Selected International Fund - Fall Review 2021
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Update from Portfolio Manager
Danton Goei
Selected International Fund
Fall Review 2021
Update on the Fund’s current positioning, Group and TAL Education Group, both of which
long-term performance and more recent results. we have since sold. Short-term underperformance
is inevitable, given our willingness to look different
For the first seven months of 2021, Selected
than the Index by investing in a focused portfolio of
International Fund returned −15.55%, underper
long-term advantaged companies. Importantly, the
forming the MSCI ACWI (All Country World Index)
stock weakness does not reflect recent company
ex US return of 7.36%. The main detractors to
operating results, which have been strong, with these
year-to-date performance have been our Chinese
top Chinese consumer companies averaging revenue
consumer holdings. JD.com, Alibaba Group, iQiyi,
growth of 27% over the last twelve months.¹
and both Prosus and Naspers, which own a
significant stake in Tencent, underperformed due Starting in earnest in November 2020, the Chinese
to heightened regulatory concerns. Of note, the government embarked on a comprehensive
Chinese government recently enacted new antitrust review of the consumer technology
regulations that materially impaired the value of sector. Historically China has followed a more
companies in the after-school tutoring sector, laissez-faire antitrust regulatory approach
including New Oriental Education & Technology tolerating fierce and even aggressive competitive
The average annual total returns for Selected International Fund Class S shares for periods ending June 30,
2021 are: 1 year, 26.38%; 5 years, 10.95%; and 10 years, 6.35%. The performance presented represents past
performance and is not a guarantee of future results. Total return assumes reinvestment of dividends and capital
gain distributions. Investment return and principal value will vary so that, when redeemed, an investor’s shares may
be worth more or less than their original cost. The Fund is subject to a 2% short-term redemption fee for shares held
for fewer than 30 days. The gross annual operating expense ratio for Class S shares as of the most recent prospectus
was 1.44%. (The Adviser is contractually committed to waive fees and/or reimburse the Fund’s expenses to the
extent necessary to cap total annual fund operating expenses of Class S shares at 1.05%. The expense cap expires
May 1, 2022.) The total annual operating expense ratio may vary in future years. Returns and expenses for other
classes of shares will vary. Current performance may be lower or higher than the performance quoted. For most
recent month-end performance, visit selectedfunds.com or call 800-243-1575. The Fund’s performance benefited
from an IPO purchase in 2014. After purchase, the IPO rapidly increased in value. Davis Advisors purchases shares
intending to benefit from long-term growth of the underlying company; the rapid appreciation of the IPOs was an
unusual occurrence.
This report includes candid statements and observations regarding investment strategies, individual securities, and economic and market conditions;
however, there is no guarantee that these statements, opinions or forecasts will prove to be correct. Equity markets are volatile and an investor may
lose money. All fund performance discussed within this piece refers to Class S shares and are as of 7/31/21 unless otherwise noted. This is not a
recommendation to buy, sell or hold any specific security. Past performance is not a guarantee of future results. There is no guarantee that the
Fund performance will be positive as equity markets are volatile and an investor may lose money.
1. As of 6/30/21.
SIF | FALL REVIEW [1]behavior as Big Tech transformed the way people The Chinese government has also clearly commun
communicated, shopped, played and accessed icated what its long-term goals are. In 2015, the
information. As Big Tech has grown in scale and government proclaimed the Made in China 2025
scope, however, becoming crucial to not only strategy, which was a policy roadmap to transform
retail and entertainment, but also becoming the Chinese economy from a powerhouse in
leaders in enterprise software, chip design, news labor-intensive industries into a powerhouse of
and media, and especially financial services, the technology-intensive products and services.
Chinese government has wanted to tighten its Industries specifically targeted for leadership
regulatory oversight. positions include information technology, artificial
intelligence, robotics, new materials, biotechnology,
The trend of stricter regulatory oversight of Big aerospace and renewable energy. Many of our
Tech is one that is global in nature. Europe led holdings, including Alibaba Group, JD.com, DiDi
this trend by starting to investigate Google in Global and Meituan, are leaders in many of these
2010 for antitrust violations and five years later fields and are key to achieving China’s goal of
in 2015 serving the search market leader with becoming a modern 21st century economy. Their
a formal complaint. Investigations and lawsuits entrepreneurial management teams and talented
against other Big Tech companies have become workforce are driven by the profit motives of
commonplace, as governments everywhere seek private enterprise, and these knowledge-intensive
to establish standardized regulations for the new industries are key to their companies’ success. As
and evolving consumer technology sector. The big such, we believe the ongoing technology industry
technology companies have had to adapt and antitrust review is designed to strengthen the
build large regulatory departments, but the scale industry, rather than weaken or nationalize it.
of their businesses that first invited regulatory
scrutiny has, if anything, grown even larger over Alibaba Group was the first company to undergo
the past several years. the antitrust review and after a three-month
investigation, was fined $2.8 billion to punish it
It is true that the Chinese government operates for non-competitive behavior. The government
differently than those in democratically-elected specifically mentioned its exclusive supplier
states such as in Europe and the United States, contracts colloquially known as “choose one
and its decision-making is often opaque. We do, from two” as behavior harming customers and
however, have a long government track record to competitors. It is our expectation that Alibaba
look back on, given the Communist Party of China Group will be the most heavily fined company,
has been in power for so long. This track record given it had the most aggressive business tactics.
over the past several decades has been one of While $2.8 billion, equivalent to 4% of Alibaba
pragmatism focused on economic growth. At Group’s 2019 domestic revenues, is almost three
times, the Chinese government has been compelled times the previous record $975 million anti-
to make course corrections, such as dealing with monopoly fine levied against Qualcomm in 2015,
the terrible environmental damage that was the it is also much lower than the legal 10% of revenues
consequence of economic growth at breakneck that could have been assessed. $2.8 billion is also
speed or regulating the real estate market to avoid an amount that the company can easily weather,
frequent boom-bust cycles. But tightening regulation given it is also only 4% of the cash on Alibaba Group’s
is nothing new, and the past record indicates that balance sheet. While the government clearly wanted
the goal of stricter oversight is to establish a to punish the company for non-competitive behavior,
healthier environment for future growth. it also seems that its goal was not to permanently
damage the company, but rather set clear
standardized regulations for the entire industry.
SIF | FALL REVIEW [2]Over the 15+ years we have been investing in China for less than 2% of Danske Bank’s profits, saw over
at Davis, we have carefully monitored government 200 billion Euros in suspicious funds flow through
and regulatory actions, and should we see a move it over a number of years. In the aftermath of the
away from the pragmatic long-term growth strategy scandal, the entire management team has turned
of the past, we will take action. Today the Big Tech over, and there has been substantial investment
antitrust review in China seems driven by similar in updating the bank’s compliance defenses. The
goals and circumstances to the reviews ongoing for core of Danske Bank, including during the COVID-
many years in other countries. Yet the stock market induced recession, has proven very resilient.
moves in our Chinese Big Tech names are imputing Uncertainty still exists, given the ongoing litigation
a very dire scenario that neither the government’s and investigations, but with Danske Bank’s strong
track record, long-term strategic plans or recent balance sheet, good ongoing results and substantial
review of the Alibaba Group support. We instead improvement in compliance systems, we expect the
see a collection of world-class companies trading company to emerge from this scandal as an even
at exceptionally attractive valuations. stronger bank.
Positive contributors to results were our financial Looking forward to its restructuring in 2023,
holdings including DNB Bank, DBS Group, Danske Danske Bank is trading at an attractive 6x P/E.
Bank, Julius Baer and Bank of Butterfield. The banks Approximately 40% of current market cap is
proved to be extremely resilient in weathering the excess capital over regulatory requirements,
recession of 2020. High capital ratios and more and we conservatively estimate that less than a
conservative credit policies in the aftermath of the third of the excess will be eventually paid off in
financial crisis, coupled with government stimulus fines. We think Danske Bank can return to earning
programs, combined to diminish the impact of double-digit return on equity while the current
the sharp recession on bank results. Moreover, valuation is 0.7x tangible book value, which already
the economic outlook looks very positive, with includes a conservative estimate for potential
expectations for 2021 GDP growth in the U.S. of fines. Our estimated Internal Rate of Return (IRR)
6.6%2, in Europe of 4.2%3, in China of 8.3%4 and for Danske Bank is in the mid-teens, making it an
for the global economy of 6.2%5. attractive long-term holding.
We added South Korea’s best-known company,
Discuss some of the businesses Samsung, to the portfolio in the first quarter of
Selected International Fund owns. 2021. Samsung’s products are everywhere, and it
has recently been ranked as the fifth most valuable
Danske Bank is the leading bank in Denmark, with
brand in the world. Globally, no company makes
a mature 25–30% market share across most
more TVs, computer screens or mobile handsets.
financial products in its home market. It also
Apart from the company’s branded electronic
acts as a challenger bank in Norway, Sweden and
products, Samsung’s subsidiaries are themselves
Finland, where it offers banking services to niche
globally recognized brands: NeuroLogica (medical
customer segments.
equipment), Dacor (stoves/ovens, refrigerators,
We opportunistically invested in Danske Bank in etc.) and Harmon International (consumer/lifestyle
2018 after it was implicated in a large money electronics). The Harmon division itself includes
laundering scandal. The Estonian branch, accounting other recognizable brands like AKG, Arcam,
Cambridge Audio and SmartThings.
2. https://www.conference-board.org/research/us-forecast
3. https://ec.europa.eu/info/business-economy-euro/economic-performance-and-forecasts/economic-forecasts/spring-2021-economic-forecast_en
4. https://www.scmp.com/economy/china-economy/article/3145228/chinas-economic-recovery-falters-delta-outbreak-henan-floods
5. https://www.fitchratings.com/research/sovereigns/global-economic-outlook-june-2021-15-06-2021
SIF | FALL REVIEW [3]While its handset and consumer electronics business businesses are all very positive, yet the company
are well-known, actually the most valuable part of trades at what we estimate is a significant discount
Samsung is building the components that run a vast to fair value. Samsung is trading at 7–8x our estimate
array of electronic systems globally. Samsung is the of peak cycle earnings power, with an attractive
number one manufacturer of memory chips, with IRR of 14%.
a 42% share of the DRAM market and 32% of the
flash memory market. In addition, it accounts for
30% of all flat panel displays. Many of its largest Conclusion
customers, including Apple, Sony and Huawei, are We would encourage investors to look very much
also major competitors, which speaks to the trust individually at companies throughout different areas
that Samsung has built over the years. This high of the economy and markets. A detailed search
level of trust is what enabled Samsung to build the reveals that many fine businesses still represent
number two semiconductor foundry business in the good value, particularly considering that conditions
world after only TSMC. Samsung’s manufacturing for most sectors are improving. Owning durable
of semiconductor chips for customers worldwide is compounding machines with the potential for free
a $15 billion business, growing nearly 40% a year cash flow growth over many years is a core part of
for the past decade. our discipline. Over the 50 years since the firm’s
founding, the Davis investment discipline has
Given the post-pandemic economic resurgence demonstrated an ability to generate above-average
and well-publicized shortages in semiconductor returns, based on in-depth fundamental analysis,
capacity, we anticipate significant growth in a long-term investment horizon and a strong value
Samsung’s earnings power over the next few years discipline. While the times have changed, these
on the back of the company’s semiconductor fundamental principles are timeless and proven.
operation. In fact, the outlook for Samsung’s We thank you for your continued trust and interest
handset, consumer electronics, flat panel display, in Selected International Fund.
memory chip and especially semiconductor foundry
SIF | FALL REVIEW [4]Selecting Quality Companies for the Long Term
This report is authorized for use by existing shareholders. A current Selected may cause the Fund to underperform relevant benchmarks; fees and
International Fund prospectus must accompany or precede this material if it expenses risk: the Fund may not earn enough through income and capital
is distributed to prospective shareholders. You should carefully consider the appreciation to offset the operating expenses of the Fund; and mid- and
Fund’s investment objective, risks, fees, and expenses before investing. Read small-capitalization companies risk: companies with less than $10 billion
the prospectus carefully before you invest or send money. in market capitalization typically have more limited product lines, markets
and financial resources than larger companies, and may trade less fre
This report includes candid statements and observations regarding quently and in more limited volume. See the prospectus for a complete
investment strategies, individual securities, and economic and market description of the principal risks.
conditions; however, there is no guarantee that these statements, opinions
or forecasts will prove to be correct. These comments may also include The Fund is subject to a 2% short-term redemption fee for shares held for
the expression of opinions that are speculative in nature and should not fewer than 30 days.
be relied on as statements of fact.
The information provided in this material should not be considered a
Davis Advisors is committed to communicating with our investment recommendation to buy, sell or hold any particular security. As of 6/30/21,
partners as candidly as possible because we believe our investors benefit the top ten holdings of Selected International Fund were: Meituan, 8.17%;
from understanding our investment philosophy and approach. Our views DiDi Global, 6.41%; JD.com, 6.06%; DBS Group, 5.87%; DNB ASA, 5.87%;
and opinions include “forward-looking statements” which may or may Alibaba Group, 5.15%; Danske Bank, 5.03%; New Oriental Education &
not be accurate over the long term. Forward-looking statements can Tech, 4.97%; Samsung Electronics, 4.81%; and AIA Group, 4.75%.
be identified by words like “believe,” “expect,” “anticipate,” or similar
Selected Funds has adopted a Portfolio Holdings Disclosure policy that
expressions. You should not place undue reliance on forward-looking
governs the release of non-public portfolio holding information. This policy
statements, which are current as of the date of this report. We disclaim any
is described in the prospectus. Holding percentages are subject to change.
obligation to update or alter any forward-looking statements, whether as a
Visit selectedfunds.com or call 800-243-1575 for the most current public
result of new information, future events, or otherwise. While we believe we
portfolio holdings information.
have a reasonable basis for our appraisals and we have confidence in our
opinions, actual results may differ materially from those we anticipate. We gather our index data from a combination of reputable sources,
including, but not limited to, Lipper, Wilshire, and index websites.
Objective and Risks. Selected International Fund’s investment objective
is capital growth. There can be no assurance that the Fund will achieve its The MSCI ACWI (All Country World Index) ex US is a free float-adjusted
objective. Some important risks of an investment in the Fund are: stock market capitalization weighted index that is designed to measure the equity
market risk: stock markets have periods of rising prices and periods of market performance of developed and emerging markets, excluding the
falling prices, including sharp declines; common stock risk: an adverse United States. The index includes reinvestment of dividends, net of foreign
event may have a negative impact on a company and could result in a withholding taxes. The S&P 500 Index is an unmanaged index of 500
decline in the price of its common stock; foreign country risk: foreign selected common stocks, most of which are listed on the New York Stock
companies may be subject to greater risk as foreign economies may not be Exchange. The index is adjusted for dividends, weighted towards stocks with
as strong or diversified; headline risk: the Fund may invest in a company large market capitalizations and represents approximately two-thirds of the
when the company becomes the center of controversy. The company’s stock total market value of all domestic common stocks. Investments cannot be
may never recover or may become worthless; depositary receipts risk: made directly in an index.
depositary receipts may trade at a discount (or premium) to the underlying
security and may be less liquid than the underlying securities listed on an Forward Price/Earnings (Forward P/E) Ratio is a stock’s current price
exchange; foreign currency risk: the change in value of a foreign currency divided by the company’s forecasted earnings for the following 12 months.
against the U.S. dollar will result in a change in the U.S. dollar value of The values for the portfolio and index are the weighted average of the p/e
securities denominated in that foreign currency; exposure to industry ratios of the stocks in the portfolio or index.
or sector risk: significant exposure to a particular industry or sector may After 10/31/21, this material must be accompanied by a supplement
cause the Fund to be more impacted by risks relating to and developments containing performance data for the most recent quarter end.
affecting the industry or sector; emerging market risk: securities of issuers
in emerging and developing markets may present risks not found in more Shares of the Selected Funds are not deposits or obligations of any
mature markets. As of 6/30/21, the Fund had approximately 61.3% of net bank, are not guaranteed by any bank, are not insured by the FDIC or
assets invested in emerging markets; large-capitalization companies any other agency, and involve investment risks, including possible loss
risk: companies with $10 billion or more in market capitalization generally of the principal amount invested.
experience slower rates of growth in earnings per share than do mid- and
small-capitalization companies; manager risk: poor security selection
Davis Distributors, LLC
2949 East Elvira Road, Suite 101, Tucson, AZ 85756
800-243-1575, selectedfunds.com
Item #4404 7/21You can also read
