UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-09293
Davis Variable Account Fund, Inc.
(Exact name of registrant as specified in charter)
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
(Address of principal executive offices)
Thomas D. Tays
Davis Selected Advisers, LP
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
(Name and address of agent for service)
Registrant's telephone number, including area code: (520) 806-7600
Date of fiscal year end: December 31
Date of reporting period: December 31, 2004
ITEM 1. REPORTS TO STOCKHOLDERS
ANNUAL REPORT
DECEMBER 31, 2004
DAVIS VALUE PORTFOLIO
DAVIS FINANCIAL PORTFOLIO
DAVIS REAL ESTATE PORTFOLIO
(PORTFOLIOS OF DAVIS VARIABLE ACCOUNT FUND, INC.)
[DAVIS FUNDS LOGO]
OVER 35 YEARS OF RELIABLE INVESTING(TM)
TABLE OF CONTENTS
Management's Discussion and Analysis:
Davis Value Portfolio.............................................. 2
Davis Financial Portfolio.......................................... 3
Davis Real Estate Portfolio........................................ 4
Fund Performance and Supplementary Information:
Davis Value Portfolio.............................................. 7
Davis Financial Portfolio.......................................... 10
Davis Real Estate Portfolio........................................ 13
Schedule of Investments:
Davis Value Portfolio.............................................. 17
Davis Financial Portfolio.......................................... 21
Davis Real Estate Portfolio........................................ 23
Statements of Assets and Liabilities........................................ 26
Statements of Operations.................................................... 27
Statements of Changes in Net Assets......................................... 28
Notes to Financial Statements............................................... 30
Financial Highlights:
Davis Value Portfolio.............................................. 35
Davis Financial Portfolio.......................................... 36
Davis Real Estate Portfolio........................................ 37
Report of Independent Registered Public Accounting Firm..................... 38
Fund Information............................................................ 39
Directors and Officers...................................................... 40
DAVIS VARIABLE ACCOUNT FUND, INC.
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS
MARKET ENVIRONMENT
During the year ended December 31, 2004, the stock market, as measured by the
Standard & Poor's 500(R) Index(1), returned 10.88%. U.S. economic activity, as
measured by the gross domestic product, rose sharply in the first two quarters
before falling sharply in the third quarter of 2004. Interest rates, as measured
by the 10-year Treasury bond, trended downward over the first three months, rose
over the next three months then slowly declined over the last half of the year.
After trending sideways during the first seven months of the year, the S&P
500(R) Index went on a sustained rally over the last five months of 2004.
DAVIS VALUE PORTFOLIO
PERFORMANCE OVERVIEW
Davis Value Portfolio returned 12.33% for the year ended December 31, 2004(2),
compared with a return of 10.88% for the Standard & Poor's 500(R) Index(1).
The Portfolio had more invested in financial service companies than in any other
single sector. The financial service companies that the Portfolio owned
out-performed the S&P 500(R) Index. Contributors(3) to performance included
American Express(4), Loews, and Moody's. Over the year ended December 31, 2004,
American Express increased by 17.60%, Loews increased by 43.59%, and Moody's
increased by 44.06%.
Energy companies represented one of the Portfolio's largest sector weightings.
The energy companies that the Portfolio owned significantly out-performed the
S&P 500(R) Index. Over the year ended December 31, 2004, ConocoPhillips
increased by 35.60%, Devon Energy increased by 36.78%, and EOG Resources
increased by 55.21%.
Property and casualty insurance companies also represented one of the
Portfolio's largest sector weightings, and short-term performance was hurt when
these companies under-performed the S&P 500(R) Index. Over the year ended
December 31, 2004, Berkshire Hathaway, Class A increased by 4.33% and
Progressive increased by 1.63%.
The health care companies that the Portfolio owned under-performed the S&P
500(R) Index in 2004. The most important contributor in this sector was Cardinal
Health, which increased by 15.95% since being purchased in July 2004. The most
important detractors from performance were Eli Lilly, which decreased by 17.55%
over the year ended December 31, 2004, and Pfizer, which decreased by 25.02%
before being sold in December 2004.
Davis Advisors investment strategy is driven by individual stock selection in
which we attempt to construct a portfolio that is not optimized to a single set
of economic conditions. We invest the Portfolio's assets one company at a time.
The resulting investment portfolio does not resemble the S&P 500(R) Index.
Other important contributors to performance included: Tyco International, a
diversified manufacturing company, Altria Group, a consumer products company,
and Costco, a discount retailing company. Over the year ended December 31, 2004,
Tyco International increased by 35.41%, Altria Group increased by 18.38%, and
Costco increased by 31.15%. All three companies were among the Portfolio's ten
largest holdings at the end of the year.
2
DAVIS VARIABLE ACCOUNT FUND, INC.
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
PERFORMANCE OVERVIEW - CONTINUED
Other important detractors from performance included: Fifth Third Bancorp, a
banking and savings & loan company, H&R Block, a financial service company, and
Marsh & McLennan, an insurance brokerage company. Over the year ended December
31, 2004, Fifth Third Bancorp decreased by 17.93% and H&R Block decreased by
9.99%. Marsh & McLennan decreased by 25.46% since being purchased in June 2004.
DAVIS FINANCIAL PORTFOLIO
PERFORMANCE OVERVIEW
Davis Financial Portfolio returned 10.32% for the year ended December 31,
2004(2), compared with a return of 10.88% for the Standard & Poor's 500(R)
Index(1).
Financial companies are subdivided into several sectors. As a group, these
sectors kept pace with the S&P 500(R) Index, neither out-performing, nor
under-performing the Index by a significant margin. Financial companies making
important contributions(3) to the Portfolio's relative performance included
three companies in the financial services sector: American Express(4), Moody's,
and Loews. Over the year ended December 31, 2004, American Express increased by
17.60%, Moody's increased by 44.06%, and Loews increased by 43.59%. Another
financial service company, H&R Block, decreased by 9.99% over the year ended
December 31, 2004 and was one of the more important detractors from relative
performance. Markel, a property and casualty insurance company, increased by
43.58% over the year ended December 31, 2004.
In 2004 the Portfolio also invested in non-financial companies. Tyco
International, a diversified manufacturing company, increased by 35.41% over the
year ended December 31, 2004 and was an important contributor to performance.
Sealed Air, an industrial company, decreased by 1.61% over the same time period
and was an important detractor from performance.
The Portfolio's largest sector weightings were in financial services, banks and
savings & loan associations, and property/casualty insurance. The Portfolio's
financial service holdings and property/casualty insurance holdings
out-performed the S&P 500(R) Index, but the Portfolio's banks and savings & loan
holdings under-performed the Index.
Among the companies detracting from the Portfolio's performance relative to the
S&P 500(R) Index were: Julius Baer, an investment firm, Fifth Third Bancorp, a
banking and savings & loan company, Transatlantic Holdings, a reinsurance
company, and China Life, a life insurance company. Over the year ended December
31, 2004, Julius Baer decreased by 9.42%, Fifth Third Bancorp decreased by
17.93%, Transatlantic Holdings decreased by 3.77%, and China Life decreased by
19.81%.
We continue to believe that long-term demographics favor financial services
companies. The Portfolio's investment strategy is to perform extensive research
to buy companies with expanding earnings at value prices and hold them for the
long term. We believe that performance should be evaluated over long periods of
time and are strong supporters of long-term buy-and-hold investing.
3
DAVIS VARIABLE ACCOUNT FUND, INC.
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
DAVIS REAL ESTATE PORTFOLIO
PERFORMANCE OVERVIEW
Davis Real Estate Portfolio returned 33.35% for the year ended December 31,
2004(2), compared with a return of 34.78% for the Dow Jones Wilshire Real Estate
Securities Index(1).
The Portfolio's largest real estate sector weightings were in office space REITs
and shopping center REITs. The Portfolio's shopping center REITs out-performed
the Dow Jones Wilshire Real Estate Securities Index, while the Portfolio's
office space REITs under-performed the Index. Over the year ended December 31,
2004, SL Green Realty(4), an office space REIT, increased by 53.52% and
Developers Diversified, a shopping center REIT, increased 38.86%.
Other companies contributing(3) to performance relative to the Dow Jones
Wilshire Real Estate Securities Index included: two industrial REITs,
Centerpoint Properties and ProLogis, and Vornado Realty Trust, a diversified
REIT. Over the year ended December 31, 2004, Centerpoint Properties increased by
32.93%, ProLogis increased by 41.03%, and Vornado Realty Trust increased by
46.53%. All three companies were among the Portfolio's ten largest holdings at
the end of the year. Starwood Hotels & Resorts, a hotel & lodging company, also
increased by 64.71% over the year ended December 31, 2004.
The individual companies detracting the most from performance relative to the
Dow Jones Wilshire Real Estate Securities Index were: Affordable Residential
Communities, a manufactured home REIT, Equity Office Properties, an office space
REIT, and Home Properties, an apartment REIT. Affordable Residential Communities
decreased by 20.81% while it was held in the Portfolio. Equity Office Properties
decreased by 8.89% prior to being sold in April 2004. Home Properties decreased
by 4.68% prior to being sold in May 2004. In the strong bull market, cash
holdings were also a drag on relative performance.
The Portfolio's investment strategy is to seek out growing real estate companies
(principally REITs) that can be purchased at value prices and held for the
long-term.
- ------------------------------
This Annual Report is authorized for use by existing shareholders. Prospective
shareholders must receive a current Davis Variable Account Funds prospectus,
which contains more information about investment strategies, risks, charges, and
expenses. Please read the prospectus carefully before investing or sending
money.
Davis Value Portfolio's investment objective is long-term growth of capital.
There can be no assurance that the Portfolio will achieve its objective. The
primary risks of an investment in Davis Value Portfolio are: (1) market risk,
(2) company risk, (3) headline risk, and (4) selection risk. See the prospectus
for a full description of each risk.
4
DAVIS VARIABLE ACCOUNT FUND, INC.
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
Davis Financial Portfolio's investment objective is long-term growth of capital.
There can be no assurance that the Portfolio will achieve its objective. The
primary risks of an investment in Davis Financial Portfolio are: (1) market
risk, (2) company risk, (3) headline risk, (4) selection risk, and (5)
concentrated financial services portfolio risk. See the prospectus for a full
description of each risk.
Davis Financial Portfolio concentrates its investments in the financial sector,
and it may be subject to greater risks than a portfolio that does not
concentrate its investments in a particular sector. The Portfolio's investment
performance, both good and bad, is expected to reflect the economic performance
of the financial sector more than a portfolio that does not concentrate its
portfolio.
Davis Real Estate Portfolio's investment objective is total return through a
combination of growth and income. There can be no assurance that the Portfolio
will achieve its objective. The primary risks of an investment in Davis Real
Estate Portfolio are: (1) market risk, (2) company risk, (3) small and medium
capitalization risk, (4) headline risk, (5) selection risk, (6) focused
portfolio risk, and (7) concentrated real estate portfolio 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 under its charter 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 definitions of indices quoted in this report appear below. Investments
cannot be made directly in the indices.
I. The S&P 500(R) Index is an unmanaged index of 500 selected common stocks,
most of which are listed on the New York Stock Exchange. The Index is adjusted
for dividends, weighted towards stocks with large market capitalizations, and
represents approximately two-thirds of the total market value of all domestic
common stocks.
II. The Dow Jones Wilshire Real Estate Securities Index is a broad measure of
the performance of publicly traded real estate securities, such as Real Estate
Investment Trusts (REITs) and Real Estate Operating Companies (REOCs). The Index
is capitalization-weighted. The beginning date was January 1, 1978, and the
Index is rebalanced monthly and returns are calculated on a buy and hold basis.
5
DAVIS VARIABLE ACCOUNT FUND, INC.
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
(2) Total return assumes reinvestment of dividends and capital gain
distributions. Past performance is not a guarantee of future results. Investment
return and principal value will vary so that, when redeemed, an investor's
shares may be worth more or less than when purchased. The following table lists
the average annual total returns for the periods ended December 31, 2004.
- --------------------------------------------------------------------------------
PORTFOLIO NAME 1-YEAR 5-YEAR INCEPTION
(July 1, 1999)
- --------------------------------------------------------------------------------
Davis Value Portfolio 12.33% 3.63% 3.78%
- --------------------------------------------------------------------------------
Davis Financial Portfolio 10.32% 7.31% 5.18%
- --------------------------------------------------------------------------------
Davis Real Estate Portfolio 33.35% 20.24% 15.78%
- --------------------------------------------------------------------------------
Performance numbers are net of all portfolio operating expenses, but do not
include any insurance charges imposed by your insurance company's separate
account. If performance information included the effect of these additional
charges, the total return would be lower.
Portfolio performance changes over time and current performance may be higher or
lower than stated. For more current information please call Davis Funds
Shareholder Services at 1-800-279-0279.
(3) A company's or sector's contribution to the Portfolio's performance is a
product both of its appreciation or depreciation and it's weighting within the
portfolio. For example, a 5% holding that rises 20% has twice as much impact as
a 1% holding that rises 50%.
(4) This Management Discussion & Analysis discusses a number of individual
companies. The information provided in this report does not provide information
reasonably sufficient upon which to base an investment decision and should not
be considered a recommendation to purchase or sell any particular security. The
schedule of investments lists each Portfolio's holdings of each company
discussed.
Shares of the Davis Variable Account Funds are not deposits or obligations of
any bank, are not guaranteed by any bank, are not insured by the FDIC or any
other agency, and involve investment risks, including possible loss of the
principal amount invested.
6
DAVIS VARIABLE ACCOUNT FUND, INC.
FUND OVERVIEW
DAVIS VALUE PORTFOLIO
At December 31, 2004
================================================================================
PORTFOLIO MAKEUP (% OF FUND NET ASSETS)
[GRAPHIC OMITTED]
Short Term Investments, Other Assets & Liabilities 2.0%
Common Stocks 98.0%
SECTOR WEIGHTINGS (% OF STOCK HOLDINGS)
[GRAPHIC OMITTED]
Banks and Savings & Loan 12.7%
Consumer Products 5.5%
Diversified Manufacturing 4.2%
Energy 9.1%
Technology 2.7%
Health Care 4.1%
Financial Services 20.8%
Food/Beverage & Restaurant 3.4%
Industrial 3.0%
Discount Retailer 3.5%
Insurance 16.6%
Cable Television 3.6%
Other 10.8%
TOP 10 HOLDINGS
STOCK SECTOR % OF FUND NET ASSETS
- -----------------------------------------------------------------------------------------------------------
American Express Co. Financial Services 6.97%
Altria Group, Inc. Consumer Products 5.33%
American International Group, Inc. Multi-Line Insurance 4.72%
Berkshire Hathaway Inc., Class A Property/Casualty Insurance 4.69%
Tyco International Ltd. Diversified Manufacturing 4.12%
HSBC Holdings PLC Banks and Savings & Loan Associations 3.51%
Comcast Corp., Special Class A Cable Television 3.50%
Costco Wholesale Corp. Discount Retailer 3.40%
Wells Fargo & Co. Banks and Savings & Loan Associations 3.35%
JPMorgan Chase & Co. Financial Services 3.32%
7
DAVIS VARIABLE ACCOUNT FUND, INC.
PORTFOLIO ACTIVITY
DAVIS VALUE PORTFOLIO
January 1, 2004 through December 31, 2004
================================================================================
NEW POSITIONS ADDED (1/1/04-12/31/04)
(Highlighted positions are those greater than 0.99% of 12/31/04 total net
assets)
DATE OF 1ST % OF 12/31/04
SECURITY SECTOR PURCHASE FUND NET ASSETS
- ------------------------------------------------------------------------------------------------------------------
Cardinal Health, Inc. Health Care 07/14/04 1.29%
Comcast Corp., Special Class A Cable Television 01/14/04 3.50%
Hunter Douglas NV Manufacturing 10/18/04 0.02%
IAC/InterActiveCorp E-Commerce/Services 08/04/04 0.56%
Iron Mountain Inc. Business Services 09/21/04 0.94%
Marsh & McLennan Cos, Inc. Insurance Brokers 06/28/04 1.05%
Nokia Oyj, ADR Telecommunications 04/14/04 0.30%
Rentokil Initial PLC Diversified Commercial Services 01/13/04 0.41%
SK Telecom Co., Ltd., ADR Telecommunications 04/14/04 0.49%
Transocean Inc. Energy 01/23/04 0.74%
POSITIONS CLOSED (1/1/04-12/31/04)
(Gains and losses greater than $550,000 are highlighted)
DATE OF
SECURITY SECTOR FINAL SALE GAIN/(LOSS)
- --------------------------------------------------------------------------------------------------------------------
Agere Systems Inc., Class A Electronics 11/17/04 $ (1,720,194)
Janus Capital Group Inc. Investment Firms 04/29/04 (537,837)
Kraft Foods Inc., Class A Food/Beverage & Restaurant 08/10/04 (294,753)
Marriott International, Inc., Class A Hotels & Motels 08/30/04 672,530
Merck & Co., Inc. Health Care 07/29/04 (346,408)
Pfizer Inc. Health Care 12/22/04 (873,244)
8
DAVIS VARIABLE ACCOUNT FUND, INC.
DAVIS VALUE PORTFOLIO
FUND PERFORMANCE
================================================================================
- --------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN EXPENSE EXAMPLE
FOR THE PERIODS ENDED DECEMBER 31, 2004 BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
(07/01/04) (12/31/04) (07/01/04-12/31/04)
---------- ---------- -------------------
One Year................................ 12.33% Actual............... $1,000.00 $1,075.49 $4.23
Five Years.............................. 3.63% Hypothetical (5%
Life of Fund (July 1, 1999 return before
through December 31, 2004)......... 3.78% expenses).......... $1,000.00 $1,021.06 $4.12
- --------------------------------------------------------------------------------------------------------------------------
*Expenses are equal to the Fund's annualized expense ratio (0.81%), multiplied
by the average account value over the period, multiplied by 184/366 (to reflect
the one-half year period). See Notes to Performance on page 16 for a description
of the "Expense Example".
$10,000 INVESTED AT COMMENCEMENT OF OPERATIONS. Let's say you invested $10,000
in Davis Value Portfolio on July 1, 1999 (commencement of operations). As the
chart below shows, by December 31, 2004 the value of your investment would have
grown to $12,269 - a 22.69% increase on your initial investment. For comparison,
look at how the Standard & Poor's 500(R) Stock Index did over the same period.
With dividends reinvested, the same $10,000 investment would have been $9,532 -
a 4.68% decrease.
[GRAPHIC OMITTED]
S&P 500 DVP
----------- ------------
7/1/99 $ 10,000.00 $ 10,000.00
12/31/99 $ 10,706.00 $ 10,263.57
12/31/00 $ 9,732.00 $ 11,218.07
12/31/01 $ 8,576.00 $ 10,052.32
12/31/02 $ 6,681.00 $ 8,417.83
12/31/03 $ 8,597.00 $ 10,922.65
12/31/04 $ 9,532.00 $ 12,269.47
The Standard & Poor's 500(R) Stock Index is an unmanaged index of 500 selected
common stocks, most of which are listed on the New York Stock Exchange. The
Index is adjusted for dividends, weighted towards stocks with large market
capitalization, and represents approximately two-thirds of the total market
value of all domestic common stocks.
The performance data for Davis Value Portfolio contained in this report
represents past performance and assumes that all distributions were reinvested,
and should not be considered as an indication of future performance from an
investment in the Fund today. The investment return and principal value will
fluctuate so that shares may be worth more or less than their original cost when
redeemed.
9
DAVIS VARIABLE ACCOUNT FUND, INC.
FUND OVERVIEW
DAVIS FINANCIAL PORTFOLIO
At December 31, 2004
================================================================================
PORTFOLIO MAKEUP (% OF FUND NET ASSETS)
[GRAPHIC OMITTED]
Short Term Investments, Other Assets & Liabilities 7.6%
Common Stocks 92.4%
SECTOR WEIGHTINGS (% OF STOCK HOLDINGS)
[GRAPHIC OMITTED]
Banks and Savings & Loan 19.0%
Diversified Manufacturing 4.6%
Financial Services 36.3%
Insurance 33.3%
Other 6.8%
TOP 10 HOLDINGS
STOCK SECTOR % OF FUND NET ASSETS
- -----------------------------------------------------------------------------------------------------------
American Express Co. Financial Services 9.93%
Transatlantic Holdings, Inc. Reinsurance 6.57%
Moody's Corp. Financial Services 4.93%
Citigroup Inc. Financial Services 4.80%
American International Group, Inc. Multi-Line Insurance 4.73%
Golden West Financial Corp. Banks and Savings & Loan Associations 4.73%
Fifth Third Bancorp Banks and Savings & Loan Associations 4.70%
Berkshire Hathaway Inc., Class B Property/Casualty Insurance 4.39%
Cincinnati Financial Corp. Property/Casualty Insurance 4.39%
Tyco International Ltd. Diversified Manufacturing 4.27%
10
DAVIS VARIABLE ACCOUNT FUND, INC.
PORTFOLIO ACTIVITY
DAVIS FINANCIAL PORTFOLIO
January 1, 2004 through December 31, 2004
================================================================================
POSITIONS CLOSED (1/1/04-12/31/04)
(Gains and losses greater than $100,000 are highlighted)
DATE OF
SECURITY SECTOR FINAL SALE GAIN/(LOSS)
- --------------------------------------------------------------------------------------------------------------------
Aon Corp. Insurance Brokers 05/14/04 $ (263,058)
Charles Schwab Corp. Financial Services 02/10/04 (59,013)
Janus Capital Group Inc. Investment Firms 05/03/04 (569,682)
11
DAVIS VARIABLE ACCOUNT FUND, INC.
DAVIS FINANCIAL PORTFOLIO
FUND PERFORMANCE
================================================================================
- --------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN EXPENSE EXAMPLE
FOR THE PERIODS ENDED DECEMBER 31, 2004 BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
(07/01/04) (12/31/04) (07/01/04-12/31/04)
---------- ---------- -------------------
One Year................................ 10.32% Actual............... $1,000.00 $1,070.14 $4.42
Five Years.............................. 7.31% Hypothetical (5%
Life of Fund (July 1, 1999 return before
through December 31, 2004)......... 5.18% expenses).......... $1,000.00 $1,020.71 $4.32
- --------------------------------------------------------------------------------------------------------------------------
*Expenses are equal to the Fund's annualized expense ratio (0.85%), multiplied
by the average account value over the period, multiplied by 184/366 (to reflect
the one-half year period). See Notes to Performance on page 16 for a description
of the "Expense Example".
$10,000 INVESTED AT COMMENCEMENT OF OPERATIONS. Let's say you invested $10,000
in Davis Financial Portfolio on July 1, 1999 (commencement of operations). As
the chart below shows, by December 31, 2004 the value of your investment would
have grown to $13,210 - a 32.10% increase on your initial investment. For
comparison, look at how the Standard & Poor's 500(R) Stock Index did over the
same period. With dividends reinvested, the same $10,000 investment would have
been $9,532 - a 4.68% decrease.
[GRAPHIC OMITTED]
S&P 500 DFP
------------ ------------
7/1/99 $ 10,000.00 $ 10,000.00
12/31/99 $ 10,706.00 $ 9,282.62
12/31/00 $ 9,732.00 $ 12,157.43
12/31/01 $ 8,576.00 $ 10,896.24
12/31/02 $ 6,681.00 $ 9,061.29
12/31/03 $ 8,597.00 $ 11,974.80
12/31/04 $ 9,532.00 $ 13,210.28
The Standard & Poor's 500(R) Stock Index is an unmanaged index of 500 selected
common stocks, most of which are listed on the New York Stock Exchange. The
Index is adjusted for dividends, weighted towards stocks with large market
capitalization, and represents approximately two-thirds of the total market
value of all domestic common stocks.
The performance data for Davis Financial Portfolio contained in this report
represents past performance and assumes that all distributions were reinvested,
and should not be considered as an indication of future performance from an
investment in the Fund today. The investment return and principal value will
fluctuate so that shares may be worth more or less than their original cost when
redeemed.
12
DAVIS VARIABLE ACCOUNT FUND, INC.
FUND OVERVIEW
DAVIS REAL ESTATE PORTFOLIO
At December 31, 2004
================================================================================
PORTFOLIO MAKEUP (% OF FUND NET ASSETS)
[GRAPHIC OMITTED]
Short Term Investments, Preferred Stocks, Other Assets & Liabilities 10.3%
Common Stocks 89.7%
SECTOR WEIGHTINGS (% OF STOCK HOLDINGS)
[GRAPHIC OMITTED]
REITS 88.3%
Shopping Centers 1.6%
Diversified 4.2%
Industrial 1.7%
Residential/Commercial Building 2.6%
Hotels & Lodging 1.6%
TOP 10 HOLDINGS
STOCK SECTOR % OF FUND NET ASSETS
- -----------------------------------------------------------------------------------------------------------
Centerpoint Properties Trust Industrial (REITS) 6.62%
SL Green Realty Corp. Office Space (REITS) 4.19%
ProLogis Industrial (REITS) 4.12%
Alexandria Real Estate Equities, Inc. Office Space (REITS) 3.66%
Vornado Realty Trust Diversified (REITS) 3.64%
Developers Diversified Realty Corp. Shopping Centers (REITS) 3.55%
Catellus Development Corp. Industrial (REITS) 3.38%
Forest City Enterprises, Inc., Class A Diversified 3.33%
Essex Property Trust, Inc. Apartments (REITS) 3.29%
General Growth Properties, Inc. Malls (REITS) 3.28%
13
DAVIS VARIABLE ACCOUNT FUND, INC.
PORTFOLIO ACTIVITY
DAVIS REAL ESTATE PORTFOLIO
January 1, 2004 through December 31, 2004
================================================================================
NEW POSITIONS ADDED (1/1/04-12/31/04)
(Highlighted positions are those greater than 2.25% of 12/31/04 total net
assets)
DATE OF 1ST % OF 12/31/04
SECURITY SECTOR PURCHASE FUND NET ASSETS
- ------------------------------------------------------------------------------------------------------------------
Affordable Residential Communities Inc. Manufactured Homes (REITS) 02/11/04 -
Brandywine Realty Trust Office Space (REITS) 04/06/04 2.40%
Brixton PLC Industrial 09/02/04 1.54%
Camden Property Trust Apartments (REITS) 05/07/04 1.19%
Capital Automotive REIT Specialty Retail (REITS) 06/09/04 2.97%
Gramercy Capital Corp. Financial Services (REITS) 07/28/04 1.35%
Kilroy Realty Corp. Office Space (REITS) 05/07/04 0.95%
Liberty International PLC Shopping Centers 09/02/04 1.47%
Mills Corp. Malls (REITS) 08/04/04 2.69%
Pan Pacific Retail Properties, Inc. Shopping Centers (REITS) 06/29/04 2.87%
St. Joe Co. Diversified 05/18/04 0.43%
POSITIONS CLOSED (1/1/04-12/31/04)
(Gains and losses greater than $150,000 are highlighted)
DATE OF
SECURITY SECTOR FINAL SALE GAIN/(LOSS)
- -------------------------------------------------------------------------------------------------------------------
Affordable Residential Communities Inc. Manufactured Homes (REITS) 10/15/04 $ (142,930)
Archstone-Smith Trust Apartments (REITS) 12/17/04 278,228
Avalonbay Communities, Inc. Apartments (REITS) 10/14/04 393,770
CBL & Associates Properties, Inc. Malls (REITS) 05/26/04 136,956
Chelsea Property Group, Inc. Outlet Centers (REITS) 08/20/04 984,305
Equity Office Properties Trust Office Space (REITS) 04/13/04 (84,283)
Equity Residential Apartments (REITS) 04/13/04 187
Home Properties of New York, Inc. Apartments (REITS) 05/04/04 39,299
Liberty Property Trust Diversified (REITS) 05/10/04 187,280
Rayonier Inc. Forestry (REITS) 05/19/04 (7,159)
Rouse Co. Malls (REITS) 11/15/04 573,284
14
DAVIS VARIABLE ACCOUNT FUND, INC.
DAVIS REAL ESTATE PORTFOLIO
FUND PERFORMANCE
================================================================================
- --------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN EXPENSE EXAMPLE
FOR THE PERIODS ENDED DECEMBER 31, 2004 BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
(07/01/04) (12/31/04) (07/01/04-12/31/04)
---------- ---------- -------------------
One Year................................ 33.35% Actual............... $1,000.00 $1,251.62 $4.98
Five Years.............................. 20.24% Hypothetical (5%
Life of Fund (July 1, 1999 return before
through December 31, 2004)......... 15.78% expenses).......... $1,000.00 $1,020.86 $4.47
- --------------------------------------------------------------------------------------------------------------------------
*Expenses are equal to the Fund's annualized expense ratio (0.88%), multiplied
by the average account value over the period, multiplied by 184/366 (to reflect
the one-half year period). See Notes to Performance on page 16 for a description
of the "Expense Example".
$10,000 INVESTED AT COMMENCEMENT OF OPERATIONS. Let's say you invested $10,000
in Davis Real Estate Portfolio on July 1, 1999 (commencement of operations). As
the chart below shows, by December 31, 2004 the value of your investment would
have grown to $22,419 - a 124.19% increase on your initial investment. For
comparison, the Dow Jones Wilshire Real Estate Securities Index and the Standard
& Poor's 500(R) Stock Index are also presented on the chart below.
[GRAPHIC OMITTED]
S&P 500 DJ Wilshire Real Estate Index DREP
----------- ----------------------------- ------------
7/1/99 $ 10,000.00 $ 10,000.00 $ 10,000.00
12/31/99 $ 10,706.00 $ 9,075.00 $ 8,920.53
12/31/00 $ 9,732.00 $ 11,863.75 $ 11,001.85
12/31/01 $ 8,576.00 $ 13,103.51 $ 11,606.73
12/31/02 $ 6,681.00 $ 13,452.06 $ 12,290.85
12/31/03 $ 8,597.00 $ 18,440.09 $ 16,812.61
12/31/04 $ 9,532.00 $ 24,853.55 $ 22,419.13
The Dow Jones Wilshire Real Estate Securities Index is a broad measure of the
performance of publicly traded real estate securities, such as Real Estate
Investment Trusts (REITs) and Real Estate Operating Companies (REOCs).
Investments cannot be made directly into the Index. The index used includes net
dividends reinvested.
The Standard & Poor's 500(R) Stock Index is an unmanaged index of 500 selected
common stocks, most of which are listed on the New York Stock Exchange. The
Index is adjusted for dividends, weighted towards stocks with large market
capitalization, and represents approximately two-thirds of the total market
value of all domestic common stocks.
The performance data for Davis Real Estate Portfolio contained in this report
represents past performance and assumes that all distributions were reinvested,
and should not be considered as an indication of future performance from an
investment in the Fund today. The investment return and principal value will
fluctuate so that shares may be worth more or less than their original cost when
redeemed.
15
DAVIS VARIABLE ACCOUNT FUND, INC.
NOTES TO PERFORMANCE
================================================================================
THE FOLLOWING DISCLOSURE PROVIDES IMPORTANT INFORMATION REGARDING THE FUNDS'
EXPENSE EXAMPLE, WHICH APPEARS IN EACH FUND'S PERFORMANCE SECTION IN THIS ANNUAL
REPORT. PLEASE REFER TO THIS INFORMATION WHEN REVIEWING THE EXPENSE EXAMPLE FOR
EACH FUND.
EXAMPLE
As a shareholder of the Fund, you incur ongoing costs only, including advisory
and administrative fees and other Fund expenses. The Expense Example is intended
to help you understand your ongoing costs (in dollars) of investing in each Fund
and to compare these costs with the ongoing costs of investing in other mutual
funds. The Expense Example is based on an investment of $1,000 invested at the
beginning of the period and held for the entire period indicated, which for each
Fund is from 07/01/04 to 12/31/04. Please note that the Expense Example is
general and does not reflect charges imposed by your insurance company's
separate account or account specific costs, which may increase your total costs
of investing in the funds. If these charges or account specific costs were
included in the Expense Example, the expenses would have been higher.
ACTUAL EXPENSES
The information represented in the row entitled "Actual" provides information
about actual account values and actual expenses. You may use the information in
this row, together with the amount you invested, to estimate the expenses that
you paid over the period. Simply divide your account value by $1,000 (for
example, an $8,600 account value divided by $1,000 = 8.6), then multiply the
result by the number under the heading "Expenses Paid During Period" to estimate
the expenses you paid for on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The information represented in the row entitled "Hypothetical (5% return before
expenses)" 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
(5% return before expenses)" is useful in comparing ongoing costs only, and will
not help you determine the relative total costs of owning different funds.
16
DAVIS VARIABLE ACCOUNT FUND, INC.
SCHEDULE OF INVESTMENTS
DAVIS VALUE PORTFOLIO
DECEMBER 31, 2004
VALUE
SHARES SECURITY (NOTE 1)
==============================================================================================================
COMMON STOCK - (97.98%)
AUTOMOTIVE - (0.92%)
69,100 AutoZone, Inc.*.............................................................. $ 6,309,521
-------------
BANKS AND SAVINGS & LOAN ASSOCIATIONS - (12.47%)
186,000 Fifth Third Bancorp.......................................................... 8,805,240
359,000 Golden West Financial Corp. ................................................. 22,049,780
1,426,607 HSBC Holdings PLC............................................................ 24,024,499
162,000 Lloyds TSB Group PLC, ADR.................................................... 5,959,980
33,800 State Street Corp. .......................................................... 1,660,256
368,600 Wells Fargo & Co. ........................................................... 22,908,490
-------------
85,408,245
-------------
BUILDING MATERIALS - (1.47%)
92,600 Martin Marietta Materials, Inc. ............................................. 4,968,916
93,800 Vulcan Materials Co. ........................................................ 5,122,418
-------------
10,091,334
-------------
BUSINESS SERVICES - (1.76%)
94,400 D&B Corp.*................................................................... 5,630,960
211,200 Iron Mountain Inc.*.......................................................... 6,439,488
-------------
12,070,448
-------------
CABLE TELEVISION - (3.50%)
729,200 Comcast Corp., Special Class A*.............................................. 23,983,388
-------------
CONSUMER PRODUCTS - (5.33%)
597,500 Altria Group, Inc. .......................................................... 36,507,250
-------------
DISCOUNT RETAILER - (3.40%)
480,700 Costco Wholesale Corp. ...................................................... 23,287,511
-------------
DIVERSIFIED COMMERCIAL SERVICES - (0.41%)
986,400 Rentokil Initial PLC......................................................... 2,792,169
-------------
DIVERSIFIED MANUFACTURING - (4.12%)
789,858 Tyco International Ltd. ..................................................... 28,229,525
-------------
E-COMMERCE/SERVICES - (0.56%)
138,200 IAC/InterActiveCorp*......................................................... 3,816,393
-------------
ENERGY - (8.96%)
185,371 ConocoPhillips............................................................... 16,095,764
376,000 Devon Energy Corp. .......................................................... 14,633,920
160,000 EOG Resources, Inc. ......................................................... 11,417,600
241,800 Occidental Petroleum Corp. .................................................. 14,111,448
119,500 Transocean Inc.*............................................................. 5,065,605
-------------
61,324,337
-------------
FINANCIAL SERVICES - (19.56%)
846,700 American Express Co. ........................................................ 47,728,479
445,833 Citigroup Inc. .............................................................. 21,480,234
220,000 H&R Block, Inc. ............................................................. 10,780,000
17
DAVIS VARIABLE ACCOUNT FUND, INC.
SCHEDULE OF INVESTMENTS
DAVIS VALUE PORTFOLIO - (CONTINUED)
DECEMBER 31, 2004
VALUE
SHARES SECURITY (NOTE 1)
==============================================================================================================
COMMON STOCK - (CONTINUED)
FINANCIAL SERVICES - (CONTINUED)
582,648 JPMorgan Chase & Co. ........................................................ $ 22,729,098
196,800 Loews Corp. ................................................................. 13,835,040
107,300 Moody's Corp. ............................................................... 9,319,005
188,500 Providian Financial Corp.*................................................... 3,104,595
73,100 Takefuji Corp. .............................................................. 4,931,208
-------------
133,907,659
-------------
FOOD/BEVERAGE & RESTAURANT - (3.34%)
176,000 Diageo PLC, ADR.............................................................. 10,186,880
209,140 Heineken Holding NV, Class A................................................. 6,299,261
115,400 Hershey Foods Corp. ......................................................... 6,409,316
-------------
22,895,457
-------------
HEALTH CARE - (4.01%)
152,200 Cardinal Health, Inc. ....................................................... 8,850,430
116,600 Eli Lilly and Co. ........................................................... 6,617,050
218,300 HCA Inc. .................................................................... 8,723,268
65,000 Novartis AG, Registered...................................................... 3,264,242
-------------
27,454,990
-------------
INDUSTRIAL - (2.94%)
378,500 Sealed Air Corp.*............................................................ 20,162,695
-------------
INSURANCE BROKERS - (1.78%)
211,200 Aon Corp. ................................................................... 5,039,232
217,500 Marsh & McLennan Cos, Inc. .................................................. 7,155,750
-------------
12,194,982
-------------
INVESTMENT FIRMS - (0.78%)
96,600 Morgan Stanley............................................................... 5,363,232
-------------
LIFE INSURANCE - (0.61%)
65,800 Principal Financial Group, Inc. ............................................. 2,693,852
44,700 Sun Life Financial Inc. ..................................................... 1,499,238
-------------
4,193,090
-------------
MANUFACTURING - (0.02%)
2,000 Hunter Douglas NV............................................................ 106,265
-------------
MEDIA - (1.67%)
124,700 Lagardere S.C.A. ............................................................ 8,963,621
44,600 WPP Group PLC, ADR........................................................... 2,440,735
-------------
11,404,356
-------------
MULTI-LINE INSURANCE - (4.72%)
492,237 American International Group, Inc. .......................................... 32,325,204
-------------
PROPERTY/CASUALTY INSURANCE - (7.81%)
365 Berkshire Hathaway Inc., Class A*............................................ 32,083,500
42 Berkshire Hathaway Inc., Class B*............................................ 123,312
18
DAVIS VARIABLE ACCOUNT FUND, INC.
SCHEDULE OF INVESTMENTS
DAVIS VALUE PORTFOLIO - (CONTINUED)
DECEMBER 31, 2004
VALUE
SHARES SECURITY (NOTE 1)
==============================================================================================================
COMMON STOCK - (CONTINUED)
PROPERTY/CASUALTY INSURANCE - (CONTINUED)
28,700 Chubb Corp. ................................................................. $ 2,207,030
2,100 Markel Corp.*................................................................ 764,400
215,700 Progressive Corp. (Ohio)..................................................... 18,299,988
-------------
53,478,230
-------------
PUBLISHING - (0.57%)
47,700 Gannett Co., Inc. ........................................................... 3,897,090
-------------
REAL ESTATE - (1.71%)
244,600 Centerpoint Properties Trust................................................. 11,713,894
-------------
REINSURANCE - (1.32%)
145,937 Transatlantic Holdings, Inc. ................................................ 9,023,285
-------------
TECHNOLOGY - (2.69%)
130,800 Lexmark International, Inc., Class A*........................................ 11,118,000
272,100 Microsoft Corp. ............................................................. 7,269,152
-------------
18,387,152
-------------
TELECOMMUNICATIONS - (0.79%)
131,000 Nokia Oyj, ADR............................................................... 2,052,770
150,400 SK Telecom Co., Ltd., ADR.................................................... 3,346,400
-------------
5,399,170
-------------
TRANSPORTATION - (0.76%)
60,600 United Parcel Service, Inc., Class B......................................... 5,178,876
-------------
Total Common Stock - (identified cost $539,097,865)...................... 670,905,748
-------------
19
DAVIS VARIABLE ACCOUNT FUND, INC.
SCHEDULE OF INVESTMENTS
DAVIS VALUE PORTFOLIO - (CONTINUED)
DECEMBER 31, 2004
VALUE
PRINCIPAL SECURITY (NOTE 1)
==============================================================================================================
SHORT TERM INVESTMENTS - (1.58%)
$ 3,494,000 Goldman, Sachs & Co. Joint Repurchase Agreement, 2.25%,
01/03/05, dated 12/31/04, repurchase value of $3,494,655
(collateralized by: U.S. Government obligations in a pooled cash account,
total market value $3,563,880)............................................ $ 3,494,000
3,882,000 Nomura Securities International, Inc. Joint Repurchase Agreement, 2.35%,
01/03/05, dated 12/31/04, repurchase value of $3,882,760
(collateralized by: U.S. Government obligations in a pooled cash account,
total market value $3,959,640)............................................ 3,882,000
3,407,000 UBS Financial Services Inc. Joint Repurchase Agreement, 2.27%,
01/03/05, dated 12/31/04, repurchase value of $3,407,644
(collateralized by: U.S. Government obligations in a pooled cash account,
total market value $3,475,140)............................................ 3,407,000
--------------
Total Short Term Investments - (identified cost $10,783,000)........ 10,783,000
--------------
Total Investments - (99.56%) - (identified cost $549,880,865) - (a).......... 681,688,748
Other Assets Less Liabilities - (0.44%)...................................... 3,034,189
--------------
Net Assets - (100%)...................................................... $ 684,722,937
==============
*Non-Income Producing Security.
(a) Aggregate cost for Federal Income Tax purposes is $551,064,358. At December
31, 2004 unrealized appreciation (depreciation) of securities for Federal Income
Tax purposes is as follows:
Unrealized appreciation...................................................... $ 138,941,340
Unrealized depreciation...................................................... (8,316,950)
--------------
Net unrealized appreciation.............................................. $ 130,624,390
==============
SEE NOTES TO FINANCIAL STATEMENTS
20
DAVIS VARIABLE ACCOUNT FUND, INC.
SCHEDULE OF INVESTMENTS
DAVIS FINANCIAL PORTFOLIO
DECEMBER 31, 2004
VALUE
SHARES SECURITY (NOTE 1)
==============================================================================================================
COMMON STOCK - (92.35%)
BANKS AND SAVINGS & LOAN ASSOCIATIONS - (17.56%)
68,200 Commerce Bancorp, Inc. ...................................................... $ 4,392,080
108,450 Fifth Third Bancorp.......................................................... 5,134,023
84,100 Golden West Financial Corp. ................................................. 5,165,422
72,400 Wells Fargo & Co. ........................................................... 4,499,660
-------------
19,191,185
-------------
BUSINESS SERVICES - (2.40%)
44,000 D&B Corp.*................................................................... 2,624,600
-------------
CONSUMER PRODUCTS - (2.28%)
40,800 Altria Group, Inc. .......................................................... 2,492,880
-------------
DIVERSIFIED MANUFACTURING - (4.27%)
130,500 Tyco International Ltd. ..................................................... 4,664,070
-------------
FINANCIAL SERVICES - (31.42%)
192,500 American Express Co. ........................................................ 10,851,225
108,800 Citigroup Inc. .............................................................. 5,241,984
48,100 H&R Block, Inc. ............................................................. 2,356,900
92,948 JPMorgan Chase & Co. ........................................................ 3,625,902
61,800 Loews Corp. ................................................................. 4,344,540
62,000 Moody's Corp. .............................................................. 5,384,700
153,200 Providian Financial Corp.*................................................... 2,523,204
-------------
34,328,455
-------------
INDUSTRIAL - (1.63%)
33,500 Sealed Air Corp.*............................................................ 1,784,545
-------------
INVESTMENT FIRMS - (2.09%)
7,600 Julius Baer Holding, Ltd. AG................................................. 2,279,667
-------------
LIFE INSURANCE - (0.55%)
22,600 China Life Insurance Co., Ltd., ADR*......................................... 597,544
-------------
MULTI-LINE INSURANCE - (4.73%)
78,787 American International Group, Inc. .......................................... 5,173,942
-------------
PROPERTY/CASUALTY INSURANCE - (16.76%)
7 Berkshire Hathaway Inc., Class A*............................................ 615,300
1,635 Berkshire Hathaway Inc., Class B*............................................ 4,800,360
108,290 Cincinnati Financial Corp. .................................................. 4,797,788
38,600 FPIC Insurance Group, Inc.*.................................................. 1,363,931
9,400 Markel Corp.*................................................................ 3,421,600
39,100 Progressive Corp. (Ohio)..................................................... 3,317,244
-------------
18,316,223
-------------
21
DAVIS VARIABLE ACCOUNT FUND, INC.
SCHEDULE OF INVESTMENTS
DAVIS FINANCIAL PORTFOLIO - (CONTINUED)
DECEMBER 31, 2004
VALUE
SHARES/PRINCIPAL SECURITY (NOTE 1)
==============================================================================================================
COMMON STOCK - (CONTINUED)
REINSURANCE - (8.66%)
25,500 Everest Re Group, Ltd. ...................................................... $ 2,283,780
116,037 Transatlantic Holdings, Inc. ................................................ 7,174,568
--------------
9,458,348
-------------
Total Common Stock - (identified cost $80,845,455)....................... 100,911,459
--------------
SHORT TERM INVESTMENTS - (7.53%)
$ 2,666,000 Goldman, Sachs & Co. Joint Repurchase Agreement, 2.25%,
01/03/05, dated 12/31/04, repurchase value of $2,666,500
(collateralized by: U.S. Government obligations in a pooled cash account,
total market value $2,719,320)............................................ 2,666,000
2,962,000 Nomura Securities International, Inc. Joint Repurchase Agreement, 2.35%,
01/03/05, dated 12/31/04, repurchase value of $2,962,580
(collateralized by: U.S. Government obligations in a pooled cash account,
total market value $3,021,240)............................................ 2,962,000
2,599,000 UBS Financial Services Inc. Joint Repurchase Agreement, 2.27%,
01/03/05, dated 12/31/04, repurchase value of $2,599,492
(collateralized by: U.S. Government obligations in a pooled cash account,
total market value $2,650,980)............................................ 2,599,000
--------------
Total Short Term Investments - (identified cost $8,227,000)......... 8,227,000
--------------
Total Investments - (99.88%) - (identified cost $89,072,455) - (a)........... 109,138,459
Other Assets Less Liabilities - (0.12%)...................................... 135,290
--------------
Net Assets - (100%)...................................................... $ 109,273,749
==============
*Non-Income Producing Security.
(a) Aggregate cost for Federal Income Tax purposes is $89,403,696. At December
31, 2004 unrealized appreciation (depreciation) of securities for Federal Income
Tax purposes is as follows:
Unrealized appreciation...................................................... $ 20,916,908
Unrealized depreciation...................................................... (1,182,145)
--------------
Net unrealized appreciation.............................................. $ 19,734,763
==============
SEE NOTES TO FINANCIAL STATEMENTS
22
DAVIS VARIABLE ACCOUNT FUND, INC.
SCHEDULE OF INVESTMENTS
DAVIS REAL ESTATE PORTFOLIO
DECEMBER 31, 2004
VALUE
SHARES SECURITY (NOTE 1)
==============================================================================================================
COMMON STOCK - (89.65%)
APARTMENTS (REITS) - (7.73%)
13,600 Camden Property Trust........................................................ $ 693,600
22,900 Essex Property Trust, Inc. .................................................. 1,919,020
76,400 United Dominion Realty Trust, Inc. .......................................... 1,894,720
-------------
4,507,340
-------------
DIVERSIFIED - (3.76%)
33,700 Forest City Enterprises, Inc., Class A....................................... 1,939,435
3,900 St. Joe Co. ................................................................. 250,380
-------------
2,189,815
-------------
DIVERSIFIED (REITS) - (6.67%)
51,800 Duke Realty Corp. ........................................................... 1,768,452
27,831 Vornado Realty Trust......................................................... 2,118,774
-------------
3,887,226
-------------
FINANCIAL SERVICES (REITS) - (3.45%)
38,100 Gramercy Capital Corp. ...................................................... 784,860
27,100 iStar Financial Inc. ........................................................ 1,226,546
-------------
2,011,406
-------------
FORESTRY (REITS) - (2.61%)
39,600 Plum Creek Timber Co., Inc. ................................................. 1,522,224
-------------
HOTELS & LODGING - (1.47%)
14,700 Starwood Hotels & Resorts Worldwide, Inc. ................................... 858,480
-------------
INDUSTRIAL - (1.54%)
133,500 Brixton PLC.................................................................. 897,023
-------------
INDUSTRIAL (REITS) - (14.12%)
64,466 Catellus Development Corp. .................................................. 1,972,660
80,500 Centerpoint Properties Trust................................................. 3,855,145
55,400 ProLogis..................................................................... 2,400,482
-------------
8,228,287
-------------
MALLS (REITS) - (8.03%)
52,942 General Growth Properties, Inc. ............................................. 1,914,383
24,600 Mills Corp. ................................................................. 1,568,496
18,500 Simon Property Group, Inc. .................................................. 1,196,395
-------------
4,679,274
-------------
OFFICE SPACE (REITS) - (21.63%)
28,700 Alexandria Real Estate Equities, Inc. ....................................... 2,135,854
41,100 Arden Realty, Inc. .......................................................... 1,550,292
8,900 Boston Properties, Inc. ..................................................... 575,563
47,500 Brandywine Realty Trust...................................................... 1,396,025
45,500 CarrAmerica Realty Corp. .................................................... 1,501,500
60,900 Corporate Office Properties Trust............................................ 1,787,415
13,000 Kilroy Realty Corp. ......................................................... 555,750
23
DAVIS VARIABLE ACCOUNT FUND, INC.
SCHEDULE OF INVESTMENTS
DAVIS REAL ESTATE PORTFOLIO - (CONTINUED)
DECEMBER 31, 2004
VALUE
SHARES SECURITY (NOTE 1)
==============================================================================================================
COMMON STOCK - (CONTINUED)
OFFICE SPACE (REITS) - (CONTINUED)
13,000 Parkway Properties, Inc. .................................................... $ 659,750
40,370 SL Green Realty Corp. ....................................................... 2,444,403
-------------
12,606,552
-------------
RESIDENTIAL/COMMERCIAL BUILDING - (2.30%)
45,500 WCI Communities, Inc.*....................................................... 1,337,700
-------------
SHOPPING CENTERS - (1.47%)
46,000 Liberty International PLC.................................................... 855,292
-------------
SHOPPING CENTERS (REITS) - (11.90%)
46,625 Developers Diversified Realty Corp. ......................................... 2,068,751
23,800 Kimco Realty Corp. .......................................................... 1,380,162
26,700 Pan Pacific Retail Properties, Inc. ......................................... 1,674,090
32,700 Regency Centers Corp. ....................................................... 1,811,580
-------------
6,934,583
-------------
SPECIALTY RETAIL (REITS) - (2.97%)
48,800 Capital Automotive REIT...................................................... 1,733,620
-------------
Total Common Stock - (identified cost $36,540,854).................. 52,248,822
-------------
PREFERRED STOCK - (0.23%)
APARTMENTS (REITS) - (0.23%)
2,000 Equity Residential, 7.00%, Series E, Cum. Conv. Pfd. ........................ 81,000
1,600 Equity Residential, 8.60%, Series D, Cum. Pfd. .............................. 43,864
400 Equity Residential, 9.125%, Series C, Cum. Pfd. ............................. 10,724
-------------
Total Preferred Stock - (identified cost $113,921)......................... 135,588
-------------
24
DAVIS VARIABLE ACCOUNT FUND, INC.
SCHEDULE OF INVESTMENTS
DAVIS REAL ESTATE PORTFOLIO - (CONTINUED)
DECEMBER 31, 2004
VALUE
PRINCIPAL SECURITY (NOTE 1)
==============================================================================================================
SHORT TERM INVESTMENTS - (9.67%)
$ 1,825,000 Goldman, Sachs & Co. Joint Repurchase Agreement, 2.25%,
01/03/05, dated 12/31/04, repurchase value of $1,825,342
(collateralized by: U.S. Government obligations in a pooled cash account,
total market value $1,861,500)........................................... $ 1,825,000
2,028,000 Nomura Securities International, Inc. Joint Repurchase Agreement, 2.35%,
01/03/05, dated 12/31/04, repurchase value of $2,028,397
(collateralized by: U.S. Government obligations in a pooled cash account,
total market value $2,068,560)............................................ 2,028,000
1,780,000 UBS Financial Services Inc. Joint Repurchase Agreement, 2.27%,
01/03/05, dated 12/31/04, repurchase value of $1,780,337
(collateralized by: U.S. Government obligations in a pooled cash account,
total market value $1,815,600)............................................ 1,780,000
-------------
Total Short Term Investments - (identified cost $5,633,000)......... 5,633,000
-------------
Total Investments - (99.55%) - (identified cost $42,287,775) - (a)........... 58,017,410
Other Assets Less Liabilities - (0.45%)...................................... 261,208
-------------
Net Assets - (100%)...................................................... $ 58,278,618
=============
*Non-Income Producing Security.
(a) Aggregate cost for Federal Income Tax purposes is $42,291,610. At December
31, 2004 unrealized appreciation (depreciation) of securities for Federal Income
Tax purposes is as follows:
Unrealized appreciation...................................................... $ 15,726,120
Unrealized depreciation...................................................... (320)
-------------
Net unrealized appreciation.............................................. $ 15,725,800
=============
SEE NOTES TO FINANCIAL STATEMENTS
25
DAVIS VARIABLE ACCOUNT FUND, INC.
STATEMENTS OF ASSETS AND LIABILITIES
At December 31, 2004
================================================================================
DAVIS
DAVIS DAVIS REAL
VALUE FINANCIAL ESTATE
PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- ---------
ASSETS:
Investments in securities, at value
* (see accompanying Schedules
of Investments).............................. $ 681,688,748 $ 109,138,459 $ 58,017,410
Cash........................................... 45,190 2,600 126,563
Receivables:
Dividends and interest....................... 1,016,162 134,641 258,713
Capital stock sold........................... 2,480,423 81,846 21,994
Investment securities sold................... - - 29,005
--------------- -------------- --------------
Total assets......... 685,230,523 109,357,546 58,453,685
--------------- -------------- --------------
LIABILITIES:
Payables:
Capital stock reacquired..................... 33,115 302 124,047
Accrued expenses............................... 30,852 13,423 13,712
Accrued management fees........................ 443,619 70,072 37,308
--------------- -------------- --------------
Total liabilities.... 507,586 83,797 175,067
--------------- -------------- --------------
NET ASSETS ....................................... $ 684,722,937 $ 109,273,749 $ 58,278,618
=============== ============== ==============
SHARES OUTSTANDING (NOTE 4)....................... 58,104,130 8,522,573 3,468,251
=============== ============== ==============
NET ASSET VALUE, offering and
redemption price per share (Net
Assets [divided by] Shares Outstanding)...... $ 11.78 $ 12.82 $ 16.80
=========== ========== ==========
NET ASSETS CONSIST OF:
Par value of shares of capital stock........... $ 58,104 $ 8,523 $ 3,468
Additional paid-in capital..................... 589,926,942 91,583,027 41,698,075
Undistributed net investment loss.............. - (2,146) -
Accumulated net realized gains (losses) from
investments and foreign currency transactions (37,070,842) (2,383,246) 847,440
Net unrealized appreciation on investments and
foreign currency transactions................ 131,808,733 20,067,591 15,729,635
--------------- -------------- --------------
$ 684,722,937 $ 109,273,749 $ 58,278,618
=============== ============== ==============
* Including cost of $549,880,865, $89,072,455, and $42,287,775 for Davis Value
Portfolio, Davis Financial Portfolio, and Davis Real Estate Portfolio,
respectively.
SEE NOTES TO FINANCIAL STATEMENTS
26
DAVIS VARIABLE ACCOUNT FUND, INC.
STATEMENTS OF OPERATIONS
For the year ended December 31, 2004
================================================================================
DAVIS
DAVIS DAVIS REAL
VALUE FINANCIAL ESTATE
PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- ---------
INVESTMENT INCOME:
Income:
Dividends*..................................... $ 9,933,091 $ 1,032,742 $ 1,365,447
Interest....................................... 332,791 94,876 45,013
--------------- --------------- --------------
Total income............................... 10,265,882 1,127,618 1,410,460
--------------- --------------- --------------
Expenses:
Management fees (Note 2)....................... 4,578,270 676,192 331,425
Custodian fees................................. 179,906 37,538 24,583
Transfer agent fees............................ 14,149 9,037 8,470
Audit fees..................................... 12,000 8,400 8,400
Accounting fees (Note 2)....................... 6,000 6,000 6,000
Legal fees..................................... 10,635 1,596 948
Reports to shareholders........................ 41,828 11,406 898
Directors' fees and expenses................... 89,462 13,566 6,752
Registration and filing fees................... 15,636 2,491 1,475
Miscellaneous.................................. 11,866 2,486 5,252
--------------- --------------- ---------------
Total expenses............................. 4,959,752 768,712 394,203
Expenses paid indirectly (Note 5).......... (56) (29) (66)
--------------- --------------- ---------------
Net expenses............................... 4,959,696 768,683 394,137
--------------- --------------- ---------------
Net investment income.................... 5,306,186 358,935 1,016,323
--------------- --------------- ---------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from:
Investment transactions...................... (3,085,739) (1,006,272) 3,278,373
Foreign currency transactions................ (27,254) (3,128) (868)
Net increase in unrealized appreciation of
investments and foreign currency transactions 69,125,469 9,637,834 9,199,069
--------------- --------------- ---------------
Net realized and unrealized gain on
investments and foreign currency............. 66,012,476 8,628,434 12,476,574
--------------- --------------- ---------------
Net increase in net assets resulting
from operations.......................... $ 71,318,662 $ 8,987,369 $ 13,492,897
=============== =============== ===============
*Net of foreign taxes withheld as follows......... $ 246,146 $ 9,853 $ 1,159
SEE NOTES TO FINANCIAL STATEMENTS
27
DAVIS VARIABLE ACCOUNT FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
For the year ended December 31, 2004
================================================================================
DAVIS
DAVIS DAVIS REAL
VALUE FINANCIAL ESTATE
PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- ---------
OPERATIONS:
Net investment income........................ $ 5,306,186 $ 358,935 $ 1,016,323
-------------- ------------- --------------
Net realized gain (loss) from investment
and foreign currency transactions.......... (3,112,993) (1,009,400) 3,277,505
Net increase in unrealized appreciation of
investments and foreign currency
transactions............................... 69,125,469 9,637,834 9,199,069
-------------- ------------- --------------
Net increase in net assets resulting
from operations............................ 71,318,662 8,987,369 13,492,897
DIVIDENDS AND DISTRIBUTIONS
TO SHAREHOLDERS FROM:
Net investment income........................ (5,273,618) (364,973) (1,497,449)
Return of capital............................ (115,109) - -
Realized gains from investment transactions.. - - (1,939,529)
CAPITAL SHARE TRANSACTIONS
(NOTE 4)..................................... 133,790,608 29,472,122 12,559,434
-------------- ------------- --------------
Total increase in net assets..................... 199,720,543 38,094,518 22,615,353
NET ASSETS:
Beginning of year............................ 485,002,394 71,179,231 35,663,265
-------------- ------------- --------------
End of year*................................. $ 684,722,937 $ 109,273,749 $ 58,278,618
============== ============= ==============
*Including undistributed
net investment loss of................... - $ (2,146) -
SEE NOTES TO FINANCIAL STATEMENTS
28
DAVIS VARIABLE ACCOUNT FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
For the year ended December 31, 2003
================================================================================
DAVIS
DAVIS DAVIS REAL
VALUE FINANCIAL ESTATE
PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- ---------
OPERATIONS:
Net investment income....................... $ 3,215,304 $ 222,162 $ 941,827
Net realized gain (loss) from investment
and foreign currency transactions......... (7,034,431) (380,603) 966,089
Net change in unrealized appreciation
(depreciation) of investments and foreign
currency transactions..................... 104,044,100 14,533,880 6,265,053
-------------- ------------- -------------
Net increase in net assets resulting
from operations........................... 100,224,973 14,375,439 8,172,969
DIVIDENDS AND DISTRIBUTIONS
TO SHAREHOLDERS FROM:
Net investment income....................... (3,188,878) (215,570) (1,245,232)
Realized gains from investment transactions. - - (596,951)
CAPITAL SHARE TRANSACTIONS
(NOTE 4).................................... 104,927,119 25,310,603 10,526,271
-------------- ------------- -------------
Total increase in net assets.................... 201,963,214 39,470,472 16,857,057
NET ASSETS:
Beginning of year........................... 283,039,180 31,708,759 18,806,208
-------------- ------------- -------------
End of year*................................ $ 485,002,394 $ 71,179,231 $ 35,663,265
============== ============= =============
*Including undistributed net investment
income (loss) of........................ $ (5,314) $ 6,114 -
SEE NOTES TO FINANCIAL STATEMENTS
29
DAVIS VARIABLE ACCOUNT FUND, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
================================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Davis Variable Account Fund, Inc. consists of three series of Funds,
Davis Value Portfolio, Davis Financial Portfolio, and Davis Real Estate
Portfolio (collectively "the Funds"). Davis Value Portfolio and Davis Financial
Portfolio are registered under the Investment Company Act of 1940, as amended,
as diversified, open-end management investment companies. Davis Real Estate
Portfolio is registered under the Investment Company Act of 1940, as amended, as
a non-diversified, open-end management investment company. Shares of the Funds
may only be purchased by insurance companies for the purpose of funding variable
annuity or variable life insurance contracts. The Funds account separately for
the assets, liabilities and operations of each series. The following is a
summary of significant accounting policies followed by the Funds in the
preparation of financial statements.
A. VALUATION OF SECURITIES - Portfolio securities listed on national securities
exchanges are valued at the last reported sales price on the day of valuation.
Securities traded in the over the counter market and listed securities for which
no sale was reported on that date are stated at the average of closing bid and
asked prices. Securities for which market quotations are not readily available,
or whose values have been affected by a significant event occurring after the
close of their primary markets, are valued at fair value as determined in good
faith by the Board of Directors. Short-term obligations are valued at amortized
cost, which approximates fair value. These valuation procedures are reviewed and
subject to approval by the Board of Directors.
B. MASTER REPURCHASE AGREEMENTS - The Funds, along with other affiliated funds,
may transfer uninvested cash balances into one or more master repurchase
agreement accounts. These balances are invested in one or more repurchase
agreements, secured by U.S. government securities. Securities pledged as
collateral for repurchase agreements are held by a custodian bank until the
agreements mature. Each agreement requires that the market value of the
collateral be sufficient to cover payments of interest and principal; however,
in the event of default by the other party to the agreement, retention of the
collateral may be subject to legal proceedings.
C. CURRENCY TRANSLATION - The market values of all assets and liabilities
denominated in foreign currencies are recorded in the financial statements after
translation to the U.S. dollar based upon the mean between the bid and offered
quotations of the currencies against U.S. dollars on the date of valuation. The
cost basis of such assets and liabilities is determined based upon historical
exchange rates. Income and expenses are translated at average exchange rates in
effect as accrued or incurred.
D. FOREIGN CURRENCY - The Funds may enter into forward purchases or sales of
foreign currencies to hedge certain foreign currency denominated assets and
liabilities against declines in market value relative to the U.S. dollar.
Forward currency contracts are marked-to-market daily and the change in market
value is recorded by the Funds as an unrealized gain or loss. When the forward
currency contract is closed, the Funds record a realized gain or loss equal to
the difference between the value of the forward currency contract at the time it
was opened and value at the time it was closed. Investments in forward currency
contracts may expose the Funds to risks resulting from unanticipated movements
in foreign currency exchange rates or failure of the counter-party to the
agreement to perform in accordance with the terms of the contract.
30
DAVIS VARIABLE ACCOUNT FUND, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
December 31, 2004
================================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Reported net realized foreign exchange gains or losses arise from the sales
and maturities of investments, sales of foreign currencies, currency gains or
losses realized between the trade and settlement dates on securities
transactions, the difference between the amounts of dividends, interest and
foreign withholding taxes recorded on the Funds' books, and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in the value of assets and
liabilities other than investments in securities at fiscal year end, resulting
from changes in the exchange rate. The Funds include foreign currency gains and
losses realized on the sale of investments together with market gains and losses
on such investments in the statement of operations.
E. FEDERAL INCOME TAXES - It is each Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income, including
any net realized gains on investments not offset by loss carryovers, to
shareholders. Therefore, no provision for federal income or excise tax is
required. At December 31, 2004, Davis Value Portfolio and Davis Financial
Portfolio had approximately $1,625,000 and $148,000, respectively, of post
October 2004 losses available to offset future capital gains if any, which
expire in 2013. Additionally, Davis Financial Portfolio had $2,000 of post
October 2004 foreign currency losses which were deferred. At December 31, 2004,
the Funds had available for federal income tax purposes unused capital loss
carryforwards as follows:
DAVIS DAVIS
VALUE FINANCIAL
PORTFOLIO PORTFOLIO
--------- ---------
EXPIRING
12/31/2009 $ 6,568,000 $ 650,000
12/31/2010 19,386,000 -
12/31/2011 4,776,000 328,000
12/31/2012 3,532,000 926,000
------------- ------------
TOTAL $ 34,262,000 $ 1,904,000
F. USE OF ESTIMATES IN FINANCIAL STATEMENTS - In preparing financial statements
in conformity with accounting principles generally accepted in the United States
of America, management makes estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, as well as the reported
amounts of income and expenses during the reporting period. Actual results may
differ from these estimates.
G. 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.
31
DAVIS VARIABLE ACCOUNT FUND, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
December 31, 2004
================================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
H. 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) of
investments may differ for financial statement and tax purposes primarily
because of the recognition of certain foreign currency gains (losses) as
ordinary income (loss) for tax purposes and the tax deferral of losses on "wash
sale" 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 Funds. The Funds adjust the classification of
distributions to shareholders to reflect the differences between financial
statement amounts and distributions determined in accordance with income tax
regulations. Accordingly, during the year ended December 31, 2004, for Davis
Value Portfolio, amounts have been reclassified to reflect a decrease in
undistributed net investment loss of $87,855, a decrease in accumulated net
realized loss of $27,254, and a decrease to paid in capital of $115,109; for
Davis Financial Portfolio, amounts have been reclassified to reflect a decrease
in undistributed net investment income of $2,222, a decrease in accumulated net
realized loss of $3,128, and a decrease to paid in capital of $906; for Davis
Real Estate Portfolio, amounts have been reclassified to reflect a decrease in
undistributed net investment loss of $481,126 and a corresponding decrease in
accumulated net realized gain.
The tax character of distributions paid during the years ended December 31, 2004
and 2003, was as follows:
Ordinary Long-Term Return of
Income Capital Gain Capital Total
------ ------------ ------- -----
Davis Value Portfolio
2004..................... $ 5,273,618 $ - $ 115,109 $ 5,388,727
2003..................... 3,188,878 - - 3,188,878
Davis Financial Portfolio
2004..................... 364,973 - - 364,973
2003..................... 215,570 - - 215,570
Davis Real Estate Portfolio
2004..................... 1,178,988 2,257,990 - 3,436,978
2003..................... 1,027,407 814,776 - 1,842,183
As of December 31, 2004 the components of distributable earnings (accumulated
losses) on a tax basis were as follows:
DAVIS
DAVIS DAVIS REAL
VALUE FINANCIAL ESTATE
PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- ---------
Undistributed net investment income............ $ - $ - $ -
Accumulated net realized loss from investments
and foreign currency transactions............ (35,887,350) (2,054,151) -
Undistributed long term capital gain........... - - 851,273
Net unrealized appreciation on investments..... 130,625,241 19,736,350 15,725,802
------------- ------------- -------------
Total...................................... $ 94,737,891 $ 17,682,199 $ 16,577,075
============= ============= =============
32
DAVIS VARIABLE ACCOUNT FUND, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
December 31, 2004
================================================================================
NOTE 2 - INVESTMENT ADVISORY FEES
Advisory fees are paid monthly to Davis Advisors, the Funds' investment
adviser (the "Adviser"). The fee for each of the Davis Value Portfolio, Davis
Financial Portfolio, and Davis Real Estate Portfolio is 0.75% of the respective
Fund's average annual net assets.
State Street Bank and Trust Company ("State Street Bank") is the Funds'
primary transfer agent. The Adviser is also paid for certain transfer agent
services. The fee paid to the Adviser for the year ended December 31, 2004 was
$57 for Davis Value Portfolio, $35 for Davis Financial Portfolio, and $32 for
Davis Real Estate Portfolio. State Street Bank is the Funds' primary accounting
provider. Fees for such services are included in the custodian fee as State
Street Bank also serves as the Funds' custodian. The Adviser is also paid for
certain accounting services. The fee for the year ended December 31, 2004 for
Davis Value Portfolio, Davis Financial Portfolio, and Davis Real Estate
Portfolio amounted to $6,000 for each portfolio. Certain directors and officers
of the Funds are also directors and officers of the general partner of the
Adviser.
Davis Selected Advisers - NY, Inc. ("DSA-NY"), a wholly-owned subsidiary of
the Adviser, acts as sub-adviser to the Funds. The Funds pay no fees directly to
DSA-NY.
NOTE 3 - PURCHASES AND SALES OF SECURITIES
Purchases and sales of investment securities (excluding short-term
securities) during the year ended December 31, 2004 were as follows:
DAVIS DAVIS DAVIS
VALUE FINANCIAL REAL ESTATE
PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- ---------
Cost of purchases......... $ 183,794,645 $ 30,856,392 $ 20,115,212
Proceeds of sales......... $ 21,591,031 $ 4,840,238 $ 13,136,560
NOTE 4 - CAPITAL STOCK
At December 31, 2004, there were 5 billion shares of capital stock ($0.001
par value per share) authorized. Transactions in capital stock were as follows:
YEAR ENDED
DECEMBER 31, 2004
----------------------------------------
DAVIS DAVIS DAVIS
VALUE FINANCIAL REAL ESTATE
PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- ---------
Shares sold........................... 16,736,008 3,238,473 1,356,048
Shares issued in reinvestment
of distributions.................... 456,672 28,469 215,308
------------ ----------- ------------
17,192,680 3,266,942 1,571,356
Shares redeemed....................... (4,984,466) (848,124) (751,119)
------------ ----------- ------------
Net increase........................ 12,208,214 2,418,818 820,237
============ =========== ============
Proceeds from shares sold............. $182,733,878 $39,191,938 $ 19,825,910
Proceeds from shares issued in
reinvestment of distributions....... 5,388,727 364,973 3,436,978
------------ ----------- ------------
188,122,605 39,556,911 23,262,888
Cost of shares redeemed............... (54,331,997) (10,084,789) (10,703,454)
------------ ----------- ------------
Net increase........................ $133,790,608 $29,472,122 $ 12,559,434
============ =========== ============
33
DAVIS VARIABLE ACCOUNT FUND, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
December 31, 2004
================================================================================
NOTE 4 - CAPITAL STOCK - (CONTINUED)
YEAR ENDED
DECEMBER 31, 2003
-----------------------------------------
DAVIS DAVIS DAVIS
VALUE FINANCIAL REAL ESTATE
PORTFOLIO PORTFOLIO PORTFOLIO
------------ ----------- -----------
Shares sold.......................... 13,746,849 2,921,413 1,477,124
Shares issued in reinvestment
of distributions................... 301,691 18,520 144,561
------------ ----------- -----------
14,048,540 2,939,933 1,621,685
Shares redeemed...................... (2,661,937) (420,309) (766,305)
------------ ----------- -----------
Net increase....................... 11,386,603 2,519,624 855,380
============ =========== ===========
Proceeds from shares sold............ $124,904,118 $29,024,533 $17,872,635
Proceeds from shares issued in
reinvestment of distributions...... 3,188,877 215,570 1,842,181
------------ ----------- -----------
128,092,995 29,240,103 19,714,816
Cost of shares redeemed.............. (23,165,876) (3,929,500) (9,188,545)
------------ ----------- -----------
Net increase....................... $104,927,119 $25,310,603 $10,526,271
============ =========== ===========
NOTE 5 - EXPENSES PAID INDIRECTLY
Under an agreement with the custodian bank, each Fund's custodian fee is
reduced for earnings on cash balances maintained at the custodian by the Funds.
Such reductions amounted to $56, $29, and $66 for Davis Value Portfolio, Davis
Financial Portfolio, and Davis Real Estate Portfolio, respectively, during the
year ended December 31, 2004.
34
DAVIS VARIABLE ACCOUNT FUND, INC.
FINANCIAL HIGHLIGHTS
DAVIS VALUE PORTFOLIO
================================================================================
The following financial information represents data for each share of capital
stock outstanding throughout each period:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Net Asset Value, Beginning of Period...... $ 10.57 $ 8.20 $ 9.87 $ 11.06 $ 10.25
---------- ---------- ---------- ---------- ----------
Income (Loss) From Investment Operations
Net Investment Income.................... 0.09 0.07 0.06 0.04 0.03
Net Realized and Unrealized
Gains (Losses)........................ 1.21 2.37 (1.66) (1.19) 0.92
---------- ---------- ---------- ---------- ----------
Total From Investment Operations...... 1.30 2.44 (1.60) (1.15) 0.95
Dividends and Distributions
Dividends from Net Investment Income..... (0.09) (0.07) (0.06) (0.04) (0.03)
Return of Capital........................ -(3) - (0.01) -(3) -(3)
Distributions from Realized Gains........ - - - - (0.11)
---------- ---------- ---------- ---------- ----------
Total Dividends and Distributions..... (0.09) (0.07) (0.07) (0.04) (0.14)
---------- ---------- ---------- ---------- ----------
Net Asset Value, End of Period............ $ 11.78 $ 10.57 $ 8.20 $ 9.87 $ 11.06
========== ========== ========== ========== ==========
Total Return(1)........................... 12.33% 29.76% (16.26)% (10.39)% 9.30%
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted)... $ 684,723 $ 485,002 $ 283,039 $ 278,958 $ 120,209
Ratio of Expenses to Average Net Assets... 0.81% 0.82% 0.83% 0.87% 1.00%(4)
Ratio of Net Investment Income to
Average Net Assets...................... 0.87% 0.90% 0.70% 0.55% 0.73%
Portfolio Turnover Rate(2)................ 4% 7% 24% 18% 10%
(1) Assumes hypothetical initial investment on the business day before the
first day of the fiscal period, with all dividends and distributions
reinvested in additional shares on the reinvestment date, and redemption at
the net asset value calculated on the last business day of the fiscal
period. Total returns do not reflect charges attributable to your insurance
company's separate account. Inclusion of these charges would reduce the
total returns shown.
(2) The lesser of purchases or sales of portfolio securities for a period,
divided by the monthly average of the market value of portfolio securities
owned during the period. Securities with a maturity or expiration date at
the time of acquisition of one year or less are excluded from the
calculation.
(3) Less than $0.005 per share.
(4) Had the Adviser not absorbed certain expenses the ratio of expenses to
average net assets would have been 1.01% for 2000.
SEE NOTES TO FINANCIAL STATEMENTS
35
DAVIS VARIABLE ACCOUNT FUND, INC.
FINANCIAL HIGHLIGHTS
DAVIS FINANCIAL PORTFOLIO
================================================================================
The following financial information represents data for each share of capital
stock outstanding throughout each period:
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Net Asset Value, Beginning of Period...... $ 11.66 $ 8.85 $ 10.67 $ 11.91 $ 9.26
---------- ---------- ---------- ---------- ----------
Income (Loss) From Investment Operations
Net Investment Income................... 0.04 0.04 0.02 - 0.01
Net Realized and Unrealized
Gains (Losses)........................ 1.16 2.81 (1.82) (1.24) 2.84
---------- ---------- ---------- ---------- ----------
Total From Investment Operations...... 1.20 2.85 (1.80) (1.24) 2.85
Dividends and Distributions
Dividends from Net Investment Income..... (0.04) (0.04) (0.02) -(3) (0.01)
Return of Capital........................ - - - -(3) -(3)
Distributions from Realized Gains........ - - - - (0.19)
---------- ---------- ---------- ---------- ----------
Total Dividends and Distributions..... (0.04) (0.04) (0.02) - (0.20)
---------- ---------- ---------- ---------- ----------
Net Asset Value, End of Period............ $ 12.82 $ 11.66 $ 8.85 $ 10.67 $ 11.91
========== ========== ========== ========== ==========
Total Return(1)........................... 10.32% 32.15% (16.84)% (10.37)% 30.97%
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted) $ 109,274 $ 71,179 $ 31,709 $ 24,587 $ 14,770
Ratio of Expenses to Average Net Assets 0.85% 0.90% 0.99% 1.00%(4) 1.00%(4)
Ratio of Net Investment Income to
Average Net Assets.................... 0.40% 0.48% 0.32% 0.04% 0.18%
Portfolio Turnover Rate(2).............. 6% 10% 23% 24% 26%
(1) Assumes hypothetical initial investment on the business day before the
first day of the fiscal period, with all dividends and distributions
reinvested in additional shares on the reinvestment date, and redemption at
the net asset value calculated on the last business day of the fiscal
period. Total returns do not reflect charges attributable to your insurance
company's separate account. Inclusion of these charges would reduce the
total returns shown.
(2) The lesser of purchases or sales of portfolio securities for a period,
divided by the monthly average of the market value of portfolio securities
owned during the period. Securities with a maturity or expiration date at
the time of acquisition of one year or less are excluded from the
calculation.
(3) Less than $0.005 per share.
(4) Had the Adviser not absorbed certain expenses the ratio of expenses to
average net assets would have been 1.04% and 1.55% for 2001 and 2000,
respectively.
SEE NOTES TO FINANCIAL STATEMENTS
36
DAVIS VARIABLE ACCOUNT FUND, INC.
FINANCIAL HIGHLIGHTS
DAVIS REAL ESTATE PORTFOLIO
================================================================================
The following financial information represents data for each share of capital
stock outstanding throughout each period:
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Net Asset Value, Beginning of Period...... $ 13.47 $ 10.49 $ 10.35 $ 10.38 $ 8.71
---------- ---------- ---------- ---------- ----------
Income From Investment Operations
Net Investment Income................... 0.34 0.44 0.36 0.36 0.33
Net Realized and Unrealized Gains....... 4.07 3.34 0.25 0.19 1.67
---------- ---------- ---------- ---------- ----------
Total From Investment Operations..... 4.41 3.78 0.61 0.55 2.00
..
Dividends and Distributions
Dividends from Net Investment Income.... (0.48) (0.55) (0.36) (0.36) (0.33)
Return of Capital....................... - - (0.11) (0.07) -
Distributions from Realized Gains....... (0.60) (0.25) - (0.11) -
Distributions in Excess of Net
Investment Income..................... - - - (0.04) -
---------- ---------- ---------- ---------- ----------
Total Dividends and Distributions..... (1.08) (0.80) (0.47) (0.58) (0.33)
---------- ---------- ---------- ---------- ----------
Net Asset Value, End of Period............ $ 16.80 $ 13.47 $ 10.49 $ 10.35 $ 10.38
========== ========== ========== ========== ==========
Total Return(1)........................... 33.35% 36.79% 5.89% 5.50% 23.33%
Ratios/Supplemental Data
Net Assets, End of Period
(000 omitted)......................... $ 58,279 $ 35,663 $ 18,806 $ 10,029 $ 4,853
Ratio of Expenses to Average
Net Assets............................ 0.89% 0.98% 1.00%(3) 1.00%(3) 1.07%(3,4)
Ratio of Net Investment Income to
Average Net Assets.................... 2.30% 3.74% 3.54% 3.70% 4.31%
Portfolio Turnover Rate(2).............. 32% 22% 52% 45% 16%
(1) Assumes hypothetical initial investment on the business day before the
first day of the fiscal period, with all dividends and distributions
reinvested in additional shares on the reinvestment date, and redemption at
the net asset value calculated on the last business day of the fiscal
period. Total returns do not reflect charges attributable to your insurance
company's separate account. Inclusion of these charges would reduce the
total returns shown.
(2) The lesser of purchases or sales of portfolio securities for a period,
divided by the monthly average of the market value of portfolio securities
owned during the period. Securities with a maturity or expiration date at
the time of acquisition of one year or less are excluded from the
calculation.
(3) Had the Adviser not absorbed certain expenses the ratio of expenses to
average net assets would have been 1.10%, 1.39%, and 3.15%, for 2002, 2001,
and 2000, respectively.
(4) Ratio of expenses to average net assets after the reduction of expenses
paid indirectly was 1.00% for 2000.
SEE NOTES TO FINANCIAL STATEMENTS
37
DAVIS VARIABLE ACCOUNT FUND, INC.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
================================================================================
To the Shareholders and Board of Directors
of Davis Variable Account Fund, Inc.:
We have audited the accompanying statements of assets and liabilities of
Davis Value Portfolio, Davis Financial Portfolio, and Davis Real Estate
Portfolio (comprising the Davis Variable Account Fund, Inc.), including the
schedules of investments as of December 31, 2004 and the related statements of
operations for the year then ended, the statements of changes in net assets for
each of the years in the two-year period then ended, and the financial
highlights for each of the years in the five-year period then ended. These
financial statements and financial highlights are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 2004, by correspondence with
the custodian. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Davis Value Portfolio, Davis Financial Portfolio, and Davis Real Estate
Portfolio as of December 31, 2004, and the results of their operations for the
year then ended, the changes in their net assets for each of the years in the
two-year period then ended, and the financial highlights for each of the years
in the five-year period then ended, in conformity with U.S. generally accepted
accounting principles.
/s/ KPMG LLP
Denver, Colorado
February 4, 2005
38
DAVIS VARIABLE ACCOUNT FUND, INC.
For the Year Ended December 31, 2004 (Unaudited)
================================================================================
FEDERAL INCOME TAX INFORMATION
The information and distributions reported herein may differ from the
information reported as distributions taxable to certain shareholders for the
calendar year ended 2004 with their 2004 Form 1099-DIV.
DAVIS VALUE PORTFOLIO
Income dividends paid by the Fund during the calendar year ended 2004
should be multiplied by 100% to arrive at the net amount eligible for the
corporate dividend-received deduction.
For the calendar year ended 2004 certain dividends paid by the Fund
constitute qualified dividend income for Federal Income Tax purposes. The Fund
designates $5,273,618 as qualified dividend income.
DAVIS FINANCIAL PORTFOLIO
Income dividends paid by the Fund during the calendar year ended 2004
should be multiplied by 100% to arrive at the net amount eligible for the
corporate dividend-received deduction.
For the calendar year ended 2004 certain dividends paid by the Fund
constitute qualified dividend income for Federal Income Tax purposes. The Fund
designates $364,973 as qualified dividend income.
DAVIS REAL ESTATE PORTFOLIO
During the calendar year ended 2004 the Fund declared and paid long-term
capital gain distributions in the amount of $2,257,990.
Dividends paid by the Fund during the calendar year ended 2004, which are
not designated as capital gain distributions, should be multiplied by 2% to
arrive at the net amount eligible for the corporate dividend-received deduction.
For the calendar year ended 2004 certain dividends paid by the Fund
constitute qualified dividend income for Federal Income Tax purposes. The Fund
designates $38,314 as qualified dividend income.
PORTFOLIO PROXY VOTING POLICIES AND PROCEDURES
The Funds have adopted Portfolio Proxy Voting Policies and Procedures under
which the Funds vote proxies relating to securities held by the Funds. A
description of the Funds' Portfolio Proxy Voting Policies and Procedures is
available (i) without charge, upon request, by calling the Funds toll-free at
1-800-279-2279, (ii) on the Funds' website at www.davisfunds.com, and (iii) on
the SEC's website at www.sec.gov.
In addition, the Funds are required to file Form N-PX, with their complete
proxy voting record for the 12 months ended June 30th, no later than August 31st
of each year. The Funds' Form N-PX filing is available (i) without charge, upon
request, by calling the Funds toll-free at 1-800-279-2279, (ii) on the Funds'
website at www.davisfunds.com, and (iii) on the SEC's website at www.sec.gov.
FORM N-Q
The Funds file their complete schedule of portfolio holdings with the SEC
for the first and third quarters of each fiscal year on Form N-Q. The Funds'
Form N-Q is available without charge upon request by calling 1-800-279-2279 or
on the Funds' website at www.davisfunds.com or on the SEC's website at
www.sec.gov. The Funds' Form N-Q may be reviewed and copied at the SEC's Public
Reference Room in Washington, DC, and that information on the operation of the
Public Reference Room may be obtained by calling 1-800-SEC-0330.
39
DAVIS VARIABLE ACCOUNT FUND, INC.
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
================================================================================
DIRECTORS
For the purposes of their service as directors to the Davis Funds, the business
address for each of the directors is 2949 E. Elvira Road, Suite 101, Tucson, AZ
85706. Each Director serves until their retirement, resignation, death or
removal. Directors must retire at the close of business on the last day of the
calendar year in which the Director attains age seventy-two (72), except that
any person who was a Director on July 1, 1994, and at that date was
seventy-three (73) years of age or less shall retire from the Board of Directors
and cease being a Director at the close of business on the last day of the year
in which the Director attains age seventy-four (74).
NUMBER OF
TERM OF PORTFOLIOS IN
OFFICE AND PRINCIPAL FUND COMPLEX
POSITION(S) LENGTH OF OCCUPATION(S) DURING OVERSEEN BY OTHER DIRECTORSHIPS
NAME AND AGE HELD WITH FUND TIME SERVED PAST FIVE YEARS DIRECTOR HELD BY DIRECTOR
- -------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT DIRECTORS
WESLEY E. Director director President, Bass & 12 none
BASS, JR. since 1990 Associates (financial
(born 8/21/31) consulting); formerly
First Deputy City Treasurer,
City of Chicago; and
Executive Vice President,
Chicago Title and Trust
Company (bank and trust).
MARC P. BLUM Director director Chief Executive 12 Director, Legg Mason Trust
(born 9/9/42) since 1986 Officer, World Total (asset management company)
Return Fund, LLLP; Of and Rodney Trust Company
Counsel to Gordon, (Delaware); Former Director,
Feinblatt, Rothman, Mid-Atlantic Realty Trust
Hoffberger and (real estate investment
Hollander, LLC (law trust); Trustee, College of
firm). Notre Dame of Maryland, McDonogh
School and other public charities,
private foundations, and
businesses.
THOMAS S. GAYNER Director director Chief Investment 12 Markel Corporation.
(born 12/16/61) since 2004 Officer, Markel
Corporation
(insurance company).
JERRY D. GEIST Director director Chairman, Santa Fe 12 Director, CH2M-Hill, Inc.
(born 5/23/34) since 1986 Center Enterprises (engineering);Chairman, Santa
(energy project Fe Center Enterprises;
development); Retired Investment Committee for
Chairman and Microgeneration Technology
President, Public Fund, UTECH Funds.
Service Company of New
Mexico.
40
DAVIS VARIABLE ACCOUNT FUND, INC.
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
================================================================================
DIRECTORS - CONTINUED
NUMBER OF
TERM OF PORTFOLIOS IN
OFFICE AND PRINCIPAL FUND COMPLEX
POSITION(S) LENGTH OF OCCUPATION(S) DURING OVERSEEN BY OTHER DIRECTORSHIPS
NAME AND AGE HELD WITH FUND TIME SERVED PAST FIVE YEARS DIRECTOR HELD BY DIRECTOR
- ----------------------------------------------------------------------------------------------------------------------------
INDEPENDENT DIRECTORS - CONTINUED
D. JAMES GUZY Director director Chairman, PLX 12 Director, Intel Corp.
(born 3/7/36) since 1982 Technology, Inc. (semi-conductor
(semi-conductor manufacturer), Cirrus Logic
manufacturer). Corp. (semi-conductor
manufacturer), Alliance
Technology Fund (a mutual
fund), Micro Component
Technology, Inc.
(micro-circuit handling and
testing equipment
manufacturer), LogicVision,
Inc. (semi-conductor
software company), and
Tessera Technologies, Inc.
(semi-conductor packaging
company); Former Director,
Novellus Systems, Inc.
(semi-conductor
manufacturer).
G. BERNARD Director director Managing General 12 none
HAMILTON since 1978 Partner, Avanti
(born 3/18/37) Partners, L.P.
(investment
partnership).
ROBERT P. Director director Chairman, Northroad 12 none
MORGENTHAU since 2002 Capital Management,
(born 3/22/57) LLC (an investment
management firm) since June
2002; President of Private
Advisory Services, Bank of
America (an investment
management firm) from 2001
until 2002; prior to that a
managing director and global
head of marketing and
distribution for Lazard Asset
Management (an investment
management firm) for ten
years.
THEODORE B. Director director Chairman, John 12 Mayor, Incorporated Village
SMITH, JR. since 1994 Hassall, Inc. of Mill Neck.
(born 12/23/32) (fastener
manufacturing);
Chairman, Cantrock
Realty.
41
DAVIS VARIABLE ACCOUNT FUND, INC.
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
================================================================================
DIRECTORS - CONTINUED
NUMBER OF
TERM OF PORTFOLIOS IN
OFFICE AND PRINCIPAL FUND COMPLEX
POSITION(S) LENGTH OF OCCUPATION(S) DURING OVERSEEN BY OTHER DIRECTORSHIPS
NAME AND AGE HELD WITH FUND TIME SERVED PAST FIVE YEARS DIRECTOR HELD BY DIRECTOR
- ----------------------------------------------------------------------------------------------------------------------------
INDEPENDENT DIRECTORS - CONTINUED
CHRISTIAN R. Director director General Partner, 12 none
SONNE since 1990 Tuxedo Park Associates
(born 5/6/36) (land holding and
development firm);
President and Chief
Executive Officer,
Mulford Securities
Corporation (private
investment fund) until
1990; Former Vice
President, Goldman
Sachs & Co.
(investment banking).
MARSHA WILLIAMS Director director Executive Vice 15 Director of the Selected
(born 3/28/51) since 1999 President and Chief Funds (consisting of three
Financial Officer, portfolios) since 1996;
Equity Office Director, Modine
Properties Trust (a Manufacturing, Inc. (heat
real estate investment transfer technology);
trust); Former Chief Director, Chicago Bridge &
Administrative Iron Company, N.V.
Officer, Crate & (industrial construction and
Barrel (home engineering).
furnishings retailer);
former Vice President
and Treasurer, Amoco
Corporation (oil & gas
company).
INSIDE DIRECTORS*
JEREMY H. BIGGS Director/ director Vice Chairman, Head of 12 none
(born 8/16/35) Chairman since 1994 Equity Research, Vice
Chairman of U.S. Investment
Policy Committee and Member
of the International
Investment Committee, all for
Fiduciary Trust Company
International (money
management firm) Consultant
to Davis Selected Advisers,
L.P.
42
DAVIS VARIABLE ACCOUNT FUND, INC.
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
================================================================================
DIRECTORS - CONTINUED
NUMBER OF
TERM OF PORTFOLIOS IN
OFFICE AND PRINCIPAL FUND COMPLEX
POSITION(S) LENGTH OF OCCUPATION(S) DURING OVERSEEN BY OTHER DIRECTORSHIPS
NAME AND AGE HELD WITH FUND TIME SERVED PAST FIVE YEARS DIRECTOR HELD BY DIRECTOR
- ----------------------------------------------------------------------------------------------------------------------------
INSIDE DIRECTORS* - CONTINUED
ANDREW A. DAVIS Director director President or Vice 15 Director of the Selected
(born 6/25/63) since 1997 President of each Funds (consisting of three
Davis Fund and portfolios) since 1998.
Selected Fund;
President, Davis
Selected Advisers,
L.P., and also serves
as an executive
officer in certain
companies affiliated
with the Adviser.
CHRISTOPHER C. Director director Chief Executive 15 Director of the Selected
DAVIS since 1997 Officer, President or Funds (consisting of three
(born 7/13/65) Vice President of each portfolios) since 1998.
Davis Fund and Selected Fund;
Chairman and Chief Executive
Officer, Davis Selected
Advisers, L.P., and also
serves as an executive
officer in certain companies
affiliated with the Adviser,
including sole member of the
Adviser's general partner,
Davis Investments, LLC;
Employee of Shelby Cullom
Davis & Co. (registered
broker/dealer).
* Jeremy H. Biggs, Andrew A. Davis and Christopher C. Davis own partnership
units (directly, indirectly or both) of the Adviser and are considered to
be "interested persons" of the Funds as defined in the Investment Company
Act of 1940. Andrew A. Davis and Christopher C. Davis are brothers.
43
(This page has been left blank intentionally.)
(This page has been left blank intentionally.)
DAVIS VARIABLE ACCOUNT FUND, INC.
2949 East Elvira Road, Suite 101, Tucson, Arizona 85706
================================================================================
DIRECTORS OFFICERS
Wesley E. Bass, Jr. Jeremy H. Biggs
Jeremy H. Biggs Chairman
Marc P. Blum Christopher C. Davis
Andrew A. Davis President - Davis Value Portfolio, Davis
Christopher C. Davis Financial Portfolio, & Vice President -
Thomas S. Gayner Davis Real Estate Portfolio
Jerry D. Geist Andrew A. Davis
D. James Guzy President - Davis Real Estate Portfolio,
G. Bernard Hamilton Vice President - Davis Value Portfolio &
Robert P. Morgenthau Davis Financial Portfolio
Theodore B. Smith, Jr. Kenneth C. Eich
Christian R. Sonne Executive Vice President &
Marsha Williams Principal Executive Officer
Sharra L. Reed
Vice President & Chief Compliance Officer
Douglas A. Haines
Vice President
& Principal Accounting Officer
Thomas D. Tays
Vice President & Secretary
INVESTMENT ADVISER
Davis Selected Advisers, L.P. (Doing business as "Davis Advisors")
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
(800) 279-0279
DISTRIBUTOR
Davis Distributors, LLC
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
TRANSFER AGENT & CUSTODIAN
State Street Bank and Trust Company
c/o The Davis Funds
P.O. Box 8406
Boston, Massachusetts 02266-8406
COUNSEL
Seyfarth Shaw LLP
55 East Monroe Street, Suite 4200
Chicago, Illinois 60603-5803
AUDITORS
KPMG LLP
707 Seventeenth Street
Suite 2700
Denver, Colorado 80202
================================================================================
FOR MORE INFORMATION ABOUT THE 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. QUARTERLY FACT SHEETS ARE
AVAILABLE ON THE FUNDS' WEBSITE AT WWW.DAVISFUNDS.COM.
================================================================================
DAVIS ADVISORS
2949 EAST ELVIRA ROAD
SUITE 101
TUSCON, AZ 85706
1-800-279-0279
DAVISFUNDS.COM
[DAVIS FUNDS LOGO]
OVER 35 YEARS OF RELIABLE INVESTING(TM)
ANNUAL REPORT
DECEMBER 31, 2004
DAVIS VALUE PORTFOLIO
(PORTFOLIO OF DAVIS VARIABLE ACCOUNT FUND, INC.)
[DAVIS FUNDS LOGO]
OVER 35 YEARS OF RELIABLE INVESTING(TM)
TABLE OF CONTENTS
Management's Discussion and Analysis........................................2
Fund Performance and Supplementary Information..............................5
Schedule of Investments.....................................................9
Statement of Assets and Liabilities........................................13
Statement of Operations....................................................14
Statements of Changes in Net Assets........................................15
Notes to Financial Statements..............................................16
Financial Highlights.......................................................20
Report of Independent Registered Public Accounting Firm....................21
Fund Information...........................................................22
Directors and Officers.....................................................23
DAVIS VALUE PORTFOLIO
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS
MARKET ENVIRONMENT
During the year ended December 31, 2004, the stock market, as measured by the
Standard & Poor's 500(R) Index(1), returned 10.88%. U.S. economic activity, as
measured by the gross domestic product, rose sharply in the first two quarters
before falling sharply in the third quarter of 2004. Interest rates, as measured
by the 10-year Treasury bond, trended downward over the first three months, rose
over the next three months then slowly declined over the last half of the year.
After trending sideways during the first seven months of the year, the S&P
500(R) Index went on a sustained rally over the last five months of 2004.
DAVIS VALUE PORTFOLIO
PERFORMANCE OVERVIEW
Davis Value Portfolio returned 12.33% for the year ended December 31, 2004(2),
compared with a return of 10.88% for the Standard & Poor's 500(R) Index(1).
The Portfolio had more invested in financial service companies than in any other
single sector. The financial service companies that the Portfolio owned
out-performed the S&P 500(R) Index. Contributors(3) to performance included
American Express(4), Loews, and Moody's. Over the year ended December 31, 2004,
American Express increased by 17.60%, Loews increased by 43.59%, and Moody's
increased by 44.06%.
Energy companies represented one of the Portfolio's largest sector weightings.
The energy companies that the Portfolio owned significantly out-performed the
S&P 500(R) Index. Over the year ended December 31, 2004, ConocoPhillips
increased by 35.60%, Devon Energy increased by 36.78%, and EOG Resources
increased by 55.21%.
Property and casualty insurance companies also represented one of the
Portfolio's largest sector weightings, and short-term performance was hurt when
these companies under-performed the S&P 500(R) Index. Over the year ended
December 31, 2004, Berkshire Hathaway, Class A increased by 4.33% and
Progressive increased by 1.63%.
The health care companies that the Portfolio owned under-performed the S&P
500(R) Index in 2004. The most important contributor in this sector was Cardinal
Health, which increased by 15.95% since being purchased in July 2004. The most
important detractors from performance were Eli Lilly, which decreased by 17.55%
over the year ended December 31, 2004, and Pfizer, which decreased by 25.02%
before being sold in December 2004.
Davis Advisors investment strategy is driven by individual stock selection in
which we attempt to construct a portfolio that is not optimized to a single set
of economic conditions. We invest the Portfolio's assets one company at a time.
The resulting investment portfolio does not resemble the S&P 500(R) Index.
Other important contributors to performance included: Tyco International, a
diversified manufacturing company, Altria Group, a consumer products company,
and Costco, a discount retailing company. Over the year ended December 31, 2004,
Tyco International increased by 35.41%, Altria Group increased by 18.38%, and
Costco increased by 31.15%. All three companies were among the Portfolio's ten
largest holdings at the end of the year.
2
DAVIS VALUE PORTFOLIO
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
PERFORMANCE OVERVIEW - CONTINUED
Other important detractors from performance included: Fifth Third Bancorp, a
banking and savings & loan company, H&R Block, a financial service company, and
Marsh & McLennan, an insurance brokerage company. Over the year ended December
31, 2004, Fifth Third Bancorp decreased by 17.93% and H&R Block decreased by
9.99%. Marsh & McLennan decreased by 25.46% since being purchased in June 2004.
- ------------------------------
This Annual Report is authorized for use by existing shareholders. Prospective
shareholders must receive a current Davis Value Portfolio prospectus, which
contains more information about investment strategies, risks, charges, and
expenses. Please read the prospectus carefully before investing or sending
money.
Davis Value Portfolio's investment objective is long-term growth of capital.
There can be no assurance that the Portfolio will achieve its objective. The
primary risks of an investment in Davis Value Portfolio are: (1) market risk,
(2) company risk, (3) headline risk, and (4) selection risk. See the prospectus
for a full description of each risk.
(1) The S&P 500(R) 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.
(2) Total return assumes reinvestment of dividends and capital gain
distributions. Past performance is not a guarantee of future results. Investment
return and principal value will vary so that, when redeemed, an investor's
shares may be worth more or less than when purchased. The following table lists
the average annual total returns for the periods ended December 31, 2004.
- -------------------------- -------------- ------------ ----------------
INCEPTION
PORTFOLIO NAME 1-YEAR 5-YEAR (July 1, 1999)
- -------------------------- -------------- ------------ ----------------
Davis Value Portfolio 12.33% 3.63% 3.78%
- -------------------------- -------------- ------------ ----------------
Performance numbers are net of all portfolio operating expenses, but do not
include any insurance charges imposed by your insurance company's separate
account. If performance information included the effect of these additional
charges, the total return would be lower.
Portfolio performance changes over time and current performance may be higher or
lower than stated. For more current information please call Davis Funds
Shareholder Services at 1-800-279-0279.
(3) A company's or sector's contribution to the Portfolio's performance is a
product both of its appreciation or depreciation and it's weighting within the
portfolio. For example, a 5% holding that rises 20% has twice as much impact as
a 1% holding that rises 50%.
3
DAVIS VALUE PORTFOLIO
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
(4) This Management Discussion & Analysis discusses a number of individual
companies. The information provided in this report does not provide information
reasonably sufficient upon which to base an investment decision and should not
be considered a recommendation to purchase or sell any particular security. The
schedule of investments lists the Portfolio's holdings of each company
discussed.
Shares of the Davis Value Portfolio are not deposits or obligations of any bank,
are not guaranteed by any bank, are not insured by the FDIC or any other agency,
and involve investment risks, including possible loss of the principal amount
invested.
4
DAVIS VALUE PORTFOLIO
FUND OVERVIEW
At December 31, 2004
================================================================================
PORTFOLIO MAKEUP (% OF FUND NET ASSETS) SECTOR WEIGHTINGS (% OF STOCK HOLDINGS)
- --------------------------------------- ---------------------------------------
[GRAPHIC OMITTED]
Short Term Investments, [GRAPHIC OMITTED]
Other Assets &
Liabilities 2.0% Financial Services 20.8%
Insurance 16.6%
Bank and Savings & Loan 12.7%
Other 10.8%
Energy 9.1%
Common Stocks 98.0% Consumer Products 5.5%
Diversified Manufacturing 4.2%
Health Care 4.1%
Cable Television 3.6%
Discount Retailer 3.5%
Food/Beverage & Restaurant 3.4%
Industrial 3.0%
Technology 2.7%
TOP 10 HOLDINGS
STOCK SECTOR % OF FUND NET ASSETS
- -------------------------------------------------------------------------------------------------
American Express Co. Financial Services 6.97%
Altria Group, Inc. Consumer Products 5.33%
American International Group, Inc. Multi-Line Insurance 4.72%
Berkshire Hathaway Inc., Class A Property/Casualty Insurance 4.69%
Tyco International Ltd. Diversified Manufacturing 4.12%
HSBC Holdings PLC Banks and Savings & Loan Associations 3.51%
Comcast Corp., Special Class A Cable Television 3.50%
Costco Wholesale Corp. Discount Retailer 3.40%
Wells Fargo & Co. Banks and Savings & Loan Associations 3.35%
JPMorgan Chase & Co. Financial Services 3.32%
5
DAVIS VALUE PORTFOLIO
Portfolio Activity
January 1, 2004 through December 31, 2004
================================================================================
NEW POSITIONS ADDED (1/1/04-12/31/04)
(Highlighted positions are those greater than 0.99% of 12/31/04 total net assets)
DATE OF 1ST % OF 12/31/04
SECURITY SECTOR PURCHASE FUND NET ASSETS
- ------------------------------------------------------------------------------------------------------------------
Cardinal Health, Inc. Health Care 07/14/04 1.29%
Comcast Corp., Special Class A Cable Television 01/14/04 3.50%
Hunter Douglas NV Manufacturing 10/18/04 0.02%
IAC/InterActiveCorp E-Commerce/Services 08/04/04 0.56%
Iron Mountain Inc. Business Services 09/21/04 0.94%
Marsh & McLennan Cos, Inc. Insurance Brokers 06/28/04 1.05%
Nokia Oyj, ADR Telecommunications 04/14/04 0.30%
Rentokil Initial PLC Diversified Commercial Services 01/13/04 0.41%
SK Telecom Co., Ltd., ADR Telecommunications 04/14/04 0.49%
Transocean Inc. Energy 01/23/04 0.74%
POSITIONS CLOSED (1/1/04-12/31/04)
(Gains and losses greater than $550,000 are highlighted)
DATE OF
SECURITY SECTOR FINAL SALE GAIN/(LOSS)
- --------------------------------------------------------------------------------------------------------------------
Agere Systems Inc., Class A Electronics 11/17/04 $ (1,720,194)
Janus Capital Group Inc. Investment Firms 04/29/04 (537,837)
Kraft Foods Inc., Class A Food/Beverage & Restaurant 08/10/04 (294,753)
Marriott International, Inc., Class A Hotels & Motels 08/30/04 672,530
Merck & Co., Inc. Health Care 07/29/04 (346,408)
Pfizer Inc. Health Care 12/22/04 (873,244)
6
DAVIS VALUE PORTFOLIO
FUND PERFORMANCE
================================================================================
- ------------------------------------------ -------- ----------------------- ------------- ------------- ------------------
AVERAGE ANNUAL TOTAL RETURN EXPENSE EXAMPLE
FOR THE PERIODS ENDED DECEMBER 31, 2004 BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
(07/01/04) (12/31/04) (07/01/04-12/31/04)
---------- ---------- -------------------
One Year............................... 12.33% Actual................. $1,000.00 $1,075.49 $4.23
Five Years............................. 3.63% Hypothetical (5% return
Life of Fund (July 1, 1999 before expenses)..... $1,000.00 $1,021.06 $4.12
through December 31, 2004)........ 3.78%
- ------------------------------------------ -------- ----------------------- ------------- ------------- ------------------
*Expenses are equal to the Fund's annualized expense ratio (0.81%), multiplied
by the average account value over the period, multiplied by 184/366 (to reflect
the one-half year period). See Notes to Performance on page 8 for a description
of the "Expense Example".
$10,000 INVESTED AT COMMENCEMENT OF OPERATIONS. Let's say you invested $10,000
in Davis Value Portfolio on July 1, 1999 (commencement of operations). As the
chart below shows, by December 31, 2004 the value of your investment would have
grown to $12,269 - a 22.69% increase on your initial investment. For comparison,
look at how the Standard & Poor's 500(R) Stock Index did over the same period.
With dividends reinvested, the same $10,000 investment would have been $9,532 -
a 4.68% decrease.
[GRAPHIC OMITTED]
S & P 500 DVP
--------- -------
7/1/99 $10,000.00 $10,000.00
12/31/99 $10,706.00 $10,263.57
12/31/00 $ 9,732.00 $11,218.07
12/31/01 $ 8,576.00 $10,052.32
12/31/02 $ 6,681.00 $ 8,417.83
12/31/03 $ 8,597.00 $10,922.65
12/31/04 $ 9,532.00 $12,269.47
The Standard & Poor's 500(R) Stock Index is an unmanaged index of 500 selected
common stocks, most of which are listed on the New York Stock Exchange. The
Index is adjusted for dividends, weighted towards stocks with large market
capitalization, and represents approximately two-thirds of the total market
value of all domestic common stocks.
The performance data for Davis Value Portfolio contained in this report
represents past performance and assumes that all distributions were reinvested,
and should not be considered as an indication of future performance from an
investment in the Fund today. The investment return and principal value will
fluctuate so that shares may be worth more or less than their original cost when
redeemed.
7
DAVIS VALUE PORTFOLIO
NOTES TO PERFORMANCE
================================================================================
THE FOLLOWING DISCLOSURE PROVIDES IMPORTANT INFORMATION REGARDING THE FUND'S
EXPENSE EXAMPLE, WHICH APPEARS IN THE FUND'S PERFORMANCE SECTION IN THIS ANNUAL
REPORT. PLEASE REFER TO THIS INFORMATION WHEN REVIEWING THE EXPENSE EXAMPLE FOR
THE FUND.
EXAMPLE
As a shareholder of the Fund, you incur ongoing costs only, including advisory
and administrative fees and other Fund expenses. The Expense Example is intended
to help you understand your ongoing costs (in dollars) of investing in the Fund
and to compare these costs with the ongoing costs of investing in other mutual
funds. The Expense Example is based on an investment of $1,000 invested at the
beginning of the period and held for the entire period indicated, which for the
Fund is from 07/01/04 to 12/31/04. 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 for on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The information represented in the row entitled "Hypothetical (5% return before
expenses)" 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
(5% return before expenses)" is useful in comparing ongoing costs only, and will
not help you determine the relative total costs of owning different funds.
8
DAVIS VALUE PORTFOLIO
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2004
VALUE
SHARES SECURITY (NOTE 1)
==============================================================================================================
COMMON STOCK - (97.98%)
AUTOMOTIVE - (0.92%)
69,100 AutoZone, Inc.*.............................................................. $ 6,309,521
-------------
BANKS AND SAVINGS & LOAN ASSOCIATIONS - (12.47%)
186,000 Fifth Third Bancorp.......................................................... 8,805,240
-------------
359,000 Golden West Financial Corp. ................................................. 22,049,780
1,426,607 HSBC Holdings PLC............................................................ 24,024,499
162,000 Lloyds TSB Group PLC, ADR.................................................... 5,959,980
33,800 State Street Corp. .......................................................... 1,660,256
368,600 Wells Fargo & Co. ........................................................... 22,908,490
-------------
85,408,245
-------------
BUILDING MATERIALS - (1.47%)
92,600 Martin Marietta Materials, Inc. ............................................. 4,968,916
93,800 Vulcan Materials Co. ........................................................ 5,122,418
-------------
10,091,334
-------------
BUSINESS SERVICES - (1.76%)
94,400 D&B Corp.*................................................................... 5,630,960
211,200 Iron Mountain Inc.*.......................................................... 6,439,488
-------------
12,070,448
-------------
CABLE TELEVISION - (3.50%)
729,200 Comcast Corp., Special Class A*.............................................. 23,983,388
-------------
CONSUMER PRODUCTS - (5.33%)
597,500 Altria Group, Inc. .......................................................... 36,507,250
-------------
DISCOUNT RETAILER - (3.40%)
480,700 Costco Wholesale Corp. ...................................................... 23,287,511
-------------
DIVERSIFIED COMMERCIAL SERVICES - (0.41%)
986,400 Rentokil Initial PLC......................................................... 2,792,169
-------------
DIVERSIFIED MANUFACTURING - (4.12%)
789,858 Tyco International Ltd. ..................................................... 28,229,525
-------------
E-COMMERCE/SERVICES - (0.56%)
138,200 IAC/InterActiveCorp*......................................................... 3,816,393
-------------
ENERGY - (8.96%)
185,371 ConocoPhillips............................................................... 16,095,764
376,000 Devon Energy Corp. .......................................................... 14,633,920
160,000 EOG Resources, Inc. ......................................................... 11,417,600
241,800 Occidental Petroleum Corp. .................................................. 14,111,448
119,500 Transocean Inc.*............................................................. 5,065,605
-------------
61,324,337
-------------
FINANCIAL SERVICES - (19.56%)
846,700 American Express Co. ........................................................ 47,728,479
445,833 Citigroup Inc. .............................................................. 21,480,234
220,000 H&R Block, Inc. ............................................................. 10,780,000
9
DAVIS VALUE PORTFOLIO
SCHEDULE OF INVESTMENTS - (Continued)
DECEMBER 31, 2004
VALUE
SHARES SECURITY (NOTE 1)
==============================================================================================================
COMMON STOCK - (CONTINUED)
FINANCIAL SERVICES - (CONTINUED)
582,648 JPMorgan Chase & Co. ........................................................ $ 22,729,098
196,800 Loews Corp. ................................................................. 13,835,040
107,300 Moody's Corp. ............................................................... 9,319,005
188,500 Providian Financial Corp.*................................................... 3,104,595
73,100 Takefuji Corp. .............................................................. 4,931,208
-------------
133,907,659
-------------
FOOD/BEVERAGE & RESTAURANT - (3.34%)
176,000 Diageo PLC, ADR.............................................................. 10,186,880
209,140 Heineken Holding NV, Class A................................................. 6,299,261
115,400 Hershey Foods Corp. ......................................................... 6,409,316
-------------
22,895,457
-------------
HEALTH CARE - (4.01%)
152,200 Cardinal Health, Inc......................................................... 8,850,430
116,600 Eli Lilly and Co. ........................................................... 6,617,050
218,300 HCA Inc. .................................................................... 8,723,268
65,000 Novartis AG, Registered...................................................... 3,264,242
-------------
27,454,990
-------------
INDUSTRIAL - (2.94%)
378,500 Sealed Air Corp.*............................................................ 20,162,695
-------------
INSURANCE BROKERS - (1.78%)
211,200 Aon Corp. ................................................................... 5,039,232
217,500 Marsh & McLennan Cos, Inc. .................................................. 7,155,750
-------------
12,194,982
-------------
INVESTMENT FIRMS - (0.78%)
96,600 Morgan Stanley............................................................... 5,363,232
-------------
LIFE INSURANCE - (0.61%)
65,800 Principal Financial Group, Inc. ............................................. 2,693,852
44,700 Sun Life Financial Inc. ..................................................... 1,499,238
-------------
4,193,090
-------------
MANUFACTURING - (0.02%)
2,000 Hunter Douglas NV............................................................ 106,265
-------------
MEDIA - (1.67%)
124,700 Lagardere S.C.A. ............................................................ 8,963,621
44,600 WPP Group PLC, ADR........................................................... 2,440,735
-------------
11,404,356
-------------
MULTI-LINE INSURANCE - (4.72%)
492,237 American International Group, Inc. .......................................... 32,325,204
-------------
PROPERTY/CASUALTY INSURANCE - (7.81%)
365 Berkshire Hathaway Inc., Class A*............................................ 32,083,500
42 Berkshire Hathaway Inc., Class B*............................................ 123,312
10
DAVIS VALUE PORTFOLIO
SCHEDULE OF INVESTMENTS - (Continued)
DECEMBER 31, 2004
VALUE
SHARES SECURITY (NOTE 1)
==============================================================================================================
COMMON STOCK - (CONTINUED)
PROPERTY/CASUALTY INSURANCE - (CONTINUED)
28,700 Chubb Corp. ................................................................. $ 2,207,030
2,100 Markel Corp.*................................................................ 764,400
215,700 Progressive Corp. (Ohio)..................................................... 18,299,988
-------------
53,478,230
-------------
PUBLISHING - (0.57%)
47,700 Gannett Co., Inc. ........................................................... 3,897,090
-------------
REAL ESTATE - (1.71%)
244,600 Centerpoint Properties Trust................................................. 11,713,894
-------------
REINSURANCE - (1.32%)
145,937 Transatlantic Holdings, Inc. ................................................ 9,023,285
-------------
TECHNOLOGY - (2.69%)
130,800 Lexmark International, Inc., Class A*........................................ 11,118,000
272,100 Microsoft Corp. ............................................................. 7,269,152
-------------
18,387,152
-------------
TELECOMMUNICATIONS - (0.79%)
131,000 Nokia Oyj, ADR............................................................... 2,052,770
150,400 SK Telecom Co., Ltd., ADR.................................................... 3,346,400
-------------
5,399,170
-------------
TRANSPORTATION - (0.76%)
60,600 United Parcel Service, Inc., Class B......................................... 5,178,876
-------------
Total Common Stock - (identified cost $539,097,865)...................... 670,905,748
-------------
11
DAVIS VALUE PORTFOLIO
SCHEDULE OF INVESTMENTS - (Continued)
DECEMBER 31, 2004
VALUE
PRINCIPAL SECURITY (NOTE 1)
==============================================================================================================
SHORT TERM INVESTMENTS - (1.58%)
$ 3,494,000 Goldman, Sachs & Co. Joint Repurchase Agreement, 2.25%,
01/03/05, dated 12/31/04, repurchase value of $3,494,655
(collateralized by: U.S. Government obligations in a pooled cash account,
total market value $3,563,880)............................................ $ 3,494,000
3,882,000 Nomura Securities International, Inc. Joint Repurchase Agreement, 2.35%,
01/03/05, dated 12/31/04, repurchase value of $3,882,760
(collateralized by: U.S. Government obligations in a pooled cash account,
total market value $3,959,640)............................................ 3,882,000
3,407,000 UBS Financial Services Inc. Joint Repurchase Agreement, 2.27%,
01/03/05, dated 12/31/04, repurchase value of $3,407,644
(collateralized by: U.S. Government obligations in a pooled cash account,
total market value $3,475,140)............................................ 3,407,000
--------------
Total Short Term Investments - (identified cost $10,783,000)........ 10,783,000
--------------
Total Investments - (99.56%) - (identified cost $549,880,865) - (a).......... 681,688,748
Other Assets Less Liabilities - (0.44%)...................................... 3,034,189
--------------
Net Assets - (100%)...................................................... $ 684,722,937
==============
*Non-Income Producing Security.
(a) Aggregate cost for Federal Income Tax purposes is $551,064,358. At December
31, 2004 unrealized appreciation (depreciation) of securities for Federal Income
Tax purposes is as follows:
Unrealized appreciation...................................................... $ 138,941,340
Unrealized depreciation...................................................... (8,316,950)
--------------
Net unrealized appreciation.............................................. $ 130,624,390
==============
SEE NOTES TO FINANCIAL STATEMENTS
12
DAVIS VALUE PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
At December 31, 2004
================================================================================
ASSETS:
Investments in securities, at value
(see accompanying Schedule of Investments)(cost of $549,880,865)................... $ 681,688,748
Cash................................................................................. 45,190
Receivables:
Dividends and interest............................................................. 1,016,162
Capital stock sold................................................................. 2,480,423
---------------
Total assets.................................................................. 685,230,523
---------------
LIABILITIES:
Payables:
Capital stock reacquired........................................................... 33,115
Accrued expenses..................................................................... 30,852
Accrued management fee............................................................... 443,619
---------------
Total liabilities............................................................. 507,586
---------------
NET ASSETS ............................................................................. $ 684,722,937
===============
SHARES OUTSTANDING (NOTE 4)............................................................. 58,104,130
===============
NET ASSET VALUE, offering and
redemption price per share (Net Assets [Divided By] Shares Outstanding)............ $ 11.78
===========
NET ASSETS CONSIST OF:
Par value of shares of capital stock................................................. $ 58,104
Additional paid-in capital........................................................... 589,926,942
Accumulated net realized loss from investments and foreign currency transactions..... (37,070,842)
Net unrealized appreciation on investments and foreign currency transactions......... 131,808,733
---------------
$ 684,722,937
===============
SEE NOTES TO FINANCIAL STATEMENTS
13
DAVIS VALUE PORTFOLIO
STATEMENT OF OPERATIONS
For the year ended December 31, 2004
================================================================================
INVESTMENT INCOME:
Income:
Dividends (Net of foreign withholding taxes of $246,146)...................... $ 9,933,091
Interest...................................................................... 332,791
---------------
Total income.............................................................. 10,265,882
---------------
Expenses:
Management fees (Note 2)...................................................... 4,578,270
Custodian fees................................................................ 179,906
Transfer agent fees........................................................... 14,149
Audit fees.................................................................... 12,000
Accounting fees (Note 2)...................................................... 6,000
Legal fees.................................................................... 10,635
Reports to shareholders....................................................... 41,828
Directors' fees and expenses.................................................. 89,462
Registration and filing fees.................................................. 15,636
Miscellaneous................................................................. 11,866
---------------
Total expenses............................................................ 4,959,752
Expenses paid indirectly (Note 5)......................................... (56)
---------------
Net expenses.............................................................. 4,959,696
---------------
Net investment income.................................................. 5,306,186
---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss from:
Investment transactions................................................... (3,085,739)
Foreign currency transactions............................................. (27,254)
Net increase in unrealized appreciation of investments and foreign
currency transactions..................................................... 69,125,469
---------------
Net realized and unrealized gain on investments and foreign currency...... 66,012,476
---------------
Net increase in net assets resulting from operations................... $ 71,318,662
===============
SEE NOTES TO FINANCIAL STATEMENTS
14
DAVIS VALUE PORTFOLIO
STATEMENTS OF CHANGES IN NET ASSETS
================================================================================
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2004 2003
---- ----
OPERATIONS:
Net investment income.............................................. $ 5,306,186 $ 3,215,304
Net realized loss from investment and foreign currency
transactions..................................................... (3,112,993) (7,034,431)
Net change in unrealized appreciation (depreciation) of
investments and foreign currency transactions.................... 69,125,469 104,044,100
---------------- ----------------
Net increase in net assets resulting from operations............... 71,318,662 100,224,973
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.............................................. (5,273,618) (3,188,878)
Return of capital.................................................. (115,109) -
CAPITAL SHARE TRANSACTIONS (NOTE 4).................................... 133,790,608 104,927,119
---------------- ----------------
Total increase in net assets........................................... 199,720,543 201,963,214
NET ASSETS:
Beginning of year.................................................. 485,002,394 283,039,180
---------------- ----------------
End of year* ...................................................... $ 684,722,937 $ 485,002,394
================ ================
*Including undistributed net investment loss of................ - $ (5,314)
SEE NOTES TO FINANCIAL STATEMENTS
15
DAVIS VALUE PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
================================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Fund is a separate series of Davis Variable Account Fund, Inc., which
is registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company. Shares of the Fund may only
be purchased by insurance companies for the purpose of funding variable annuity
or variable life insurance contracts. The following is a summary of significant
accounting policies followed by the Fund in the preparation of financial
statements.
A. VALUATION OF SECURITIES - Portfolio securities listed on national securities
exchanges are valued at the last reported sales price on the day of valuation.
Securities traded in the over the counter market and listed securities for which
no sale was reported on that date are stated at the average of closing bid and
asked prices. Securities for which market quotations are not readily available,
or whose values have been affected by a significant event occurring after the
close of their primary markets, are valued at fair value as determined in good
faith by the Board of Directors. Short-term obligations are valued at amortized
cost, which approximates fair value. These valuation procedures are reviewed and
subject to approval by the Board of Directors.
B. MASTER REPURCHASE AGREEMENTS - The Fund, along with other affiliated funds,
may transfer uninvested cash balances into one or more master repurchase
agreement accounts. These balances are invested in one or more repurchase
agreements, secured by U.S. government securities. Securities pledged as
collateral for repurchase agreements are held by a custodian bank until the
agreements mature. Each agreement requires that the market value of the
collateral be sufficient to cover payments of interest and principal; however,
in the event of default by the other party to the agreement, retention of the
collateral may be subject to legal proceedings.
C. CURRENCY TRANSLATION - The market values of all assets and liabilities
denominated in foreign currencies are recorded in the financial statements after
translation to the U.S. dollar based upon the mean between the bid and offered
quotations of the currencies against U.S. dollars on the date of valuation. The
cost basis of such assets and liabilities is determined based upon historical
exchange rates. Income and expenses are translated at average exchange rates in
effect as accrued or incurred.
D. FOREIGN CURRENCY - The Fund may enter into forward purchases or sales of
foreign currencies to hedge certain foreign currency denominated assets and
liabilities against declines in market value relative to the U.S. dollar.
Forward currency contracts are marked-to-market daily and the change in market
value is recorded by the Fund as an unrealized gain or loss. When the forward
currency contract is closed, the Fund records a realized gain or loss equal to
the difference between the value of the forward currency contract at the time it
was opened and value at the time it was closed. Investments in forward currency
contracts may expose the Fund to risks resulting from unanticipated movements in
foreign currency exchange rates or failure of the counter-party to the agreement
to perform in accordance with the terms of the contract.
Reported net realized foreign exchange gains or losses arise from the sales
and maturities of investments, sales of foreign currencies, currency gains or
losses realized between the trade and settlement dates on securities
transactions, the difference between the amounts of dividends, interest and
foreign withholding taxes recorded on the Fund's books, and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in the value of assets and
liabilities other than investments in securities at fiscal year end, resulting
from changes in the exchange rate. The Fund includes foreign currency gains and
losses realized on the sale of investments together with market gains and losses
on such investments in the statement of operations.
16
DAVIS VALUE PORTFOLIO
NOTES TO FINANCIAL STATEMENTS - (Continued)
December 31, 2004
================================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
E. FEDERAL INCOME TAXES - It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income, including
any net realized gains on investments not offset by loss carryovers, to
shareholders. Therefore, no provision for federal income or excise tax is
required. At December 31, 2004 the Fund had approximately $1,625,000 of post
October 2004 losses available to offset future capital gains if any, which
expire in 2013. At December 31, 2004 the Fund had available for federal income
tax purposes unused capital loss carryforwards of $6,568,000, $19,386,000,
$4,776,000, and $3,532,000, which expire in 2009, 2010, 2011, and 2012,
respectively.
F. USE OF ESTIMATES IN FINANCIAL STATEMENTS - In preparing financial statements
in conformity with accounting principles generally accepted in the United States
of America, management makes estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, as well as the reported
amounts of income and expenses during the reporting period. Actual results may
differ from these estimates.
G. 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.
H. 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) of
investments may differ for financial statement and tax purposes primarily
because of the recognition of certain foreign currency gains (losses) as
ordinary income (loss) for tax purposes and the tax deferral of losses on "wash
sale" 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 the classification of
distributions to shareholders to reflect the differences between financial
statement amounts and distributions determined in accordance with income tax
regulations. Accordingly, during the year ended December 31, 2004 amounts have
been reclassified to reflect a decrease in undistributed net investment loss of
$87,855, a decrease in accumulated net realized loss of $27,254, and a decrease
to paid in capital of $115,109.
The tax character of distributions paid during the years ended December 31, 2004
and 2003, was as follows:
2004 2003
------------ -------------
Ordinary income $ 5,273,618 $ 3,188,878
Return of capital 115,109 -
------------ -------------
Total $ 5,388,727 $ 3,188,878
============ =============
17
DAVIS VALUE PORTFOLIO
NOTES TO FINANCIAL STATEMENTS - (Continued)
December 31, 2004
================================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
As of December 31, 2004 the components of distributable earnings (accumulated
losses) on a tax basis were as follows:
Undistributed net investment income............ $ -
Accumulated net realized loss from investments
and foreign currency transactions............ (35,887,350)
Net unrealized appreciation on investments..... 130,625,241
-------------
Total...................................... $ 94,737,891
=============
NOTE 2 - INVESTMENT ADVISORY FEES
Advisory fees are paid to Davis Advisors, the Fund's investment adviser
(the "Adviser") at an annual rate of 0.75% of the average annual net assets.
State Street Bank and Trust Company ("State Street Bank") is the Fund's
primary transfer agent. The Adviser is also paid for certain transfer agent
services. The fee paid to the Adviser for the year ended December 31, 2004 was
$57. State Street Bank is the Fund's primary accounting provider. Fees for such
services are included in the custodian fee as State Street Bank also serves as
the Fund's custodian. The Adviser is also paid for certain accounting services.
The fee for the year ended December 31, 2004 amounted to $6,000. Certain
directors and officers of the Fund are also directors and officers of the
general partner of the Adviser.
Davis Selected Advisers - NY, Inc. ("DSA-NY"), a wholly-owned subsidiary of
the Adviser, acts as sub-adviser to the Fund. The Fund pays no fees directly to
DSA-NY.
NOTE 3 - PURCHASES AND SALES OF SECURITIES
Purchases and sales of investment securities (excluding short-term
securities) during the year ended December 31, 2004 were $183,794,645 and
$21,591,031, respectively.
18
DAVIS VALUE PORTFOLIO
NOTES TO FINANCIAL STATEMENTS - (Continued)
December 31, 2004
================================================================================
NOTE 4 - CAPITAL STOCK
At December 31, 2004, there were 500 million shares of capital stock
($0.001 par value per share) authorized. Transactions in capital stock were as
follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2004 2003
---- ----
Shares sold............................................... 16,736,008 13,746,849
Shares issued in reinvestment of distributions............ 456,672 301,691
---------------- ----------------
17,192,680 14,048,540
Shares redeemed........................................... (4,984,466) (2,661,937)
---------------- ----------------
Net increase........................................ 12,208,214 11,386,603
================ ================
Proceeds from shares sold................................. $ 182,733,878 $ 124,904,118
Proceeds from shares issued in
reinvestment of distributions......................... 5,388,727 3,188,877
---------------- ----------------
188,122,605 128,092,995
Cost of shares redeemed................................... (54,331,997) (23,165,876)
---------------- ----------------
Net increase........................................ $ 133,790,608 $ 104,927,119
================ ================
NOTE 5 - EXPENSES PAID INDIRECTLY
Under an agreement with the custodian bank, custodian fees are reduced for
earnings on cash balances maintained at the custodian by the Fund. Such
reductions amounted to $56 for the year ended December 31, 2004.
19
DAVIS VALUE PORTFOLIO
FINANCIAL HIGHLIGHTS
================================================================================
The following financial information represents data for each share of capital
stock outstanding throughout each period:
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Net Asset Value, Beginning of Period. $ 10.57 $ 8.20 $ 9.87 $ 11.06 $ 10.25
---------- ---------- ---------- ---------- ----------
Income (Loss) From Investment Operations
- ----------------------------------------
Net Investment Income.................. 0.09 0.07 0.06 0.04 0.03
Net Realized and Unrealized
Gains (Losses)...................... 1.21 2.37 (1.66) (1.19) 0.92
---------- ---------- ---------- ---------- ----------
Total From Investment Operations.... 1.30 2.44 (1.60) (1.15) 0.95
Dividends and Distributions
- ---------------------------
Dividends from Net Investment Income... (0.09) (0.07) (0.06) (0.04) (0.03)
Return of Capital...................... -(3) - (0.01) -(3) -(3)
Distributions from Realized Gains...... - - - - (0.11)
---------- ---------- ---------- ---------- ----------
Total Dividends and Distributions... (0.09) (0.07) (0.07) (0.04) (0.14)
---------- ---------- ---------- ---------- ----------
Net Asset Value, End of Period.......... $ 11.78 $ 10.57 $ 8.20 $ 9.87 $ 11.06
========== ========== ========== ========== ==========
Total Return(1)......................... 12.33% 29.76% (16.26)% (10.39)% 9.30%
- ------------
Ratios/Supplemental Data
- ------------------------
Net Assets, End of Period (000 omitted). $684,723 $485,002 $283,039 $278,958 $120,209
Ratio of Expenses to Average Net Assets. 0.81% 0.82% 0.83% 0.87% 1.00%(4)
Ratio of Net Investment Income to
Average Net Assets.................. 0.87% 0.90% 0.70% 0.55% 0.73%
Portfolio Turnover Rate(2).............. 4% 7% 24% 18% 10%
(1) Assumes hypothetical initial investment on the business day before the
first day of the fiscal period, with all dividends and distributions
reinvested in additional shares on the reinvestment date, and redemption at
the net asset value calculated on the last business day of the fiscal
period. Total returns do not reflect charges attributable to your insurance
company's separate account. Inclusion of these charges would reduce the
total returns shown.
(2) The lesser of purchases or sales of portfolio securities for a period,
divided by the monthly average of the market value of portfolio securities
owned during the period. Securities with a maturity or expiration date at
the time of acquisition of one year or less are excluded from the
calculation.
(3) Less than $0.005 per share.
(4) Had the Adviser not absorbed certain expenses the ratio of expenses to
average net assets would have been 1.01% for 2000.
SEE NOTES TO FINANCIAL STATEMENTS
20
DAVIS VALUE PORTFOLIO
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
================================================================================
To the Shareholders and Board of Directors
of Davis Variable Account Fund Inc.:
We have audited the accompanying statements of assets and liabilities of
Davis Value Portfolio (a separate series of Davis Variable Account Fund, Inc.),
including the schedules of investments as of December 31, 2004 and the related
statements of operations for the year then ended, the statements of changes in
net assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years in the five-year period then ended.
These financial statements and financial highlights are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 2004, by correspondence with
the custodian. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Davis Value Portfolio, as of December 31, 2004, and the results of its
operations for the year then ended, the changes in its net assets for each of
the years in the two-year period then ended, and the financial highlights for
each of the years in the five-year period then ended, in conformity with U.S.
generally accepted accounting principles.
/s/ KPMG LLP
Denver, Colorado
February 4, 2005
21
DAVIS VALUE PORTFOLIO
For the Year Ended December 31, 2004 (Unaudited)
================================================================================
FEDERAL INCOME TAX INFORMATION
The information and distributions reported herein may differ from the
information reported as distributions taxable to certain shareholders for the
calendar year ended 2004 with their 2004 Form 1099-DIV.
Income dividends paid by the Fund during the calendar year ended 2004
should be multiplied by 100% to arrive at the net amount eligible for the
corporate dividend-received deduction.
For the calendar year ended 2004 certain dividends paid by the Fund
constitute qualified dividend income for Federal Income Tax purposes. The Fund
designates $5,273,618 as qualified dividend income.
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
1-800-279-2279, (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 1-800-279-2279, (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 1-800-279-2279 or on the
Fund's website at www.davisfunds.com or on the SEC's website at www.sec.gov. The
Fund's Form N-Q may be reviewed and copied at the SEC's Public Reference Room in
Washington, DC, and that information on the operation of the Public Reference
Room may be obtained by calling 1-800-SEC-0330.
22
DAVIS VALUE PORTFOLIO
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
================================================================================
DIRECTORS
For the purposes of their service as directors to the Davis Funds, the business
address for each of the directors is 2949 E. Elvira Road, Suite 101, Tucson, AZ
85706. Each Director serves until their retirement, resignation, death or
removal. Directors must retire at the close of business on the last day of the
calendar year in which the Director attains age seventy-two (72), except that
any person who was a Director on July 1, 1994, and at that date was
seventy-three (73) years of age or less shall retire from the Board of Directors
and cease being a Director at the close of business on the last day of the year
in which the Director attains age seventy-four (74).
NUMBER OF
TERM OF PORTFOLIOS IN
OFFICE AND PRINCIPAL FUND COMPLEX
POSITION(S) HELD LENGTH OF OCCUPATION(S) DURING OVERSEEN BY OTHER DIRECTORSHIPS HELD BY
NAME AND AGE WITH FUND TIME SERVED PAST FIVE YEARS DIRECTOR DIRECTOR
- ------------------ ---------------- -------------- ------------------------ ---------------- -------------------------------
INDEPENDENT DIRECTORS
WESLEY E. Director director President, Bass & 12 none
BASS, JR. since 1990 Associates (financial
(born 8/21/31) consulting); formerly
First Deputy City Treasurer,
City of Chicago; and
Executive Vice President,
Chicago Title and Trust
Company (bank and trust).
MARC P. BLUM Director director Chief Executive 12 Director, Legg Mason Trust
(born 9/9/42) since 1986 Officer, World Total (asset management company)
Return Fund, LLLP; Of and Rodney Trust Company
Counsel to Gordon, (Delaware); Former Director,
Feinblatt, Rothman, Mid-Atlantic Realty Trust
Hoffberger and (real estate investment
Hollander, LLC (law trust); Trustee, College of
firm). Notre Dame of Maryland, McDonogh
School and other public charities,
private foundations, and businesses.
THOMAS S. GAYNER Director director Chief Investment 12 Markel Corporation.
(born 12/16/61) since 2004 Officer, Markel
Corporation
(insurance company).
JERRY D. GEIST Director director Chairman, Santa Fe 12 Director, CH2M-Hill, Inc.
(born 5/23/34) since 1986 Center Enterprises (engineering);Chairman, Santa
(energy project Fe Center Enterprises;
development); Retired Investment Committee for
Chairman and Microgeneration Technology
President, Public Fund, UTECH Funds.
Service Company of New
Mexico.
23
DAVIS VALUE PORTFOLIO
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
================================================================================
DIRECTORS - CONTINUED
NUMBER OF
TERM OF PORTFOLIOS IN
OFFICE AND PRINCIPAL FUND COMPLEX
POSITION(S) LENGTH OF OCCUPATION(S) DURING OVERSEEN BY OTHER DIRECTORSHIPS HELD BY
NAME AND AGE HELD WITH FUND TIME SERVED PAST FIVE YEARS DIRECTOR DIRECTOR
- ------------------ ---------------- -------------- ------------------------ ---------------- -------------------------------
INDEPENDENT DIRECTORS - CONTINUED
D. JAMES GUZY Director director Chairman, PLX 12 Director, Intel Corp.
(born 3/7/36) since 1982 Technology, Inc. (semi-conductor
(semi-conductor manufacturer), Cirrus Logic
manufacturer). Corp. (semi-conductor
manufacturer), Alliance
Technology Fund (a mutual
fund), Micro Component
Technology, Inc.
(micro-circuit handling and
testing equipment
manufacturer), LogicVision,
Inc. (semi-conductor software
company), and Tessera
Technologies, Inc.
(semi-conductor packaging
company); Former Director,
Novellus Systems, Inc.
(semi-conductor manufacturer).
G. BERNARD Director director Managing General 12 none
HAMILTON since 1978 Partner, Avanti
(born 3/18/37) Partners, L.P.
(investment
partnership).
ROBERT P. Director director Chairman, Northroad 12 none
MORGENTHAU since 2002 Capital Management,
(born 3/22/57) LLC (an investment
management firm) since June
2002; President of Private
Advisory Services, Bank of
America (an investment
management firm) from 2001
until 2002; prior to that a
managing director and global
head of marketing and
distribution for Lazard Asset
Management (an investment
management firm) for ten
years.
THEODORE B. Director director Chairman, John 12 Mayor, Incorporated Village
SMITH, JR. since 1994 Hassall, Inc. of Mill Neck.
(born 12/23/32) (fastener
manufacturing);
Chairman, Cantrock
Realty.
24
DAVIS VALUE PORTFOLIO
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
================================================================================
DIRECTORS - CONTINUED
NUMBER OF
TERM OF PORTFOLIOS IN
OFFICE AND PRINCIPAL FUND COMPLEX
POSITION(S) LENGTH OF OCCUPATION(S) DURING OVERSEEN BY OTHER DIRECTORSHIPS HELD BY
NAME AND AGE HELD WITH FUND TIME SERVED PAST FIVE YEARS DIRECTOR DIRECTOR
- ------------------ ---------------- -------------- ------------------------ ---------------- -------------------------------
INDEPENDENT DIRECTORS - CONTINUED
CHRISTIAN R. Director director General Partner, 12 none
SONNE since 1990 Tuxedo Park Associates
(born 5/6/36) (land holding and
development firm);
President and Chief
Executive Officer,
Mulford Securities
Corporation (private
investment fund) until
1990; Former Vice
President, Goldman
Sachs & Co.
(investment banking).
MARSHA WILLIAMS Director director Executive Vice 15 Director of the Selected
(born 3/28/51) since 1999 President and Chief Funds (consisting of three
Financial Officer of portfolios) since 1996;
Equity Office Director, Modine
Properties Trust (a Manufacturing, Inc. (heat
real estate investment transfer technology);
trust); Former Chief Director, Chicago Bridge &
Administrative Iron Company, N.V.
Officer, Crate & (industrial construction and
Barrel (home engineering).
furnishings retailer);
former Vice President
and Treasurer, Amoco
Corporation (oil & gas
company).
INSIDE DIRECTORS*
JEREMY H. BIGGS Director/ director Vice Chairman, Head of 12 none
(born 8/16/35) Chairman since 1994 Equity Research, Vice
Chairman of U.S. Investment
Policy Committee, and Member
of the International
Investment Committee, all for
Fiduciary Trust Company
International (money
management firm) Consultant
to Davis Selected Advisers,
L.P.
25
DAVIS VALUE PORTFOLIO
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
================================================================================
DIRECTORS - CONTINUED
NUMBER OF
TERM OF PORTFOLIOS IN
OFFICE AND PRINCIPAL FUND COMPLEX
POSITION(S) LENGTH OF OCCUPATION(S) DURING OVERSEEN BY OTHER DIRECTORSHIPS HELD BY
NAME AND AGE HELD WITH FUND TIME SERVED PAST FIVE YEARS DIRECTOR DIRECTOR
- ------------------ ---------------- -------------- ------------------------ ---------------- -------------------------------
INSIDE DIRECTORS* - CONTINUED
ANDREW A. DAVIS Director director President or Vice 15 Director of the Selected
(born 6/25/63) since 1997 President, of each Funds (consisting of three
Davis Fund and portfolios) since 1998.
Selected Fund;
President, Davis
Selected Advisers,
L.P., and also serves
as an executive
officer in certain
companies affiliated
with the Adviser.
CHRISTOPHER C. Director director Chief Executive 15 Director of the Selected
DAVIS since 1997 Officer, President or Funds (consisting of three
(born 7/13/65) Vice President, of portfolios) since 1998.
each Davis Fund and Selected
Fund; Chairman and Chief
Executive Officer, Davis
Selected Advisers, L.P., and
also serves as an executive
officer in certain companies
affiliated with the Adviser,
including sole member of the
Adviser's general partner,
Davis Investments, LLC;
Employee of Shelby Cullom
Davis & Co. (registered
broker/dealer).
* Jeremy H. Biggs, Andrew A. Davis and Christopher C. Davis own partnership
units (directly, indirectly or both) of the Adviser and are considered to
be "interested persons" of the Funds as defined in the Investment Company
Act of 1940. Andrew A. Davis and Christopher C. Davis are brothers.
26
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(This page has been left blank intentionally.)
DAVIS VALUE PORTFOLIO
2949 East Elvira Road, Suite 101, Tucson, Arizona 85706
================================================================================
DIRECTORS OFFICERS
Wesley E. Bass, Jr. Jeremy H. Biggs
Jeremy H. Biggs Chairman
Marc P. Blum Christopher C. Davis
Andrew A. Davis President
Christopher C. Davis Andrew A. Davis
Thomas S. Gayner Vice President
Jerry D. Geist Kenneth C. Eich
D. James Guzy Executive Vice President
G. Bernard Hamilton & Principal Executive Officer
Robert P. Morgenthau Sharra L. Reed
Theodore B. Smith, Jr. Vice President & Chief Compliance Officer
Christian R. Sonne Douglas A. Haines
Marsha Williams Vice President
& Principal Accounting Officer
Thomas D. Tays
Vice President & Secretary
INVESTMENT ADVISER
Davis Selected Advisers, L.P. (Doing business as "Davis Advisors")
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
(800) 279-0279
DISTRIBUTOR
Davis Distributors, LLC
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
TRANSFER AGENT & CUSTODIAN
State Street Bank and Trust Company
c/o The Davis Funds
P.O. Box 8406
Boston, Massachusetts 02266-8406
COUNSEL
Seyfarth Shaw LLP
55 East Monroe Street, Suite 4200
Chicago, Illinois 60603-5803
AUDITORS
KPMG LLP
707 Seventeenth Street
Suite 2700
Denver, Colorado 80202
================================================================================
FOR MORE INFORMATION ABOUT THE 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. QUARTERLY FACT SHEETS ARE AVAILABLE ON THE
FUND'S WEBSITE AT WWW.DAVISFUNDS.COM.
================================================================================
DAVIS ADVISORS
2949 EAST ELVIRA ROAD
SUITE 101
TUCSON, AZ 85706
1-800-279-0279
davisfunds.com
[DAVIS FUNDS LOGO]
OVER 35 YEARS OF RELIABLE INVESTING(TM)
ANNUAL REPORT
[DAVIS FUNDS GRAPHIC OMITTED]
DECEMBER 31, 2004
DAVIS FINANCIAL PORTFOLIO
(PORTFOLIO OF DAVIS VARIABLE ACCOUNT FUND, INC.)
TABLE OF CONTENTS
Management's Discussion and Analysis.........................................2
Fund Performance and Supplementary Information...............................4
Schedule of Investments......................................................8
Statement of Assets and Liabilities.........................................10
Statement of Operations.....................................................11
Statements of Changes in Net Assets.........................................12
Notes to Financial Statements...............................................13
Financial Highlights........................................................17
Report of Independent Registered Public Accounting Firm.....................18
Fund Information............................................................19
Directors and Officers......................................................20
DAVIS FINANCIAL PORTFOLIO
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS
MARKET ENVIRONMENT
During the year ended December 31, 2004, the stock market, as measured by the
Standard & Poor's 500(R) Index(1), returned 10.88%. U.S. economic activity, as
measured by the gross domestic product rose sharply in the first two quarters
before falling sharply in the third quarter of 2004. Interest rates, as measured
by the 10-year Treasury bond, trended downward over the first three months, rose
over the next three months then slowly declined over the last half of the year.
After trending sideways during the first seven months of the year, the S&P
500(R) Index went on a sustained rally over the last five months of 2004.
DAVIS FINANCIAL PORTFOLIO
PERFORMANCE OVERVIEW
Davis Financial Portfolio returned 10.32% for the year ended December 31,
2004(2), compared with a return of 10.88% for the Standard & Poor's 500(R)
Index(1).
Financial companies are subdivided into several sectors. As a group, these
sectors kept pace with the S&P 500(R) Index, neither out-performing, nor
under-performing the Index by a significant margin. Financial companies making
important contributions(3) to the Portfolio's relative performance included
three companies in the financial services sector: American Express(4), Moody's,
and Loews. Over the year ended December 31, 2004, American Express increased by
17.60%, Moody's increased by 44.06%, and Loews increased by 43.59%. Another
financial service company, H&R Block, decreased by 9.99% over the year ended
December 31, 2004 and was one of the more important detractors from relative
performance. Markel, a property and casualty insurance company, increased by
43.58% over the year ended December 31, 2004.
In 2004 the Portfolio also invested in non-financial companies. Tyco
International, a diversified manufacturing company, increased by 35.41% over the
year ended December 31, 2004 and was an important contributor to performance.
Sealed Air, an industrial company, decreased by 1.61% over the same time period
and was an important detractor from performance.
The Portfolio's largest sector weightings were in financial services, banks and
savings & loan associations, and property and casualty insurance. The
Portfolio's financial service holdings and property and casualty insurance
holdings out-performed the S&P 500(R) Index, but the Portfolio's banks and
savings & loan holdings under-performed the Index.
Among the companies detracting from the Portfolio's performance relative to the
S&P 500(R) Index were: Julius Baer, an investment firm, Fifth Third Bancorp, a
banking and savings & loan company, Transatlantic Holdings, a reinsurance
company, and China Life, a life insurance company. Over the year ended December
31, 2004, Julius Baer decreased by 9.42%, Fifth Third Bancorp decreased by
17.93%, Transatlantic Holdings decreased by 3.77%, and China Life decreased by
19.81%.
We continue to believe that long-term demographics favor financial services
companies. The Portfolio's investment strategy is to perform extensive research
to buy companies with expanding earnings at value prices and hold them for the
long term. We believe that performance should be evaluated over long periods of
time and are strong supporters of long-term buy-and-hold investing.
2
DAVIS FINANCIAL PORTFOLIO
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
This Annual Report is authorized for use by existing shareholders. Prospective
shareholders must receive a current Davis Variable Account Funds (including
Davis Financial Portfolio) prospectus, which contains more information about
investment strategies, risks, charges, and expenses. Please read the prospectus
carefully before investing or sending money.
Davis Financial Portfolio's investment objective is long-term growth of capital.
There can be no assurance that the Portfolio will achieve its objective. The
primary risks of an investment in Davis Financial Portfolio are: (1) market
risk, (2) company risk, (3) headline risk, (4) selection risk, and (5)
concentrated financial services portfolio 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) The S&P 500(R) 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.
(2) Total return assumes reinvestment of dividends and capital gain
distributions. Past performance is not a guarantee of future results. Investment
return and principal value will vary so that, when redeemed, an investor's
shares may be worth more or less than when purchased. The following table lists
the average annual total return for the periods ended December 31, 2004.
- ----------------------------- ------------ ------------ -------------------
INCEPTION
PORTFOLIO NAME 1-YEAR 5-YEAR (July 1, 1999)
- ----------------------------- ------------ ------------ -------------------
Davis Financial Portfolio 10.32% 7.31% 5.18%
- ----------------------------- ------------ ------------ -------------------
Performance numbers are net of all portfolio operating expenses, but do not
include any insurance charges imposed by your insurance company's separate
account. If performance information included the effect of these additional
charges, the total return would be lower.
Portfolio performance changes over time and current performance may be higher or
lower than stated. For more current information please call Davis Funds
Shareholder Services at 1-800-279-0279.
(3) A company's or sector's contribution to the Portfolio's performance is a
product both of its appreciation or depreciation and it's weighting within the
portfolio. For example, a 5% holding that rises 20% has twice as much impact as
a 1% holding that rises 50%.
(4) This Management Discussion & Analysis discusses a number of individual
companies. The information provided in this report does not provide information
reasonably sufficient upon which to base an investment decision and should not
be considered a recommendation to purchase or sell any particular security. The
schedule of investments lists each Portfolio's holdings of each company
discussed.
Shares of the Davis 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.
3
DAVIS FINANCIAL PORTFOLIO
FUND OVERVIEW
At December 31, 2004
================================================================================
[GRAPHIC OMITTED]
PORTFOLIO MAKEUP (% OF FUND NET ASSETS)
- ---------------------------------------
Short Term Investments, Other Assets & Liabilities 7.6%
Common Stocks 92.4%
[GRAPHIC OMITTED]
SECTOR WEIGHTINGS (% OF STOCK HOLDINGS)
- ---------------------------------------
Banks and Savings & Loan 19.0%
Diversified Manufacturing 4.6%
Financial Services 36.3%
Insurance 33.3%
Other 6.8%
TOP 10 HOLDINGS
STOCK SECTOR % OF FUND NET ASSETS
- ------------------------------------------------------------------------------------------------------
American Express Co. Financial Services 9.93%
Transatlantic Holdings, Inc. Reinsurance 6.57%
Moody's Corp. Financial Services 4.93%
Citigroup Inc. Financial Services 4.80%
American International Group, Inc. Multi-Line Insurance 4.73%
Golden West Financial Corp. Banks and Savings & Loan Associations 4.73%
Fifth Third Bancorp Banks and Savings & Loan Associations 4.70%
Berkshire Hathaway Inc., Class B Property/Casualty Insurance 4.39%
Cincinnati Financial Corp. Property/Casualty Insurance 4.39%
Tyco International Ltd. Diversified Manufacturing 4.27%
4
DAVIS FINANCIAL PORTFOLIO
PORTFOLIO ACTIVITY
January 1, 2004 through December 31, 2004
================================================================================
POSITIONS CLOSED (1/1/04-12/31/04)
(Gains and losses greater than $100,000 are highlighted)
DATE OF
SECURITY SECTOR FINAL SALE GAIN/(LOSS)
- ------------------------------------------------------------------------------
Aon Corp. Insurance Brokers 05/14/04 $ (263,058)
Charles Schwab Corp. Financial Services 02/10/04 (59,013)
Janus Capital Group Inc. Investment Firms 05/03/04 (569,682)
5
DAVIS FINANCIAL PORTFOLIO
FUND PERFORMANCE
================================================================================
- -------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN EXPENSE EXAMPLE
FOR THE PERIODS ENDED DECEMBER 31, 2004 BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
(07/01/04) (12/31/04) (07/01/04-12/31/04)
---------- ---------- -------------------
One Year.............................. 10.32% Actual............... $1,000.00 $1,070.14 $4.42
Five Years............................ 7.31% Hypothetical (5% return
Life of Fund (July 1, 1999 before expenses)... $1,000.00 $1,020.71 $4.32
through December 31, 2004)....... 5.18%
- -------------------------------------------------------------------------------------------------------------------------------
*Expenses are equal to the Fund's annualized expense ratio (0.85%), multiplied
by the average account value over the period, multiplied by 184/366 (to reflect
the one-half year period). See Notes to Performance on page 7 for a description
of the "Expense Example".
$10,000 INVESTED AT COMMENCEMENT OF OPERATIONS. Let's say you invested $10,000
in Davis Financial Portfolio on July 1, 1999 (commencement of operations). As
the chart below shows, by December 31, 2004 the value of your investment would
have grown to $13,210 - a 32.10% increase on your initial investment. For
comparison, look at how the Standard & Poor's 500(R) Stock Index did over the
same period. With dividends reinvested, the same $10,000 investment would have
been $9,532 - a 4.68% decrease.
[GRAPHIC OMITTED]
S&P 500 DFP
----------- -----------
7/1/99 $ 10,000.00 $ 10,000.00
12/31/99 $ 10,706.00 $ 9,282.62
12/31/00 $ 9,732.00 $ 12,157.43
12/31/01 $ 8,576.00 $ 10,896.24
12/31/02 $ 6,681.00 $ 9,061.29
12/31/03 $ 8,597.00 $ 11,974.80
12/31/04 $ 9,532.00 $ 13,210.28
The Standard & Poor's 500(R) Stock Index is an unmanaged index of 500 selected
common stocks, most of which are listed on the New York Stock Exchange. The
Index is adjusted for dividends, weighted towards stocks with large market
capitalization, and represents approximately two-thirds of the total market
value of all domestic common stocks.
The performance data for Davis Financial Portfolio contained in this report
represents past performance and assumes that all distributions were reinvested,
and should not be considered as an indication of future performance from an
investment in the Fund today. The investment return and principal value will
fluctuate so that shares may be worth more or less than their original cost when
redeemed.
6
DAVIS FINANCIAL PORTFOLIO
NOTES TO PERFORMANCE
================================================================================
THE FOLLOWING DISCLOSURE PROVIDES IMPORTANT INFORMATION REGARDING THE FUND'S
EXPENSE EXAMPLE, WHICH APPEARS IN THE FUND'S PERFORMANCE SECTION IN THIS ANNUAL
REPORT. PLEASE REFER TO THIS INFORMATION WHEN REVIEWING THE EXPENSE EXAMPLE FOR
THE FUND.
EXAMPLE
As a shareholder of the Fund, you incur ongoing costs only, including advisory
and administrative fees and other Fund expenses. The Expense Example is intended
to help you understand your ongoing costs (in dollars) of investing in the Fund
and to compare these costs with the ongoing costs of investing in other mutual
funds. The Expense Example is based on an investment of $1,000 invested at the
beginning of the period and held for the entire period indicated, which for the
Fund is from 07/01/04 to 12/31/04. 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 for on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The information represented in the row entitled "Hypothetical (5% return before
expenses)" 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
(5% return before expenses)" is useful in comparing ongoing costs only, and will
not help you determine the relative total costs of owning different funds.
7
DAVIS FINANCIAL PORTFOLIO
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2004
VALUE
SHARES SECURITY (NOTE 1)
=============================================================================================
COMMON STOCK - (92.35%)
BANKS AND SAVINGS & LOAN ASSOCIATIONS - (17.56%)
68,200 Commerce Bancorp, Inc. ..................................... $ 4,392,080
108,450 Fifth Third Bancorp......................................... 5,134,023
84,100 Golden West Financial Corp. ................................ 5,165,422
72,400 Wells Fargo & Co. .......................................... 4,499,660
-------------
19,191,185
BUSINESS SERVICES - (2.40%)
44,000 D&B Corp.*.................................................. 2,624,600
-------------
CONSUMER PRODUCTS - (2.28%)
40,800 Altria Group, Inc. ......................................... 2,492,880
-------------
DIVERSIFIED MANUFACTURING - (4.27%)
130,500 Tyco International Ltd. .................................... 4,664,070
-------------
FINANCIAL SERVICES - (31.42%)
192,500 American Express Co. ....................................... 10,851,225
108,800 Citigroup Inc. ............................................. 5,241,984
48,100 H&R Block, Inc. ............................................ 2,356,900
92,948 JPMorgan Chase & Co. ....................................... 3,625,902
61,800 Loews Corp. ................................................ 4,344,540
62,000 Moody's Corp. ............................................. 5,384,700
153,200 Providian Financial Corp.*.................................. 2,523,204
-------------
34,328,455
-------------
INDUSTRIAL - (1.63%)
33,500 Sealed Air Corp.*........................................... 1,784,545
-------------
INVESTMENT FIRMS - (2.09%)
7,600 Julius Baer Holding, Ltd. AG................................ 2,279,667
-------------
LIFE INSURANCE - (0.55%)
22,600 China Life Insurance Co., Ltd., ADR*........................ 597,544
-------------
MULTI-LINE INSURANCE - (4.73%)
78,787 American International Group, Inc. ......................... 5,173,942
-------------
PROPERTY/CASUALTY INSURANCE - (16.76%)
7 Berkshire Hathaway Inc., Class A*........................... 615,300
1,635 Berkshire Hathaway Inc., Class B*........................... 4,800,360
108,290 Cincinnati Financial Corp. ................................. 4,797,788
38,600 FPIC Insurance Group, Inc.*................................. 1,363,931
9,400 Markel Corp.*............................................... 3,421,600
39,100 Progressive Corp. (Ohio).................................... 3,317,244
-------------
18,316,223
-------------
8
DAVIS FINANCIAL PORTFOLIO
SCHEDULE OF INVESTMENTS - (Continued)
DECEMBER 31, 2004
VALUE
SHARES/PRINCIPAL SECURITY (NOTE 1)
==============================================================================================================
COMMON STOCK - (CONTINUED)
REINSURANCE - (8.66%)
25,500 Everest Re Group, Ltd. ...................................................... $ 2,283,780
116,037 Transatlantic Holdings, Inc. ................................................ 7,174,568
--------------
9,458,348
--------------
Total Common Stock - (identified cost $80,845,455)....................... 100,911,459
--------------
SHORT TERM INVESTMENTS - (7.53%)
$ 2,666,000 Goldman, Sachs & Co. Joint Repurchase Agreement, 2.25%,
01/03/05, dated 12/31/04, repurchase value of $2,666,500
(collateralized by: U.S. Government obligations in a pooled cash account,
total market value $2,719,320)............................................ 2,666,000
2,962,000 Nomura Securities International, Inc. Joint Repurchase Agreement, 2.35%,
01/03/05, dated 12/31/04, repurchase value of $2,962,580
(collateralized by: U.S. Government obligations in a pooled cash account,
total market value $3,021,240)............................................ 2,962,000
2,599,000 UBS Financial Services Inc. Joint Repurchase Agreement, 2.27%,
01/03/05, dated 12/31/04, repurchase value of $2,599,492
(collateralized by: U.S. Government obligations in a pooled cash account,
total market value $2,650,980)............................................ 2,599,000
--------------
Total Short Term Investments - (identified cost $8,227,000)......... 8,227,000
--------------
Total Investments - (99.88%) - (identified cost $89,072,455) - (a)........... 109,138,459
Other Assets Less Liabilities - (0.12%)...................................... 135,290
--------------
Net Assets - (100%).................................................. $ 109,273,749
==============
*Non-Income Producing Security.
(a) Aggregate cost for Federal Income Tax purposes is $89,403,696. At December
31, 2004 unrealized appreciation (depreciation) of securities for Federal Income
Tax purposes is as follows:
Unrealized appreciation...................................................... $ 20,916,908
Unrealized depreciation...................................................... (1,182,145)
--------------
Net unrealized appreciation.............................................. $ 19,734,763
==============
SEE NOTES TO FINANCIAL STATEMENTS
9
DAVIS FINANCIAL PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
At December 31, 2004
================================================================================
ASSETS:
Investments in securities, at value
(see accompanying Schedule of Investments)(cost of $89,072,455)............................... $ 109,138,459
Cash............................................................................................ 2,600
Receivables:
Dividends and interest........................................................................ 134,641
Capital stock sold............................................................................ 81,846
---------------
Total assets............................................................................. 109,357,546
---------------
LIABILITIES:
Payables:
Capital stock reacquired...................................................................... 302
Accrued expenses................................................................................ 13,423
Accrued management fee.......................................................................... 70,072
---------------
Total liabilities........................................................................ 83,797
---------------
NET ASSETS......................................................................................... $ 109,273,749
===============
SHARES OUTSTANDING (NOTE 4)........................................................................ 8,522,573
===============
NET ASSET VALUE, offering and
redemption price per share (Net Assets / Shares Outstanding).................................. $ 12.82
===========
NET ASSETS CONSIST OF:
Par value of shares of capital stock............................................................ $ 8,523
Additional paid-in capital...................................................................... 91,583,027
Undistributed net investment loss............................................................... (2,146)
Accumulated net realized loss from investments and foreign currency transactions................ (2,383,246)
Net unrealized appreciation on investments and foreign currency transactions.................... 20,067,591
---------------
$ 109,273,749
===============
SEE NOTES TO FINANCIAL STATEMENTS
10
DAVIS FINANCIAL PORTFOLIO
STATEMENT OF OPERATIONS
For the year ended December 31, 2004
================================================================================
INVESTMENT INCOME:
Income:
Dividends (Net of foreign withholding taxes of $9,853)........................................ $ 1,032,742
Interest...................................................................................... 94,876
--------------
Total income.............................................................................. 1,127,618
--------------
Expenses:
Management fees (Note 2)...................................................................... 676,192
Custodian fees................................................................................ 37,538
Transfer agent fees........................................................................... 9,037
Audit fees.................................................................................... 8,400
Accounting fees (Note 2)...................................................................... 6,000
Legal fees.................................................................................... 1,596
Reports to shareholders....................................................................... 11,406
Directors' fees and expenses.................................................................. 13,566
Registration and filing fees.................................................................. 2,491
Miscellaneous................................................................................. 2,486
--------------
Total expenses............................................................................ 768,712
Expenses paid indirectly (Note 5)......................................................... (29)
--------------
Net expenses.............................................................................. 768,683
--------------
Net investment income.................................................................. 358,935
--------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss from:
Investment transactions................................................................... (1,006,272)
Foreign currency transactions............................................................. (3,128)
Net increase in unrealized appreciation of investments and
foreign currency transactions............................................................ 9,637,834
--------------
Net realized and unrealized gain on investments and foreign currency...................... 8,628,434
--------------
Net increase in net assets resulting from operations................................... $ 8,987,369
==============
SEE NOTES TO FINANCIAL STATEMENTS
11
DAVIS FINANCIAL PORTFOLIO
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED
DECEMBER 31,
-----------------------------------------
2004 2003
---- ----
OPERATIONS:
Net investment income.............................................. $ 358,935 $ 222,162
Net realized loss from investment and foreign currency
transactions..................................................... (1,009,400) (380,603)
Net change in unrealized appreciation (depreciation) of
investments and foreign currency transactions.................... 9,637,834 14,533,880
---------------- ----------------
Net increase in net assets resulting from operations............... 8,987,369 14,375,439
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.............................................. (364,973) (215,570)
CAPITAL SHARE TRANSACTIONS (NOTE 4).................................... 29,472,122 25,310,603
---------------- ----------------
Total increase in net assets........................................... 38,094,518 39,470,472
NET ASSETS:
Beginning of year.................................................. 71,179,231 31,708,759
---------------- ----------------
End of year*....................................................... $ 109,273,749 $ 71,179,231
================ ================
*Including undistributed net investment income (loss) of...... $ (2,146) $ 6,114
SEE NOTES TO FINANCIAL STATEMENTS
12
DAVIS FINANCIAL PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
================================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Fund is a separate series of Davis Variable Account Fund, Inc., which is
registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company. Shares of the Fund may only
be purchased by insurance companies for the purpose of funding variable annuity
or variable life insurance contracts. The following is a summary of significant
accounting policies followed by the Fund in the preparation of financial
statements.
A. VALUATION OF SECURITIES - Portfolio securities listed on national securities
exchanges are valued at the last reported sales price on the day of valuation.
Securities traded in the over the counter market and listed securities for which
no sale was reported on that date are stated at the average of closing bid and
asked prices. Securities for which market quotations are not readily available,
or whose values have been affected by a significant event occurring after the
close of their primary markets, are valued at fair value as determined in good
faith by the Board of Directors. Short-term obligations are valued at amortized
cost, which approximates fair value. These valuation procedures are reviewed and
subject to approval by the Board of Directors.
B. MASTER REPURCHASE AGREEMENTS - The Fund, along with other affiliated funds,
may transfer uninvested cash balances into one or more master repurchase
agreement accounts. These balances are invested in one or more repurchase
agreements, secured by U.S. government securities. Securities pledged as
collateral for repurchase agreements are held by a custodian bank until the
agreements mature. Each agreement requires that the market value of the
collateral be sufficient to cover payments of interest and principal; however,
in the event of default by the other party to the agreement, retention of the
collateral may be subject to legal proceedings.
C. CURRENCY TRANSLATION - The market values of all assets and liabilities
denominated in foreign currencies are recorded in the financial statements after
translation to the U.S. dollar based upon the mean between the bid and offered
quotations of the currencies against U.S. dollars on the date of valuation. The
cost basis of such assets and liabilities is determined based upon historical
exchange rates. Income and expenses are translated at average exchange rates in
effect as accrued or incurred.
D. FOREIGN CURRENCY - The Fund may enter into forward purchases or sales of
foreign currencies to hedge certain foreign currency denominated assets and
liabilities against declines in market value relative to the U.S. dollar.
Forward currency contracts are marked-to-market daily and the change in market
value is recorded by the Fund as an unrealized gain or loss. When the forward
currency contract is closed, the Fund records a realized gain or loss equal to
the difference between the value of the forward currency contract at the time it
was opened and value at the time it was closed. Investments in forward currency
contracts may expose the Fund to risks resulting from unanticipated movements in
foreign currency exchange rates or failure of the counter-party to the agreement
to perform in accordance with the terms of the contract.
Reported net realized foreign exchange gains or losses arise from the sales
and maturities of investments, sales of foreign currencies, currency gains or
losses realized between the trade and settlement dates on securities
transactions, the difference between the amounts of dividends, interest and
foreign withholding taxes recorded on the Fund's books, and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in the value of assets and
liabilities other than investments in securities at fiscal year end, resulting
from changes in the exchange rate. The Fund includes foreign currency gains and
losses realized on the sale of investments together with market gains and losses
on such investments in the statement of operations.
13
DAVIS FINANCIAL PORTFOLIO
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
December 31, 2004
================================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
E. FEDERAL INCOME TAXES - It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income, including
any net realized gains on investments not offset by loss carryovers, to
shareholders. Therefore, no provision for federal income or excise tax is
required. At December 31, 2004, the Fund had approximately $148,000 of post
October 2004 losses available to offset future capital gains if any, which
expire in 2013. Additionally, the Fund had $2,000 of post October 2004 foreign
currency losses which were deferred. At December 31, 2004, the Fund had
available for federal income tax purposes unused capital loss carryforwards of
$650,000, $328,000 and $926,000, which expire in 2009, 2011 and 2012,
respectively.
F. USE OF ESTIMATES IN FINANCIAL STATEMENTS - In preparing financial statements
in conformity with accounting principles generally accepted in the United States
of America, management makes estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, as well as the reported
amounts of income and expenses during the reporting period. Actual results may
differ from these estimates.
G. 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.
H. 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) of
investments may differ for financial statement and tax purposes primarily
because of the recognition of certain foreign currency gains (losses) as
ordinary income (loss) for tax purposes and the tax deferral of losses on "wash
sale" 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 the classification of
distributions to shareholders to reflect the differences between financial
statement amounts and distributions determined in accordance with income tax
regulations. Accordingly, during the year ended December 31, 2004, amounts have
been reclassified to reflect a decrease in undistributed net investment income
of $2,222, a decrease in accumulated net realized loss of $3,128, and a decrease
to paid in capital of $906.
The tax character of distributions paid during the years ended December 31, 2004
and 2003, was as follows:
2004 2003
----------------- -----------------
Ordinary income $ 364,973 $ 215,570
14
DAVIS FINANCIAL PORTFOLIO
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
December 31, 2004
================================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
As of December 31, 2004 the components of distributable earnings (accumulated
losses) on a tax basis were as follows:
Undistributed net investment income.......................... $ -
Accumulated net realized losses from investments and foreign
currency transactions....................................... (2,054,151)
Net unrealized appreciation on investments................... 19,736,350
-------------
Total..................................................... $ 17,682,199
=============
NOTE 2 - INVESTMENT ADVISORY FEES
Advisory fees are paid to Davis Advisors (the "Adviser") at an annual rate
of 0.75% of the average annual net assets.
State Street Bank and Trust Company ("State Street Bank") is the Fund's
primary transfer agent. The Adviser is also paid for certain transfer agent
services. The fee paid to the Adviser for the year ended December 31, 2004 was
$35. State Street Bank is the Fund's primary accounting provider. Fees for such
services are included in the custodian fee as State Street Bank also serves as
the Fund's custodian. The Adviser is also paid for certain accounting services.
The fee for the year ended December 31, 2004 amounted to $6,000. Certain
directors and officers of the Fund are also directors and officers of the
general partner of the Adviser.
Davis Selected Advisers - NY, Inc. ("DSA-NY"), a wholly-owned subsidiary of
the Adviser, acts as sub-adviser to the Fund. The Fund pays no fees directly to
DSA-NY.
NOTE 3 - PURCHASES AND SALES OF SECURITIES
Purchases and sales of investment securities (excluding short-term
securities) during the year ended December 31, 2004 were $30,856,392 and
$4,840,238, respectively.
15
DAVIS FINANCIAL PORTFOLIO
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
December 31, 2004
================================================================================
NOTE 4 - CAPITAL STOCK
At December 31, 2004, there were 500 million shares of capital stock ($0.001
par value per share) authorized. Transactions in capital stock were as follows:
YEAR ENDED
DECEMBER 31,
---------------------------------------------
2004 2003
---- ----
Shares sold............................................... 3,238,473 2,921,413
Shares issued in reinvestment of distributions............ 28,469 18,520
---------------- ----------------
3,266,942 2,939,933
Shares redeemed........................................... (848,124) (420,309)
---------------- ----------------
Net increase........................................ 2,418,818 2,519,624
================ ================
Proceeds from shares sold................................. $ 39,191,938 $ 29,024,533
Proceeds from shares issued in
reinvestment of distributions......................... 364,973 215,570
---------------- ----------------
39,556,911 29,240,103
Cost of shares redeemed................................... (10,084,789) (3,929,500)
---------------- ----------------
Net increase........................................ $ 29,472,122 $ 25,310,603
================ ================
NOTE 5 - EXPENSES PAID INDIRECTLY
Under an agreement with the custodian bank, custodian fees are reduced for
earnings on cash balances maintained at the custodian by the Fund. Such
reductions amounted to $29 for the year ended December 31, 2004.
16
DAVIS FINANCIAL PORTFOLIO
FINANCIAL HIGHLIGHTS
================================================================================
The following financial information represents data for each share of capital
stock outstanding throughout each period:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Net Asset Value, Beginning of Period.... $ 11.66 $ 8.85 $ 10.67 $ 11.91 $ 9.26
---------- ---------- ---------- ---------- ----------
Income (Loss) From Investment Operations
Net Investment Income.................. 0.04 0.04 0.02 - 0.01
Net Realized and Unrealized
Gains (Losses)...................... 1.16 2.81 (1.82) (1.24) 2.84
---------- ---------- ---------- ---------- ----------
Total From Investment Operations.... 1.20 2.85 (1.80) (1.24) 2.85
Dividends and Distributions
Dividends from Net Investment Income... (0.04) (0.04) (0.02) -(3) (0.01)
Return of Capital...................... - - - -(3) -(3)
Distributions from Realized Gains...... - - - - (0.19)
---------- ---------- ---------- ---------- ----------
Total Dividends and Distributions... (0.04) (0.04) (0.02) - (0.20)
---------- ---------- ---------- ---------- ----------
Net Asset Value, End of Period.......... $ 12.82 $ 11.66 $ 8.85 $ 10.67 $ 11.91
========== ========== ========== ========== ==========
Total Return(1)......................... 10.32% 32.15% (16.84)% (10.37)% 30.97%
- ------------
Ratios/Supplemental Data
Net Assets, End of Period (000 omitted) $109,274 $71,179 $31,709 $24,587 $14,770
Ratio of Expenses to Average Net Assets 0.85% 0.90% 0.99% 1.00%(4) 1.00%(4)
Ratio of Net Investment Income to
Average Net Assets.................. 0.40% 0.48% 0.32% 0.04% 0.18%
Portfolio Turnover Rate(2)............. 6% 10% 23% 24% 26%
(1) Assumes hypothetical initial investment on the business day before the first
day of the fiscal period with all dividends and distributions reinvested in
additional shares on the reinvestment date, and redemption at the net asset
value calculated on the last business day of the fiscal period. Total
returns do not reflect charges attributable to your insurance company's
separate account. Inclusion of these charges would reduce the total returns
shown.
(2) The lesser of purchases or sales of portfolio securities for a period,
divided by the monthly average of the market value of portfolio securities
owned during the period. Securities with a maturity or expiration date at
the time of acquisition of one year or less are excluded from the
calculation.
(3) Less than $0.005 per share.
(4) Had the Adviser not absorbed certain expenses the ratio of expenses to
average net assets would have been 1.04% and 1.55% for 2001 and 2000,
respectively.
SEE NOTES TO FINANCIAL STATEMENTS
17
DAVIS FINANCIAL PORTFOLIO
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
================================================================================
To the Shareholders and Board of Directors
of Davis Variable Account Fund, Inc.:
We have audited the accompanying statement of assets and liabilities of
Davis Financial Portfolio (a separate series of Davis Variable Account Fund,
Inc.), including the schedule of investments as of December 31, 2004 and the
related statement of operations for the year then ended, the statements of
changes in net assets for each of the years in the two-year period then ended,
and the financial highlights for each of the years in the five-year period then
ended. These financial statements and financial highlights are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with auditing standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements and financial highlights are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 2004, by correspondence with
the custodian. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Davis Financial Portfolio as of December 31, 2004, and the results
of its operations for the year then ended, the changes in its net assets for
each of the years in the two-year period then ended, and the financial
highlights for each of the years in the five-year period then ended, in
conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Denver, Colorado
February 4, 2005
18
DAVIS FINANCIAL PORTFOLIO
DECEMBER 31, 2004 (UNAUDITED)
================================================================================
FEDERAL INCOME TAX INFORMATION
The information and distributions reported herein may differ from the
information reported as distributions taxable to certain shareholders for the
calendar year ended 2004 with their 2004 Form 1099-DIV.
Income dividends paid by the Fund during the calendar year ended 2004 should
be multiplied by 100% to arrive at the net amount eligible for the corporate
dividend-received deduction.
For the calendar year ended 2004 certain dividends paid by the Fund
constitute qualified dividend income for Federal Income Tax purposes. The Fund
designates $364,973 as qualified dividend income.
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
1-800-279-2279, (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 Funds toll-free at 1-800-279-2279, (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 the 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 1-800-279-2279 or on the
Fund's website at www.davisfunds.com or on the SEC's website at www.sec.gov. The
Fund's Form N-Q may be reviewed and copied at the SEC's Public Reference Room in
Washington, DC, and that information on the operation of the Public Reference
Room may be obtained by calling 1-800-SEC-0330.
19
DAVIS FINANCIAL PORTFOLIO
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
================================================================================
DIRECTORS
For the purposes of their service as directors to the Davis Funds, the business
address for each of the directors is 2949 E. Elvira Road, Suite 101, Tucson, AZ
85706. Each Director serves until their retirement, resignation, death or
removal. Directors must retire at the close of business on the last day of the
calendar year in which the Director attains age seventy-two (72), except that
any person who was a Director on July 1, 1994, and at that date was
seventy-three (73) years of age or less shall retire from the Board of Directors
and cease being a Director at the close of business on the last day of the year
in which the Director attains age seventy-four (74).
NUMBER OF
TERM OF PORTFOLIOS IN
OFFICE AND PRINCIPAL FUND COMPLEX
POSITION(S) LENGTH OF OCCUPATION(S) DURING OVERSEEN BY OTHER DIRECTORSHIPS HELD BY
NAME AND AGE HELD WITH FUND TIME SERVED PAST FIVE YEARS DIRECTOR DIRECTOR
- ------------------ ---------------- -------------- ------------------------ ---------------- -------------------------------
INDEPENDENT DIRECTORS
WESLEY E. Director director President, Bass & 12 none
BASS, JR. since 1990 Associates (financial
(born 8/21/31) consulting); formerly
First Deputy City
Treasurer, City of
Chicago; and Executive
Vice President,
Chicago Title and Trust
Company (bank and trust).
MARC P. BLUM Director director Chief Executive 12 Director, Legg Mason Trust
(born 9/9/42) since 1986 Officer, World Total (asset management company)
Return Fund, LLLP; Of and Rodney Trust Company
Counsel to Gordon, (Delaware); Former Director,
Feinblatt, Rothman, Mid-Atlantic Realty Trust
Hoffberger and (real estate investment
Hollander, LLC (law trust); Trustee, College of
firm). Notre Dame of Maryland,
McDonogh School and other
public charities, private
foundations, and businesses.
THOMAS S. GAYNER Director director Chief Investment 12 Markel Corporation.
(born 12/16/61) since 2004 Officer, Markel
Corporation
(insurance company).
JERRY D. GEIST Director director Chairman, Santa Fe 12 Director, CH2M-Hill, Inc.
(born 5/23/34) since 1986 Center Enterprises (engineering);Chairman, Santa
(energy project Fe Center Enterprises;
development); Retired Investment Committee for
Chairman and Microgeneration Technology
President, Public Fund, UTECH Funds.
Service Company of New
Mexico.
20
DAVIS FINANCIAL PORTFOLIO
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
================================================================================
DIRECTORS - CONTINUED
NUMBER OF
TERM OF PORTFOLIOS IN
OFFICE AND PRINCIPAL FUND COMPLEX
POSITION(S) LENGTH OF OCCUPATION(S) DURING OVERSEEN BY OTHER DIRECTORSHIPS HELD BY
NAME AND AGE HELD WITH FUND TIME SERVED PAST FIVE YEARS DIRECTOR DIRECTOR
- ------------------ ---------------- -------------- ------------------------ ---------------- -------------------------------
INDEPENDENT DIRECTORS - CONTINUED
D. JAMES GUZY Director director Chairman, PLX 12 Director, Intel Corp.
(born 3/7/36) since 1982 Technology, Inc. (semi-conductor
(semi-conductor manufacturer), Cirrus Logic
manufacturer). Corp. (semi-conductor
manufacturer), Alliance
Technology Fund (a mutual
fund), Micro Component
Technology, Inc.
(micro-circuit handling and
testing equipment
manufacturer), LogicVision,
Inc. (semi-conductor software
company), and Tessera
Technologies, Inc.
(semi-conductor packaging
company); Former Director,
Novellus Systems, Inc.
(semi-conductor manufacturer).
G. BERNARD Director director Managing General 12 none
HAMILTON since 1978 Partner, Avanti
(born 3/18/37) Partners, L.P.
(investment
partnership).
ROBERT P. Director director Chairman, Northroad 12 none
MORGENTHAU since 2002 Capital Management,
(born 3/22/57) LLC (an investment
management firm) since
June 2002; President
of Private Advisory
Services, Bank of
America (an investment
management firm) from
2001 until 2002; prior
to that a managing
director and global
head of marketing and
distribution for
Lazard Asset
Management (an
investment management
firm) for ten years.
THEODORE B. Director director Chairman, John 12 Mayor, Incorporated Village
SMITH, JR. since 1994 Hassall, Inc. of Mill Neck.
(born 12/23/32) (fastener
manufacturing);
Chairman, Cantrock
Realty.
21
DAVIS FINANCIAL PORTFOLIO
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
================================================================================
DIRECTORS - CONTINUED
NUMBER OF
TERM OF PORTFOLIOS IN
OFFICE AND PRINCIPAL FUND COMPLEX
POSITION(S) LENGTH OF OCCUPATION(S) DURING OVERSEEN BY OTHER DIRECTORSHIPS HELD BY
NAME AND AGE HELD WITH FUND TIME SERVED PAST FIVE YEARS DIRECTOR DIRECTOR
- ------------------ ---------------- -------------- ------------------------ ---------------- -------------------------------
INDEPENDENT DIRECTORS - CONTINUED
CHRISTIAN R. Director director General Partner, 12 none
SONNE since 1990 Tuxedo Park Associates
(born 5/6/36) (land holding and
development firm);
President and Chief
Executive Officer,
Mulford Securities
Corporation (private
investment fund) until
1990; Former Vice
President, Goldman
Sachs & Co.
(investment banking).
MARSHA WILLIAMS Director director Executive Vice 15 Director of the Selected
(born 3/28/51) since 1999 President and Chief Funds (consisting of three
Financial Officer, portfolios) since 1996;
Equity Office Director, Modine
Properties Trust (a Manufacturing, Inc. (heat
real estate investment transfer technology);
trust); Former Chief Director, Chicago Bridge &
Administrative Iron Company, N.V.
Officer, Crate & (industrial construction and
Barrel (home engineering).
furnishings retailer);
former Vice President
and Treasurer, Amoco
Corporation (oil & gas
company).
INSIDE DIRECTORS*
JEREMY H. BIGGS Director/ director Vice Chairman, Head of 12 none
(born 8/16/35) Chairman since 1994 Equity Research, Vice
Chairman of U.S.
Investment Policy
Committee and Member
of the International
Investment Committee,
all for Fiduciary
Trust Company
International (money
management firm)
Consultant to Davis
Selected Advisers,
L.P.
22
DAVIS FINANCIAL PORTFOLIO
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
================================================================================
DIRECTORS - CONTINUED
NUMBER OF
TERM OF PORTFOLIOS IN
OFFICE AND PRINCIPAL FUND COMPLEX
POSITION(S) LENGTH OF OCCUPATION(S) DURING OVERSEEN BY OTHER DIRECTORSHIPS HELD BY
NAME AND AGE HELD WITH FUND TIME SERVED PAST FIVE YEARS DIRECTOR DIRECTOR
- ------------------ ---------------- -------------- ------------------------ ---------------- -------------------------------
INSIDE DIRECTORS* - CONTINUED
ANDREW A. DAVIS Director director President or Vice 15 Director of the Selected
(born 6/25/63) since 1997 President, of each Funds (consisting of three
Davis Fund and portfolios) since 1998.
Selected Fund;
President, Davis
Selected Advisers,
L.P., and also serves
as an executive
officer in certain
companies affiliated
with the Adviser.
CHRISTOPHER C. Director director Chief Executive 15 Director of the Selected
DAVIS since 1997 Officer, President or Funds (consisting of three
(born 7/13/65) Vice President, of portfolios) since 1998.
each Davis Fund and
Selected Fund;
Chairman and Chief
Executive Officer,
Davis Selected
Advisers, L.P., and
also serves as an
executive officer in
certain companies
affiliated with the
Adviser, including
sole member of the
Adviser's general
partner, Davis
Investments, LLC;
Employee of Shelby
Cullom Davis & Co.
(registered
broker/dealer).
* Jeremy H. Biggs, Andrew A. Davis and Christopher C. Davis own partnership
units (directly, indirectly or both) of the Adviser and are considered to be
"interested persons" of the Funds as defined in the Investment Company Act of
1940. Andrew A. Davis and Christopher C. Davis are brothers.
23
DAVIS FINANCIAL PORTFOLIO
================================================================================
2949 East Elvira Road, Suite 101, Tucson, Arizona 85706
DIRECTORS OFFICERS
Wesley E. Bass, Jr. Jeremy H. Biggs
Jeremy H. Biggs Chairman
Marc P. Blum Christopher C. Davis
Andrew A. Davis President
Christopher C. Davis Andrew A. Davis
Thomas S. Gayner Vice President
Jerry D. Geist Kenneth C. Eich
D. James Guzy Executive Vice President &
G. Bernard Hamilton Principal Executive Officer
Robert P. Morgenthau Sharra L. Reed
Theodore B. Smith, Jr. Vice President & Chief Compliance
Christian R. Sonne Officer
Marsha Williams Douglas A. Haines
Vice President
& Principal Accounting Officer
Thomas D. Tays
Vice President & Secretary
INVESTMENT ADVISER
Davis Selected Advisers, L.P. (Doing business as "Davis Advisors")
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
(800) 279-0279
DISTRIBUTOR
Davis Distributors, LLC
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
TRANSFER AGENT & CUSTODIAN
State Street Bank and Trust Company
c/o The Davis Funds
P.O. Box 8406
Boston, Massachusetts 02266-8406
COUNSEL
Seyfarth Shaw LLP
55 East Monroe Street, Suite 4200
Chicago, Illinois 60603-5803
AUDITORS
KPMG LLP
707 Seventeenth Street
Suite 2700
Denver, Colorado 80202
================================================================================
FOR MORE INFORMATION ABOUT THE DAVIS FINANCIAL PORTFOLIO, INCLUDING MANAGEMENT
FEE, CHARGES AND EXPENSES, SEE THE CURRENT DAVIS VARIABLE ACCOUNT FUNDS
(INCLUDING DAVIS FINANCIAL PORTFOLIO) PROSPECTUS WHICH MUST PRECEDE OR ACCOMPANY
THIS REPORT. THE DAVIS VARIABLE ACCOUNT FUNDS 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. QUARTERLY FACT
SHEETS ARE AVAILABLE ON THE FUND'S WEBSITE AT WWW.DAVISFUNDS.COM.
================================================================================
DAVIS ADVISORS
2949 EAST ELVIRA ROAD
SUITE 101
TUCSON, AZ 85706
1-800-279-0279
WWW.DAVISFUNDS.COM
[DAVIS FUND LOGO]
ANNUAL REPORT
[DAVIS FUNDS GRAPHIC OMITTED]
DECEMBER 31, 2004
DAVIS REAL ESTATE PORTFOLIO
(PORTFOLIO OF DAVIS VARIABLE ACCOUNT FUND, INC.)
TABLE OF CONTENTS
Management's Discussion and Analysis.........................................2
Fund Performance and Supplementary Information...............................5
Schedule of Investments......................................................9
Statement of Assets and Liabilities.........................................12
Statement of Operations.....................................................13
Statements of Changes in Net Assets.........................................14
Notes to Financial Statements...............................................15
Financial Highlights........................................................19
Report of Independent Registered Public Accounting Firm.....................20
Fund Information............................................................21
Directors and Officers......................................................22
DAVIS REAL ESTATE PORTFOLIO
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS
MARKET ENVIRONMENT
During the year ended December 31, 2004, the stock market, as measured by the
Standard & Poor's 500(R) Index(1), returned 10.88%. U.S. economic activity, as
measured by the gross domestic product rose sharply in the first two quarters
before falling sharply in the third quarter of 2004. Interest rates, as measured
by the 10-year Treasury bond, trended downward over the first three months, rose
over the next three months then slowly declined over the last half of the year.
After trending sideways during the first seven months of the year, the S&P
500(R) Index went on a sustained rally over the last five months of 2004.
DAVIS REAL ESTATE PORTFOLIO
PERFORMANCE OVERVIEW
Davis Real Estate Portfolio returned 33.35% for the year ended December 31,
2004(2), compared with a return of 34.78% for the Dow Jones Wilshire Real Estate
Securities Index(1).
The Portfolio's largest real estate sector weightings were in office space REITs
and shopping center REITs. The Portfolio's shopping center REITs out-performed
the Dow Jones Wilshire Real Estate Securities Index, while the Portfolio's
office space REITs under-performed the Index. Over the year ended December 31,
2004, SL Green Realty(3), an office space REIT, increased by 53.52% and
Developers Diversified, a shopping center REIT, increased 38.86%.
Other companies contributing(4) to performance relative to the Dow Jones
Wilshire Real Estate Securities Index included: two industrial REITs,
Centerpoint Properties and ProLogis, and Vornado Realty Trust, a diversified
REIT. Over the year ended December 31, 2004, Centerpoint Properties increased by
32.93%, ProLogis increased by 41.03%, and Vornado Realty Trust increased by
46.53%. All three companies were among the Portfolio's ten largest holdings at
the end of the year. Starwood Hotels & Resorts, a hotel & lodging company, also
increased by 64.71% over the year ended December 31, 2004.
The individual companies detracting the most from performance relative to the
Dow Jones Wilshire Real Estate Securities Index were: Affordable Residential
Communities, a manufactured home REIT, Equity Office Properties, an office space
REIT, and Home Properties, an apartment REIT. Affordable Residential Communities
decreased by 20.81% while it was held in the Portfolio. Equity Office Properties
decreased by 8.89% prior to being sold in April 2004. Home Properties decreased
by 4.68% prior to being sold in May 2004. In the strong bull market, cash
holdings were also a drag on relative performance.
The Portfolio's investment strategy is to seek out growing real estate companies
(principally REITs) that can be purchased at value prices and held for the
long-term.
This Annual Report is authorized for use by existing shareholders. Prospective
shareholders must receive a current Davis Variable Account Funds (including
Davis Real Estate Portfolio) prospectus, which contains more information about
investment strategies, risks, charges, and expenses. Please read the prospectus
carefully before investing or sending money.
2
DAVIS REAL ESTATE PORTFOLIO
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
Davis Real Estate Portfolio's investment objective is total return through a
combination of growth and income. There can be no assurance that the Portfolio
will achieve its objective. The primary risks of an investment in Davis Real
Estate Portfolio are: (1) market risk, (2) company risk, (3) small and medium
capitalization risk, (4) headline risk, (5) selection risk, (6) focused
portfolio risk, and (7) concentrated real estate portfolio 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 under its charter 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 definitions of indices quoted in this report appear below. Investments
cannot be made directly in the indices.
I. The S&P 500(R) Index is an unmanaged index of 500 selected common stocks,
most of which are listed on the New York Stock Exchange. The Index is adjusted
for dividends, weighted towards stocks with large market capitalizations, and
represents approximately two-thirds of the total market value of all domestic
common stocks.
II. The Dow Jones Wilshire Real Estate Securities Index is a broad measure of
the performance of publicly traded real estate securities, such as Real Estate
Investment Trusts (REITs) and Real Estate Operating Companies (REOCs). The Index
is capitalization-weighted. The beginning date was January 1, 1978, and the
Index is rebalanced monthly and returns are calculated on a buy and hold basis.
(2) Total return assumes reinvestment of dividends and capital gain
distributions. Past performance is not a guarantee of future results. Investment
return and principal value will vary so that, when redeemed, an investor's
shares may be worth more or less than when purchased. The following table lists
the average annual total returns for the periods ended December 31, 2004.
- ------------------------------ ------------- ------------ -------------------
PORTFOLIO NAME INCEPTION
1-YEAR 5-YEAR (July 1, 1999)
- ------------------------------ ------------- ------------ -------------------
Davis Real Estate Portfolio 33.35% 20.24% 15.78%
- ------------------------------ ------------- ------------ -------------------
Performance numbers are net of all portfolio operating expenses, but do not
include any insurance charges imposed by your insurance company's separate
account. If performance information included the effect of these additional
charges, the total return would be lower.
Portfolio performance changes over time and current performance may be higher or
lower than stated. For more current information please call Davis Funds
Shareholder Services at 1-800-279-0279.
3
DAVIS REAL ESTATE PORTFOLIO
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
(3) This Management Discussion & Analysis discusses a number of individual
companies. The information provided in this report does not provide information
reasonably sufficient upon which to base an investment decision and should not
be considered a recommendation to purchase or sell any particular security. The
schedule of investments lists each Portfolio's holdings of each company
discussed.
(4) A company's or sector's contribution to the Portfolio's performance is a
product both of its appreciation or depreciation and it's weighting within the
portfolio. For example, a 5% holding that rises 20% has twice as much impact as
a 1% holding that rises 50%.
Shares of the Davis Real Estate Portfolio are not deposits or obligations of any
bank, are not guaranteed by any bank, are not insured by the FDIC or any other
agency, and involve investment risks, including possible loss of the principal
amount invested.
4
DAVIS REAL ESTATE PORTFOLIO
FUND OVERVIEW
At December 31, 2004
================================================================================
[GRAPHIC OMITTED]
PORTFOLIO MAKEUP (% OF FUND NET ASSETS)
Common Stocks 89.7%
Short Term Investments, Preferred Stocks, Other Assets & Liabilities 10.3%
[GRAPHIC OMITTED]
SECTOR WEIGHTINGS (% OF STOCK HOLDINGS)
- ---------------------------------------
REITs 88.3%
Diversified 4.2%
Residential/Commercial Building 2.6%
Industrial 1.7%
Hotels & Lodgings 1.6%
Shopping Centers 1.6%
TOP 10 HOLDINGS
STOCK SECTOR % OF FUND NET ASSETS
- ----------------------------------------------------------------------------------------------
Centerpoint Properties Trust Industrial (REITS) 6.62%
SL Green Realty Corp. Office Space (REITS) 4.19%
ProLogis Industrial (REITS) 4.12%
Alexandria Real Estate Equities, Inc. Office Space (REITS) 3.66%
Vornado Realty Trust Diversified (REITS) 3.64%
Developers Diversified Realty Corp. Shopping Centers (REITS) 3.55%
Catellus Development Corp. Industrial (REITS) 3.38%
Forest City Enterprises, Inc., Class A Diversified 3.33%
Essex Property Trust, Inc. Apartments (REITS) 3.29%
General Growth Properties, Inc. Malls (REITS) 3.28%
5
DAVIS REAL ESTATE PORTFOLIO
PORTFOLIO ACTIVITY
January 1, 2004 through December 31, 2004
================================================================================
NEW POSITIONS ADDED (1/1/04-12/31/04)
(Highlighted positions are those greater than 2.25% of 12/31/04 total net
assets)
DATE OF 1ST % OF 12/31/04
SECURITY SECTOR PURCHASE FUND NET ASSETS
- --------------------------------------------------------------------------------------------------------------------
Affordable Residential Communities Inc. Manufactured Homes (REITS) 02/11/04 -
Brandywine Realty Trust Office Space (REITS) 04/06/04 2.40%
Brixton PLC Industrial 09/02/04 1.54%
Camden Property Trust Apartments (REITS) 05/07/04 1.19%
Capital Automotive REIT Specialty Retail (REITS) 06/09/04 2.97%
Gramercy Capital Corp. Financial Services (REITS) 07/28/04 1.35%
Kilroy Realty Corp. Office Space (REITS) 05/07/04 0.95%
Liberty International PLC Shopping Centers 09/02/04 1.47%
Mills Corp. Malls (REITS) 08/04/04 2.69%
Pan Pacific Retail Properties, Inc. Shopping Centers (REITS) 06/29/04 2.87%
St. Joe Co. Diversified 05/18/04 0.43%
POSITIONS CLOSED (1/1/04-12/31/04)
(Gains and losses greater than $150,000 are highlighted)
DATE OF
SECURITY SECTOR FINAL SALE GAIN/(LOSS)
- -------------------------------------------------------------------------------------------------------------------
Affordable Residential Communities Inc. Manufactured Homes (REITS) 10/15/04 $ (142,930)
Archstone-Smith Trust Apartments (REITS) 12/17/04 278,228
Avalonbay Communities, Inc. Apartments (REITS) 10/14/04 393,770
CBL & Associates Properties, Inc. Malls (REITS) 05/26/04 136,956
Chelsea Property Group, Inc. Outlet Centers (REITS) 08/20/04 984,305
Equity Office Properties Trust Office Space (REITS) 04/13/04 (84,283)
Equity Residential Apartments (REITS) 04/13/04 187
Home Properties of New York, Inc. Apartments (REITS) 05/04/04 39,299
Liberty Property Trust Diversified (REITS) 05/10/04 187,280
Rayonier Inc. Forestry (REITS) 05/19/04 (7,159)
Rouse Co. Malls (REITS) 11/15/04 573,284
6
DAVIS REAL ESTATE PORTFOLIO
FUND PERFORMANCE
================================================================================
- ------------------------------------------------ --------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN EXPENSE EXAMPLE
FOR THE PERIODS ENDED DECEMBER 31, 2004 BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
(07/01/04) (12/31/04) (07/01/04-12/31/04)
---------- --------- -------------------
One Year............................. 33.35% Actual............... $1,000.00 $1,251.62 $4.98
Five Years........................... 20.24% Hypothetical (5%return
Life of Fund (July 1, 1999 before expenses)... $1,000.00 $1,020.86 $4.47
through December 31, 2004)...... 15.78%
- ------------------------------------------------ --------------------------------------------------------------------------
*Expenses are equal to the Fund's annualized expense ratio (0.88%), multiplied
by the average account value over the period, multiplied by 184/366 (to reflect
the one-half year period). See Notes to Performance on page 8 for a description
of the "Expense Example".
$10,000 INVESTED AT COMMENCEMENT OF OPERATIONS. Let's say you invested $10,000
in Davis Real Estate Portfolio on July 1, 1999 (commencement of operations). As
the chart below shows, by December 31, 2004 the value of your investment would
have grown to $22,419 - a 124.19% increase on your initial investment. For
comparison, the Dow Jones Wilshire Real Estate Securities Index and the Standard
& Poor's 500(R) Stock Index are also presented on the chart below.
[GRAPHIC OMITTED]
S&P 500 DJ Wilshire Real Estate Index DREP
----------- ----------------------------- ------------
7/1/99 $ 10,000.00 $ 10,000.00 $ 10,000.00
12/31/99 $ 10,706.00 $ 9,075.00 $ 8,920.53
12/31/00 $ 9,732.00 $ 11,863.75 $ 11,001.85
12/31/01 $ 8,576.00 $ 13,103.51 $ 11,606.73
12/31/02 $ 6,681.00 $ 13,452.06 $ 12,290.85
12/31/03 $ 8,597.00 $ 18,440.09 $ 16,812.61
12/31/04 $ 9,532.00 $ 24,853.55 $ 22,419.13
The Dow Jones Wilshire Real Estate Securities Index is a broad measure of the
performance of publicly traded real estate securities, such as Real Estate
Investment Trusts (REITs) and Real Estate Operating Companies (REOCs).
Investments cannot be made directly into the Index. The index used includes net
dividends reinvested.
The Standard & Poor's 500(R) Stock Index is an unmanaged index of 500 selected
common stocks, most of which are listed on the New York Stock Exchange. The
Index is adjusted for dividends, weighted towards stocks with large market
capitalization, and represents approximately two-thirds of the total market
value of all domestic common stocks.
The performance data for Davis Real Estate Portfolio contained in this report
represents past performance and assumes that all distributions were reinvested,
and should not be considered as an indication of future performance from an
investment in the Fund today. The investment return and principal value will
fluctuate so that shares may be worth more or less than their original cost when
redeemed.
7
DAVIS REAL ESTATE PORTFOLIO
NOTES TO PERFORMANCE
================================================================================
THE FOLLOWING DISCLOSURE PROVIDES IMPORTANT INFORMATION REGARDING THE FUND'S
EXPENSE EXAMPLE, WHICH APPEARS IN THE FUND'S PERFORMANCE SECTION IN THIS ANNUAL
REPORT. PLEASE REFER TO THIS INFORMATION WHEN REVIEWING THE EXPENSE EXAMPLE FOR
THE FUND.
EXAMPLE
As a shareholder of the Fund, you incur ongoing costs only, including advisory
and administrative fees and other Fund expenses. The Expense Example is intended
to help you understand your ongoing costs (in dollars) of investing in the Fund
and to compare these costs with the ongoing costs of investing in other mutual
funds. The Expense Example is based on an investment of $1,000 invested at the
beginning of the period and held for the entire period indicated, which for the
Fund is from 07/01/04 to 12/31/04. 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 for on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The information represented in the row entitled "Hypothetical (5% return before
expenses)" 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
(5% return before expenses)" is useful in comparing ongoing costs only, and will
not help you determine the relative total costs of owning different funds.
8
DAVIS REAL ESTATE PORTFOLIO
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2004
VALUE
SHARES SECURITY (NOTE 1)
==========================================================================================
COMMON STOCK - (89.65%)
APARTMENTS (REITS) - (7.73%)
13,600 Camden Property Trust....................................... $ 693,600
22,900 Essex Property Trust, Inc. ................................. 1,919,020
76,400 United Dominion Realty Trust, Inc. ......................... 1,894,720
-------------
4,507,340
-------------
DIVERSIFIED - (3.76%)
33,700 Forest City Enterprises, Inc., Class A...................... 1,939,435
3,900 St. Joe Co. ................................................ 250,380
-------------
2,189,815
-------------
DIVERSIFIED (REITS) - (6.67%)
51,800 Duke Realty Corp. .......................................... 1,768,452
27,831 Vornado Realty Trust........................................ 2,118,774
-------------
3,887,226
-------------
FINANCIAL SERVICES (REITS) - (3.45%)
38,100 Gramercy Capital Corp. ..................................... 784,860
27,100 iStar Financial Inc. ....................................... 1,226,546
-------------
2,011,406
-------------
FORESTRY (REITS) - (2.61%)
39,600 Plum Creek Timber Co., Inc. ................................ 1,522,224
-------------
HOTELS & LODGING - (1.47%)
14,700 Starwood Hotels & Resorts Worldwide, Inc. .................. 858,480
-------------
INDUSTRIAL - (1.54%)
133,500 Brixton PLC................................................. 897,023
-------------
INDUSTRIAL (REITS) - (14.12%)
64,466 Catellus Development Corp. ................................. 1,972,660
80,500 Centerpoint Properties Trust................................ 3,855,145
55,400 ProLogis.................................................... 2,400,482
-------------
8,228,287
-------------
MALLS (REITS) - (8.03%)
52,942 General Growth Properties, Inc. ............................ 1,914,383
24,600 Mills Corp. ................................................ 1,568,496
18,500 Simon Property Group, Inc. ................................. 1,196,395
-------------
4,679,274
-------------
OFFICE SPACE (REITS) - (21.63%)
28,700 Alexandria Real Estate Equities, Inc. ...................... 2,135,854
41,100 Arden Realty, Inc. ......................................... 1,550,292
8,900 Boston Properties, Inc. .................................... 575,563
47,500 Brandywine Realty Trust..................................... 1,396,025
45,500 CarrAmerica Realty Corp. ................................... 1,501,500
60,900 Corporate Office Properties Trust........................... 1,787,415
13,000 Kilroy Realty Corp. ........................................ 555,750
9
DAVIS REAL ESTATE PORTFOLIO
SCHEDULE OF INVESTMENTS - (Continued)
DECEMBER 31, 2004
VALUE
SHARES SECURITY (NOTE 1)
============================================================================================
COMMON STOCK - (CONTINUED)
OFFICE SPACE (REITS) - (CONTINUED)
13,000 Parkway Properties, Inc. .................................. $ 659,750
40,370 SL Green Realty Corp. ..................................... 2,444,403
-------------
12,606,552
-------------
RESIDENTIAL/COMMERCIAL BUILDING - (2.30%)
45,500 WCI Communities, Inc.*..................................... 1,337,700
-------------
SHOPPING CENTERS - (1.47%)
46,000 Liberty International PLC.................................. 855,292
-------------
SHOPPING CENTERS (REITS) - (11.90%)
46,625 Developers Diversified Realty Corp. ....................... 2,068,751
23,800 Kimco Realty Corp. ........................................ 1,380,162
26,700 Pan Pacific Retail Properties, Inc. ....................... 1,674,090
32,700 Regency Centers Corp. ..................................... 1,811,580
-------------
6,934,583
-------------
SPECIALTY RETAIL (REITS) - (2.97%)
48,800 Capital Automotive REIT.................................... 1,733,620
-------------
Total Common Stock - (identified cost $36,540,854)....... 52,248,822
-------------
PREFERRED STOCK - (0.23%)
APARTMENTS (REITS) - (0.23%)
2,000 Equity Residential, 7.00%, Series E, Cum. Conv. Pfd. ...... 81,000
1,600 Equity Residential, 8.60%, Series D, Cum. Pfd. ............ 43,864
400 Equity Residential, 9.125%, Series C, Cum. Pfd. ........... 10,724
-------------
Total Preferred Stock - (identified cost $113,921)....... 135,588
-------------
10
DAVIS REAL ESTATE PORTFOLIO
SCHEDULE OF INVESTMENTS - (Continued)
DECEMBER 31, 2004
VALUE
PRINCIPAL SECURITY (NOTE 1)
============================================================================================================
SHORT TERM INVESTMENTS - (9.67%)
$ 1,825,000 Goldman, Sachs & Co. Joint Repurchase Agreement, 2.25%,
01/03/05, dated 12/31/04, repurchase value of $1,825,342
(collateralized by: U.S. Government obligations in a pooled cash account,
total market value $1,861,500)............................................ $ 1,825,000
2,028,000 Nomura Securities International, Inc. Joint Repurchase Agreement, 2.35%,
01/03/05, dated 12/31/04, repurchase value of $2,028,397
(collateralized by: U.S. Government obligations in a pooled cash account,
total market value $2,068,560)............................................ 2,028,000
1,780,000 UBS Financial Services Inc. Joint Repurchase Agreement, 2.27%,
01/03/05, dated 12/31/04, repurchase value of $1,780,337
(collateralized by: U.S. Government obligations in a pooled cash account,
total market value $1,815,600)............................................ 1,780,000
-------------
Total Short Term Investments - (identified cost $5,633,000)......... 5,633,000
-------------
Total Investments - (99.55%) - (identified cost $42,287,775) - (a)........... 58,017,410
Other Assets Less Liabilities - (0.45%)...................................... 261,208
-------------
Net Assets - (100%)................................................. $ 58,278,618
=============
*Non-Income Producing Security.
(a) Aggregate cost for Federal Income Tax purposes is $42,291,610. At December 31, 2004
unrealized appreciation (depreciation) of securities for Federal Income Tax purposes is
as follows:
Unrealized appreciation...................................................... $ 15,726,120
Unrealized depreciation...................................................... (320)
-------------
Net unrealized appreciation......................................... $ 15,725,800
=============
SEE NOTES TO FINANCIAL STATEMENTS
11
DAVIS REAL ESTATE PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
At December 31, 2004
================================================================================
ASSETS:
Investments in securities, at value
(see accompanying Schedule of Investments)(cost of $42,287,775)................................. $ 58,017,410
Cash.............................................................................................. 126,563
Receivables:
Dividends and interest.......................................................................... 258,713
Capital stock sold.............................................................................. 21,994
Investment securities sold...................................................................... 29,005
---------------
Total assets............................................................................... 58,453,685
---------------
LIABILITIES:
Payables:
Capital stock reacquired........................................................................ 124,047
Accrued expenses.................................................................................. 13,712
Accrued management fee............................................................................ 37,308
----------------
Total liabilities.......................................................................... 175,067
---------------
NET ASSETS .......................................................................................... $ 58,278,618
===============
SHARES OUTSTANDING (NOTE 4).......................................................................... 3,468,251
===============
NET ASSET VALUE, offering and
redemption price per share (Net Assets divided by Shares Outstanding).......................... $ 16.80
===========
NET ASSETS CONSIST OF:
Par value of shares of capital stock.............................................................. $ 3,468
Additional paid-in capital........................................................................ 41,698,075
Accumulated net realized gains from investments and foreign currency transactions................. 847,440
Net unrealized appreciation on investments and foreign currency transactions...................... 15,729,635
---------------
$ 58,278,618
===============
SEE NOTES TO FINANCIAL STATEMENTS
12
DAVIS REAL ESTATE PORTFOLIO
STATEMENT OF OPERATIONS
For the year ended December 31, 2004
================================================================================
INVESTMENT INCOME:
Income:
Dividends (Net of foreign withholding taxes of $1,159)........................................ $ 1,365,447
Interest...................................................................................... 45,013
--------------
Total income.............................................................................. 1,410,460
--------------
Expenses:
Management fees (Note 2)...................................................................... 331,425
Custodian fees................................................................................ 24,583
Transfer agent fees........................................................................... 8,470
Audit fees.................................................................................... 8,400
Accounting fees (Note 2)...................................................................... 6,000
Legal fees.................................................................................... 948
Reports to shareholders....................................................................... 898
Directors' fees and expenses.................................................................. 6,752
Registration and filing fees.................................................................. 1,475
Miscellaneous................................................................................. 5,252
--------------
Total expenses............................................................................ 394,203
Expenses paid indirectly (Note 5)......................................................... (66)
--------------
Net expenses.............................................................................. 394,137
--------------
Net investment income.................................................................. 1,016,323
--------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from:
Investment transactions................................................................... 3,278,373
Foreign currency transactions............................................................. (868)
Net increase in unrealized appreciation of investments and foreign
currency transactions.................................................................... 9,199,069
--------------
Net realized and unrealized gain on investments and foreign currency...................... 12,476,574
--------------
Net increase in net assets resulting from operations................................... $ 13,492,897
==============
SEE NOTES TO FINANCIAL STATEMENTS
13
DAVIS REAL ESTATE PORTFOLIO
STATEMENTS OF CHANGES IN NET ASSETS
================================================================================
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2004 2003
---- ----
OPERATIONS:
Net investment income.............................................. $ 1,016,323 $ 941,827
Net realized gain from investment and foreign currency
transactions..................................................... 3,277,505 966,089
Net increase in unrealized appreciation of investments
and foreign currency transactions................................ 9,199,069 6,265,053
---------------- ----------------
Net increase in net assets resulting from operations............... 13,492,897 8,172,969
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.............................................. (1,497,449) (1,245,232)
Realized gains from investment transactions........................ (1,939,529) (596,951)
CAPITAL SHARE TRANSACTIONS (NOTE 4).................................... 12,559,434 10,526,271
---------------- ----------
Total increase in net assets........................................... 22,615,353 16,857,057
NET ASSETS:
Beginning of year.................................................. 35,663,265 18,806,208
---------------- ----------------
End of year........................................................ $ 58,278,618 $ 35,663,265
================ ================
SEE NOTES TO FINANCIAL STATEMENTS
14
DAVIS REAL ESTATE PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
================================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Fund is a separate series of Davis Variable Account Fund, Inc., which is
registered under the Investment Company Act of 1940, as amended, as a
non-diversified, open-end management investment company. Shares of the Fund may
only be purchased by insurance companies for the purpose of funding variable
annuity or variable life insurance contracts. The following is a summary of
significant accounting policies followed by the Fund in the preparation of
financial statements.
A. VALUATION OF SECURITIES - Portfolio securities listed on national securities
exchanges are valued at the last reported sales price on the day of valuation.
Securities traded in the over the counter market and listed securities for which
no sale was reported on that date are stated at the average of closing bid and
asked prices. Securities for which market quotations are not readily available,
or whose values have been affected by a significant event occurring after the
close of their primary markets, are valued at fair value as determined in good
faith by the Board of Directors. Short-term obligations are valued at amortized
cost, which approximates fair value. These valuation procedures are reviewed and
subject to approval by the Board of Directors.
B. MASTER REPURCHASE AGREEMENTS - The Fund, along with other affiliated funds,
may transfer uninvested cash balances into one or more master repurchase
agreement accounts. These balances are invested in one or more repurchase
agreements, secured by U.S. government securities. Securities pledged as
collateral for repurchase agreements are held by a custodian bank until the
agreements mature. Each agreement requires that the market value of the
collateral be sufficient to cover payments of interest and principal; however,
in the event of default by the other party to the agreement, retention of the
collateral may be subject to legal proceedings.
C. CURRENCY TRANSLATION - The market values of all assets and liabilities
denominated in foreign currencies are recorded in the financial statements after
translation to the U.S. dollar based upon the mean between the bid and offered
quotations of the currencies against U.S. dollars on the date of valuation. The
cost basis of such assets and liabilities is determined based upon historical
exchange rates. Income and expenses are translated at average exchange rates in
effect as accrued or incurred.
D. FOREIGN CURRENCY - The Fund may enter into forward purchases or sales of
foreign currencies to hedge certain foreign currency denominated assets and
liabilities against declines in market value relative to the U.S. dollar.
Forward currency contracts are marked-to-market daily and the change in market
value is recorded by the Fund as an unrealized gain or loss. When the forward
currency contract is closed, the Fund records a realized gain or loss equal to
the difference between the value of the forward currency contract at the time it
was opened and value at the time it was closed. Investments in forward currency
contracts may expose the Fund to risks resulting from unanticipated movements in
foreign currency exchange rates or failure of the counter-party to the agreement
to perform in accordance with the terms of the contract.
Reported net realized foreign exchange gains or losses arise from the sales
and maturities of investments, sales of foreign currencies, currency gains or
losses realized between the trade and settlement dates on securities
transactions, the difference between the amounts of dividends, interest and
foreign withholding taxes recorded on the Fund's books, and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in the value of assets and
liabilities other than investments in securities at fiscal year end, resulting
from changes in the exchange rate. The Fund includes foreign currency gains and
losses realized on the sale of investments together with market gains and losses
on such investments in the statement of operations.
15
DAVIS REAL ESTATE PORTFOLIO
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
December 31, 2004
================================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
E. FEDERAL INCOME TAXES - It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income, including
any net realized gains on investments not offset by loss carryovers, to
shareholders. Therefore, no provision for federal income or excise tax is
required.
F. USE OF ESTIMATES IN FINANCIAL STATEMENTS - In preparing financial statements
in conformity with accounting principles generally accepted in the United States
of America, management makes estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, as well as the reported
amounts of income and expenses during the reporting period. Actual results may
differ from these estimates.
G. 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.
H. 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) of
investments may differ for financial statement and tax purposes primarily
because of the recognition of certain foreign currency gains (losses) as
ordinary income (loss) for tax purposes and the tax deferral of losses on "wash
sale" 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 the classification of
distributions to shareholders to reflect the differences between financial
statement amounts and distributions determined in accordance with income tax
regulations. Accordingly, during the year ended December 31, 2004 amounts have
been reclassified to reflect a decrease in undistributed net investment loss of
$481,126 and a corresponding decrease in accumulated net realized gain.
The tax character of distributions paid during the years ended December 31, 2004
and 2003, was as follows:
2004 2003
----------------- -----------------
Ordinary income $ 1,178,988 $ 1,027,407
Long term capital gain 2,257,990 814,776
------------ -------------
Total $ 3,436,978 $ 1,842,183
============ =============
16
DAVIS REAL ESTATE PORTFOLIO
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
December 31, 2004
================================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
As of December 31, 2004 the components of distributable earnings (accumulated
losses) on a tax basis were as follows:
Undistributed net investment income............ $ -
Undistributed long term capital gain........... 851,273
Net unrealized appreciation on investments..... 15,725,802
-------------
Total...................................... $ 16,577,075
=============
NOTE 2 - INVESTMENT ADVISORY FEES
Advisory fees are paid to Davis Advisors, the Fund's investment adviser (the
"Adviser") at an annual rate of 0.75% of the average annual net assets.
State Street Bank and Trust Company ("State Street Bank") is the Fund's
primary transfer agent. The Adviser is also paid for certain transfer agent
services. The fee paid to the Adviser for the year ended December 31, 2004 was
$32. State Street Bank is the Fund's primary accounting provider. Fees for such
services are included in the custodian fee as State Street Bank also serves as
the Fund's custodian. The Adviser is also paid for certain accounting services.
The fee for the year ended December 31, 2004 amounted to $6,000. Certain
directors and officers of the Fund are also directors and officers of the
general partner of the Adviser.
Davis Selected Advisers - NY, Inc. ("DSA-NY"), a wholly-owned subsidiary of
the Adviser, acts as sub-adviser to the Fund. The Fund pays no fees directly to
DSA-NY.
NOTE 3 - PURCHASES AND SALES OF SECURITIES
Purchases and sales of investment securities (excluding short-term
securities) during the year ended December 31, 2004 were $20,115,212 and
$13,136,560, respectively.
17
DAVIS REAL ESTATE PORTFOLIO
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
December 31, 2004
================================================================================
NOTE 4 - CAPITAL STOCK
At December 31, 2004, there were 500 million shares of capital stock ($0.001
par value per share) authorized. Transactions in capital stock were as follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2004 2003
---- ----
Shares sold............................................... 1,356,048 1,477,124
Shares issued in reinvestment of distributions............ 215,308 144,561
---------------- ----------------
1,571,356 1,621,685
Shares redeemed........................................... (751,119) (766,305)
---------------- ----------------
Net increase........................................ 820,237 855,380
================ ================
Proceeds from shares sold................................. $ 19,825,910 $ 17,872,635
Proceeds from shares issued in
reinvestment of distributions......................... 3,436,978 1,842,181
---------------- ----------------
23,262,888 19,714,816
Cost of shares redeemed................................... (10,703,454) (9,188,545)
---------------- ----------------
Net increase........................................ $ 12,559,434 $ 10,526,271
================ ================
NOTE 5 - EXPENSES PAID INDIRECTLY
Under an agreement with the custodian bank, custodian fees are reduced for
earnings on cash balances maintained at the custodian by the Fund. Such
reductions amounted to $66 for the year ended December 31, 2004.
18
DAVIS REAL ESTATE PORTFOLIO
FINANCIAL HIGHLIGHTS
================================================================================
The following financial information represents data for each share of capital
stock outstanding throughout each period:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Net Asset Value, Beginning of Period.... $ 13.47 $ 10.49 $ 10.35 $ 10.38 $ 8.71
---------- ---------- ---------- ---------- ----------
Income From Investment Operations
- ---------------------------------
Net Investment Income.................. 0.34 0.44 0.36 0.36 0.33
Net Realized and Unrealized Gains...... 4.07 3.34 0.25 0.19 1.67
---------- ---------- ---------- ---------- ----------
Total From Investment Operations.... 4.41 3.78 0.61 0.55 2.00
Dividends and Distributions
- ----------------------------
Dividends from Net Investment Income... (0.48) (0.55) (0.36) (0.36) (0.33)
Return of Capital...................... - - (0.11) (0.07) -
Distributions from Realized Gains...... (0.60) (0.25) - (0.11) -
Distributions in Excess of Net
Investment Income................... - - - (0.04) -
--------- ---------- ---------- ---------- ----------
Total Dividends and Distributions... (1.08) (0.80) (0.47) (0.58) (0.33)
---------- ---------- ---------- ---------- ----------
Net Asset Value, End of Period.......... $ 16.80 $ 13.47 $ 10.49 $ 10.35 $ 10.38
========== ========== ========== ========== ==========
Total Return(1)......................... 33.35% 36.79% 5.89% 5.50% 23.33%
- ------------
Ratios/Supplemental Data
- ------------------------
Net Assets, End of Period (000 omitted) $58,279 $35,663 $18,806 $10,029 $4,853
Ratio of Expenses to Average Net Assets 0.89% 0.98% 1.00%(3) 1.00%(3) 1.07%(3,4)
Ratio of Net Investment Income to
Average Net Assets.................. 2.30% 3.74% 3.54% 3.70% 4.31%
Portfolio Turnover Rate(2)............. 32% 22% 52% 45% 16%
1 Assumes hypothetical initial investment on the business day before the first
day of the fiscal period, with all dividends and distributions reinvested in
additional shares on the reinvestment date, and redemption at the net asset
value calculated on the last business day of the fiscal period. Total
returns do not reflect charges attributable to your insurance company's
separate account. Inclusion of these charges would reduce the total returns
shown.
2 The lesser of purchases or sales of portfolio securities for a period,
divided by the monthly average of the market value of portfolio securities
owned during the period. Securities with a maturity or expiration date at
the time of acquisition of one year or less are excluded from the
calculation.
3 Had the Adviser not absorbed certain expenses, the ratio of expenses to
average net assets would have been 1.10%, 1.39%, and 3.15% for 2002, 2001,
and 2000, respectively.
4 Ratio of expenses to average net assets after the reduction of expenses paid
indirectly was 1.00% for 2000.
SEE NOTES TO FINANCIAL STATEMENTS
19
DAVIS REAL ESTATE PORTFOLIO
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
================================================================================
To the Shareholders and Board of Directors
of Davis Variable Account Fund, Inc.:
We have audited the accompanying statements of assets and liabilities of
Davis Real Estate Portfolio (a separate series of Davis Variable Account Fund,
Inc.), including the schedules of investments as of December 31, 2004 and the
related statements of operations for the year then ended, the statements of
changes in net assets for each of the years in the two-year period then ended,
and the financial highlights for each of the years in the five-year period then
ended. These financial statements and financial highlights are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with auditing standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements and financial highlights are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 2004, by correspondence with
the custodian. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Davis Real Estate Portfolio, as of December 31, 2004, and the
results of its operations for the year then ended, the changes in its net assets
for each of the years in the two-year period then ended, and the financial
highlights for each of the years in the five-year period then ended, in
conformity with U.S. generally accepted accounting principles.
/S/ KPMG LLP
Denver, Colorado
February 4, 2005
20
DAVIS REAL ESTATE PORTFOLIO
FOR THE YEAR ENDED DECEMBER 31, 2004 (UNAUDITED)
================================================================================
FEDERAL INCOME TAX INFORMATION
The information and distributions reported herein may differ from the
information reported as distributions taxable to certain shareholders for the
calendar year ended 2004 with their 2004 Form 1099-DIV.
During the calendar year ended 2004 the Fund declared and paid long-term
capital gain distributions in the amount of $2,257,990.
Dividends paid by the Fund during the calendar year ended 2004, which are
not designated as capital gain distributions, should be multiplied by 2% to
arrive at the net amount eligible for the corporate dividend-received deduction.
For the calendar year ended 2004 certain dividends paid by the Fund
constitute qualified dividend income for Federal Income Tax purposes. The Fund
designates $38,314 as qualified dividend income.
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
1-800-279-2279, (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 1-800-279-2279, (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 the 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 1-800-279-2279 or on the
Fund's website at www.davisfunds.com or on the SEC's website at www.sec.gov. The
Fund's Form N-Q may be reviewed and copied at the SEC's Public Reference Room in
Washington, DC, and that information on the operation of the Public Reference
Room may be obtained by calling 1-800-SEC-0330.
21
DAVIS REAL ESTATE PORTFOLIO
================================================================================
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
================================================================================
DIRECTORS
For the purposes of their service as directors to the Davis Funds, the business
address for each of the directors is 2949 E. Elvira Road, Suite 101, Tucson, AZ
85706. Each Director serves until their retirement, resignation, death or
removal. Directors must retire at the close of business on the last day of the
calendar year in which the Director attains age seventy-two (72), except that
any person who was a Director on July 1, 1994, and at that date was
seventy-three (73) years of age or less shall retire from the Board of Directors
and cease being a Director at the close of business on the last day of the year
in which the Director attains age seventy-four (74).
NUMBER OF
TERM OF PORTFOLIOS IN
OFFICE AND PRINCIPAL FUND COMPLEX
POSITION(S)HELD LENGTH OF OCCUPATION(S) DURING OVERSEEN BY OTHER DIRECTORSHIPS HELD BY
NAME AND AGE WITH FUND TIME SERVED PAST FIVE YEARS DIRECTOR DIRECTOR
- -----------------------------------------------------------------------------------------------------------------------------
INDEPENDENT DIRECTORS
WESLEY E. Director director President, Bass & 12 none
BASS, JR. since 1990 Associates (financial
(born 8/21/31) consulting); formerly
First Deputy City
Treasurer,
City of Chicago; and
Executive Vice President,
Chicago Title and Trust
Company (bank and trust).
MARC P. BLUM Director director Chief Executive 12 Director, Legg Mason Trust
(born 9/9/42) since 1986 Officer, World Total (asset management company)
Return Fund, LLLP; Of and Rodney Trust Company
Counsel to Gordon, (Delaware); Former Director,
Feinblatt, Rothman, Mid-Atlantic Realty Trust
Hoffberger and (real estate investment
Hollander, LLC (law trust); Trustee, College of
firm). Notre Dame of Maryland, McDonogh
School and other public charities,
private foundations, and
businesses.
THOMAS S. GAYNER Director director Chief Investment 12 Markel Corporation.
(born 12/16/61) since 2004 Officer, Markel
Corporation
(insurance company).
JERRY D. GEIST Director director Chairman, Santa Fe 12 Director, CH2M-Hill, Inc.
(born 5/23/34) since 1986 Center Enterprises (engineering); Chairman,
(energy project Santa Fe Center Enterprises;
development); Retired Investment Committee for
Chairman and Microgeneration Technology
President, Public Fund, UTECH Funds.
Service Company of New
Mexico.
22
DAVIS REAL ESTATE PORTFOLIO
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
================================================================================
DIRECTORS - CONTINUED
NUMBER OF
TERM OF PORTFOLIOS IN
OFFICE AND PRINCIPAL FUND COMPLEX
POSITION(S) LENGTH OF OCCUPATION(S) DURING OVERSEEN BY OTHER DIRECTORSHIPS HELD BY
NAME AND AGE HELD WITH FUND TIME SERVED PAST FIVE YEARS DIRECTOR DIRECTOR
- -----------------------------------------------------------------------------------------------------------------------------
INDEPENDENT DIRECTORS - CONTINUED
D. JAMES GUZY Director director Chairman, PLX 12 Director, Intel Corp.
(born 3/7/36) since 1982 Technology, Inc. (semi-conductor
(semi-conductor manufacturer), Cirrus Logic
manufacturer). Corp. (semi-conductor
manufacturer), Alliance
Technology Fund (a mutual
fund), Micro Component
Technology, Inc.
(micro-circuit handling and
testing equipment
manufacturer), LogicVision,
Inc. (semi-conductor software
company), and Tessera
Technologies, Inc.
(semi-conductor packaging
company); Former Director,
Novellus Systems, Inc.
(semi-conductor manufacturer).
G. BERNARD Director director Managing General 12 none
HAMILTON since 1978 Partner, Avanti
(born 3/18/37) Partners, L.P.
(investment
partnership).
ROBERT P. Director director Chairman, Northroad 12 none
MORGENTHAU since 2002 Capital Management,
(born 3/22/57) LLC (an investment
management firm) since June
2002; President of Private
Advisory Services, Bank of
America (an investment
management firm) from 2001
until 2002; prior to that a
managing director and global
head of marketing and
distribution for Lazard Asset
Management (an investment
management firm) for ten
years.
THEODORE B. Director director Chairman, John 12 Mayor, Incorporated Village
SMITH, JR. since 1994 Hassall, Inc. of Mill Neck.
(born 12/23/32) (fastener
manufacturing);
Chairman, Cantrock
Realty.
23
DAVIS REAL ESTATE PORTFOLIO
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
================================================================================
DIRECTORS - CONTINUED
NUMBER OF
TERM OF PORTFOLIOS IN
OFFICE AND PRINCIPAL FUND COMPLEX
POSITION(S) LENGTH OF OCCUPATION(S) DURING OVERSEEN BY OTHER DIRECTORSHIPS HELD BY
NAME AND AGE HELD WITH FUND TIME SERVED PAST FIVE YEARS DIRECTOR DIRECTOR
- ----------------------------------------------------------------------------------------------------------------------------
INDEPENDENT DIRECTORS - CONTINUED
CHRISTIAN R. Director director General Partner, 12 none
SONNE since 1990 Tuxedo Park Associates
(born 5/6/36) (land holding and
development firm);
President and Chief
Executive Officer,
Mulford Securities
Corporation (private
investment fund) until
1990; Former Vice
President, Goldman
Sachs & Co.
(investment banking).
MARSHA WILLIAMS Director director Executive Vice 15 Director of the Selected
(born 3/28/51) since 1999 President and Chief Funds (consisting of three
Financial Officer, portfolios) since 1996;
Equity Office Director, Modine
Properties Trust (a Manufacturing, Inc. (heat
real estate investment transfer technology);
trust); Former Chief Director, Chicago Bridge &
Administrative Iron Company, N.V.
Officer, Crate & (industrial construction and
Barrel (home engineering).
furnishings retailer);
former Vice President
and Treasurer, Amoco
Corporation (oil & gas
company).
INSIDE DIRECTORS*
JEREMY H. BIGGS Director/ director Vice Chairman, Head of 12 none
(born 8/16/35) Chairman since 1994 Equity Research, Vice
Chairman of U.S. Investment
Policy Committee and Member
of the International
Investment Committee, all for
Fiduciary Trust Company
International (money
management firm) Consultant
to Davis Selected Advisers,
L.P.
24
DAVIS REAL ESTATE PORTFOLIO
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
================================================================================
DIRECTORS - CONTINUED
NUMBER OF
TERM OF PORTFOLIOS IN
OFFICE AND PRINCIPAL FUND COMPLEX
POSITION(S) LENGTH OF OCCUPATION(S) DURING OVERSEEN BY OTHER DIRECTORSHIPS HELD BY
NAME AND AGE HELD WITH FUND TIME SERVED PAST FIVE YEARS DIRECTOR DIRECTOR
- ----------------------------------------------------------------------------------------------------------------------------
INSIDE DIRECTORS* - CONTINUED
ANDREW A. DAVIS Director director President or Vice 15 Director of the Selected
(born 6/25/63) since 1997 President, of each Funds (consisting of three
Davis Fund and portfolios) since 1998.
Selected Fund;
President, Davis
Selected Advisers,
L.P., and also serves
as an executive
officer in certain
companies affiliated
with the Adviser.
CHRISTOPHER C. Director director Chief Executive 15 Director of the Selected
DAVIS since 1997 Officer, President or Funds (consisting of three
(born 7/13/65) Vice President, of portfolios) since 1998.
each Davis Fund and Selected
Fund; Chairman and Chief
Executive Officer, Davis
Selected Advisers, L.P., and
also serves as an executive
officer in certain companies
affiliated with the Adviser,
including sole member of the
Adviser's general partner,
Davis Investments, LLC;
Employee of Shelby Cullom
Davis & Co. (registered
broker/dealer).
* Jeremy H. Biggs, Andrew A. Davis and Christopher C. Davis own partnership
units (directly, indirectly or both) of the Adviser and are considered to be
"interested persons" of the Funds as defined in the Investment Company Act of
1940. Andrew A. Davis and Christopher C. Davis are brothers.
25
DAVIS REAL ESTATE PORTFOLIO
2949 East Elvira Road, Suite 101, Tucson, Arizona 85706
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DIRECTORS OFFICERS
Wesley E. Bass, Jr. Jeremy H. Biggs
Jeremy H. Biggs Chairman
Marc P. Blum Andrew A. Davis
Andrew A. Davis President
Christopher C. Davis Christopher C. Davis
Thomas S. Gayner Vice President
Jerry D. Geist Kenneth C. Eich
D. James Guzy Executive Vice President
G. Bernard Hamilton & Principal Executive Officer
Robert P. Morgenthau Sharra L. Reed
Theodore B. Smith, Jr. Vice President
Christian R. Sonne & Chief Compliance Officer
Marsha Williams Douglas A. Haines
Vice President
& Principal Accounting Officer
Thomas D. Tays
Vice President & Secretary
INVESTMENT ADVISER
Davis Selected Advisers, L.P. (Doing business as "Davis Advisors")
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
(800) 279-0279
DISTRIBUTOR
Davis Distributors, LLC
2949 East Elvira Road, Suite 101
Tucson, Arizona 85706
TRANSFER AGENT & CUSTODIAN
State Street Bank and Trust Company
c/o The Davis Funds
P.O. Box 8406
Boston, Massachusetts 02266-8406
COUNSEL
Seyfarth Shaw LLP
55 East Monroe Street, Suite 4200
Chicago, Illinois 60603-5803
AUDITORS
KPMG LLP
707 Seventeenth Street
Suite 2700
Denver, Colorado 80202
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FOR MORE INFORMATION ABOUT THE DAVIS REAL ESTATE PORTFOLIO, INCLUDING MANAGEMENT
FEE, CHARGES AND EXPENSES, SEE THE CURRENT DAVIS VARIABLE ACCOUNT FUNDS
(INCLUDING DAVIS REAL ESTATE PORTFOLIO) PROSPECTUS WHICH MUST PRECEDE OR
ACCOMPANY THIS REPORT. THE DAVIS VARIABLE ACCOUNT 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. QUARTERLY FACT
SHEETS ARE AVAILABLE ON THE FUND'S WEBSITE AT WWW.DAVISFUNDS.COM.
================================================================================
DAVIS ADVISORS
2949 EAST ELVIRA ROAD
SUITE, 101
TUCSON, AZ 85706
1-800-279-0279
WWW.DAVISFUNDS.COM
[DAVIS FUND LOGO]
ITEM 2. CODE OF ETHICS
The registrant has adopted a code of ethics that applies to the
registrant's principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing
similiar functions.
Exhibit A of the code of ethics was amended September 14, 2004 to
reflect Douglas A. Haines as Principal Financial Officer and Principal
Accounting Officer.
A copy of the code of ethics is filed as an exhibit to this form N-CSR.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT
The registrant's board of directors has determined that independant
trustee Marsha Williams qualifies as the "audit committee financial
expert", as defined in Item 3 of form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES
(a) Audit Fees. The aggregate Audit Fees billed by KPMG LLP ("KPMG")
for professional services rendered for the audits of the financial
statements, or services that are normally provided in connection
with statutory and regulatory filings or engagements for the fiscal
year ends December 31, 2004 and December 31, 2003 were $28,886 and
$29,914, respectively.
(b) Audit-Related Fees. The aggregate Audit-Related Fees billed by
KPMG for services rendered for assurance and related services that
are not reasonably related to the performance of the audit or
review of the fund financial statements, but not reported as Audit
Fees for the fiscal year ends December 31, 2004 and
December 31, 2003 were $0 and $0, respectively.
(c) Tax Fees. The aggregate Tax Fees billed by KPMG for professional
services rendered for tax compliance, tax advise and tax planning
for the fiscal year ends December 31, 2004 and December 31, 2003
were $7,260 and $15,840, respectively.
Fees included in the Tax Fee category comprise all services
performed by professional staff in the independent accountant's
tax division except those services related to the audit. These
services include preparation of tax returns, tax advice related to
mergers and a review of the fund income and capital gain
distributions.
(d) All Other Fees. The aggregate Other Fees billed by KPMG for all
other non-audit services rendered to the fund for the fiscal year
ends December 31, 2004 and December 31, 2003 were $0 and $0,
respectively.
(e)(1) Audit Committee Pre-Approval Policies and Procedures.
The fund Audit Committee must pre-approve all audit and non-audit
services provided by the independent accountant relating to the
operations or financial reporting of the funds. Prior to the
commencement of any audit or non-audit services to a fund, the
Audit Committee reviews the services to determine whether they are
appropriate and permissible under applicable law.
The fund Audit Committee has adopted a policy whereby audit and
non-audit services performed by the fund independent accountant
require pre-approval in advance at regularly scheduled Audit
Committee meetings. If such a service is required between
regularly scheduled Audit Committee meetings, pre-approval may be
authorized by the Audit Committee Chairperson with ratification at
the next scheduled audit committee meeting.
(2) No services included in (b) - (d) above were approved pursuant to
paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
(f) Not applicable
(g) The Funds' independent accountant did not provide any services to
the investment advisor or any affiliate for the fiscal years ended
December 31, 2004 and December 31, 2003. The fund has not paid any
fees for non-audit not previously disclosed in items 4 (b)-(d).
(h) The registrant's audit committee of the board of trustees has
considered whether the provision of non-audit services that were
rendered to the registrant's investment adviser, and any entity
controlling, controlled by, or under common control with the
investment adviser that provides ongoing services to the registrant
that were not pre-approved pursuant to paragraph (c)(7)(ii) of
Rule 2-01 of Regulation S-X is compatible with maintaining the
principal accountant's independence. No such services were
rendered.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS - Not Required
ITEM 6. SCHEDULE OF INVESTMENTS - Not Applicable
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES - Not Applicable
ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT
INVESTMENT COMPANY AND AFFILIATED PERSONS - Not Applicable
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There have been no changes to the procedures by which shareholders
may recommend nominees to the registrant's Board of Trustees.
ITEM 10. CONTROLS AND PROCEDURES
(a) The registrant's principal executive officer and principal financial
officer have concluded that the registrant's disclosure controls and
procedures (as defined in Rule 30a-2(c) under the Investment Company
Act of 1940, as amended) are effective as of a date within 90 days
of the filing date of this report.
(b) There have been no significant changes in the registrant's internal
controls or in other factors that could significantly affect these
controls.
ITEM 11. EXHIBITS
EX-99.CODE ETH - Code of Ethics
EX-99.CERT - Section 302 Certification
EX-99.906 CERT - Section 906 CertificationITEM 11. EXHIBITS
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 it behalf by the undersigned, thereunto duly authorized.
DAVIS VARIABLE ACCOUNT FUND, INC.
By /s/ Kenneth C. Eich
Kenneth C. Eich
Principal Executive Officer
Date: February 24, 2005
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: February 24, 2005
By /s/ Douglas A. Haines
Douglas A. Haines
Principal Financial officer
Date: February 24, 2005