Financials Savvy
If Christopher C. Davis ever falls down on the job, nobody will blame it on bad genes. Davis, 32, is a grandson of legendary Wall Street insurance investor Shelby Cullom Davis and the son of Shelby M.C. Davis, who took over the family’s money management business and multiplied the fortune his father had amassed.
So far, the grandson is carrying on the family tradition: Now in his fifth year as manager of the Davis Financial Fund, Chris Davis has led the fund to a five-star Morningstar rating, with a total return of 190% through 1996, or twice the average stock fund’s five-year gain.
The family’s core investment philosophy is to buy well-managed growth companies at cheap prices and to hold for the long haul. Chris Davis applies this idea to the financial services sector in the belief that many of the best insurance, banking and brokerage firms are “growth companies in disguise.”
Davis spoke with Times staff writer Thomas S. Mulligan in Manhattan at Davis’ Fifth Avenue offices, amid signed photographs of the last four Republican presidents, with Herbert Hoover and former New York Gov. Thomas E. Dewey thrown in for good measure.
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Times: Your family has a long history of involvement with financial services stocks. How did it start?
Davis: My grandfather started investing in financial stocks in 1947, in insurance companies. Back then, they were valued at a premium to the market. That’s where you put the “widows-and-orphans” money--safe, conservative, you didn’t have to worry.
But we’ve gone through this horrible period of devaluation [of the stocks] beginning in the late 1970s. What happened was that the interest rates that banks pay out went from 4% to 20% [and back] to 4%. Inflation, deflation--it was the worst of all worlds for financial companies.
Times: So many of the stocks were badly beaten up in the 1970s and 1980s. But in the 1990s they have rebounded dramatically.
Davis: But even after the last five years, it’s still not an industry that’s perceived as anywhere near as attractive as the overall market. The stocks’ valuations are at about 80% of the broad market, maybe less.
Our company is built on this idea that there are long-term themes that play out, often over a generation, certainly over a decade. What we try to do is find the best companies to capitalize on these themes. We don’t mean just the best-managed or the best-positioned, we also mean the most attractively valued. It’s where value and growth come together that you get the real investment opportunities.
The stage we’re in now is recognizing that maybe the growth characteristics of financial services companies are better than they’ve been in the last 20 years, and maybe better than the general market. Demographics is a large part of that, with the baby boomers becoming investors instead of consumers. We feel the ‘90s are the decade of financial stocks.
Times: How do you capitalize on that?
Davis: The main theme is companies positioned to take advantage of the booming pre-retirement savings market. That may include SunAmerica, Charles Schwab, Fidelity if they were public--companies like that.
A second trend is the emergence of a global oligopoly in investment banking. The spread of American-style capitalism around the world has been coincident with the collapse of the Japanese investment banks and the lack of competitiveness of the European investment banks.
Five years ago, if a Brazilian power company was going to go private, you could close your eyes and predict who would be on the cover of the prospectus: You’d have Sumitomo, Deutsche Bank, maybe another Japanese company, maybe a British firm, and then maybe Merrill Lynch or Goldman Sachs. But now it’s only the American investment banks. Gazprom [the Russian natural gas firm] goes private, and you know it’s the end of the Cold War when Morgan Stanley’s on the cover of the prospectus.
The third theme is that crisis creates opportunity. What’s happening in property-casualty insurance and banking is that the strong managements have been like foxes in the henhouse. After going through the real estate debacle and the balance sheet crises of the early ‘90s, they came out stronger and more focused, their irrational competition went out of business, and they built a cost advantage that’s given them a moat around their business. The slow just aren’t going to catch up.
Times: So who are these heroes?
Davis: Wells Fargo, maybe BankAmerica, AIG [American International Group], certainly Travelers. What’s happened with Wells Fargo and with [Chairman] Sandy Weill at Travelers is these proven entrepreneurial managers got in there and they’ve just blown away any expectations of what was possible in terms of the costs that could come out of these businesses while still giving the customer even better service.
Times: So management matters, but how do you evaluate management?
Davis: They’ve got to have a record. Eli Broad [head of SunAmerica] had a record of making money and Sandy Weill had a record of making money. Now, is Sandy an insurance guy? No. Wells Fargo isn’t made up of computer guys, either, but they knew how to apply technology in a smart way, and they had the culture.
Times: How did you react to the Morgan Stanley-Dean Witter merger announcement?
Davis: We own a lot of Morgan Stanley and Dean Witter, but I was surprised by it.
One of the striking things to me is that there was quite a bit of press about the supposed culture clash. To me, if you have two high-performing companies, you don’t get culture clash. Where you get culture clash is putting high-performance companies together with mediocre companies.
Both Dean Witter and Morgan Stanley are high-performing companies. They had different focuses, maybe different markets, different customer bases, but I would say that they had more in common culturally than they would have with mediocre companies that might be a closer business fit.
Times: Do you see the financial services industry consolidation gaining speed after this deal?
Davis: Look at Banc One getting together with First USA [the fourth-largest U.S. credit card issuer]. That’s related in a way. It’s not a bank merging with another bank, but it’s buying a series of relationships. How is the next bank going to get into California? Maybe through a company that has deep customer relationships in California. The best example of that would be a Schwab or an American Express, or a Dean Witter for that matter. First USA had lots of customers in California.
Times: What other stocks do you like now, and why?
Davis: American Express. One of the great brand names in the world selling at 12 times earnings. So you’ve got the brand story, the global story and the management story. It’s a focused, entrepreneurial management that is restructuring with huge costs still to come out of the business.
I also love General Re. I like the reinsurance business. A few people can make a lot of money. It’s concentrated and not so regulated as the primary insurance business.
Allstate’s another . . . there’s a great brand name at 10 times earnings. It was under a cloud because people said the [Northridge] earthquake would wipe them out. Bull! They paid for that earthquake out of cash flow. They never had to sell one bond. That’s incredible power. So they didn’t earn [much] money that year--that’s a small price to pay.
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Davis Financial Fund
Strategy: Seeks long-term capital growth by investing primarily in stocks of companies in the financial services industries, including insurance, banking and brokerages. May also own stocks in other industries, including technology.
VITAL STATISTICS
Year-to-date total return: + 11.5%
Five-year total return through 1996: + 190.4
Avg. gen. stock fund, five year total ret., through 1996: + 91.8
Five biggest holdings as of Sept 30: 1. Travelers Group 2. Intel 3. General Re 4. American Express 5. Morgan Stanley.
Sales charge: 4.75%
Assets: $108 million
Min. Investment: $1,000
Phone: (800) 279-0279
Morningstar risk-adjusted performance rating, 1-5: *****
Sources: Lipper Analytical Services, Morningstar Inc.
