Christopher C. Davis, co-manager of the Davis New York Venture Fund, says he purchased shares of J.P. Morgan Chase & Co. because the bank's newly appointed chief executive knows how to outperform the market.
James Dimon, named to succeed William B. Harrison Jr. as chief executive on Oct. 19, six months ahead of schedule, is a manager who "has a very strong record of producing good results and communicating honestly with investors and employees," Davis said.
Davis first bought shares of J.P. Morgan Chase, the No. 3 U.S. bank, after Dimon joined in the third quarter of 2004. He said Dimon, along with Progressive Corp.'s Peter B. Lewis and Golden West Financial Corp.'s Herbert M. and Marion O. Sandler, may help his fund extend its lead over the Standard & Poor's 500-stock index.
"Those are managers who have built records that are among the best on the New York Stock Exchange for decades," said Davis, 40, who followed his father and grandfather into the money management business. His New York-based firm oversees $60 billion for clients.
The Davis fund has risen at an annual rate of 4.3 percent since 2000, exceeding the 1.5 percent decline of the S&P 500. J.P. Morgan Chase has held back the gains by losing 0.9 percent, including dividends, since completing its acquisition of Bank One Corp. in July 2004.
Investments in J.P. Morgan Chase, Progressive and Golden West account for 11 percent of the Davis fund's $31.4 billion of assets. Davis's firm is the third-largest investor in Progressive, an insurer in Mayfield Village, Ohio, and the biggest holder of Oakland, Calif.-based Golden West, a savings bank and fund manager.
The Davis New York Venture Fund, started in 1969, has risen 5 percent this year and the S&P 500 has lost 0.3 percent, including reinvested dividends. The return ranks seventh among 24 U.S.-based stock funds with at least $25 billion in assets, data compiled by Bloomberg show. The $64 billion American EuroPacific Growth Fund, run by a team from Los Angeles-based Capital Group Cos., is No. 1 with an increase of 7.4 percent.
U.S. stock returns this decade probably won't be "anywhere near" the historical average of 10 percent, Davis and co-manager Kenneth C. Feinberg, 47, said in a report sent to investors last month. The S&P 500 has fallen at an annual pace of 1.5 percent since January 2000, on pace for the worst decade since the Great Depression of the 1930s when the index lost 0.05 percent, according to Chicago-based Ibbotson Associates.
"Our prediction for a low-return decade doesn't mean that we are pessimistic about the future, but rather realistic about the past," the managers wrote.
Davis and Feinberg said the banks and insurers they've picked are attractive because their services are "unlikely to become obsolete." They scout for balance sheets that show the wherewithal to withstand recessions, and pick stocks with a low price relative to earnings after adjusting for non-cash expenses.
The fund invests 46 percent of its assets in shares of financial companies, the largest among funds with more than $25 billion, and double the weighting of the S&P 500, according to Morningstar Inc., the Chicago research firm.
The preference for financial stocks dates back to Davis's grandfather, Shelby Cullom Davis, who invested $100,000 in insurers in 1947 when he was 38. By the time he died in 1994, the sum had grown to almost $900 million, according to John Rothchild's book "The Davis Dynasty," published in 2001 by John Wiley & Sons.
His father, Shelby M.C. Davis, spent 28 years at the helm of the New York fund. He beat the S&P 500 during every 10-year period, winning by an average of 3.5 percentage points a year.
Davis started his investment career at Boston-based State Street Corp. and then joined Davis Advisors, his family's firm, in 1989. He took over the New York fund in 1995. Davis received a master's degree in philosophy and theology from University of St. Andrews in Scotland. Feinberg got a master's in business administration from Columbia University.
"One of the things that is most important to Christopher is repeatable success, and that's why he is so systematic," said Scott Kays, president of Atlanta-based Kays Financial Advisory Corp. and author of "Five Key Lessons From Top Money Managers," which featured Davis.
"He is very much his own man," Kays said. "He has done the thinking and research about what's the best way to invest, and he has come to similar conclusions as his father and grandfather."
Davis bought J.P. Morgan Chase shares following last year's takeover of Chicago-based Bank One. The fund benefited from Bank One's 65 percent advance during Dimon's four-year tenure when he slashed costs and boosted earnings for 13 straight quarters.
"We never owned J.P. Morgan before Jamie Dimon," Davis said.
Dimon, 49, will become the New York-based bank's chief executive at the start of the year, a decision that was made because he met targets for integrating Bank One. J.P. Morgan Chase's stock has fallen 7.5 percent this year. It closed Friday at $36.44 a share.
Davis and Feinberg added to their holdings of Progressive and Golden West during the past three years. Progressive, whose stock reached a record earlier this month, ranks fourth in returns on shareholder equity among 86 rival insurers, Bloomberg data show. Golden West is No. 2 among 37 savings and loans.
Lewis, 71, was Progressive's chief executive from 1965 to 2000 and he's now chairman. Golden West's co-founders Marion and Herbert Sandler, 75 and 74 respectively, have boosted earnings at an annual rate of almost 20 percent over the past 37 years.
Shares of Progressive, which closed Friday at $116.50, have gained 32 percent this year, and Golden West, which ended the week at $58.44, has slipped 6.1 percent, compared with the 18 percent drop of the S&P Thrifts and Mortgage Finance Index.
"My father often stressed the importance of people, and there is no telling where a great leader will take a business," Davis said.