and state income tax returns for all open tax years and has concluded that as of June 30, 2014, no provision for income tax is required in the Fund's financial statements related to these tax positions. The Fund's federal and state (Arizona) 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 department of revenue. The earliest tax year that remains subject to examination by these jurisdictions is 2010.
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.
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 and foreign currency transactions. 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 certain components of capital to reflect permanent differences between financial statement amounts and net income and realized gains/losses determined in accordance with income tax rules.
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.
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.
Directors Fees and Expenses - The Fund set up a Rabbi Trust to provide for the deferred compensation plan for Independent Directors that enables them to elect to defer receipt of all or a portion of annual fees they are entitled to receive. The value of an eligible Directors account is based upon years of service and fees paid to each Directors during the years of service. The amount paid to the Directors by the Trust under the plan will be determined based upon the performance of the Davis Funds in which the amounts are invested.
NOTE 2 - PURCHASES AND SALES OF SECURITIES
The cost of purchases and proceeds from sales of investment securities (excluding short-term securities) during the six months ended June 30, 2014 were $50,625,996 and $76,543,410, respectively.
| DAVIS VALUE PORTFOLIO | Notes to Financial Statements – (Continued) |
| June 30, 2014 (Unaudited) |
NOTE 3 - FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Davis Selected Advisers-NY, Inc. ("DSA-NY"), a wholly-owned subsidiary of the Adviser, acts as sub-adviser to the Fund. DSA-NY performs research and portfolio management services for the Fund under a Sub-Advisory Agreement with the Adviser. The Fund pays no fees directly to DSA-NY.
Certain directors and officers of the Fund are also directors and officers of the general partner of the Adviser.
Investment Advisory Fees - Advisory fees are paid monthly to the Adviser at an annual rate of 0.55% of the Fund's average net assets.
Accounting Fees - State Street Bank and Trust Company ("State Street Bank") is the Fund's primary accounting provider. Fees for accounting services are included in the custodian fees as State Street Bank also serves as the Fund's custodian. The Adviser is also paid for certain accounting services. The fee paid to the Adviser for these services during the six months ended June 30, 2014 amounted to $3,996.
NOTE 4 - CAPITAL STOCK
At June 30, 2014, there were 500 million shares of capital stock ($0.001 par value per share) authorized. Transactions in capital stock were as follows:
| Six months ended June 30, 2014 (Unaudited) |
| | Sold | | | Reinvestment of Distributions | | | Redeemed | | | Net Decrease |
| | | | | | | | | | | |
Shares: | | 338,717 | | | – | | | (2,399,391) | | | (2,060,674) |
Value: | $ | 4,573,365 | | $ | – | | $ | (32,468,028) | | $ | (27,894,663) |
| | | | | | | | | | | |
| |
| Year ended December 31, 2013 |
| | Sold | | | Reinvestment of Distributions | | | Redeemed | | | Net Decrease |
| | | | | | | | | | | |
Shares: | | 977,891 | | | 2,230,747 | | | (5,424,748) | | | (2,216,110) |
Value: | $ | 12,415,959 | | $ | 29,892,008 | | $ | (69,005,244) | | $ | (26,697,277) |
| | | | | | | | | | | |
NOTE 5 - 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 higher of the Federal Funds Rate or the Overnight Libor Rate, plus 1.25%. The Fund had no borrowings during the six months ended June 30, 2014.
NOTE 6 - SECURITIES LOANED
The Fund has entered into a securities lending arrangement with State Street Bank. Under the terms of the agreement, the Fund receives fee income from lending transactions; in exchange for such fees, State Street Bank is authorized to loan securities on behalf of the Fund, against receipt of collateral at least equal to the value of the securities loaned. As of June 30, 2014, the Fund had on loan:
| Securities valued at | $ | 1,060,602 |
| Cash received as loan collateral | | 1,116,023 |
The Fund bears the risk of any deficiency in the amount of the collateral available for return to a borrower due to a loss in an approved investment.
| The following financial information represents selected data for each share of capital stock outstanding throughout each period: |
| Six months ended
June 30, 2014 | | Year ended December 31, |
| (Unaudited) | | 2013 | | 2012 | | 2011 | | 2010 | | 2009 |
| Net Asset Value, Beginning of Period | | $ | 13.48 | | $ | 10.93 | | $ | 10.47 | | $ | 11.97 | | $ | 10.75 | | $ | 8.26 |
| | | | | | | | | | | | |
| Income (Loss) from Investment Operations: | | | | | | | | | | | | |
| Net Investment Income | | 0.07 | | 0.12 | | 0.20 | | 0.13 | | 0.11 | | 0.08 |
| Net Realized and Unrealized Gains (Losses) | | 0.62 | | 3.53 | | 1.16 | | (0.63) | | 1.26 | | 2.49 |
| Total from Investment Operations | | 0.69 | | 3.65 | | 1.36 | | (0.50) | | 1.37 | | 2.57 |
| | | | | | | | | | | | |
| Dividends and Distributions: | | | | | | | | | | | | |
| Dividends from Net Investment Income | | – | | (0.12) | | (0.19) | | (0.10) | | (0.15) | | (0.08) |
| Distributions from Realized Gains | | – | | (0.98) | | (0.71) | | (0.90) | | – | | – |
| Total Dividends and Distributions | | – | | (1.10) | | (0.90) | | (1.00) | | (0.15) | | (0.08) |
| Net Asset Value, End of Period | | $ | 14.17 | | $ | 13.48 | | $ | 10.93 | | $ | 10.47 | | $ | 11.97 | | $ | 10.75 |
| | | | | | | | | | | | | | | | | | |
Total Returna | | 5.12 | % | | 33.43 | % | | 13.08 | % | | (4.18) | % | | 12.76 | % | | 31.16 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Ratios/Supplemental Data: | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Assets, End of Period (in thousands) | | $ | 387,490 | | | $ | 396,251 | | | $ | 345,556 | | | $ | 351,369 | | | $ | 472,734 | | | $ | 519,404 | |
| Ratio of Expenses to Average Net Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gross | | 0.62 | %b | | 0.62 | % | | 0.64 | % | | 0.63 | % | | 0.63 | % | | 0.71 | % |
| Netc | | 0.62 | %b | | 0.62 | % | | 0.64 | % | | 0.63 | % | | 0.63 | % | | 0.71 | % |
Ratio of Net Investment Income to Average Net Assets | | 1.04 | %b | | 0.84 | % | | 1.63 | % | | 1.15 | % | | 1.03 | % | | 0.97 | % |
Portfolio Turnover Rated | | 13 | % | | 10 | % | | 10 | % | | 13 | % | | 21 | % | | 20 | % |
| a | 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 are not annualized for periods of less than one year and do not reflect charges attributable to your insurance company's separate account. Inclusion of these charges would reduce the total returns shown. |
| |
| b | Annualized. |
| |
| c | 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. |
| |
| d | 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. |
|
| See Notes to Financial Statements |
| Director Approval of Advisory Agreements (Unaudited) |
Process of Annual Review
The Board of Directors of the Davis Funds oversees the management of each Davis Fund and, as required by law, determines annually whether to approve the continuance of each Davis Fund's advisory agreement with Davis Selected Advisers, L.P. and sub-advisory agreement with Davis Selected Advisers-NY, Inc. (jointly "Davis Advisors" and "Advisory Agreements").
As a part of this process the Independent Directors, with the assistance of counsel for the Independent Directors, prepared questions submitted to Davis Advisors in anticipation of the annual contract review. The Independent Directors were provided with responsive background material (including recent investment performance data), and their counsel provided guidance, prior to a separate contract review meeting held in March 2014 where the Independent Directors reviewed and evaluated all information which they deemed reasonably necessary in the circumstances. In reaching their decision the Independent Directors also took into account information furnished to them throughout the year and otherwise provided to them. Upon completion of this review, the Independent Directors found that the terms of the Advisory Agreements were fair and reasonable and that continuation of the Advisory Agreements was in the best interest of Davis Value Portfolio and its shareholders.
Reasons the Independent Directors Approved Continuation of the Advisory Agreements
The Independent Directors' determinations were based upon a comprehensive consideration of all information provided to the Independent Directors and they did not identify any single item or piece of information as the controlling factor. Each Independent Director did not necessarily attribute the same weight to each factor. The following facts and conclusions were important, but not exclusive, in the Independent Directors' recommendation to renew the Advisory Agreements.
The Independent Directors considered not only the investment performance of the Fund, but also the full range and quality of services provided by Davis Advisors to the Fund and its shareholders, including whether it:
| 1. | Achieves satisfactory investment results over the long-term after all costs; |
| 2. | Handles shareholder transactions, inquiries, requests, and records efficiently and effectively, and provides quality accounting, legal, and compliance services, and oversees third-party service providers; and |
| 3. | Fosters healthy investor behavior. |
Davis Advisors is reimbursed a portion of its costs in providing some, but not all, of these services.
A shareholder's ultimate return is the product of a fund's results as well as the shareholder's behavior, specifically in selecting when to invest or redeem. The Independent Directors concluded that, through its actions and communications, Davis Advisors has attempted to have a meaningful, positive impact on investor behavior.
The Independent Directors noted the importance of reviewing quantitative measures, but also recognized that qualitative factors are also important in assessing whether Davis Funds' shareholders are likely to be well served by the renewal of the Advisory Agreements. They noted both the value and shortcomings of purely quantitative measures, including the data provided by independent service providers, and concluded that while such measures and data may be informative, the judgment of the Independent Directors must take many factors, including those listed below, into consideration in representing the shareholders of the Davis Funds. In connection with reviewing comparative performance information, the Independent Directors generally give greater weight to longer-term measurements.
The Independent Directors expect Davis Advisors to employ a disciplined, company-specific, research-driven, businesslike, long-term investment philosophy.
The Independent Directors recognized Davis Advisors' (a) efforts to minimize transaction costs by generally having a long-term time horizon and low portfolio turnover; (b) record of generally producing satisfactory results over the long-term; (c) efforts towards fostering healthy investor behavior by, among other things, providing informative and substantial educational material; and (d) efforts to promote shareholder interests by actively speaking out on corporate governance issues.
| DAVIS VALUE PORTFOLIO | Director Approval of Advisory Agreements (Unaudited) – (Continued) |
Reasons the Independent Directors Approved Continuation of the Advisory Agreements – (Continued)
The Independent Directors reviewed (a) comparative fee and expense information for other funds, as selected and analyzed by a nationally recognized independent service provider; (b) information regarding fees charged by Davis Advisors to other advisory clients, including funds which it sub-advises and private accounts, as well as the differences in the services provided to such other clients; and (c) the fee schedule of the Fund, including an assessment of competitive fee schedules.
The Independent Directors reviewed the fixed management fee for the Fund, profitability of the Fund to Davis Advisors, the extent to which economies of scale might be realized if the Fund's net assets increase, and whether the fixed fee reflected those potential economies of scale. The Independent Directors considered the nature, quality, and extent of the services being provided to the Fund and the costs incurred by Davis Advisors in providing such services. The Independent Directors considered various potential benefits that Davis Advisors may receive in connection with the services it provides under the Advisory Agreements with the Fund, including a review of portfolio brokerage practices. The Independent Directors noted that Davis Advisors does not use client commissions to pay for publications that are available to the general public or for third-party research services.
The Independent Directors compared the fees paid to Davis Advisors by the Davis Funds with those paid by Davis Advisors' sub-advised clients, private account clients, and managed money/wrap clients. To the extent sub-advised or private account fees were lower than fees paid by the Funds, the Independent Directors noted that the range of services provided to the Funds is more extensive and the risks associated with operating SEC registered, publicly traded mutual funds are greater. Serving as the primary adviser for mutual funds is more work because of the complex overlay of regulatory, tax and accounting issues which are unique to mutual funds. In addition, the operational work required to service shareholders is more extensive because of the significantly greater number of shareholders and managing trading is more complex because of more frequent fund flows. With respect to risk, not only has regulation become more complex and burdensome, but the scrutiny of regulators and shareholders has gotten more intense.
The Independent Directors noted that Davis Value Portfolio had under-performed its benchmark, the Standard & Poor's 500® Index, over the three-, five-, and ten-year time periods and out-performed over the one-year time period and since inception (July 1, 1999), all ended February 28, 2014. The Lipper Report (prepared by an independent service provider) indicated that the Fund out-performed the Lipper Performance Universe and Lipper Index over the one-year time period, but under-performed over the two-, three-, four-, five-, and ten-year time periods, all ended December 31, 2013. The Fund out-performed the Standard & Poor's 500® Index in 5 of the 10 rolling five-year time frames and the performance universe in 8 of the 10 rolling five-year time frames ended December 31 for each year from 2004 through 2013. The Fund out-performed the Index in 3 of the 5 rolling ten-year time frames and the performance universe in all 5 rolling ten-year time frames ended December 31 for each year from 2009 through 2013.
The Independent Directors considered Davis Value Portfolio's management fee and total expense ratio. Both were reasonable and below the average and median ratios of its peer group as determined by Lipper.
Approval of Advisory Agreements
The Independent Directors concluded that Davis Advisors had provided Davis Value Portfolio and its shareholders a reasonable level of both investment and non-investment services. The Independent Directors further concluded that shareholders have received a significant benefit from Davis Advisors' shareholder oriented approach, as well as the execution of its investment discipline.
The Independent Directors determined that the advisory fee for Davis Value Portfolio was reasonable in light of the nature, quality, and extent of the services being provided to the Fund, the costs incurred by Davis Advisors in providing such service, and in comparison to the range of the average advisory fees of its peer group as determined by an independent service provider. The Independent Directors found that the terms of the Advisory Agreements were fair and reasonable and that continuation of the Advisory Agreements was in the best interest of the Fund and its shareholders. The Independent Directors and the full Board of Directors therefore voted to continue the Advisory Agreements.
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 85756. 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).
Name (birthdate) | Position(s) Held With Fund | Term of Office and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Director | Other Directorships Held by Director |
| | | | | |
Independent Directors
| | | | | |
Marc P. Blum (09/09/42) | Director | Director since 1986 | Chief Executive Officer, World Total Return Fund, LLLP; of Counsel to Gordon Feinblatt LLC (law firm). | 13 | Director, Rodney Trust Company (trust and asset management company). |
| | | | | |
John S. Gates, Jr. (08/02/53) | Director | Director since 2007 | Chairman and Chief Executive Officer of PortaeCo LLC (private investment company). | 13 | Director, DCT Industrial Trust (REIT); Chairman, Regional Transportation Authority of Chicago (public transportation system). |
| | | | | |
Thomas S. Gayner (12/16/61) | Director/ Chairman | Director since 2004 | President and Chief Investment Officer, Markel Corp. (diversified financial holding company). | 13 | Director, Graham Holdings Company (publishing company); Director, Colfax Corp. (engineering and manufacturer of pumps and fluid handling equipment). |
| | | | | |
Samuel H. Iapalucci (07/19/52) | Director | Director since 2006 | Retired; Executive Vice President and Chief Financial Officer, CH2M- HILL Companies, Ltd. (engineering) until 2008. | 13 | Director, exp Global Inc. (engineering). |
| | | | | |
Robert P. Morgenthau (03/22/57) | Director | Director since 2002 | Principal, Spears Abacus Advisors, LLC (investment management firm) since 2011; Chairman, NorthRoad Capital Management, LLC (investment management firm) 2002-2011. | 13 | none |
| | | | | |
Marsha Williams (03/28/51) | Director | Director since 1999 | Retired; Senior Vice President and Chief Financial Officer, Orbitz Worldwide, Inc. (travel-services provider) 2007-2010. | 13 | Director, Modine Manufacturing Company (heat transfer technology); Director, Chicago Bridge & Iron Company, N.V. (industrial construction and engineering); Director, Fifth Third Bancorp (diversified financial services). |
| DAVIS VALUE PORTFOLIO | Directors and Officers – (Continued) |
Name (birthdate) | Position(s) Held With Fund | Term of Office and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Director | Other Directorships Held by Director |
| | | | | |
Inside Directors*
| | | | | |
Andrew A. Davis (06/25/63) | 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 of certain companies affiliated with the Adviser. | 15 | Director, Selected Funds (consisting of two portfolios) since 1998. |
| | | | | |
Christopher C. Davis (07/13/65) | 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 of 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). | 15 | Director, Selected Funds (consisting of two portfolios) since 1998; Director, Graham Holdings Company (publishing company). |
*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.
Officers
Andrew A. Davis (born 06/25/63, Davis Funds officer since 1997). See description in the section on Inside Directors.
Christopher C. Davis (born 07/13/65, Davis Funds officer since 1997). See description in the section on Inside Directors.
Kenneth C. Eich (born 08/14/53, Davis Funds officer since 1997). Executive Vice President and Principal Executive Officer of each of the Davis Funds (consisting of 13 portfolios), Selected Funds (consisting of two portfolios), and Clipper Fund, Inc. (consisting of one portfolio); Chief Operating Officer, Davis Selected Advisers, L.P., and also serves as an executive officer of certain companies affiliated with the Adviser.
Douglas A. Haines (born 03/04/71, Davis Funds officer since 2004). Vice President, Treasurer, Chief Financial Officer, Principal Financial Officer, and Principal Accounting Officer of each of the Davis Funds (consisting of 13 portfolios), Selected Funds (consisting of two portfolios), and Clipper Fund, Inc. (consisting of one portfolio); Vice President and Director of Fund Accounting, Davis Selected Advisers, L.P.
Sharra L. Haynes (born 09/25/66, Davis Funds officer since 1997). Vice President and Chief Compliance Officer of each of the Davis Funds (consisting of 13 portfolios), Selected Funds (consisting of two portfolios), and Clipper Fund, Inc. (consisting of one portfolio); Vice President and Chief Compliance Officer, Davis Selected Advisers, L.P., and also serves as an executive officer of certain companies affiliated with the Adviser.
Ryan M. Charles (born 07/25/78, Davis Funds officer since 2014). Vice President and Secretary of each of the Davis Funds (consisting of 13 portfolios), Selected Funds (consisting of two portfolios), and Clipper Fund, Inc. (consisting of one portfolio); Vice President, Chief Legal Officer, and Secretary, Davis Selected Advisers, L.P., and also serves as an executive officer of certain companies affiliated with the Adviser.
Arthur Don (born 09/24/53, Davis Funds officer since 1991). Assistant Secretary (for clerical purposes only) of each of the Davis Funds and Selected Funds; Shareholder, Greenberg Traurig, LLP (law firm); counsel to the Independent Directors and the Davis Funds.
| Investment Adviser |
| Davis Selected Advisers, L.P. (Doing business as "Davis Advisors") |
| 2949 East Elvira Road, Suite 101 |
| Tucson, Arizona 85756 |
| (800) 279-0279 |
|
| Distributor |
| Davis Distributors, LLC |
| 2949 East Elvira Road, Suite 101 |
| Tucson, Arizona 85756 |
|
| 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 |
| Greenberg Traurig, LLP |
| 77 West Wacker Drive, Suite 3100 |
| Chicago, Illinois 60601 |
|
| Independent Registered Public Accounting Firm |
| KPMG LLP |
| 1225 Seventeenth Street, Suite 800 |
| 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 and on the Fund's website at www.davisfunds.com. Quarterly Fact Sheets are available on the Fund's website at www.davisfunds.com.
| DAVIS FINANCIAL PORTFOLIO | Table of Contents |
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This Semi-Annual Report is authorized for use by existing shareholders. Prospective shareholders must receive a current 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.
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.
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, on the Fund's website at www.davisfunds.com, and 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 information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
DAVIS FINANCIAL PORTFOLIO | Management's Discussion of Fund Performance |
Performance Overview
Davis Financial Portfolio delivered a total return on net asset value of 6.03%
for the six-month period ended June 30, 2014 (the "Period"). Over the Period, the Standard & Poor's 500
® Index
("Index") returned 7.14%.
The Portfolio's Absolute Performance
Insurance companies were the most important contributor1 to the Portfolio's absolute performance over the Period. Markel2, Alleghany, and American International Group were among the most important contributors to performance. Loews and Progressive were among the most important detractors from performance.
Banking companies were the second most important contributor to the Portfolio's absolute performance. Wells Fargo was among the most important contributors to performance. State Bank of India was among the most important detractors from performance. The Portfolio no longer owns State Bank of India.
Diversified Financial companies also made positive contributions to the Portfolio's absolute performance. Cielo, Brookfield Asset Management, American Express, Bank of New York Mellon, and Moody's were among the most important contributors to performance. Julius Baer Group, Visa, Goldman Sachs Group, First Marblehead, and Ameriprise Financial were among the most important detractors from performance. The Portfolio no longer owns First Marblehead or Ameriprise Financial.
Another important contributor to the Portfolio's performance was Canadian Natural Resources. Another important detractor from the Portfolio's performance was Bed Bath & Beyond. The Portfolio no longer owns Bed Bath & Beyond.
The Portfolio had approximately 16% of its net assets invested in foreign companies at June 30, 2014. As a whole, those companies out-performed the domestic companies held by the Portfolio.
The Portfolio's Relative Performance
The Portfolio under-performed the Index over the Period. The Portfolio's Financial holdings out-performed the corresponding sector3 within the Index, but the Portfolio's relative performance was hindered by having a higher average weighting in the weaker performing financial sector. The Portfolio also had a limited amount of assets invested in other sectors, which contributed to the Portfolio's overall relative performance versus the Index.
The Portfolio's Banking, Insurance, and Diversified Financial holdings out-performed the corresponding industry groups within the Index.
Davis Financial Portfolio's investment objective is long-term growth of capital. There can be no assurance that the Portfolio will achieve its objective. Davis Financial Portfolio's principal risks are: stock market risk, manager risk, common stock risk, large-capitalization companies risk, mid- and small-capitalization companies risk, headline risk, financial services risk, foreign country risk, emerging market risk, foreign currency risk, depositary receipts risk, focused portfolio risk, interest rate sensitivity risk, credit risk, and fees and expenses 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 A company's or sector's contribution to or detraction from 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%.
2 This Management Discussion of Fund Performance 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, sell, or hold any particular security. The Schedule of Investments lists the Portfolio's holdings of each company discussed.
3 The companies included in the Standard & Poor's 500® Index are divided into ten sectors. One or more industry groups make up a sector.
| DAVIS FINANCIAL PORTFOLIO | Management's Discussion of Fund Performance – (Continued) |
Comparison of a $10,000 investment in Davis Financial Portfolio versus the Standard & Poor's 500® Index
over 10 years for an investment made on June 30, 2004
Average Annual Total Return for periods ended June 30, 2014
| Fund & Benchmark Index | 1-Year | 5-Year | 10-Year | Since Fund's Inception (07/01/99) | Gross Expense Ratio | Net Expense Ratio |
| Davis Financial Portfolio | 21.78% | 16.18% | 5.16% | 4.87% | 0.68% | 0.68% |
Standard & Poor's 500® Index | 24.61% | 18.83% | 7.78% | 4.30% | | |
The Standard & Poor's 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.
The performance data for Davis Financial Portfolio contained in this report represents past performance, assumes that all distributions were reinvested, and should not be considered as an indication of future performance from an investment in the Portfolio today. The investment return and principal value will fluctuate so that shares may be worth more or less than their original cost when redeemed. Portfolio performance changes over time and current performance may be higher or lower than stated. The operating expense ratio may vary in future years. For more current information please call Davis Funds Investor Services at 1-800-279-0279.
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 included the effect of these additional charges, the return would be lower.
DAVIS FINANCIAL PORTFOLIO | Fund Overview |
| June 30, 2014 (Unaudited) |
| Portfolio Composition | | Industry Weightings |
| (% of Fund's 06/30/14 Net Assets) | | (% of 06/30/14 Stock Holdings) |
| | | | | | |
| | | | Fund | | S&P 500® |
| Common Stock (U.S.) | 82.80% | | Diversified Financials | 43.70% | | 5.02% |
| Common Stock (Foreign) | 16.25% | | Insurance | 31.30% | | 2.86% |
| Short-Term Investments | 1.01% | | Banks | 17.49% | | 6.00% |
| Other Assets & Liabilities | (0.06)% | | Energy | 4.48% | | 10.85% |
| 100.00% | | Information Technology | 3.03% | | 18.82% |
| | | Health Care | – | | 13.30% |
| | | | Capital Goods | – | | 7.79% |
| | | Food, Beverage & Tobacco | – | | 5.23% |
| | | Retailing | – | | 4.03% |
| | | Media | – | | 3.60% |
| | | Other | – | | 22.50% |
| | | | 100.00% | | 100.00% |
| Top 10 Long-Term Holdings |
| (% of Fund's 06/30/14 Net Assets) |
| American Express Co. | Consumer Finance | 10.18% |
| Wells Fargo & Co. | Banks | 9.91% |
| Bank of New York Mellon Corp. | Capital Markets | 6.75% |
| Markel Corp. | Property & Casualty Insurance | 6.51% |
| Visa Inc., Class A | Diversified Financial Services | 4.82% |
| Everest Re Group, Ltd. | Reinsurance | 4.79% |
| American International Group, Inc. | Multi-line Insurance | 4.74% |
| Brookfield Asset Management Inc., Class A | Capital Markets | 4.51% |
| Julius Baer Group Ltd. | Capital Markets | 4.48% |
| JPMorgan Chase & Co. | Banks | 4.44% |
DAVIS FINANCIAL PORTFOLIO | Expense Example (Unaudited) |
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 for the six-month period ended June 30, 2014. 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.
| Beginning Account Value (01/01/14) | | Ending Account Value (06/30/14) | | Expenses Paid During Period* (01/01/14-06/30/14) |
| | | | | |
| Actual | $1,000.00 | | $1,060.34 | | $3.47 |
| Hypothetical | $1,000.00 | | $1,021.42 | | $3.41 |
Hypothetical assumes 5% annual return before expenses.
* Expenses are equal to the Fund's annualized operating expense ratio (0.68%)**, multiplied by the average account value over the period, multiplied by 181/365 (to reflect the one-half year period).
** The expense ratio reflects the impact, if any, of certain reimbursements from the Adviser.
DAVIS FINANCIAL PORTFOLIO | Schedule of Investments |
| June 30, 2014 (Unaudited) |
COMMON STOCK – (99.05%) |
| ENERGY – (4.44%) |
| | | | Canadian Natural Resources Ltd. (Canada) | | | 76,190 | | $ | 3,497,883 |
| | | Total Energy | | | 3,497,883 |
| FINANCIALS – (91.60%) |
| Banks – (17.32%) |
| ICICI Bank Ltd., ADR (India) | | | 14,060 | | | 701,594 |
| JPMorgan Chase & Co. | | | 60,750 | | | 3,500,415 |
| U.S. Bancorp | | | 37,760 | | | 1,635,763 |
| Wells Fargo & Co. | | | 148,440 | | | 7,802,007 |
| | | 13,639,779 |
| Diversified Financials – (43.28%) |
| Capital Markets – (21.93%) |
| Bank of New York Mellon Corp. | | | 141,750 | | | 5,312,790 |
| Brookfield Asset Management Inc., Class A (Canada) | | | 80,780 | | | 3,555,936 |
| Charles Schwab Corp. | | | 87,550 | | | 2,357,721 |
| Goldman Sachs Group, Inc. | | | 15,030 | | | 2,516,623 |
| Julius Baer Group Ltd. (Switzerland) | | | 85,574 | | | 3,527,949 |
| | 17,271,019 |
| Consumer Finance – (10.18%) |
| American Express Co. | | | 84,510 | | | 8,017,464 |
| Diversified Financial Services – (11.17%) |
| Berkshire Hathaway Inc., Class A * | | | 9 | | | 1,709,105 |
| Cielo S.A. (Brazil) | | | 73,440 | | | 1,512,342 |
| Moody's Corp. | | | 20,300 | | | 1,779,498 |
| Visa Inc., Class A | | | 18,020 | | | 3,796,994 |
| | | 8,797,939 |
| | | 34,086,422 |
| Insurance – (31.00%) |
| Insurance Brokers – (3.60%) |
| Marsh & McLennan Cos, Inc. | | | 54,640 | | | 2,831,445 |
| Multi-line Insurance – (6.82%) |
| American International Group, Inc. | | | 68,380 | | | 3,732,181 |
| Loews Corp. | | | 37,320 | | | 1,642,453 |
| | 5,374,634 |
| Property & Casualty Insurance – (11.94%) |
| ACE Ltd. | | | 26,910 | | | 2,790,567 |
| Markel Corp. * | | | 7,825 | | | 5,130,383 |
| Progressive Corp. | | | 58,515 | | | 1,483,940 |
| | 9,404,890 |
| Reinsurance – (8.64%) |
| Alleghany Corp. * | | | 6,923 | | | 3,033,104 |
| Everest Re Group, Ltd. | | | 23,520 | | | 3,774,725 |
| | | 6,807,829 |
| | | | 24,418,798 |
| Total Financials | | | 72,144,999 |
| DAVIS FINANCIAL PORTFOLIO | Schedule of Investments – (Continued) |
| June 30, 2014 (Unaudited) |
| Shares/Principal | | Value
(Note 1) |
| COMMON STOCK – (CONTINUED) |
| INFORMATIONS TECHNOLOGY – (3.01%) |
| | Software & Services – (3.01%) |
| Google Inc., Class A * | | | 2,040 | | $ | 1,192,961 |
| Google Inc., Class C * | | | 2,040 | | | 1,173,908 |
| | | | | | | TOTAL INFORMATION TECHNOLOGY | | | 2,366,869 |
| TOTAL COMMON STOCK – (Identified cost $45,196,815) | | | 78,009,751 |
| SHORT-TERM INVESTMENTS – (1.01%) |
| Mizuho Securities USA Inc. Joint Repurchase Agreement, 0.12%, 07/01/14, dated 06/30/14, repurchase value of $380,001 (collateralized by: U.S. Government agency mortgages and obligations in a pooled cash account, 0.00%-7.00%, 07/03/14-06/01/44, total market value $387,600) | | $ | 380,000 | | | 380,000 |
| Nomura Securities International, Inc. Joint Repurchase Agreement, 0.11%, 07/01/14, dated 06/30/14, repurchase value of $352,001 (collateralized by: U.S. Government agency mortgages in a pooled cash account, 2.49%-7.50%, 05/15/22-06/20/44, total market value $359,040) | | | 352,000 | | | 352,000 |
| SunTrust Robinson Humphrey, Inc. Joint Repurchase Agreement, 0.15%, 07/01/14, dated 06/30/14, repurchase value of $66,000 (collateralized by: U.S. Government agency mortgages in a pooled cash account, 2.31%-4.50%, 01/01/23-06/01/44, total market value $67,320) | | | 66,000 | | | 66,000 |
| TOTAL SHORT-TERM INVESTMENTS – (Identified cost $798,000) | | | 798,000 |
| Total Investments – (100.06%) – (Identified cost $45,994,815) – (a) | | | 78,807,751 |
| Liabilities Less Other Assets – (0.06%) | | | (47,625) |
| Net Assets – (100.00%) | | $ | 78,760,126 |
|
| ADR: American Depositary Receipt |
|
| * | Non-Income producing security. |
|
| (a) | Aggregate cost for federal income tax purposes is $46,100,047. At June 30, 2014 unrealized appreciation (depreciation) of securities for federal income tax purposes is as follows: |
|
| Unrealized appreciation | | $ | 32,707,704 |
| Unrealized depreciation | | | – |
| Net unrealized appreciation | | $ | 32,707,704 |
| See Notes to Financial Statements |
DAVIS FINANCIAL PORTFOLIO | Statement of Assets and Liabilities |
| At June 30, 2014 (Unaudited) |
| ASSETS: | | | | | |
| Investments in securities at value* (see accompanying Schedule of Investments) | | $ | 78,807,751 |
| Cash | | | 12,362 |
| Receivables: | | | |
| Capital stock sold | | | 3,651 |
| Dividends and interest | | | 22,910 |
| Prepaid expenses | | | 480 |
| | Total assets | | | 78,847,154 |
LIABILITIES: | | | |
| Payables: | | | |
| Capital stock redeemed | | | 28,225 |
| Accrued audit fees | | | 8,260 |
| Accrued custodian fees | | | 4,474 |
| Accrued investment advisory fee | | | 37,844 |
| Other accrued expenses | | | 8,225 |
| Total liabilities | | | 87,028 |
NET ASSETS | | $ | 78,760,126 |
SHARES OUTSTANDING | | | 4,926,525 |
NET ASSET VALUE, offering, and redemption price per share (Net assets ÷ Shares outstanding) | | $ | 15.99 |
NET ASSETS CONSIST OF: | | | |
| Par value of shares of capital stock | | $ | 4,927 |
| Additional paid-in capital | | | 40,546,148 |
| Undistributed net investment income | | | 593,619 |
| Accumulated net realized gains from investments and foreign currency transactions | | | 4,802,242 |
| Net unrealized appreciation on investments and foreign currency transactions | | | 32,813,190 |
| Net Assets | | $ | 78,760,126 |
| | | | | |
| *Including: | | | |
| Cost of Investments | | $ | 45,994,815 |
| See Notes to Financial Statements |
DAVIS FINANCIAL PORTFOLIO | Statement of Operations |
| For the six months ended June 30, 2014 (Unaudited) |
| INVESTMENT INCOME: | | | | | | | |
| Income: | | | | |
| Dividends* | | $ | 698,000 |
| Interest | | | 498 |
| | Total income | | | | 698,498 |
| | | | | | | | | | |
| Expenses: | | | | |
Investment advisory fees (Note 3) | | $ | 211,389 | | | |
| Custodian fees | | | 14,378 | | | |
| Transfer agent fees | | | 5,496 | | | |
| Audit fees | | | 9,660 | | | |
| Legal fees | | | 1,071 | | | |
| Accounting fees (Note 3) | | | 1,002 | | | |
| Reports to shareholders | | | 3,801 | | | |
| Directors' fees and expenses | | | 10,135 | | | |
| Registration and filing fees | | | 30 | | | |
| Miscellaneous | | | 5,176 | | | |
| Total expenses | | | | 262,138 |
| Net investment income | | | 436,360 |
| | | | | | | | | | |
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS: | | | | | | | |
| Net realized gain (loss) from: | | | | |
| Investment transactions | | | 4,514,745 |
| Foreign currency transactions | | | (197) |
| Net realized gain | | | 4,514,548 |
| Net decrease in unrealized appreciation | | | (514,926) |
| Net realized and unrealized gain on investments and foreign currency transactions | | | | 3,999,622 |
| Net increase in net assets resulting from operations | | $ | 4,435,982 |
| | | | | | | | | | |
| *Net of foreign taxes withheld as follows | | $ | 9,590 |
| See Notes to Financial Statements |
DAVIS FINANCIAL PORTFOLIO | Statements of Changes in Net Assets |
| | Six months ended June 30, 2014 (Unaudited) | | Year ended December 31, 2013 |
| OPERATIONS: | | | | | | |
| Net investment income | | $ | 436,360 | | $ | 674,500 |
| Net realized gain from investments and foreign currency transactions | | | 4,514,548 | | | 2,727,465 |
Net increase (decrease) in unrealized appreciation on investments and foreign currency transactions | | | (514,926) | | | 16,821,040 |
| Net increase in net assets resulting from operations | | | 4,435,982 | | | 20,223,005 |
| | | | | | | | |
| DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM: | | | | | | |
| Net investment income | | | – | | | (428,791) |
| | | | | | | | |
| CAPITAL SHARE TRANSACTIONS: | | | | | | |
| Net decrease in net assets resulting from capital share transactions (Note 4) | | | (6,556,765) | | | (6,167,879) |
| Total increase (decrease) in net assets | | | (2,120,783) | | | 13,626,335 |
| | | | | | | | |
| NET ASSETS: | | | | | | |
| Beginning of period | | | 80,880,909 | | | 67,254,574 |
End of period* | | $ | 78,760,126 | | $ | 80,880,909 |
| | | | | | | | |
| *Including undistributed net investment income of | | $ | 593,619 | | $ | 157,259 |
| See Notes to Financial Statements |
DAVIS FINANCIAL PORTFOLIO | Notes to Financial Statements |
| June 30, 2014 (Unaudited) |
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. Only insurance companies, for the purpose of funding variable annuity or variable life insurance contracts, may purchase shares of the Fund. The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements.
Security Valuation - 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 valued 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 or securities whose values have been materially affected by what Davis Selected Advisers, L.P. ("Davis Advisors" or "Adviser"), the Fund's investment 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 using a standardized fair valuation methodology applicable to the security type or the significant event as previously approved by the Fund's Pricing Committee and Board of Directors. The Pricing Committee considers all facts it deems relevant that are reasonably available, through either public information or information available to the Adviser's portfolio management team, when determining the fair value of a security. To assess the continuing appropriateness of security valuations, the Adviser may compare prior day prices, prices of comparable securities, and sale prices to the prior or current day prices and challenge those prices exceeding certain tolerance levels with the third-party pricing service or broker source. Fair value determinations are subject to review, approval, and ratification by the Fund's Board of Directors at its next regularly scheduled meeting covering the period in which the fair valuation was determined.
Short-term securities purchased within 60 days to maturity are valued at amortized cost, which approximates market value.
The Fund's valuation procedures are reviewed and subject to approval by the Board of Directors. There have been no significant changes to the fair valuation procedures during the period.
Value Measurements - Fair value is defined as the price that the Fund would receive upon selling an investment in an orderly transaction to an independent buyer in the principal market for the investment. Various inputs are used to determine the fair value of the Fund's investments. These inputs are summarized in the three broad levels listed below.
| Level 1 – | quoted prices in active markets for identical securities |
| Level 2 – | other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.) |
| Level 3 – | significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments) |
The inputs or methodologies used for valuing securities are not necessarily an indication of the risks associated with investing in those securities nor can it be assured that the Fund can obtain the fair value assigned to a security if it were to sell the security.
| DAVIS FINANCIAL PORTFOLIO | Notes to Financial Statements – (Continued) |
| June 30, 2014 (Unaudited) |
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (CONTINUED)
Value Measurements - (Continued)
The following is a summary of the inputs used as of June 30, 2014 in valuing the Fund's investments carried at value:
| Investments in Securities at Value |
| Valuation Inputs |
| | | Level 2: | | Level 3: | | |
| | | Other Significant | | Significant | | |
| Level 1: | | Observable | | Unobservable | | |
| Quoted Prices | | Inputs | | Inputs | | Total |
Equity securities: | | | | | | | | | | | |
| Energy | $ | 3,497,883 | | | – | | | – | | | 3,497,883 |
| Financials | | 72,144,999 | | | – | | | – | | | 72,144,999 |
| Information Technology | | 2,366,869 | | | – | | | – | | | 2,366,869 |
| Short-term securities | | – | | | 798,000 | | | – | | | 798,000 |
| Total Investments | $ | 78,009,751 | | $ | 798,000 | | $ | – | | $ | 78,807,751 |
There were no transfers of investments between Level 1 and Level 2 of the fair value hierarchy during the six months ended June 30, 2014.
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.
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.
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.
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 security 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 or 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 sales of investments together with market gains and losses on such investments in the Statement of Operations.
| DAVIS FINANCIAL PORTFOLIO | Notes to Financial Statements – (Continued) |
| June 30, 2014 (Unaudited) |
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (CONTINUED)
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 and state income tax returns for all open tax years and has concluded that as of June 30, 2014, no provision for income tax is required in the Fund's financial statements related to these tax positions. The Fund's federal and state (Arizona) 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 department of revenue. The earliest tax year that remains subject to examination by these jurisdictions is 2010.
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.
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 partnership income. 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 certain components of capital to reflect permanent differences between financial statement amounts and net income and realized gains/losses determined in accordance with income tax rules.
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.
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.
Directors Fees and Expenses - The Fund set up a Rabbi Trust to provide for the deferred compensation plan for Independent Directors that enables them to elect to defer receipt of all or a portion of annual fees they are entitled to receive. The value of an eligible Directors account is based upon years of service and fees paid to each Directors during the years of service. The amount paid to the Directors by the Trust under the plan will be determined based upon the performance of the Davis Funds in which the amounts are invested.
NOTE 2 - PURCHASES AND SALES OF SECURITIES
The cost of purchases and proceeds from sales of investment securities (excluding short-term securities) during the six months ended June 30, 2014 were $15,969,467 and $21,697,262, respectively.
| DAVIS FINANCIAL PORTFOLIO | Notes to Financial Statements – (Continued) |
| June 30, 2014 (Unaudited) |
NOTE 3 - FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Davis Selected Advisers-NY, Inc. ("DSA-NY"), a wholly-owned subsidiary of the Adviser, acts as sub-adviser to the Fund. DSA-NY performs research and portfolio management services for the Fund under a Sub-Advisory Agreement with the Adviser. The Fund pays no fees directly to DSA-NY.
Certain directors and officers of the Fund are also directors and officers of the general partner of the Adviser.
Investment Advisory Fees - Advisory fees are paid monthly to the Adviser at an annual rate of 0.55% of the Fund's average net assets.
Accounting Fees - State Street Bank and Trust Company ("State Street Bank") is the Fund's primary accounting provider. Fees for accounting services are included in the custodian fees as State Street Bank also serves as the Fund's custodian. The Adviser is also paid for certain accounting services. The fee paid to the Adviser for these services during the six months ended June 30, 2014 amounted to $1,002.
NOTE 4 - CAPITAL STOCK
At June 30, 2014, there were 500 million shares of capital stock ($0.001 par value per share) authorized. Transactions in capital stock were as follows:
| Six months ended June 30, 2014 (Unaudited) |
| | Sold | | | Reinvestment of Distributions | | | Redeemed | | | Net Decrease |
| | | | | | | | | | | |
| Shares: | | 43,733 | | | – | | | (480,534) | | | (436,801) |
| Value: | $ | 655,217 | | $ | – | | $ | (7,211,982) | | $ | (6,556,765) |
| | | | | | | | | | | |
|
| Year ended December 31, 2013 |
| | Sold | | | Reinvestment of Distributions | | | Redeemed | | | Net Decrease |
| | | | | | | | | | | |
| Shares: | | 459,945 | | | 28,682 | | | (948,654) | | | (460,027) |
| Value: | $ | 6,097,514 | | $ | 428,791 | | $ | (12,694,184) | | $ | (6,167,879) |
| | | | | | | | | | | |
NOTE 5 - 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 higher of the Federal Funds Rate or the Overnight Libor Rate, plus 1.25%. The Fund had no borrowings during the six months ended June 30, 2014.
DAVIS FINANCIAL PORTFOLIO | Financial Highlights |
| The following financial information represents selected data for each share of capital stock outstanding throughout each period: |
| Six months ended
June 30, 2014 | | Year ended December 31, |
| (Unaudited) | | 2013 | | 2012 | | 2011 | | 2010 | | 2009 |
| Net Asset Value, Beginning of Period | | $ | 15.08 | | $ | 11.55 | | $ | 9.98 | | $ | 11.00 | | $ | 9.98 | | $ | 7.12 |
| | | | | | | | | | | | |
| Income (Loss) from Investment Operations: | | | | | | | | | | | | |
| Net Investment Income | | 0.09 | | 0.13 | | 0.12 | | 0.14 | | 0.12 | | 0.05 |
| Net Realized and Unrealized Gains (Losses) | | 0.82 | | 3.48 | | 1.75 | | (1.01) | | 0.99 | | 2.88 |
| Total from Investment Operations | | 0.91 | | 3.61 | | 1.87 | | (0.87) | | 1.11 | | 2.93 |
| | | | | | | | | | | | |
| Dividends and Distributions: | | | | | | | | | | | | |
| Dividends from Net Investment Income | | – | | (0.08) | | (0.23) | | (0.15) | | (0.09) | | (0.07) |
| Distributions from Realized Gains | | – | | – | | –a | | – | | – | | – |
| Return of Capital | | – | | – | | (0.07) | | – | | – | | – |
| Total Dividends and Distributions | | – | | (0.08) | | (0.30) | | (0.15) | | (0.09) | | (0.07) |
| | | | | | | | | | | | | | | | | | | |
| Net Asset Value, End of Period | | $ | 15.99 | | $ | 15.08 | | $ | 11.55 | | $ | 9.98 | | $ | 11.00 | | $ | 9.98 |
| | | | | | | | | | | | | | | | | | |
Total Returnb | | 6.03 | % | | 31.26 | % | | 18.83 | % | | (7.96) | % | | 11.10 | % | | 41.18 | %c |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Ratios/Supplemental Data: | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Assets, End of Period (in thousands) | | $ | 78,760 | | | $ | 80,881 | | | $ | 67,255 | | | $ | 60,834 | | | $ | 82,403 | | | $ | 87,837 | |
| Ratio of Expenses to Average Net Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gross | | 0.68 | %d | | 0.68 | % | | 0.69 | % | | 0.69 | % | | 0.69 | % | | 0.78 | % |
| Nete | | 0.68 | %d | | 0.68 | % | | 0.69 | % | | 0.69 | % | | 0.69 | % | | 0.78 | % |
Ratio of Net Investment Income to Average Net Assets | | 1.14 | %d | | 0.90 | % | | 0.98 | % | | 0.99 | % | | 0.99 | % | | 0.67 | % |
Portfolio Turnover Ratef | | 21 | % | | 2 | % | | 16 | % | | 11 | % | | 2 | % | | 10 | % |
| a | Less than $0.005 per share. |
| | |
| b | 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 are not annualized for periods of less than one year and do not reflect charges attributable to your insurance company's separate account. Inclusion of these charges would reduce the total returns shown. |
| | |
| c | Davis Financial Portfolio received a favorable class action settlement from a company that it no longer owns. This settlement had an approximate impact of 0.4% on the investment performance of the Fund in 2009. This was a one-time event that is unlikely to be repeated. |
| | |
| d | Annualized. |
| |
| e | 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. |
| |
| f | 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. |
| See Notes to Financial Statements |
DAVIS FINANCIAL PORTFOLIO | Director Approval of Advisory Agreements (Unaudited) |
Process of Annual Review
The Board of Directors of the Davis Funds oversees the management of each Davis Fund and, as required by law, determines annually whether to approve the continuance of each Davis Fund's advisory agreement with Davis Selected Advisers, L.P. and sub-advisory agreement with Davis Selected Advisers-NY, Inc. (jointly "Davis Advisors" and "Advisory Agreements").
As a part of this process the Independent Directors, with the assistance of counsel for the Independent Directors, prepared questions submitted to Davis Advisors in anticipation of the annual contract review. The Independent Directors were provided with responsive background material (including recent investment performance data), and their counsel provided guidance, prior to a separate contract review meeting held in March 2014 where the Independent Directors reviewed and evaluated all information which they deemed reasonably necessary in the circumstances. In reaching their decision the Independent Directors also took into account information furnished to them throughout the year and otherwise provided to them. Upon completion of this review, the Independent Directors found that the terms of the Advisory Agreements were fair and reasonable and that continuation of the Advisory Agreements was in the best interest of Davis Financial Portfolio and its shareholders.
Reasons the Independent Directors Approved Continuation of the Advisory Agreements
The Independent Directors' determinations were based upon a comprehensive consideration of all information provided to the Independent Directors and they did not identify any single item or piece of information as the controlling factor. Each Independent Director did not necessarily attribute the same weight to each factor. The following facts and conclusions were important, but not exclusive, in the Independent Directors' recommendation to renew the Advisory Agreements.
The Independent Directors considered not only the investment performance of the Fund, but also the full range and quality of services provided by Davis Advisors to the Fund and its shareholders, including whether it:
| 1. | Achieves satisfactory investment results over the long-term after all costs; |
| 2. | Handles shareholder transactions, inquiries, requests, and records efficiently and effectively, and provides quality accounting, legal, and compliance services, and oversees third-party service providers; and |
| 3. | Fosters healthy investor behavior. |
Davis Advisors is reimbursed a portion of its costs in providing some, but not all, of these services.
A shareholder's ultimate return is the product of a fund's results as well as the shareholder's behavior, specifically in selecting when to invest or redeem. The Independent Directors concluded that, through its actions and communications, Davis Advisors has attempted to have a meaningful, positive impact on investor behavior.
The Independent Directors noted the importance of reviewing quantitative measures, but also recognized that qualitative factors are also important in assessing whether Davis Funds' shareholders are likely to be well served by the renewal of the Advisory Agreements. They noted both the value and shortcomings of purely quantitative measures, including the data provided by independent service providers, and concluded that while such measures and data may be informative, the judgment of the Independent Directors must take many factors, including those listed below, into consideration in representing the shareholders of the Davis Funds. In connection with reviewing comparative performance information, the Independent Directors generally give greater weight to longer-term measurements.
The Independent Directors expect Davis Advisors to employ a disciplined, company-specific, research-driven, businesslike, long-term investment philosophy.
The Independent Directors recognized Davis Advisors' (a) efforts to minimize transaction costs by generally having a long-term time horizon and low portfolio turnover; (b) record of generally producing satisfactory results over the long-term; (c) efforts towards fostering healthy investor behavior by, among other things, providing informative and substantial educational material; and (d) efforts to promote shareholder interests by actively speaking out on corporate governance issues.
| DAVIS FINANCIAL PORTFOLIO | Director Approval of Advisory Agreements |
| (Unaudited) – (Continued) |
Reasons the Independent Directors Approved Continuation of the Advisory Agreements – (Continued)
The Independent Directors reviewed (a) comparative fee and expense information for other funds, as selected and analyzed by a nationally recognized independent service provider; (b) information regarding fees charged by Davis Advisors to other advisory clients, including funds which it sub-advises and private accounts, as well as the differences in the services provided to such other clients; and (c) the fee schedule of the Fund, including an assessment of competitive fee schedules.
The Independent Directors reviewed the fixed management fee for the Fund, profitability of the Fund to Davis Advisors, the extent to which economies of scale might be realized if the Fund's net assets increase, and whether the fixed fee reflected those potential economies of scale. The Independent Directors considered the nature, quality, and extent of the services being provided to the Fund and the costs incurred by Davis Advisors in providing such services. The Independent Directors considered various potential benefits that Davis Advisors may receive in connection with the services it provides under the Advisory Agreements with the Fund, including a review of portfolio brokerage practices. The Independent Directors noted that Davis Advisors does not use client commissions to pay for publications that are available to the general public or for third-party research services.
The Independent Directors compared the fees paid to Davis Advisors by the Davis Funds with those paid by Davis Advisors' sub-advised clients, private account clients, and managed money/wrap clients. To the extent sub-advised or private account fees were lower than fees paid by the Funds, the Independent Directors noted that the range of services provided to the Funds is more extensive and the risks associated with operating SEC registered, publicly traded mutual funds are greater. Serving as the primary adviser for mutual funds is more work because of the complex overlay of regulatory, tax and accounting issues which are unique to mutual funds. In addition, the operational work required to service shareholders is more extensive because of the significantly greater number of shareholders and managing trading is more complex because of more frequent fund flows. With respect to risk, not only has regulation become more complex and burdensome, but the scrutiny of regulators and shareholders has gotten more intense.
The Independent Directors noted that Davis Financial Portfolio had under-performed its benchmark, the Standard & Poor's 500® Index, over the one-, three-, five-, and ten-year time periods and out-performed since inception (July 1, 1999), all ended February 28, 2014. The Lipper Report (prepared by an independent service provider) indicated that the Fund out-performed the Lipper Performance Universe over the three-, four-, five-, and ten-year time periods, but under-performed over the one- and two-year time periods, all ended December 31, 2013. The Fund out-performed the Standard & Poor's 500® Index in 3 of the 10 rolling five-year time frames and the performance universe in all 10 rolling five-year time frames ended December 31 for each year from 2004 through 2013. The Fund out-performed the Index in 1 of the 5 rolling ten-year time frames and the performance universe in all 5 rolling ten-year time frames ended December 31 for each year from 2009 through 2013.
The Independent Directors considered Davis Financial Portfolio's management fee and total expense ratio. Both were reasonable and below the average ratios of its peer group as determined by Lipper.
Approval of Advisory Agreements
The Independent Directors concluded that Davis Advisors had provided Davis Financial Portfolio and its shareholders a reasonable level of both investment and non-investment services. The Independent Directors further concluded that shareholders have received a significant benefit from Davis Advisors' shareholder oriented approach, as well as the execution of its investment discipline.
The Independent Directors determined that the advisory fee for Davis Financial Portfolio was reasonable in light of the nature, quality, and extent of the services being provided to the Fund, the costs incurred by Davis Advisors in providing such service, and in comparison to the range of the average advisory fees of its peer groups as determined by an independent service provider. The Independent Directors found that the terms of the Advisory Agreements were fair and reasonable and that continuation of the Advisory Agreements was in the best interest of the Fund and its shareholders. The Independent Directors and the full Board of Directors therefore voted to continue the Advisory Agreements.
DAVIS FINANCIAL PORTFOLIO | Directors and Officers |
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 85756. 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).
Name (birthdate) | Position(s) Held With Fund | Term of Office and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Director | Other Directorships Held by Director |
| | | | | |
Independent Directors
| | | | | |
Marc P. Blum (09/09/42) | Director | Director since 1986 | Chief Executive Officer, World Total Return Fund, LLLP; of Counsel to Gordon Feinblatt LLC (law firm). | 13 | Director, Rodney Trust Company (trust and asset management company). |
| | | | | |
John S. Gates, Jr. (08/02/53) | Director | Director since 2007 | Chairman and Chief Executive Officer of PortaeCo LLC (private investment company). | 13 | Director, DCT Industrial Trust (REIT); Chairman, Regional Transportation Authority of Chicago (public transportation system). |
| | | | | |
Thomas S. Gayner (12/16/61) | Director/ Chairman | Director since 2004 | President and Chief Investment Officer, Markel Corp. (diversified financial holding company). | 13 | Director, Graham Holdings Company (publishing company); Director, Colfax Corp. (engineering and manufacturer of pumps and fluid handling equipment). |
| | | | | |
Samuel H. Iapalucci (07/19/52) | Director | Director since 2006 | Retired; Executive Vice President and Chief Financial Officer, CH2M- HILL Companies, Ltd. (engineering) until 2008. | 13 | Director, exp Global Inc. (engineering). |
| | | | | |
Robert P. Morgenthau (03/22/57) | Director | Director since 2002 | Principal, Spears Abacus Advisors, LLC (investment management firm) since 2011; Chairman, NorthRoad Capital Management, LLC (investment management firm) 2002-2011. | 13 | none |
| | | | | |
Marsha Williams (03/28/51) | Director | Director since 1999 | Retired; Senior Vice President and Chief Financial Officer, Orbitz Worldwide, Inc. (travel-services provider) 2007-2010. | 13 | Director, Modine Manufacturing Company (heat transfer technology); Director, Chicago Bridge & Iron Company, N.V. (industrial construction and engineering); Director, Fifth Third Bancorp (diversified financial services). |
| DAVIS FINANCIAL PORTFOLIO | Directors and Officers – (Continued) |
Name (birthdate) | Position(s) Held With Fund | Term of Office and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Director | Other Directorships Held by Director |
| | | | | |
Inside Directors*
| | | | | |
Andrew A. Davis (06/25/63) | 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 of certain companies affiliated with the Adviser. | 15 | Director, Selected Funds (consisting of two portfolios) since 1998. |
| | | | | |
Christopher C. Davis (07/13/65) | 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 of 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). | 15 | Director, Selected Funds (consisting of two portfolios) since 1998; Director, Graham Holdings Company (publishing company). |
*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.
Officers
Andrew A. Davis (born 06/25/63, Davis Funds officer since 1997). See description in the section on Inside Directors.
Christopher C. Davis (born 07/13/65, Davis Funds officer since 1997). See description in the section on Inside Directors.
Kenneth C. Eich (born 08/14/53, Davis Funds officer since 1997). Executive Vice President and Principal Executive Officer of each of the Davis Funds (consisting of 13 portfolios), Selected Funds (consisting of two portfolios), and Clipper Fund, Inc. (consisting of one portfolio); Chief Operating Officer, Davis Selected Advisers, L.P., and also serves as an executive officer of certain companies affiliated with the Adviser.
Douglas A. Haines (born 03/04/71, Davis Funds officer since 2004). Vice President, Treasurer, Chief Financial Officer, Principal Financial Officer, and Principal Accounting Officer of each of the Davis Funds (consisting of 13 portfolios), Selected Funds (consisting of two portfolios), and Clipper Fund, Inc. (consisting of one portfolio); Vice President and Director of Fund Accounting, Davis Selected Advisers, L.P.
Sharra L. Haynes (born 09/25/66, Davis Funds officer since 1997). Vice President and Chief Compliance Officer of each of the Davis Funds (consisting of 13 portfolios), Selected Funds (consisting of two portfolios), and Clipper Fund, Inc. (consisting of one portfolio); Vice President and Chief Compliance Officer, Davis Selected Advisers, L.P., and also serves as an executive officer of certain companies affiliated with the Adviser.
Ryan M. Charles (born 07/25/78, Davis Funds officer since 2014). Vice President and Secretary of each of the Davis Funds (consisting of 13 portfolios), Selected Funds (consisting of two portfolios), and Clipper Fund, Inc. (consisting of one portfolio); Vice President, Chief Legal Officer, and Secretary, Davis Selected Advisers, L.P., and also serves as an executive officer of certain companies affiliated with the Adviser.
Arthur Don (born 09/24/53, Davis Funds officer since 1991). Assistant Secretary (for clerical purposes only) of each of the Davis Funds and Selected Funds; Shareholder, Greenberg Traurig, LLP (law firm); counsel to the Independent Directors and the Davis Funds.
| DAVIS FINANCIAL PORTFOLIO |
| Investment Adviser |
| Davis Selected Advisers, L.P. (Doing business as "Davis Advisors") |
| 2949 East Elvira Road, Suite 101 |
| Tucson, Arizona 85756 |
| (800) 279-0279 |
|
| Distributor |
| Davis Distributors, LLC |
| 2949 East Elvira Road, Suite 101 |
| Tucson, Arizona 85756 |
|
| 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 |
| Greenberg Traurig, LLP |
| 77 West Wacker Drive, Suite 3100 |
| Chicago, Illinois 60601 |
|
| Independent Registered Public Accounting Firm |
| KPMG LLP |
| 1225 Seventeenth Street, Suite 800 |
| Denver, Colorado 80202 |
For more information about Davis Financial 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 and on the Fund's website at www.davisfunds.com. Quarterly Fact Sheets are available on the Fund's website at www.davisfunds.com.
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This Semi-Annual Report is authorized for use by existing shareholders. Prospective shareholders must receive a current 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.
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.
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, on the Fund's website at www.davisfunds.com, and 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 information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
DAVIS REAL ESTATE PORTFOLIO | Management's Discussion of Fund Performance |
Performance Overview
Davis Real Estate Portfolio delivered a total return on net asset value of 15.31% for the six-month period ended June 30, 2014 (the "Period"). Over the same time Period, the Wilshire U.S. Real Estate Securities Index ("Index") returned 17.93%. Every sub-industry1 within the Index delivered positive returns. The sub-industries within the index that turned in the strongest performance over the Period were Hotels, Resorts & Cruise Lines and Residential REITs. The sub-industries that turned in the weakest (but still positive) performance over the Period were Real Estate Operating Companies and Health Care REITs.
The Portfolio's Absolute Performance
Residential REITs were the most important contributor2 to the Portfolio's absolute performance over the Period. Essex Property Trust3, American Campus Communities, and AvalonBay Communities were among the most important contributors to performance. Campus Crest Communities was among the most important detractors from performance. The Portfolio no longer owns Campus Crest Communities.
Retail REITs were the second most important contributor to the Portfolio's absolute performance. Simon Property Group and Federal Realty Investment Trust were among the most important contributors to performance. CBL & Associates Properties and Washington Prime Group were among the most important detractors from performance. The Portfolio no longer owns CBL & Associates Properties.
Office REITs also made positive contributions to the Portfolio's absolute performance. Alexandria Real Estate Equities, Boston Properties, and Corporate Office Properties Trust were among the most important contributors to performance. SL Green Realty was among the most important detractors from performance. The Portfolio no longer owns SL Green Realty.
The Portfolio's Relative Performance
Real Estate Operating Companies were an important detractor from the Portfolio's performance relative to the Index over the Period. The Portfolio's Real Estate Operating Companies (consisting only of Forest City Enterprises) under-performed the corresponding sub-industry within the Index and had a higher average weighting.
Hotel & Resort REITs were also a detractor from the Portfolio's relative performance. The Portfolio's Hotel & Resort REITs out-performed the corresponding sub-industry within the Index and had a lower average weighting.
Office REITs were the most important contributor to the Portfolio's relative performance. The Portfolio's Office REITs out-performed the corresponding sub-industry within the Index and had a lower average weighting.
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. Davis Real Estate Portfolio's principal risks are: stock market risk, manager risk, common stock risk, large-capitalization companies risk, mid- and small-capitalization companies risk, headline risk, real estate risk, focused portfolio risk, variable current income risk, and fees and expenses 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 The companies included in the Wilshire U.S. Real Estate Securities Index are divided into ten sub-industries.
2 A company's or sector's contribution to or detraction from 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 This Management Discussion of Fund Performance 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, sell, or hold any particular security. The Schedule of Investments lists the Portfolio's holdings of each company discussed.
| DAVIS REAL ESTATE PORTFOLIO | Management's Discussion of Fund Performance – (Continued) |
Comparison of a $10,000 investment in Davis Real Estate Portfolio versus the
Standard & Poor's 500® Index and the Wilshire U.S. Real Estate Securities Index
over 10 years for an investment made on June 30, 2004
Average Annual Total Return for periods ended June 30, 2014
| Fund & Benchmark Indices | 1-Year | 5-Year | 10-Year | Since Fund's Inception (07/01/99) | Gross Expense Ratio | Net Expense Ratio |
| Davis Real Estate Portfolio | 11.58% | 19.46% | 6.92% | 8.71% | 0.84% | 0.84% |
Standard & Poor's 500® Index | 24.61% | 18.83% | 7.78% | 4.30% | | |
Wilshire U.S. Real Estate Securities Index | 13.77% | 24.07% | 9.47% | 11.13% | | |
The Standard & Poor's 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.
The Wilshire U.S. Real Estate Securities Index is a broad measure of the performance of publicly traded real estate securities. It reflects no deduction for fees or expenses. Investments cannot be made directly in the Index.
The performance data for Davis Real Estate Portfolio contained in this report represents past performance, assumes that all distributions were reinvested, and should not be considered as an indication of future performance from an investment in the Portfolio today. The investment return and principal value will fluctuate so that shares may be worth more or less than their original cost when redeemed. Portfolio performance changes over time and current performance may be higher or lower than stated. The operating expense ratio may vary in future years. For more current information please call Davis Funds Investor Services at 1-800-279-0279.
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 included the effect of these additional charges, the return would be lower.
DAVIS REAL ESTATE PORTFOLIO | Fund Overview |
| June 30, 2014 (Unaudited) |
| Portfolio Composition | | Industry Weightings |
| (% of Fund's 06/30/14 Net Assets) | | (% of 06/30/14 Long-Term Portfolio) |
| | | | | |
| | | | | Wilshire U.S. |
| | | | | Real Estate |
| | | | Fund | | Securities Index |
| Common Stock | 91.22% | | Retail REITs | 22.11% | | 24.26% |
| Convertible Bonds | 0.50% | | Office REITs | 18.19% | | 15.58% |
| Short-Term Investments | 8.10% | | Residential REITs | 17.56% | | 18.05% |
| Other Assets & Liabilities | 0.18% | | Specialized REITs | 10.71% | | 6.61% |
| 100.00% | | Industrial REITs | 7.26% | | 5.20% |
| | | Diversified REITs | 6.29% | | 7.63% |
| | | Real Estate Operating Companies | 5.39% | | 0.62% |
| | | Hotel & Resorts REITs | 4.90% | | 8.78% |
| | | Diversified Real Estate Activities | 2.84% | | – |
| | | Telecommunication Services | 2.61% | | – |
| | | Health Care REITs | 2.14% | | 12.87% |
| | | Hotels, Resorts & Cruise Lines | – | | 0.40% |
| | | | 100.00% | | 100.00% |
| Top 10 Long-Term Holdings |
| (% of Fund's 06/30/14 Net Assets) |
| Simon Property Group, Inc. | Retail REITs | 5.15% |
| AvalonBay Communities, Inc. | Residential REITs | 4.91% |
| American Tower Corp. | Specialized REITs | 4.88% |
| Forest City Enterprises, Inc., Class A | Real Estate Operating Companies | 4.45% |
| Alexandria Real Estate Equities, Inc. | Office REITs | 3.72% |
| Acadia Realty Trust | Retail REITs | 3.18% |
| Essex Property Trust, Inc. | Residential REITs | 3.12% |
| Post Properties, Inc. | Residential REITs | 3.10% |
| Corporate Office Properties Trust | Office REITs | 2.93% |
| General Growth Properties, Inc. | Retail REITs | 2.90% |
| DAVIS REAL ESTATE PORTFOLIO | Expense Example (Unaudited) |
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 for the six-month period ended June 30, 2014. 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.
| Beginning Account Value (01/01/14) | | Ending Account Value (06/30/14) | | Expenses Paid During Period* (01/01/14-06/30/14) |
| | | | | |
| Actual | $1,000.00 | | $1,153.13 | | $4.48 |
| Hypothetical | $1,000.00 | | $1,020.63 | | $4.21 |
Hypothetical assumes 5% annual return before expenses.
* Expenses are equal to the Fund's annualized operating expense ratio (0.84%)**, multiplied by the average account value over the period, multiplied by 181/365 (to reflect the one-half year period).
** The expense ratio reflects the impact, if any, of certain reimbursements from the Adviser.
DAVIS REAL ESTATE PORTFOLIO | Schedule of Investments |
| June 30, 2014 (Unaudited) |
| | Shares | | Value
(Note 1) |
COMMON STOCK – (91.22%) |
| | FINANCIALS – (88.82%) |
| Real Estate – (88.82%) |
| | Real Estate Investment Trusts (REITs) – (81.77%) |
| | Diversified REITs – (5.77%) |
| Cousins Properties, Inc. | | | 8,910 | | $ | 110,929 |
| Liberty Property Trust | | | 18,220 | | | 691,085 |
| Vornado Realty Trust | | | 6,270 | | | 669,197 |
| | 1,471,211 |
| | Health Care REITs – (1.96%) |
| Ventas, Inc. | | | 7,810 | | | 500,621 |
| | Hotel & Resort REITs – (4.49%) |
| Host Hotels & Resorts Inc. | | | 31,820 | | | 700,358 |
| LaSalle Hotel Properties | | | 12,620 | | | 445,360 |
| | 1,145,718 |
| | Industrial REITs – (6.66%) |
| DCT Industrial Trust Inc. | | | 80,430 | | | 660,330 |
| EastGroup Properties, Inc. | | | 8,430 | | | 541,459 |
| First Industrial Realty Trust, Inc. | | | 6,820 | | | 128,489 |
| Terreno Realty Corp. | | | 19,010 | | | 367,463 |
| | 1,697,741 |
| Office REITs – (16.69%) |
| Alexandria Real Estate Equities, Inc. | | | 12,230 | | | 949,537 |
| BioMed Realty Trust, Inc. | | | 16,170 | | | 352,991 |
| Boston Properties, Inc. | | | 6,090 | | | 719,716 |
| Brandywine Realty Trust | | | 28,780 | | | 448,968 |
| CoreSite Realty Corp. | | | 11,340 | | | 375,014 |
| Corporate Office Properties Trust | | | 26,850 | | | 746,699 |
| DuPont Fabros Technology Inc. | | | 14,790 | | | 398,738 |
| Highwoods Properties, Inc. | | | 6,270 | | | 263,027 |
| | 4,254,690 |
| Residential REITs – (16.10%) |
| American Campus Communities, Inc. | | | 15,090 | | | 577,042 |
| AvalonBay Communities, Inc. | | | 8,810 | | | 1,252,694 |
| Education Realty Trust, Inc. | | | 33,340 | | | 358,072 |
| Equity Lifestyle Properties, Inc. | | | 7,530 | | | 332,525 |
| Essex Property Trust, Inc. | | | 4,300 | | | 795,113 |
| Post Properties, Inc. | | | 14,790 | | | 790,673 |
| | 4,106,119 |
| Retail REITs – (20.28%) |
| Acadia Realty Trust | | | 28,910 | | | 812,082 |
| DDR Corp. | | | 24,130 | | | 425,412 |
| Federal Realty Investment Trust | | | 5,040 | | | 609,437 |
| General Growth Properties, Inc. | | | 31,390 | | | 739,548 |
| Simon Property Group, Inc. | | | 7,892 | | | 1,312,282 |
| Tanger Factory Outlet Centers, Inc. | | | 18,190 | | | 636,104 |
| Taubman Centers, Inc. | | | 7,400 | | | 560,994 |
| Washington Prime Group Inc. | | | 3,946 | | | 73,948 |
| | 5,169,807 |
| DAVIS REAL ESTATE PORTFOLIO | Schedule of Investments – (Continued) |
| June 30, 2014 (Unaudited) |
| | Shares/Principal | | Value
(Note 1) |
| COMMON STOCK – (CONTINUED) |
| FINANCIALS – (CONTINUED) |
| | Real Estate – (Continued) |
| | Real Estate Investment Trusts (REITs) – (Continued) |
| | Specialized REITs – (9.82%) |
| American Tower Corp. | | | 13,820 | | $ | 1,243,524 |
| CubeSmart | | | 29,140 | | | 533,845 |
| EPR Properties | | | 5,620 | | | 313,989 |
| Weyerhaeuser Co. | | | 12,460 | | | 412,301 |
| | | 2,503,659 |
| | 20,849,566 |
| Real Estate Management & Development – (7.05%) |
| Diversified Real Estate Activities – (2.60%) |
| Alexander & Baldwin Inc. | | | 16,020 | | | 664,029 |
| Real Estate Operating Companies – (4.45%) |
| Forest City Enterprises, Inc., Class A * | | | 57,030 | | | 1,133,186 |
| | 1,797,215 |
| | Total Financials | | | 22,646,781 |
| TELECOMMUNICATION SERVICES – (2.40%) |
| SBA Communications Corp., Class A * | | | 5,970 | | | 610,820 |
| Total Telecommunication Services | | | 610,820 |
| | TOTAL COMMON STOCK – (Identified cost $21,171,383) | | | 23,257,601 |
CONVERTIBLE BONDS – (0.50%) |
| FINANCIALS – (0.50%) |
| Real Estate – (0.50%) |
| Real Estate Management & Development – (0.50%) |
| Real Estate Operating Companies – (0.50%) |
| Forest City Enterprises, Inc., Conv. Sr. Notes, 5.00%, 10/15/16 | | $ | 80,000 | | | 128,000 |
| TOTAL CONVERTIBLE BONDS – (Identified cost $80,000) | | | |
| SHORT-TERM INVESTMENTS – (8.10%) |
| Mizuho Securities USA Inc. Joint Repurchase Agreement, 0.12%, 07/01/14, dated 06/30/14, repurchase value of $982,003 (collateralized by: U.S. Government agency mortgages and obligations in a pooled cash account, 0.00%-7.00%, 07/03/14-06/01/44, total market value $1,001,640) | | | 982,000 | | | 982,000 |
| Nomura Securities International, Inc. Joint Repurchase Agreement, 0.11%, 07/01/14, dated 06/30/14, repurchase value of $912,003 (collateralized by: U.S. Government agency mortgages in a pooled cash account, 2.50%-6.00%, 08/15/23-06/20/44, total market value $930,240) | | | 912,000 | | | 912,000 |
| SunTrust Robinson Humphrey, Inc. Joint Repurchase Agreement, 0.15%, 07/01/14, dated 06/30/14, repurchase value of $171,001 (collateralized by: U.S. Government agency mortgages in a pooled cash account, 1.972%-4.50%, 11/01/25-06/01/44, total market value $174,420) | | | 171,000 | | | 171,000 |
| TOTAL SHORT-TERM INVESTMENTS – (Identified cost $2,065,000) | | | 2,065,000 |
| DAVIS REAL ESTATE PORTFOLIO | Schedule of Investments – (Continued) |
| June 30, 2014 (Unaudited) |
| | Total Investments – (99.82%) – (Identified cost $23,316,383) – (a) | | $ | 25,450,601 |
| Other Assets Less Liabilities – (0.18%) | | | 46,663 |
| | Net Assets – (100.00%) | | $ | 25,497,264 |
| * | | Non-Income producing security. |
| | | |
| (a) | | Aggregate cost for federal income tax purposes is $23,334,021. At June 30, 2014 unrealized appreciation (depreciation) of securities for federal income tax purposes is as follows: |
| Unrealized appreciation | | $ | 2,251,440 |
| Unrealized depreciation | | | (134,860) |
| Net unrealized appreciation | | $ | 2,116,580 |
| See Notes to Financial Statements |
DAVIS REAL ESTATE PORTFOLIO | Statement of Assets and Liabilities |
| At June 30, 2014 (Unaudited) |
| ASSETS: | | | | | |
| Investments in securities at value* (see accompanying Schedule of Investments) | | $ | 25,450,601 |
| Cash | | | 1,375 |
| Receivables: | | | |
| Capital stock sold | | | 400 |
| Dividends and interest | | | 96,644 |
| Prepaid expenses | | | 232 |
| | Total assets | | | 25,549,252 |
LIABILITIES: | | | |
| Payables: | | | |
| Capital stock redeemed | | | 18,806 |
| Accrued audit fees | | | 8,260 |
| Accrued custodian fees | | | 3,500 |
| Accrued investment advisory fee | | | 14,094 |
| Other accrued expenses | | | 7,328 |
| Total liabilities | | | 51,988 |
NET ASSETS | | $ | 25,497,264 |
SHARES OUTSTANDING | | | 2,099,607 |
NET ASSET VALUE, offering, and redemption price per share (Net assets ÷ Shares outstanding) | | $ | 12.14 |
NET ASSETS CONSIST OF: | | | |
| Par value of shares of capital stock | | $ | 2,100 |
| Additional paid-in capital | | | 27,518,830 |
| Undistributed net investment income | | | 433,885 |
| Accumulated net realized losses from investments and foreign currency transactions | | | (4,591,779) |
| Net unrealized appreciation on investments and foreign currency transactions | | | 2,134,228 |
| Net Assets | | $ | 25,497,264 |
| | | | | |
| *Including: | | | |
| Cost of Investments | | $ | 23,316,383 |
| | | | |
| See Notes to Financial Statements |
DAVIS REAL ESTATE PORTFOLIO | Statement of Operations |
| For the six months ended June 30, 2014 (Unaudited) |
| INVESTMENT INCOME: | | | | | | |
| Income: | | | |
| Dividends* | | $ | 319,640 |
| Interest | | | 8,207 |
| | Total income | | | | 327,847 |
| | | | | | | | | |
| Expenses: | | | |
| Investment advisory fees (Note 3) | | $ | 65,416 | | | |
| Custodian fees | | | 9,994 | | | |
| Transfer agent fees | | | 3,132 | | | |
| Audit fees | | | 9,660 | | | |
| Legal fees | | | 334 | | | |
| Accounting fees (Note 3) | | | 1,002 | | | |
| Reports to shareholders | | | 650 | | | |
| Directors' fees and expenses | | | 5,122 | | | |
| Registration and filing fees | | | 11 | | | |
| Miscellaneous | | | 4,146 | | | |
| Total expenses | | | | 99,467 |
| Net investment income | | | 228,380 |
| | | | | | | | | |
REALIZED & UNREALIZED GAIN ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS: | | | | | | |
| Net realized gain from: | | | |
| Investment transactions | | | 446,506 |
| Foreign currency transactions | | | 16 |
| Net realized gain | | | 446,522 |
| Net change in unrealized appreciation (depreciation) | | | 2,703,601 |
| Net realized and unrealized gain on investments and foreign currency transactions | | | | 3,150,123 |
| Net increase in net assets resulting from operations | | $ | 3,378,503 |
| | | | | | | | | |
| *Net of foreign taxes withheld as follows | | $ | 817 |
| See Notes to Financial Statements |
DAVIS REAL ESTATE PORTFOLIO | Statements of Changes in Net Assets |
| | Six months ended June 30, 2014 (Unaudited) | | Year ended December 31, 2013 |
OPERATIONS: | | | | | | |
| Net investment income | | $ | 228,380 | | $ | 397,004 |
| Net realized gain from investments and foreign currency transactions | | | 446,522 | | | 3,681,187 |
Net change in unrealized appreciation (depreciation) on investments and foreign currency transactions | | | 2,703,601 | | | (4,288,685) |
| Net increase (decrease) in net assets resulting from operations | | | 3,378,503 | | | (210,494) |
| | | | | | | | |
| DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM: | | | | | | |
| Net investment income | | | (73,345) | | | (296,834) |
| | | | | | | | |
| CAPITAL SHARE TRANSACTIONS: | | | | | | |
Net increase (decrease) in net assets resulting from capital share transactions (Note 4) | | | 181,088 | | | (5,549,967) |
| Total increase (decrease) in net assets | | | 3,486,246 | | | (6,057,295) |
| | | | | | | | |
| NET ASSETS: | | | | | | |
| Beginning of period | | | 22,011,018 | | | 28,068,313 |
End of period* | | $ | 25,497,264 | | $ | 22,011,018 |
| | | | | | | | |
| *Including undistributed net investment income of | | $ | 433,885 | | $ | 278,850 |
| See Notes to Financial Statements |
DAVIS REAL ESTATE PORTFOLIO | Notes to Financial Statements |
| June 30, 2014 (Unaudited) |
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. Only insurance companies, for the purpose of funding variable annuity or variable life insurance contracts, may purchase shares of the Fund. The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements.
Security Valuation - 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 valued 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. Fixed income securities with more than 60 days to maturity are generally valued using evaluated prices or matrix pricing methods determined by an independent pricing service which takes into consideration factors such as yield, maturity, liquidity, ratings, and traded prices in identical or similar securities. Securities (including restricted securities) for which market quotations are not readily available or securities whose values have been materially affected by what Davis Selected Advisers, L.P. ("Davis Advisors" or "Adviser"), the Fund's investment 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 using a standardized fair valuation methodology applicable to the security type or the significant event as previously approved by the Fund's Pricing Committee and Board of Directors. The Pricing Committee considers all facts it deems relevant that are reasonably available, through either public information or information available to the Adviser's portfolio management team, when determining the fair value of a security. To assess the continuing appropriateness of security valuations, the Adviser may compare prior day prices, prices of comparable securities, and sale prices to the prior or current day prices and challenge those prices exceeding certain tolerance levels with the third-party pricing service or broker source. Fair value determinations are subject to review, approval, and ratification by the Fund's Board of Directors at its next regularly scheduled meeting covering the period in which the fair valuation was determined.
Short-term securities purchased within 60 days to maturity are valued at amortized cost, which approximates market value.
The Fund's valuation procedures are reviewed and subject to approval by the Board of Directors. There have been no significant changes to the fair valuation procedures during the period.
Value Measurements - Fair value is defined as the price that the Fund would receive upon selling an investment in an orderly transaction to an independent buyer in the principal market for the investment. Various inputs are used to determine the fair value of the Fund's investments. These inputs are summarized in the three broad levels listed below.
| Level 1 – | quoted prices in active markets for identical securities |
| Level 2 – | other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.) |
| Level 3 – | significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments) |
The inputs or methodologies used for valuing securities are not necessarily an indication of the risks associated with investing in those securities nor can it be assured that the Fund can obtain the fair value assigned to a security if it were to sell the security.
| DAVIS REAL ESTATE PORTFOLIO | Notes to Financial Statements – (Continued) |
| June 30, 2014 (Unaudited) |
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (CONTINUED)
Value Measurements - (Continued)
The following is a summary of the inputs used as of June 30, 2014 in valuing the Fund's investments carried at value:
| Investments in Securities at Value |
| Valuation Inputs |
| | | Level 2: | | Level 3: | | |
| | | Other Significant | | Significant | | |
| Level 1: | | Observable | | Unobservable | | |
| Quoted Prices | | Inputs | | Inputs | | Total |
Equity securities: | | | | | | | | | | | |
| Financials | | 22,646,781 | | | – | | | – | | | 22,646,781 |
| Telecommunication Services | | 610,820 | | | – | | | – | | | 610,820 |
| Convertible debt securities | | – | | | 128,000 | | | – | | | 128,000 |
| Short-term securities | | – | | | 2,065,000 | | | – | | | 2,065,000 |
| Total Investments | $ | 23,257,601 | | $ | 2,193,000 | | $ | – | | $ | 25,450,601 |
There were no transfers of investments between Level 1 and Level 2 of the fair value hierarchy during the six months ended June 30, 2014.
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.
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.
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.
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 security 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 or 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 sales of investments together with market gains and losses on such investments in the Statement of Operations.
| DAVIS REAL ESTATE PORTFOLIO | Notes to Financial Statements – (Continued) |
| June 30, 2014 (Unaudited) |
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (CONTINUED)
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 and state income tax returns for all open tax years and has concluded that as of June 30, 2014, no provision for income tax is required in the Fund's financial statements related to these tax positions. The Fund's federal and state (Arizona) 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 department of revenue. The earliest tax year that remains subject to examination by these jurisdictions is 2010. At December 31, 2013, the Fund had available for federal income tax purposes unused capital loss carryforwards as follows:
| Capital Loss Carryforwards |
Expiring | | |
| 12/31/2017 | $ | 5,021,000 |
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/loss. Interest income, which includes accretion of discount and amortization of premium, is accrued as earned.
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 and foreign currency transactions. 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 certain components of capital to reflect permanent differences between financial statement amounts and net income and realized gains/losses determined in accordance with income tax rules.
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.
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.
Directors Fees and Expenses - The Fund set up a Rabbi Trust to provide for the deferred compensation plan for Independent Directors that enables them to elect to defer receipt of all or a portion of annual fees they are entitled to receive. The value of an eligible Directors account is based upon years of service and fees paid to each Directors during the years of service. The amount paid to the Directors by the Trust under the plan will be determined based upon the performance of the Davis Funds in which the amounts are invested.
NOTE 2 - PURCHASES AND SALES OF SECURITIES
The cost of purchases and proceeds from sales of investment securities (excluding short-term securities) during the six months ended June 30, 2014 were $5,541,211 and $6,024,603, respectively.
| DAVIS REAL ESTATE PORTFOLIO | Notes to Financial Statements – (Continued) |
| June 30, 2014 (Unaudited) |
NOTE 3 - FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Davis Selected Advisers-NY, Inc. ("DSA-NY"), a wholly-owned subsidiary of the Adviser, acts as sub-adviser to the Fund. DSA-NY performs research and portfolio management services for the Fund under a Sub-Advisory Agreement with the Adviser. The Fund pays no fees directly to DSA-NY.
Certain directors and officers of the Fund are also directors and officers of the general partner of the Adviser.
Investment Advisory Fees - Advisory fees are paid monthly to the Adviser at an annual rate of 0.55% of the Fund's average net assets.
Accounting Fees - State Street Bank and Trust Company ("State Street Bank") is the Fund's primary accounting provider. Fees for accounting services are included in the custodian fees as State Street Bank also serves as the Fund's custodian. The Adviser is also paid for certain accounting services. The fee paid to the Adviser for these services during the six months ended June 30, 2014 amounted to $1,002.
NOTE 4 - CAPITAL STOCK
At June 30, 2014, there were 500 million shares of capital stock ($0.001 par value per share) authorized. Transactions in capital stock were as follows:
| Six months ended June 30, 2014 (Unaudited) |
| | Sold | | | Reinvestment of Distributions | | | Redeemed | | | Net Increase |
|
Shares: | | 257,603 | | | 6,395 | | | (248,774) | | | 15,224 |
Value: | $ | 2,942,952 | | $ | 73,345 | | $ | (2,835,209) | | $ | 181,088 |
| | | | | | | | | | | |
|
| Year ended December 31, 2013 |
| | Sold | | | Reinvestment of Distributions | | | Redeemed | | | Net Decrease |
|
Shares: | | 137,016 | | | 27,298 | | | (671,030) | | | (506,716) |
Value: | $ | 1,523,175 | | $ | 296,834 | | $ | (7,369,976) | | $ | (5,549,967) |
| | | | | | | | | | | |
NOTE 5 - 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 higher of the Federal Funds Rate or the Overnight Libor Rate, plus 1.25%. The Fund had no borrowings during the six months ended June 30, 2014.
DAVIS REAL ESTATE PORTFOLIO | Financial Highlights |
| The following financial information represents selected data for each share of capital stock outstanding throughout each period: |
| Six months ended
June 30, 2014 | | Year ended December 31, |
| (Unaudited) | | 2013 | | 2012 | | 2011 | | 2010 | | 2009 |
| Net Asset Value, Beginning of Period | | $ | 10.56 | | $ | 10.83 | | $ | 9.34 | | $ | 8.69 | | $ | 7.40 | | $ | 5.80 |
| | | | | | | | | | | | |
| Income (Loss) from Investment Operations: | | | | | | | | | | | | |
| Net Investment Income | | 0.11 | | 0.19 | | 0.16 | | 0.14 | | 0.13 | | 0.16 |
| Net Realized and Unrealized Gains (Losses) | | 1.51 | | (0.33) | | 1.44 | | 0.63 | | 1.31 | | 1.60 |
| Total from Investment Operations | | 1.62 | | (0.14) | | 1.60 | | 0.77 | | 1.44 | | 1.76 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Dividends and Distributions: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Dividends from Net Investment Income | | (0.04) | | (0.13) | | (0.11) | | (0.12) | | (0.15) | | (0.16) |
| Total Dividends and Distributions | | (0.04) | | (0.13) | | (0.11) | | (0.12) | | (0.15) | | (0.16) |
Net Asset Value, End of Period | | $ | 12.14 | | $ | 10.56 | | $ | 10.83 | | $ | 9.34 | | $ | 8.69 | | $ | 7.40 |
| | | | | | | | | | | | | | | | | | |
Total Returna | | 15.31 | % | | (1.32) | % | | 17.15 | % | | 8.89 | % | | 19.70 | % | | 31.73 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Ratios/Supplemental Data: | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Assets, End of Period (in thousands) | | | | | | | | | | | | | | | | | | | | | | | | |
| Ratio of Expenses to Average Net Assets: | | $ | 25,497 | | | $ | 22,011 | | | $ | 28,068 | | | $ | 24,226 | | | $ | 25,269 | | | $ | 23,566 | |
| Gross | | 0.84 | %b | | 0.81 | % | | 0.77 | % | | 0.81 | % | | 0.81 | % | | 0.98 | % |
| Netc | | 0.84 | %b | | 0.81 | % | | 0.77 | % | | 0.81 | % | | 0.81 | % | | 0.98 | % |
Ratio of Net Investment Income to Average Net Assets | | 1.92 | %b | | 1.52 | % | | 1.55 | % | | 1.50 | % | | 1.58 | % | | 2.81 | % |
Portfolio Turnover Rated | | 25 | % | | 73 | % | | 51 | % | | 75 | % | | 43 | % | | 70 | % |
| a | 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 are not annualized for periods of less than one year and do not reflect charges attributable to your insurance company's separate account. Inclusion of these charges would reduce the total returns shown. |
| |
| b | Annualized. |
| |
| c | 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. |
| |
| d | 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. |
| See Notes to Financial Statements |
DAVIS REAL ESTATE PORTFOLIO | Director Approval of Advisory Agreements (Unaudited) |
Process of Annual Review
The Board of Directors of the Davis Funds oversees the management of each Davis Fund and, as required by law, determines annually whether to approve the continuance of each Davis Fund's advisory agreement with Davis Selected Advisers, L.P. and sub-advisory agreement with Davis Selected Advisers-NY, Inc. (jointly "Davis Advisors" and "Advisory Agreements").
As a part of this process the Independent Directors, with the assistance of counsel for the Independent Directors, prepared questions submitted to Davis Advisors in anticipation of the annual contract review. The Independent Directors were provided with responsive background material (including recent investment performance data), and their counsel provided guidance, prior to a separate contract review meeting held in March 2014 where the Independent Directors reviewed and evaluated all information which they deemed reasonably necessary in the circumstances. In reaching their decision the Independent Directors also took into account information furnished to them throughout the year and otherwise provided to them. Upon completion of this review, the Independent Directors found that the terms of the Advisory Agreements were fair and reasonable and that continuation of the Advisory Agreements was in the best interest of Davis Real Estate Portfolio and its shareholders.
Reasons the Independent Directors Approved Continuation of the Advisory Agreements
The Independent Directors' determinations were based upon a comprehensive consideration of all information provided to the Independent Directors and they did not identify any single item or piece of information as the controlling factor. Each Independent Director did not necessarily attribute the same weight to each factor. The following facts and conclusions were important, but not exclusive, in the Independent Directors' recommendation to renew the Advisory Agreements.
The Independent Directors considered not only the investment performance of the Fund, but also the full range and quality of services provided by Davis Advisors to the Fund and its shareholders, including whether it:
| 1. | Achieves satisfactory investment results over the long-term after all costs; |
| 2. | Handles shareholder transactions, inquiries, requests, and records efficiently and effectively, and provides quality accounting, legal, and compliance services, and oversees third-party service providers; and |
| 3. | Fosters healthy investor behavior. |
Davis Advisors is reimbursed a portion of its costs in providing some, but not all, of these services.
A shareholder's ultimate return is the product of a fund's results as well as the shareholder's behavior, specifically in selecting when to invest or redeem. The Independent Directors concluded that, through its actions and communications, Davis Advisors has attempted to have a meaningful, positive impact on investor behavior.
The Independent Directors noted the importance of reviewing quantitative measures, but also recognized that qualitative factors are also important in assessing whether Davis Funds' shareholders are likely to be well served by the renewal of the Advisory Agreements. They noted both the value and shortcomings of purely quantitative measures, including the data provided by independent service providers, and concluded that while such measures and data may be informative, the judgment of the Independent Directors must take many factors, including those listed below, into consideration in representing the shareholders of the Davis Funds. In connection with reviewing comparative performance information, the Independent Directors generally give greater weight to longer-term measurements.
The Independent Directors expect Davis Advisors to employ a disciplined, company-specific, research-driven, businesslike, long-term investment philosophy.
The Independent Directors recognized Davis Advisors' (a) efforts to minimize transaction costs by generally having a long-term time horizon and low portfolio turnover; (b) record of generally producing satisfactory results over the long-term; (c) efforts towards fostering healthy investor behavior by, among other things, providing informative and substantial educational material; and (d) efforts to promote shareholder interests by actively speaking out on corporate governance issues.
| DAVIS REAL ESTATE PORTFOLIO | Director Approval of Advisory Agreements |
| (Unaudited) – (Continued) |
Reasons the Independent Directors Approved Continuation of the Advisory Agreements – (Continued)
The Independent Directors reviewed (a) comparative fee and expense information for other funds, as selected and analyzed by a nationally recognized independent service provider; (b) information regarding fees charged by Davis Advisors to other advisory clients, including funds which it sub-advises and private accounts, as well as the differences in the services provided to such other clients; and (c) the fee schedule of the Fund, including an assessment of competitive fee schedules.
The Independent Directors reviewed the fixed management fee for the Fund, profitability of the Fund to Davis Advisors, the extent to which economies of scale might be realized if the Fund's net assets increase, and whether the fixed fee reflected those potential economies of scale. The Independent Directors considered the nature, quality, and extent of the services being provided to the Fund and the costs incurred by Davis Advisors in providing such services. The Independent Directors considered various potential benefits that Davis Advisors may receive in connection with the services it provides under the Advisory Agreements with the Fund, including a review of portfolio brokerage practices. The Independent Directors noted that Davis Advisors does not use client commissions to pay for publications that are available to the general public or for third-party research services.
The Independent Directors compared the fees paid to Davis Advisors by the Davis Funds with those paid by Davis Advisors' sub-advised clients, private account clients, and managed money/wrap clients. To the extent sub-advised or private account fees were lower than fees paid by the Funds, the Independent Directors noted that the range of services provided to the Funds is more extensive and the risks associated with operating SEC registered, publicly traded mutual funds are greater. Serving as the primary adviser for mutual funds is more work because of the complex overlay of regulatory, tax and accounting issues which are unique to mutual funds. In addition, the operational work required to service shareholders is more extensive because of the significantly greater number of shareholders and managing trading is more complex because of more frequent fund flows. With respect to risk, not only has regulation become more complex and burdensome, but the scrutiny of regulators and shareholders has gotten more intense.
The Independent Directors noted that Davis Real Estate Portfolio under-performed its benchmark, the Wilshire U.S. Real Estate Securities Index, over the one-, three-, five-, and ten-year time periods as well as since inception (July 1, 1999), all ended February 28, 2014. The Lipper Report (prepared by an independent service provider) indicated that the Fund under-performed the Lipper Performance Universe over the one-, two-, three-, four-, five-, and ten-year time periods ended December 31, 2013. The Fund out-performed the Lipper Category Index over the three-, four-, and five-year time periods, but under-performed over the one-, two-, and ten-year time periods, all ended December 31, 2013. The Independent Directors noted that the Fund out-performed the Wilshire U.S. Real Estate Securities Index in 1 of the 10 rolling five-year time frames and the performance universe in 4 of the 10 rolling five-year time frames ended December 31 for each year from 2004 through 2013. The Fund under-performed both the Index and the performance universe in all 5 of the rolling ten-year time frames ended December 31 for each year from 2009 through 2013.
The Independent Directors considered Davis Real Estate Portfolio's management fee and total expense ratio. Both were reasonable and below the average and median ratios of its peer group as determined by Lipper.
Approval of Advisory Agreements
The Independent Directors concluded that Davis Advisors had provided Davis Real Estate Portfolio and its shareholders a reasonable level of both investment and non-investment services. The Independent Directors further concluded that shareholders have received a significant benefit from Davis Advisors' shareholder oriented approach, as well as the execution of its investment discipline.
The Independent Directors determined that the advisory fee for Davis Real Estate Portfolio was reasonable in light of the nature, quality, and extent of the services being provided to the Fund, the costs incurred by Davis Advisors in providing such service, and in comparison to the range of the average advisory fees of its peer group as determined by an independent service provider. The Independent Directors found that the terms of the Advisory Agreements were fair and reasonable and that continuation of the Advisory Agreements was in the best interest of the Fund and its shareholders. The Independent Directors and the full Board of Directors therefore voted to continue the Advisory Agreements.
DAVIS REAL ESTATE PORTFOLIO | Directors and Officers |
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 85756. 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).
Name (birthdate) | Position(s) Held With Fund | Term of Office and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Director | Other Directorships Held by Director |
| | | | | |
Independent Directors
| | | | | |
Marc P. Blum (09/09/42) | Director | Director since 1986 | Chief Executive Officer, World Total Return Fund, LLLP; of Counsel to Gordon Feinblatt LLC (law firm). | 13 | Director, Rodney Trust Company (trust and asset management company). |
| | | | | |
John S. Gates, Jr. (08/02/53) | Director | Director since 2007 | Chairman and Chief Executive Officer of PortaeCo LLC (private investment company). | 13 | Director, DCT Industrial Trust (REIT); Chairman, Regional Transportation Authority of Chicago (public transportation system). |
| | | | | |
Thomas S. Gayner (12/16/61) | Director/ Chairman | Director since 2004 | President and Chief Investment Officer, Markel Corp. (diversified financial holding company). | 13 | Director, Graham Holdings Company (publishing company); Director, Colfax Corp. (engineering and manufacturer of pumps and fluid handling equipment). |
| | | | | |
Samuel H. Iapalucci (07/19/52) | Director | Director since 2006 | Retired; Executive Vice President and Chief Financial Officer, CH2M- HILL Companies, Ltd. (engineering) until 2008. | 13 | Director, exp Global Inc. (engineering). |
| | | | | |
Robert P. Morgenthau (03/22/57) | Director | Director since 2002 | Principal, Spears Abacus Advisors, LLC (investment management firm) since 2011; Chairman, NorthRoad Capital Management, LLC (investment management firm) 2002-2011. | 13 | none |
| | | | | |
Marsha Williams (03/28/51) | Director | Director since 1999 | Retired; Senior Vice President and Chief Financial Officer, Orbitz Worldwide, Inc. (travel-services provider) 2007-2010. | 13 | Director, Modine Manufacturing Company (heat transfer technology); Director, Chicago Bridge & Iron Company, N.V. (industrial construction and engineering); Director, Fifth Third Bancorp (diversified financial services). |
| DAVIS REAL ESTATE PORTFOLIO | Directors and Officers – (Continued) |
Name (birthdate) | Position(s) Held With Fund | Term of Office and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Director | Other Directorships Held by Director |
| | | | | |
Inside Directors*
| | | | | |
Andrew A. Davis (06/25/63) | 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 of certain companies affiliated with the Adviser. | 15 | Director, Selected Funds (consisting of two portfolios) since 1998. |
| | | | | |
Christopher C. Davis (07/13/65) | 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 of 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). | 15 | Director, Selected Funds (consisting of two portfolios) since 1998; Director, Graham Holdings Company (publishing company). |
*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.
Officers
Andrew A. Davis (born 06/25/63, Davis Funds officer since 1997). See description in the section on Inside Directors.
Christopher C. Davis (born 07/13/65, Davis Funds officer since 1997). See description in the section on Inside Directors.
Kenneth C. Eich (born 08/14/53, Davis Funds officer since 1997). Executive Vice President and Principal Executive Officer of each of the Davis Funds (consisting of 13 portfolios), Selected Funds (consisting of two portfolios), and Clipper Fund, Inc. (consisting of one portfolio); Chief Operating Officer, Davis Selected Advisers, L.P., and also serves as an executive officer of certain companies affiliated with the Adviser.
Douglas A. Haines (born 03/04/71, Davis Funds officer since 2004). Vice President, Treasurer, Chief Financial Officer, Principal Financial Officer, and Principal Accounting Officer of each of the Davis Funds (consisting of 13 portfolios), Selected Funds (consisting of two portfolios), and Clipper Fund, Inc. (consisting of one portfolio); Vice President and Director of Fund Accounting, Davis Selected Advisers, L.P.
Sharra L. Haynes (born 09/25/66, Davis Funds officer since 1997). Vice President and Chief Compliance Officer of each of the Davis Funds (consisting of 13 portfolios), Selected Funds (consisting of two portfolios), and Clipper Fund, Inc. (consisting of one portfolio); Vice President and Chief Compliance Officer, Davis Selected Advisers, L.P., and also serves as an executive officer of certain companies affiliated with the Adviser.
Ryan M. Charles (born 07/25/78, Davis Funds officer since 2014). Vice President and Secretary of each of the Davis Funds (consisting of 13 portfolios), Selected Funds (consisting of two portfolios), and Clipper Fund, Inc. (consisting of one portfolio); Vice President, Chief Legal Officer, and Secretary, Davis Selected Advisers, L.P., and also serves as an executive officer of certain companies affiliated with the Adviser.
Arthur Don (born 09/24/53, Davis Funds officer since 1991). Assistant Secretary (for clerical purposes only) of each of the Davis Funds and Selected Funds; Shareholder, Greenberg Traurig, LLP (law firm); counsel to the Independent Directors and the Davis Funds.
| DAVIS REAL ESTATE PORTFOLIO |
| Investment Adviser |
| Davis Selected Advisers, L.P. (Doing business as "Davis Advisors") |
| 2949 East Elvira Road, Suite 101 |
| Tucson, Arizona 85756 |
| (800) 279-0279 |
|
| Distributor |
| Davis Distributors, LLC |
| 2949 East Elvira Road, Suite 101 |
| Tucson, Arizona 85756 |
|
| 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 |
| Greenberg Traurig, LLP |
| 77 West Wacker Drive, Suite 3100 |
| Chicago, Illinois 60601 |
|
| Independent Registered Public Accounting Firm |
| KPMG LLP |
| 1225 Seventeenth Street, Suite 800 |
| Denver, Colorado 80202 |
For more information about Davis Real Estate 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 and on the Fund's website at www.davisfunds.com. Quarterly Fact Sheets are available on the Fund's website at www.davisfunds.com.
ITEM 2. CODE OF ETHICS
Not Applicable
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
Not Applicable
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-3 (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) Not Applicable
(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.
| By | /s/ Kenneth C. Eich | |
| | Kenneth C. Eich | |
| | Principal Executive Officer |
| | | |
Date: August 25, 2014
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.
| By | /s/ Kenneth C. Eich | |
| | Kenneth C. Eich | |
| | Principal Executive Officer |
| | | |
Date: August 25, 2014
| By | /s/ Douglas A. Haines | |
| | Douglas A. Haines | |
| | Principal Financial Officer |
| | | |
Date: August 25, 2014
