NEW YORK - The Davis family has developed a novel method of mutual fund product development: When the family's personal fortune requires a new asset class for diversification, the family launches a new mutual fund.
Davis Selected Advisers L.P., based in Santa Fe, N.M., and New York, now manages more than $9 billion, with about $1 billion of that invested for the Davis family and company employees. The most recent fund - international equity - was added in 1995.
The company manages 14 mutual funds with about $8 billion in two fund families under its own name. It also runs about $925 million as subadvisers for variable annuities and outside mutual funds and about $200 million in separate accounts for wealthy individuals and institutions like Baltimore Gas & Electric Co. and Mount Sinai Health Care Foundation.
Davis Selected Advisors is run by Shelby M.C. Davis, chief investment officer, and his sons, Christopher C. Davis, vice chairman and portfolio manager, and Andrew A. Davis, president and portfolio manager.
Davis Selected Advisors' buys growth companies at value prices.
Chris Davis said the company considers two kinds of risks in stock selection - business risk and valuation risk. The technique is very research-intensive; companies are treated like partners in a business and all three Davis' spend a lot of time visiting the companies they own.
"My (late) grandfather (Shelby Cullom Davis Sr.) boiled down the question of stock selection and risk by asking what kind of businesses do you want to own and how much do you want to pay for them? There's no business in the world that's good no matter what the price. If you can avoid business risk and not pay too much for a company, you will avoid most of the disappointments," said Chris Davis.
Shelby Cullom Davis started a Wall Street investment management firm in 1947 and pioneered the strategy his son and grandsons still employ today.
The aim is to hit what Chris' grandfather called the "Davis Double Play," where the company finds and holds onto a stock with steady earnings growth coupled with an expanding price-earnings multiple. As a result, the firm's greatest fault is it can be slow to sell, Chris Davis admits.
"We try to buy a stock we never want to sell," he said. The average holding period is five to seven years.
Chris Davis said financial service stocks are a favorite of his, thanks to globalization of the financial markets of the world, the demographics of savings, better company managements after difficulties in the 1980s and the current inflation outlook. Some financial stocks like Travelers Group Inc. and SunAmerica Corp. became Davis Double Plays. He also likes some drugs companies, including Merck & Co.
One advantage of having so much family and employee money tied up in the Davis funds is an unusually close alignment of shareholder and money manager interests, said Russell Wiese, chief marketing officer.
History of a 'dynasty'
The money management dynasty has been investing its own money and for outside investors since 1947, when Shelby Cullom Davis started Shelby Cullom Davis & Co. The elder Mr. Davis pioneered the investment strategy the company still uses today - buy growth companies at value prices - and parlayed $100,000 into about $800 million by the time of his death in the early 1990s.
From a childhood steeped in investment management theory, Shelby M.C. Davis continued the tradition, joining Bank of New York in 1958 and becoming its youngest vice president since Alexander Hamilton. He struck out with two partners in the mid-1960s and formed Davis Palmer & Biggs, New York. He remained a partner in that firm until it was sold in the 1970s, but started his own firm, Davis Selected Advisors, and his first fund, the Davis New York Fund Venture, in 1969.
Both sons, Andrew and Christopher, were destined to manage money. Each bought his first stock at age seven or eight. Both spent family vacations visiting companies and going to research meetings. In college, their father paid them $50 per company meeting attended during summer breaks, but only if they wrote reports on the meetings.
Chris Davis worked for several years at State Street Bank & Trust Co. in Boston and as a stock analyst at Tanaka Capital Management, New York, before joining his father's company and slowly working his way up to portfolio manager of three equity funds. He also worked with his grandfather.
Andrew Davis was head of convertibles research at PaineWebber, New York, and came to work for his father after convincing him to start up a convertible bond fund. Shelby M.C. Davis late last year passed on day-to-day investment management responsibilities to his sons.
The $4.1 billion Davis New York Venture Fund is the flagship and oldest of Davis' load funds, The Davis fund family. The Venture Fund has been in the top 10% of all growth funds for the one-, five-, 10-, 15- and 25-year periods ended March 31, according to Lipper Analytical Services Inc., New York. The fund outperformed the return of the average growth fund in 22 of the past 28 years and bettered the Standard & Poor's 500 Stock Index's return for 21 of the past 28 years.
The flagship of the no-load family, the Selected Funds, is the $1.5 billion Selected American Shares Fund. It was the third-best performing growth and income fund for the 12 months ended March 31 and ninth for the three years. Davis Selected Advisors assumed management of the fund in 1993. Chris Davis manages both funds.
The $104 million Davis Real Estate Fund, run by Andrew Davis, has been the top-performing real estate fund since its introduction in January 1994. Andrew Davis' $82 million Davis Convertible Securities Fund, started in 1992, has been the best performing convertible bond fund for the one-, two-and three-year periods ended March 31, according to Lipper.
The company has 10 load funds, with about $6 billion under management. The no-load fund family has about $2 billion under management in four funds. These funds were moved in 1993 to Davis Selected Advisors from Kemper Investment Management, Chicago.
Subadvisers are used to manage some of the funds in each family.
The company has relied so far on distribution of its funds through broker-dealer and mutual fund supermarket channels, as well as direct sales. Mr. Wiese said the company is beginning to set up more subadvisory agreements to manage funds for larger partners with strong distribution systems.
Davis Selected Advisors is beginning to build an institutional sales force and will hire at least one person to concentrate on requests for proposals and consultant relationships.