Decreased confidence in this team’s ability to execute its gutsy, high-conviction approach warrants a downgrade of Davis International’s People Pillar rating to Average from Above Average, making it and the related Selected International and Davis Select International ETF decent but no longer compelling offerings.  

Manager Danton Goei’s extensive experience investing in international stocks is noteworthy, but mounting mistakes lessen the strategy’s appeal. Goei joined Davis Advisors in 1998 and began managing a sleeve of Davis International’s portfolio at its December 2006 inception. His ability to spot promising firms impressed Davis Advisors CEO and fellow portfolio manager Christopher Davis, leading to Goei’s promotion to lead manager of this strategy and sibling Davis Global DGFAX in 2016. However, many of Goei's high-conviction bets since then have hindered performance, including positions in numerous Chinese stocks. For example, his allocations to New Oriental Education & Technology Group EDU and Alibaba BABA peaked at around 10% of assets each before their share prices plummeted more than 90% and 70%, respectively. Goei's wait-and-see approach backfired, as he began selling both stocks after each had already fallen substantially.

The team’s aggressive approach has attractive features but also carries inherent risks. It seeks competitively positioned international firms trading at discounted prices. To identify potential investments, the team looks for companies with dominant or growing market share and strong balance sheets. Goei is willing to pile into sectors or regions that he believes are misunderstood or deeply undervalued. For example, Davis International’s 26% allocation to China, as of the July 2023 portfolio, easily topped every peer in the foreign large-blend Morningstar Category. Goei's brazen conviction in China remains intact as he believes attractive valuations there far outweigh any geopolitical or regulatory risks that could impact his holdings. 

This style tends to produce volatile results. The strategy ranked in either the top or bottom quartile of its category in each of the past seven calendar years. And that hasn’t worked out so far for many investors: Davis International’s A shares gained just 2.1% annualized from January 2016 through September 2023, trailing both the MSCI ACWI ex USA Index’s 5.4% and the typical peer’s 4.4%.

Analyst Rating

Missteps keep mounting.

Analyst

Andrew Redden

Nuvn PA Mun Val Shs of Benef Interest

Teck Resources

Bridger Aerospace Group Holdings Inc

Suncor Energy

Coupang

Ferguson PLC

HollySys Automation Technologies

This aggressive approach has a mix of strengths and weaknesses that warrants an Average Process rating. 

Sound fundamental research underpins the team’s high-conviction approach, but its tendency to pile into certain sectors or regions creates some portfolio-level risks. The team seeks competitively positioned non-U.S. companies (whether emerging players or established leaders) trading at discounted prices. Manager Danton Goei divides his investments into three buckets: contrarian picks, out-of-spotlight names, and market leaders with strong balance sheets. This philosophy often leads the team to concentrate the portfolio around certain investment themes or specific areas of the market, such as Chinese or financials stocks. But that can get the strategy into trouble: For example, many of its forays into China haven’t worked out—not only because of issues at the companies themselves, but also because of worries about jurisdictional and regulatory risks in China generally. Goei doesn’t shy away from making bold calls or doubling down on out-of-favor holdings. 

The team is patient and stresses taking a long-term view. It’s also collaborative, with Goei working with analysts to determine buy/sell decisions and position sizing.

Average

Process

Poor decisions mar an otherwise experienced team and warrant a People rating downgrade to Average from Above Average.

Manager Danton Goei joined Davis Advisors in 1998, and his experience, personal investments in his own funds, and multilingual background stand out. However, questionable execution of his high-conviction approach has led to severe losses at times. For example, bold bets on various Chinese companies, including education company New Oriental Education & Technology Group EDU, streaming company iQIYI IQ, and Alibaba BABA didn’t work out. Goei stuck with Alibaba despite recognizing the threats of competition and government interference in 2021; Alibaba subsequently lost more than half its value, and Goei finally began meaningfully exiting the stock in 2022. 

That said, the team is self-aware about these mistakes, and Goei's overall ability to spot bargains and hold them through rough patches gives this strategy some appeal for patient investors. 

Goei’s supporting cast is sufficient, but Davis Advisors’ international resources are limited. Goei primarily leans on just two of the team's six other equity members. This strategy’s concentrated, low-turnover portfolio makes workload manageable, but additional resources could be beneficial given the strategy's broad geographic reach.

People

Davis Advisors has built an investor-friendly backbone, which underscores its Above Average Parent rating.

The Davis family has provided stability to this U.S. equity-oriented asset manager for more than 50 years. Christopher Davis, CEO and portfolio manager, is a third-generation investor at the firm, and his family has significant investments in its strategies. An experienced 10-person investment team supports him. Portfolio managers invest alongside fundholders, with a large portion of their pay tied to beating their benchmarks over five-year periods; some of that reward is invested in fund shares.

These attributes don’t mean the firm is perfect. Although the investment team has stabilized, it experienced heightened turnover between 2014 and 2021. Disappointing performance since the 2007-09 global financial crisis exposed weakness in the team’s high-conviction approach. Bold forays into markets such as China and other concentrated bets highlight an old-fashioned approach to risk—considering it primarily when picking stocks rather than when building portfolios.

The team’s expertise in financials remains a bright spot, and these stocks often comprise a significant portion of its portfolios. Davis offers an apt number of strategies, and fees remain competitive, even as assets under management dropped to USD 20 billion from USD 100 billion in the mid-2000s.

Above Average

Parent

Davis Select International ETF

DINT holds an actively-managed portfolio of international companies outside the US, selected based on prospects for long-term growth of capital.

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