Like Father Like Sons - Davis family of funds

Kiplinger's Personal Finance Magazine, June, 1999 by Robert Frick

The patriarch of the Davis family of funds taught his progeny to work hard for what they get in life, and to play hard, too. And that's what they do.

Minutes before takeoff, the last passenger to board American Airlines Flight 1865 from Chicago to Albuquerque tramps around the first-class curtain and excuses himself to sling his bags into an overhead bin in coach. He then quickly settles into an aisle seat and starts wading through a thick sheaf of papers and magazines.

Chris Davis's face rings a bell with a fellow passenger because it was on the cover of the August 1997 Kiplinger's Personal Finance Magazine. That year, at the tender age of 32, he guided Selected American Shares fund to a total return of 37%, beating Standard & Poor's 500-stock index for the third straight year. This slender moppet of a man may be dressed for economy class, but he's worth millions. What's he doing back here in steerage?

Lately Davis's numbers have not been nearly as outstanding, and shareholders of the funds that he and his brother, Andrew, manage may be wondering if the two inherited the necessary chromosomes from their father, legendary investor Shelby Davis.

In fact; Chris and Andrew must feel like the sons of some exalted pharaoh. Davis New York Venture fund, which Shelby Davis started in 1969, is the sixth-highest-performing stock mutual fund of the past 20 years and ranks in the top 10% for the past ten and 15 years. But in 1998, with Chris at the helm, Davis New York Venture experienced its worst performance in ten years relative to its category: Seventy percent of all long-term-growth funds did better.

Last year's results are on Chris's mind as Flight 1865 taxis for takeoff. On Saturday morning at Santa Fe's El Dorado Hotel, he and Andrew will sit down with board members of Selected American Shares fund, which Chris runs with input from Andrew and whose portfolio is almost identical to that of Davis New York Venture. Just what happened in 1998, when Selected American's return also fell short, will be topic one.

NO SILVER SPOONS

Before they even near Santa Fe's city limits the next morning, Andrew, who is at the wheel of a rented Montero bearing their skis, gets the question: Why fly economy? Chris almost gags on a mouthful of coffee-dipped biscotti. The answer goes back--as does much concerning the Davis dynasty--to grandfather Shelby Cullom Davis.

Shelby Davis Sr. wrote his will on a yellow legal pad while flying back to the States from Switzerland. The opening line was that his sound mind and body was flying economy because upgrading would be improvident. Grand-dad wasn't just parsimonious, says Andrew, he was downright puritanical. Skiing became the family sport because it wasn't wimpy like golf. You get cold, and it requires exertion to have fun. In fact, a Shelby Sr. tradition was to make everyone skip the chairlift and "lug our skis to the top of the slope for the first run," says Andrew.

Shelby Sr. attended the University of Geneva in the early 1930s and received a PhD in economics. In his dissertation, he judged France to be invulnerable to invasion because it could conscript a vast army from its African colonies. The German army would later poke holes in Davis's geopolitical theories.

But Davis's ideas about the insurance business proved to be on the mark. He made the first family fortune by investing in insurance-company stocks after serving as New York State's deputy superintendent of insurance in the late 1940s. Davis figured that high commissions paid to agents when they first sold a policy tended to dampen profits initially but that those policies would generate huge cash flows in later years. And so was born the Davis family strategy of investing in big, value-packed financial companies. With $100,000 in borrowed money, Davis started an investment firm specializing in those companies. When he died in 1994, at age 85, he was worth $800 million.

If skiing is part of the family culture, so is frugality and stock analysis. Chris remembers as a boy asking his grandfather for a dollar to buy a hot dog and getting a lesson on the power of compounding: What would happen if he invested the money instead? Why, it would grow to more than $1,000 in 50 years. Chris learned another valuable lesson that day: Carry your own money. "And I never did get the damn hot dog."

Not only did dinner talk gravitate toward finance, so did family vacations. Shelby Jr., Chris and Andrew's dad, remembers traveling to Fort Wayne, Ind., so his dad could visit Lincoln National Life. He, in turn, dragged Chris and Andrew to such spots as a machine-tool factory in Connecticut on the way to a vacation in Maine.

And instead of playing Parcheesi on Friday nights, the Davises would gather around to watch Wall Street Week. The inculcation continued during summer breaks from college, during which Chris and Andrew worked for their father and grandfather writing research reports for $100 each. But Shelby Jr. is much more laid-back than his father. "Dad was a great buffer," says Andrew.