High Quality, Reasonable Valuation

Market Perspectives 1,2
In the year-to-date period ended September 30, 2009 the S&P 500® Index returned 19.26%. While the general economic backdrop remains uncertain in many respects, signs of stabilization are beginning to appear on numerous fronts. First, the pace of deterioration seems to be moderating, whether with respect to the rate of unemployment or residential property values. Credit markets, meanwhile, have shown some meaningful signs of thawing.

Equity markets, while still below their level of two years ago, have risen from their lows. Among other positive news, valuations for many high-quality businesses remain in a range that we consider reasonable relative to their intrinsic worth. (From a risk/reward standpoint this is significant, as low valuations are generally a requirement for higher future returns.)

In addition, policymakers around the world are maintaining an accommodative stance with respect to monetary policy in order to aid the process of recovery, and businesses almost universally are cutting costs and/or consolidating to shore up profits and margins.

Portfolio Positioning 3
While market conditions vary, the core tenets of the Davis investment discipline and approach remain the same. We start with the premise that stocks represent fractional ownership in real businesses. We seek to purchase durable businesses at value prices and hold them for the long term. We believe that owning shares of well-managed businesses with attractive reinvestment rates, purchased at reasonable valuations and held for years to allow the power of compounding to work, is a reliable method for building capital over long investment horizons.

By definition, owning shares of companies for years or even decades means that some, perhaps all, of our investments will traverse rough patches along the way, whether they are specific to a company, an industry or the broader market. We know in advance that we are going to own businesses in periods of rising interest rates, falling interest rates, inflation, disinflation, a weak dollar, a strong dollar, and so forth. Therefore, when we think about purchasing shares of a company, we have to weigh carefully up front whether we think the business can withstand inevitable shocks like the present financial crisis in addition to considering the likelihood the business can grow earnings power (and therefore intrinsic worth) over full cycles. Then, company by company, we set out to build a durable, all-weather portfolio of businesses that can compound over the long term.

Our Portfolio holds three primary categories of investments:

■ Market leaders with strong balance sheets
■ “Out-of-the-spotlight” businesses
■ Headline risk or contrarian investments

Market leaders with strong balance sheets—
In many cases these are global companies with universally known brands, earnings that are well diversified from the standpoint of product line and geography, and fortress balance sheets. At this time approximately 75% of the Portfolio is invested in companies with market capitalizations in excess of $10 billion and combined revenues totaling more than $2.2 trillion. These businesses span a broad range of global industries from financial services to health care to consumer products to technology. They provide a core foundation of stability within the Portfolio and offer in our view a high probability of long-term sustainable returns through capital appreciation and dividends.

JPMorgan Chase, a leading global banking franchise, is a representative market leader in the Portfolio. With a tier 1 capital ratio of close to 10%, more than $600 billion of core deposits and pre-tax, pre-provision earnings power of more than $40 billion distributed over more than 5,000 branches, JPMorgan Chase is well positioned in our view to take market share in an industry that is likely to have far less competition in the years ahead than in the past.

Texas Instruments, another market leader, designs and manufactures semiconductors that are used worldwide in a variety of ways. For more than a decade, the company has been a leading manufacturer of digital semiconductors that enable cell phones to communicate with other cell and land-based phones. Recently, Texas Instruments made the strategic decision to wind down its cell phone semiconductor business, as it believes that market is vulnerable to commoditization. It has shifted its focus to the more profitable analog and embedded semiconductor markets. Over the past two years Texas Instruments has doubled both the types of analog semiconductors it offers as well as its customer base in those channels.

We believe market leaders such as JPMorgan Chase and Texas Instruments that possess strong brands, proven management and scale advantages are well positioned to create significant value for long-term shareholders.

Out-of-the-spotlight businesses—
After market leaders, the next major category of investments in the Portfolio is out-of-the-spotlight businesses. These are lesser known companies with attractive economics that in our opinion should eventually command higher valuations. Their appeal may take time to gain recognition, often because these businesses are smaller or operate in a mundane non-consumer-oriented industry. Given the right leadership and attractive reinvestment rates, these low-profile holdings can provide the opportunity for the “double play” of expanding multiples on expanding earnings, which can turn a company with a solid earnings growth rate into a stellar investment. As a general rule, out-of-the-spotlight holdings tend to be boring but steady compounding machines.

The Bank of New York Mellon, which was created when The Bank of New York merged with Mellon Financial Corporation in 2007, can be viewed as an out-of-the-spotlight investment insofar as it operates in such mundane businesses as securities processing, global custody, treasury services, and asset management. While less widely understood than JPMorgan Chase, The Bank of New York Mellon operates in 34 countries, has more than $20 trillion in custody assets and earns fees on almost $1 trillion in assets under management.

Other out-of-the-spotlight holdings in the Portfolio include hard asset-related businesses such as oil and natural gas exploration and production companies.

Headline risk or contrarian investments 4—
On a very selective basis we make contrarian investments. These often involve controversial situations where the market is discounting a company’s share price to reflect a perception of risk that we think is greater than the probable economic risk to the business’s long-term fundamentals. Typically a minor portion of our portfolios in percentage terms, headline risk investments can sometimes be difficult for clients to understand because they beg the question, “Don’t you read the papers?” But it is precisely because so many other investors automatically sell companies with near-term challenges, however surmountable, that the potential for high returns exists in many such instances. Our job is to ferret out opportunities that represent favorable risk/reward trade-offs and do our best to avoid the value traps. We will not get every investment right. However, overall this distinctly contrarian element of our investment discipline has been an important contributor to our long-term success and can be an effective and repeatable way to capitalize on herd mentality in the market.

Overall, the investments we have made in the three categories described above combine to form a total portfolio that we believe is well diversified and has a high probability of producing satisfactory compound returns over full market cycles.6

Performance Review
For the year-to-date period ended September 30, the Davis New York Venture Fund outperformed the S&P 500® Index, which returned 19.26%.7 Longer term the Fund has outperformed the Index over the trailing one, five, seven, 10, 15, 20, 25, 30, 35, and 40 year periods as well as since our firm’s inception in 1969.7 The Davis New York Venture Fund has also outperformed the S&P 500® Index over every 10 year rolling period since 1969,7 a testament, in our view, to the effectiveness of the fundamentals-based Davis investment discipline through a variety of market and economic conditions.

Year to date through September 30, the Portfolio’s results reflect strong performance among many individual holdings, particularly within the financials, information technology and energy sectors. (Sector allocations are a by-product of bottom-up stock selection and generally represent a cross section of market leaders, out-of-the-spotlight holdings and headline risk investments.)

Our financial holdings vary widely by industry and business type and include JPMorgan Chase (money center bank), Wells Fargo & Company (regional bank), Progressive (personal lines auto insurer), and holding companies like Berkshire Hathaway and Loews, with significant interests in utilities and insurance, among other businesses. As a general rule, we are interested in owning what we believe are the most durable, best-in-class financial franchises with strong managements, balance sheets and competitive positions. Two positives for well managed, well-capitalized financials today are that spreads are relatively wide at present and that the strong are likely to take market share as weaker competitors are marginalized. Potential negatives include the possibility of future regulation and lower returns on equity due to higher capital requirements (or, conversely, lower leverage ratios). In general, we have a strong preference for financial institutions with excess capital and liquidity, a history of intelligent capital allocation and CEOs who serve as de facto chief risk officers among their other roles.

Information technology has been one of the best performing areas of the Portfolio and the market as a whole year-to-date. Our technology holdings predominantly include workhorse category leaders in chips, online search and software such as Texas Instruments, Google and Microsoft, among other business types. We believe these businesses stand a high probability of compounding earnings by generating relatively high returns on capital and enjoy significant competitive barriers to entry.

Our energy-related holdings consist predominantly of oil and natural gas exploration and production companies that have historically earned above-average returns on capital versus their peers and that in our view are trading at reasonable normalized valuations. These companies include Canadian Natural Resources, Occidental Petroleum, EOG Resources, and Devon Energy. We believe our energy holdings are capable of creating value for shareholders under a variety of economic and market conditions through the disciplined allocation of capital.

Regarding Portfolio changes in the year-to-date period, we added to a number of positions based on valuation and increased our overall allocation to health care through select investments. In addition, we recently sold our position in Cisco Systems to redeploy capital, among other opportunities.

To provide our clients with timely information, we have discussed Portfolio results for the trailing nine month period. However, our investment discipline is based on a much longer-term view. We evaluate each investment in the Portfolio based on its potential to create value for our clients over multiyear holding periods. Through bottom-up stock selection and rigorous fundamental research, we aim to construct a total portfolio that we believe is well diversified and has a high probability of producing satisfactory compound returns over full market cycles.

Today we are finding compelling values in many areas of the market that in our view represent attractive avenues for compounding shareholders’ capital over the next decade. Most of these opportunities fit within the following long-term themes:

■ Globally dominant businesses—These industry leaders are characterized by strong pricing power, diversified earnings, healthy balance sheets, strong competitive moats, and durable business models. Because these businesses produce excess cash, they are not dependent on external funding.

■ Beneficiaries of crisis—Certain companies’ business models, capital positions and management disciplines allow them to take advantage of chaos. Given strong free cash flow, these companies are often able to use distressed prices to make investments, acquisitions or significant share buybacks at accretive prices.

■ Select financial companies—The financial services industry is not prone to obsolescence. People will always need basic banking services, insurance products, investment management advice, and other such services. Nonetheless, it is necessary to differentiate between strong and weak players in order to invest successfully in this area of the market.

■ Energy, commodities and agriculture businesses—Well-managed companies in these areas are positioned to benefit from the inexorable long-term growth of a global middle class, which will result in increasing demand and potentially higher prices for most natural resources.

■ Select special situations—These are highly opportunistic companies in diverse industries trading at steep discounts to intrinsic worth that may prove to be exceptional long-term investments in our view.

1 As of June 30, 2009. 2 This report includes candid statements and observations regarding investment strategies, individual securities, 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. Past performance is not a guarantee of future results. 3 Individual securities are discussed in this piece. While we believe we have a reasonable basis for our appraisals and we have confidence in our opinions, actual results may differ materially from those we anticipate. The return of a security to a portfolio will vary based on weighting and timing of purchase. This is not a recommendation to buy or sell any specific security. Past performance is not a guarantee of future results. 4 While we research companies subject to such contingencies, we cannot be correct every time, and a company's stock may never recover. 5 Returns for periods less than one year are not annualized. 6 While we believe we have a reasonable basis for our appraisals and we have confidence in our opinions, actual results may differ materially from those we anticipate. Equity markets are volatile and an investor may lose money. 7 Class A shares, not including a sales charge. Inception was 2/17/69. Returns would be lower in some periods if a sales charge were included. See endnotes for a description of our rolling 10 year performance and a definition of the S&P 500® Index. Past performance is not a guarantee of future results. 8 Class A shares, not including a sales charge. Past performance is not a guarantee of future results.

This report is authorized for use by existing shareholders. A current Davis New York Venture Fund prospectus must accompany or precede this material if it is distributed to prospective shareholders. You should carefully consider the Fund’s investment objectives, risks, charges, and expenses before investing. Read the prospectus carefully before you invest or send money. This report includes candid statements and observations regarding investment strategies, individual securities, economic and market conditions; however, there is no guarantee that these statements, opinions or forecasts will prove to be correct. These comments may also include the expression of opinions that are speculative in nature and should not be relied on as statements of fact. Davis New York Venture Fund’s investment objective is long-term growth of capital. There can be no assurance that the Fund will achieve its objective. The Fund invests primarily in equity securities issued by large companies with market capitalizations of at least $10 billion. Some important risks of an investment in the Fund are: market risk: the market value of shares of common stock can change rapidly and unpredictably; company risk: the market value of a common stock varies with the success or failure of the company issuing the stock; financial services risk: investing a significant portion of assets in the financial services sector may cause a fund to be more volatile as securities within the financial services sector are more prone to regulatory action in the financial services industry, more sensitive to interest rate fluctuations and are the target of increased competition; and foreign country risk: companies operating, incorporated or principally traded in foreign countries may have more fluctuation as foreign economies may not be as strong or diversified, foreign political systems may not be as stable and foreign financial reporting standards may not be as rigorous as they are in the United States. As of September 30, 2009, Davis New York Venture Fund had approximately 14.4% of assets invested in foreign companies. See the prospectus for a complete listing of the principal risks. Davis Advisors is committed to communicating with our investment partners as candidly as possible because we believe our investors benefit from understanding our investment philosophy and approach. Our views and opinions regarding the investment prospects of our portfolio holdings include “forward looking statements” which may or may not be accurate over the long term. While we believe we have a reasonable basis for our appraisals and we have confidence in our opinions, actual results may differ materially from those we anticipate. These opinions are current as of the date of this report but are subject to change. Market values will vary so that an investor may experience a gain or a loss. The information provided in this material should not be considered a recommendation to buy, sell or hold any particular security. As of September 30, 2009, Davis New York Venture Fund had invested the following percentages of its assets in the companies listed: Agilent Technologies, 1.14%; The Bank of New York Mellon, 2.49%; Berkshire Hathaway, 4.17%; Canadian Natural Resources, 2.40%; Devon Energy, 3.02%; EOG Resources, 2.99%; Google, 1.59%; Hewlett-Packard, 1.72%; JPMorgan Chase, 3.14%; Loews, 2.39%; Microsoft, 2.11%; Occidental Petroleum, 3.30%; Progressive, 2.03%; Texas Instruments, 2.11%; Wells Fargo & Company, 4.09%. Davis Funds has adopted a Portfolio Holdings Disclosure policy that governs the release of non-public portfolio holding information. This policy is described in detail in the prospectus. Visit davisfunds.com or call 800-279-0279 for the most current public portfolio holdings information. Rolling 10 Year Performance Chart. Davis New York Venture Fund’s average annual total returns for Class A shares were compared against the returns earned by the S&P 500® Index as of December 31 of each year for all 10 year time periods from 1969 through 2008. The Fund’s returns assume an investment in Class A shares on January 1 of each year with all dividends and capital gain distributions reinvested for a 10 year period. The figures are not adjusted for any sales charge that may be imposed. If a sales charge were imposed, the reported figures would be lower. The figures shown reflect past results; past performance is not a guarantee of future results. There can be no guarantee that the Fund will continue to deliver consistent investment performance. The performance presented includes periods of bear markets when performance was negative. Equity markets are volatile and an investor may lose money. Returns for other share classes will vary. Broker-dealers and other financial intermediaries may charge Davis Advisors substantial fees for selling its products and providing continuing support to clients and shareholders. For example, broker-dealers and other financial intermediaries may charge: sales commissions; distribution and service fees; and record-keeping fees. In addition, payments or reimbursements may be requested for: marketing support concerning Davis Advisors’ products; placement on a list of offered products; access to sales meetings, sales representatives and management representatives; and participation in conferences or seminars, sales or training programs for invited registered representatives and other employees, client and investor events, and other dealer-sponsored events. Financial advisors should not consider Davis Advisors’ payment(s) to a financial intermediary as a basis for recommending Davis Advisors. The net expense ratio for Davis New York Venture Fund Class A for the fiscal year ended July 31, 2009 was 0.92%. Effective July 1, 2009, Davis Advisors voluntarily and permanently reduced any management fee breakpoints ABOVE 0.55% to 0.55% for Davis New York Venture Fund. Over the last five years, the high and low turnover ratio for Davis New York Venture Fund was 16% and 3%, respectively. The S&P 500® Index is an unmanaged index of 500 selected common stocks, most of which are listed on the New York Stock Exchange. The Index is adjusted for dividends, weighted towards stocks with large market capitalizations and represents approximately two-thirds of the total market value of all domestic common stocks. Investments cannot be made directly in an index. After January 31, 2010, this material must be accompanied by a supplement containing performance data for the most recent quarter end. Shares of the Davis 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.