DAVIS GROWTH &
INCOME FUND
ANNUAL REPORT
JULY 31, 1998
[PICTURE]
[DAVIS FUND LOGO]
<PAGE>
DAVIS GROWTH & INCOME FUND
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501
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Dear Shareholder:
Market Overview
Earnings are the lifeblood of the market and the reason why, over generations,
stocks tend to do better than bonds.(1) This concept can be clearly illustrated
if you think in terms of your son's or daughter's earning power. Let's say you
have this choice: You could receive 1% of your child's first-year salary after
college, fixed at that level every year for the next 30 years. Or you could
receive 1% of whatever your child's salary turns out to be in each of the next
30 years.
In the first case, your dollar return would be the same for 30 years, which is
equivalent to the fixed-coupon return from a bond. In the second case, your
dollar return would vary with earning power, which is equivalent to the variable
return of a stock. So the level of salary or earnings going forward is critical.
If you believe your son's or daughter's income stream will expand over 30 years,
you would be better off with the second choice, just as you would be better off
investing in the stock of a company whose earnings grow over the next three
decades than in a fixed-return investment like a bond.
If you are going to invest successfully in stocks, you have to think in terms of
the future. You can't just research the past and expect that will help you too
much in understanding the future. Life is always changing, and companies are
always changing, which is why we are continually researching projected long-term
earnings trends.
Today, we are at a point where there are large crosscurrents in the earnings
picture, at least for the near term. Corporate earnings are being hurt by the
General Motors strike, the deepening Asian crisis, the fiercely competitive
business environment, a lack of pricing power, and currency translation problems
related to the strengthening U.S. dollar.
In addition to these negatives, we believe earnings sometimes are being
overstated by the use of aggressive accounting practices. These include taking
up-front write-offs for restructuring charges that may mask ongoing business
problems, as well as the extensive use of stock options, which tends to
understate the real compensation costs of a business.
Given this uncertain earnings outlook, we anticipate a choppy market
environment, where individual stocks will understandably react to strength or
weakness in earnings reports. Furthermore, it seems that more earnings reports
are coming in below earlier estimates, indicating a loss of momentum in earnings
trends. As a result, we expect there will be a loss of momentum in the stock
market.
The best case scenario, in our view, would be sort of a stealth correction or a
rotational adjustment in which prices of individual stocks or industry groups
are corrected based on disappointing earnings results. But there is always the
possibility that we will have a broader correction because valuation levels are
historically high and priced for a good economic outlook in terms of inflation,
interest rates and earnings.
Such an environment, or course, creates not only risk but opportunity if the
market overreacts and punishes stocks too harshly for short-term earnings
disappointments. As long-term investors, we don't use the latest quarterly
earnings as the only benchmark for valuing a stock. Instead, we try to develop a
normalized growth trend for earnings power that disregards short-term peaks and
valleys. Our objective is to find companies with growing normalized earnings
that are selling at reasonable prices.
<PAGE>
DAVIS GROWTH & INCOME FUND
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501
- --------------------------------------------------------------------------------
We've said before that investors should lower their expectations and that the
market is overdue for a correction. But we don't think we're at the end of the
game. The best approach is to take advantage of volatility through dollar cost
averaging(2), rather than plunging in and out of the market, and to stay aboard
for the long voyage because the earning power of companies -- like the earning
power of college graduates -- tends to grow over decades.
Sincerely,
/s/ Shelby M.C. Davis
Shelby M.C. Davis
Chief Investment Officer
August 31, 1998
2
<PAGE>
DAVIS GROWTH & INCOME FUND
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501
- --------------------------------------------------------------------------------
Management's Discussion and Analysis
Performance Overview
The Davis Growth & Income Fund was launched on May 1, 1998. From its inception
date through July 31, 1998, the fund's class A shares provided a return of
(1.90%) on net asset value(3) compared to a return of 0.35% for the Standard &
Poor's 500 Index.(4)
The fund brings together the top-down asset allocation insight and bottom-up
portfolio management skills of Shelby, Christopher and Andrew Davis. Assets are
allocated among a varying blend of quality stocks, real estate securities,
convertible securities and traditional bonds according to an approach used
successfully by the Davises for decades to balance their family's growth and
income objectives.(5)
The fund is designed as a core holding for investors who want the long-term
returns of growth stock investments while managing risk through the stability of
income-producing securities.
An Interview with Andrew A. Davis and Christopher C. Davis, Portfolio Managers
Q. What was the environment for the fund's real estate securities?
A. Real estate stocks have been one of the worst-performing market sectors this
year. While there are a few reasons for concern, the vast majority of evidence
leads us to believe that this weakness has been caused by short-term momentum
players getting out of the game as they have realized that the recovery in real
estate has been accomplished and that the industry is now in equilibrium. These
investors are fearful that we are entering another era of overbuilding and
over-development like the industry experienced in the mid-1980s and that this
will lead to another depression like the industry suffered in the late 1980s and
early 1990s.
But what we see couldn't be further from this extreme. We see a group of
companies that should grow earnings in 1998 and 1999 faster than the S&P 500,
that are valued at historically low multiples particularly relative to the S&P
500 and that offer yields some 400 basis points in excess of the S&P 500 yield.
While the days of 30% returns on real estate are over, we expect returns in the
low double digits and that's what we have been able to deliver in everything
except stock price performance so far this year. Looking ahead, we still
anticipate earnings growth of 6% to 8% plus a dividend yield of 6%, which
results in around a 12% total return assuming multiples hold constant.
We don't see any major downside risk from where we are now. Meanwhile, we think
we have wonderful earnings to enjoy from our portfolio companies for the next
two years at least, if not longer. At some point, we believe other investors
will recognize that value and the stocks' prices will reflect their earnings
performance.
Q. What have you done to take advantage of what you believe is a temporary drop
in real estate stock valuations?
3
<PAGE>
DAVIS GROWTH & INCOME FUND
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501
- --------------------------------------------------------------------------------
Management's Discussion and Analysis-Continued
An Interview with Andrew A. Davis and Christopher C. Davis, Portfolio
Managers-Continued
A. In this environment, quality companies have suffered along with mediocre
ones. As a result, we've been able to concentrate investments in first rate
companies whose shares have traded off dramatically such as Vornado,
Centerpoint, Rouse and JDN.(6) Stock selection is imperative now that real
estate markets have recovered. Rather than over-weighting particular sectors of
the real estate arena, the fund is focused on finding attractive stocks across
various real estate sectors. We look for companies with solid operating
businesses and top-notch management teams who frequently own significant stakes
in their companies. As always, we monitor valuations closely, seeking companies
selling at a discount to their expected cash flow over the next few years.
Ultimately, we expect these quality companies will be accorded premium
valuations in the market.
Q. What is your overall investment approach in managing the equity portion of
the fund?
A. The fund's top equity holdings echo our favorites in the Davis New York
Venture Fund. These include such companies as American Express, BankAmerica and
General Re. We also apply the same investment philosophy, combining intensive
firsthand research and a strong price discipline in selecting equities for the
portfolio.(6)
As long-term shareholders, we employ a fundamental investment approach that
focuses on the recognition that stocks are not just pieces of paper, but
represent ownership interests in real businesses. As a result, our investment
process has always boiled down to two questions: What kind of businesses do we
want to own, and how much should we pay for them?
We like to buy high-quality companies with these characteristics: exceptional
management, a high return on capital, a lean expense structure, a dominant share
in a growing market, products or services that do not become obsolete, a strong
balance sheet, and successful international operations.
But we also adhere closely to a price discipline that we believe helps mitigate
risk. This discipline has prevented us from buying many high-quality companies
because we thought their valuations were too high. At the other extreme, many
companies that look cheap but do not measure up to our quality criteria
performed strongly in the first half of 1998. Shareholders of Davis Growth &
Income Fund did not benefit from their strong performance either.
Although the fund's short-term results were disappointing, we will stick to our
principles of focusing on both quality and price in our investment process. We
think this is a sound method of building and preserving wealth over time. In the
longer run, we remain confident that our strategy of buying first-rate companies
with a strict price discipline should continue to serve our shareholders well.
This Annual Report is furnished to you by Davis Distributors, LLC, which acts as
the distributor for Davis Growth & Income Fund. This Annual Report is authorized
for distribution only when accompanied or preceded by a current prospectus of
Davis Growth & Income Fund which contains more information about fees and
expenses. Please read the prospectus carefully before investing or sending
money.
4
<PAGE>
DAVIS GROWTH & INCOME FUND
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501
- --------------------------------------------------------------------------------
Management's Discussion and Analysis-Continued
(1) Historically, common stocks have provided investors higher long-term returns
than bonds. Past performance is not a guarantee of future results.
(2) Neither dollar cost averaging, nor any other mechanical system can guarantee
a profit. Such a plan does not protect against loss in declining markets.
(3) Total return assumes reinvestment of dividends and capital gain
distributions. Past performance is not a guarantee of future results. Investment
return and principal value will vary so that, when redeemed, an investor's
shares may be worth more or less than when purchased.
* (Without a 4.75% Sales Charge taken into consideration for the period ended
July 31, 1998)
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FUND NAME INCEPTION
- --------------------------------------------------------------------------------
Davis Growth & Income A (1.90%) - 05/01/98
- --------------------------------------------------------------------------------
** (With a 4.75% Sales Charge taken into consideration for the period
ended July 31, 1998)
- --------------------------------------------------------------------------------
FUND NAME INCEPTION
- --------------------------------------------------------------------------------
Davis Growth & Income A (6.57%) - 05/01/98
- --------------------------------------------------------------------------------
Returns have not been annualized.
(4) 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 the S&P 500 Index.
(5) The fact that asset allocation met the needs of the Davis family for both
growth and income does not assure that the Davis Growth & Income Fund will meet
the needs of other investors. Every investor has a unique blend of investment
objectives and risk tolerances, which they should discuss with their financial
adviser.
(6) Portfolio holdings are subject to change.
An investment in the Fund is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
5
<PAGE>
DAVIS GROWTH & INCOME FUND
Comparison of Davis Growth & Income Fund, Class A Shares and Standard and Poor's
500 Stock Index
- --------------------------------------------------------------------------------
Total Return For the Period ended July 31, 1998.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
CLASS A SHARES
<S> <C>
(This calculation includes an initial sales charge of 4 3/4%).
Life of Class (May 1, 1998 through July 31, 1998).....(6.57%)
- --------------------------------------------------------------------------------
</TABLE>
$10,000 invested at commencement of operations. Let's say you invested $10,000
in Davis Growth & Income Fund, Class A Shares on May 1, 1998 (commencement of
operations) and paid a 4 3/4% sales charge. As the chart shows, by July 31, 1998
the value of your investment would have been $9,343 - a (6.57%) decrease on your
initial investment. For comparison, the S&P 500 is also presented on the chart
below.
[The following table was depicted as a line chart in the printed material.]
<TABLE>
<CAPTION>
-------------------------------------------------
S&P 500 DGIF-A
-------------------------------------------------
<S> <C> <C>
05/01/98 10,000.00 9,525.00
-------------------------------------------------
Jul-98 10,035.00 9,342.86
-------------------------------------------------
</TABLE>
Standard & Poor's Stock Index is an unmanaged index and has no specific
investment objective. The index used includes net dividends reinvested, but does
not take into account any sales charge. Investments cannot be made directly into
the index.
The performance data for Davis Growth & Income Fund contained in this report
represents past performance and assumes that all distributions were reinvested,
and should not be considered as an indication of future performance from an
investment in the Fund today. The investment return and principal value will
fluctuate so that shares may be worth more or less than their original cost when
redeemed.
6
<PAGE>
DAVIS GROWTH & INCOME FUND
Comparison of Davis Growth & Income Fund, Class B Shares and Standard and Poor's
500 Stock Index
- --------------------------------------------------------------------------------
Total Return For the Period ended July 31, 1998.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
CLASS B SHARES
(This calculation includes a contingent deferred sales charge of 4%.)
<S> <C>
Life of Class (May 4, 1998 through July 31, 1998).............(6.02%)
- --------------------------------------------------------------------------------
</TABLE>
$10,000 invested at inception. Let's say you invested $10,000 in Davis Growth &
Income Fund, Class B Shares on May 4, 1998 (inception of class). As the chart
shows, by July 31, 1998 the value of your investment (less applicable contingent
deferred sales charges) would have been $9,398 - a (6.02%) decrease on your
initial investment. For comparison, the S&P 500 is also presented on the chart
below.
[The following table was depicted as a line chart in the printed material.]
<TABLE>
<CAPTION>
-------------------------------------------------
S&P 500 DGIF-B
-------------------------------------------------
<S> <C> <C>
05/04/98 10,000.00 10,000.00
-------------------------------------------------
Jul-98 10,025.00 9,398.40
-------------------------------------------------
</TABLE>
Standard & Poor's Stock Index is an unmanaged index and has no specific
investment objective. The index used includes net dividends reinvested, but does
not take into account any sales charge. Investments cannot be made directly into
the index.
The performance data for Davis Growth & Income Fund contained in this report
represents past performance and assumes that all distributions were reinvested,
and should not be considered as an indication of future performance from an
investment in the Fund today. The investment return and principal value will
fluctuate so that shares may be worth more or less than their original cost when
redeemed.
7
<PAGE>
DAVIS GROWTH & INCOME FUND
Comparison of Davis Growth & Income Fund, Class C Shares and Standard and Poor's
500 Stock Index
- --------------------------------------------------------------------------------
Total Return For the Period ended July 31, 1998.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
CLASS C SHARES
(This calculation includes a contingent deferred sales charge of 1%.)
<S> <C>
Life of Class (May 4, 1998 through July 31, 1998).............(3.08%)
- --------------------------------------------------------------------------------
</TABLE>
$10,000 invested at inception. Let's say you invested $10,000 in Davis Growth &
Income Fund, Class C Shares on May 4, 1998 (inception of class). As the chart
shows, by July 31, 1998 the value of your investment would have been $9,692 - a
(3.08%) decrease on your initial investment. For comparison, the S&P 500 is also
presented on the chart below.
[The following table was depicted as a line chart in the printed material.]
<TABLE>
<CAPTION>
-------------------------------------------------
S&P 500 DGIF-C
-------------------------------------------------
<S> <C> <C>
05/04/98 10,000.00 10,000.00
-------------------------------------------------
Jul-98 10,025.00 9,692.10
-------------------------------------------------
</TABLE>
Standard & Poor's Stock Index is an unmanaged index and has no specific
investment objective. The index used includes net dividends reinvested, but does
not take into account any sales charge. Investments cannot be made directly into
the index.
The performance data for Davis Growth & Income Fund contained in this report
represents past performance and assumes that all distributions were reinvested,
and should not be considered as an indication of future performance from an
investment in the Fund today. The investment return and principal value will
fluctuate so that shares may be worth more or less than their original cost when
redeemed.
8
<PAGE>
DAVIS GROWTH & INCOME FUND
Comparison of Davis Growth & Income Fund, Class Y Shares and Standard and Poor's
500 Stock Index
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total Return For the Period ended July 31, 1998.
- --------------------------------------------------------------------------------
CLASS Y SHARES
(There is no sales charge applicable to this calculation.)
<S> <C>
Life of Class (May 4, 1998 through July 31, 1998...(1.80%)
- --------------------------------------------------------------------------------
</TABLE>
$10,000 invested at inception. Let's say you invested $10,000 in Davis Growth &
Income Fund, Class Y Shares on May 4, 1998 (inception of class). As the chart
shows, by July 31, 1998 the value of your investment would have been $9,820 - a
(1.80%) decrease on your initial investment. For comparison, the S&P 500 is also
presented on the chart below.
[The following table was depicted as a line chart in the printed material.]
<TABLE>
<CAPTION>
-------------------------------------------------
S&P 500 DGIF-Y
-------------------------------------------------
<S> <C> <C>
05/04/98 10,000.00 10,000.00
-------------------------------------------------
Jul-98 10,025.00 9,820.00
-------------------------------------------------
</TABLE>
Standard & Poor's Stock Index is an unmanaged index and has no specific
investment objective. The index used includes net dividends reinvested, but does
not take into account any sales charge. Investments cannot be made directly into
the index.
The performance data for Davis Growth & Income Fund contained in this report
represents past performance and assumes that all distributions were reinvested,
and should not be considered as an indication of future performance from an
investment in the Fund today. The investment return and principal value will
fluctuate so that shares may be worth more or less than their original cost when
redeemed.
9
<PAGE>
DAVIS GROWTH & INCOME FUND
Portfolio Holdings as of July 31, 1998
- --------------------------------------------------------------------------------
[The following table was represented as a pie chart in the printed material.]
<TABLE>
<CAPTION>
Portfolio Makeup (% of Fund Net Assets)
- ------------------------------------------------
<S> <C>
Preferred Stocks 5.0%
Cash & Cash Equivalents 17.9%
Other Assets 2.8%
Common Stocks 74.3%
</TABLE>
[The following table was represented as a pie chart in the printed material.]
<TABLE>
<CAPTION>
Sector Weightings (% of Portfolio)
- ------------------------------------------------
<S> <C>
Diversified Financial Services 6.0%
Insurance 16.0%
Building Materials 3.3%
Electronics 7.8%
Machinery 3.9%
Consumer Products 5.2%
Real Estate 27.5%
Technology 3.9%
Other 6.9%
Food & Restaurants 3.9%
Banking 15.6%
</TABLE>
<TABLE>
<CAPTION>
Top 10 Holdings % of Fund
Stock Sector Net Assets
- --------------------------------------------------------------------------------
<S> <C> <C>
Transatlantic Holdings Inc. Property/Casualty Insurance 5.07%
American Express Co. Diversified Financial Services 4.79
Wells Fargo & Co. Banks and Savings & Loans 4.28
BankAmerica Corp. Banks and Savings & Loans 4.20
Philip Morris Cos., Inc. Consumer Products 4.10
Chubb Corp. Property/Casualty Insurance 3.43
Citicorp Banks and Savings & Loans 3.41
McDonald's Corp. Food & Restaurant 3.13
Hewlett Packard Co. Technology 3.12
Dover Corp. Machinery 3.10
</TABLE>
10
<PAGE>
DAVIS GROWTH & INCOME FUND
Portfolio Activity - May 1, 1998 through July 31, 1998
- --------------------------------------------------------------------------------
New Positions Added (3/1/98-7/31/98)
(Highlighted positions are those greater than 2.50% of 7/31/98 total net
assets.)
<TABLE>
<CAPTION>
Date of 1st % of 7/31/98
Security Sector Purchase Fund Net Assets
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
American Express Co. Diversified Financial Services 5/18/98 4.79%
Applied Materials Inc. Electronics 6/1/98 1.34%
BankAmerica Corp. Banks and Savings & Loans 5/18/98 4.20%
Boardwalk Equities, Inc. Real Estate 5/27/98 2.43%
Boeing Co. Aerospace 5/18/98 1.82%
CenterPoint Properties Corp. Real Estate 5/18/98 2.58%
Chubb Corp. Property/Casualty Insurance 7/15/98 3.43%
Citicorp Banks and Savings & Loans 5/27/98 3.41%
Crescent Real Estate Equities, Inc. Real Estate 7/6/98 2.36%
Dover Corp. Machinery 5/26/98 3.10%
General Re Corp. Property/Casualty Insurance 5/18/98 2.54%
General Growth Properties,
7.25%, Conv. Pfd. Real Estate 6/5/98 2.70%
Hewlett-Packard Co. Technology 5/18/98 3.12%
JDN Realty Corp. Real Estate 6/23/98 2.41%
Mack-Cali Realty Corp. Real Estate 5/18/98 2.24%
Martin Marietta Material, Inc. Building Materials 6/29/98 2.65%
McDonald's Corp. Food & Restaurant 6/5/98 3.13%
Molex Incorporated Electronics 6/23/98 2.86%
Norwest Corp. Banks and Savings & Loans 6/29/98 0.48%
Philip Morris Cos., Inc. Consumer Products 7/1/98 4.10%
Progressive Corp. (Ohio) Property/Casualty Insurance 5/26/98 1.66%
Rouse Company Real Estate 5/18/98 2.34%
Schlumberger Ltd. Energy 5/18/98 1.21%
Starwood Hotels & Resorts Real Estate 5/18/98 2.25%
Texas Instruments Inc. Electronics 6/1/98 1.98%
Transatlantic Holdings Inc. Property/Casualty Insurance 5/26/98 5.07%
Union Pacific Cap Trust, 6.25%
Ser. 144A Conv. Pfd. Transportation 5/26/98 2.31%
Vornado Realty Trust Real Estate 5/18/98 2.50%
Wells Fargo & Co. Banks and Savings & Loans 6/9/98 4.28%
</TABLE>
11
<PAGE>
DAVIS GROWTH & INCOME FUND
SCHEDULE OF INVESTMENTS
July 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Value
Shares Security (Note 1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK - (74.28%)
AEROSPACE - (1.82%)
35,000 Boeing Co.............................. $ 1,358,438
-----------------
BANKS AND SAVINGS & LOANS - (12.37%)
35,000 BankAmerica Corp....................... 3,141,250
15,000 Citicorp............................... 2,550,000
10,000 Norwest Corp........................... 359,375
9,000 Wells Fargo & Co....................... 3,202,875
-----------------
9,253,500
-----------------
BUILDING MATERIALS - (2.65%)
40,000 Martin Marietta Material, Inc.......... 1,980,000
-----------------
CONSUMER PRODUCTS - (4.10%)
70,000 Philip Morris Cos., Inc................ 3,066,875
-----------------
DIVERSIFIED FINANCIAL SERVICES - (4.79%)
32,500 American Express Co.................... 3,587,187
-----------------
ELECTRONICS - (6.18%)
30,000 Applied Materials, Inc. .............. 1,004,063
75,000 Molex Incorporated..................... 2,132,812
25,000 Texas Instruments Inc.................. 1,482,813
-----------------
4,619,688
-----------------
ENERGY - (1.21%)
15,000 Schlumberger Ltd....................... 908,438
-----------------
FOOD & RESTAURANT - (3.13%)
35,000 McDonald's Corp........................ 2,338,437
-----------------
MACHINERY - (3.10%)
80,000 Dover Corp............................. 2,325,000
-----------------
PROPERTY/CASUALTY INSURANCE - (12.70%)
35,000 Chubb Corp............................. 2,568,125
8,000 General Re Corp........................ 1,896,000
10,000 Progressive Corp. (Ohio)............... 1,236,250
42,000 Transatlantic Holdings Inc............. 3,795,750
-----------------
9,496,125
-----------------
REAL ESTATE - (19.11%)
156,600 Boardwalk Equities, Inc.*.............. 1,813,820
58,000 CenterPoint Properties Corp............ 1,928,500
60,000 Crescent Real Estate Equities, Inc..... 1,762,500
84,000 JDN Realty Corp........................ 1,806,000
54,000 Mack-Cali Realty Corp.................. 1,677,375
60,000 Rouse Company.......................... 1,751,250
41,000 Starwood Hotels & Resorts.............. 1,683,562
</TABLE>
12
<PAGE>
DAVIS GROWTH & INCOME FUND
SCHEDULE OF INVESTMENTS - Continued
July 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Value
Shares/Principal Security (Note 1)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK - Continued
REAL ESTATE - Continued
51,800 Vornado Realty Trust................................................ $ 1,871,275
----------------
14,294,282
----------------
TECHNOLOGY - (3.12%)
42,000 Hewlett-Packard Co.................................................. 2,331,000
----------------
Total Common Stocks - (identified cost $56,863,942)............ 55,558,970
----------------
PREFERRED STOCK - (5.01%)
80,000 General Growth Properties, 7.25%, Conv. Pfd........................ 2,020,000
38,000 Union Pacific Cap Trust, 6.25%, Ser. 144A Conv. Pfd.(b)............. 1,729,000
----------------
Total Preferred Stocks - (identified cost $3,961,750).......... 3,749,000
----------------
SHORT TERM INVESTMENTS - (17.86%)
$ 6,305,000 Fannie Mae Discount Note, 5.50%, 08/07/98........................... 6,299,220
7,065,000 Federal Farm Credit Bank Discount Note, 5.44%, 08/03/98............. 7,062,865
----------------
Total Short Term Investments - (identified cost $13,362,085)... 13,362,085
----------------
Total Investments - (identified cost $74,187,777)(97.15%)(a)... 72,670,055
Other Assets Less Liabilities- (2.85%)......................... 2,134,139
----------------
Net Assets - ( 100%).................................. $ 74,804,194
================
</TABLE>
(a) Aggregate cost for Federal Income Tax purposes is $74,187,777. At July 31,
1998 unrealized appreciation (depreciation) of securities for Federal Income Tax
purposes was as follows:
<TABLE>
<CAPTION>
<S> <C>
Unrealized appreciation............................................. $ 2,410,083
Unrealized depreciation............................................. (3,927,805)
----------------
Net depreciation............................................... $ (1,517,722)
================
</TABLE>
(b) This security is subject to Rule 144A. The Board of Directors of the Fund
has determined that there is sufficient liquidity in such security to realize
current valuations. The security amounts to $1,729,000 or 2.31% of the Fund's
net assets as of July 31, 1998.
* Non-Income Producing Security
See Notes to Financial Statements
13
<PAGE>
DAVIS GROWTH & INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
At July 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments in securities, at value (identified cost
$74,187,777) (see accompanying Schedule of Investments).. $72,670,055
Cash......................................................... 7,885
Receivables:
Capital stock sold....................................... 2,222,349
Dividends and interest................................... 49,750
Prepaid expenses............................................. 15,330
-----------
Total assets........................................ 74,965,369
-----------
LIABILITIES:
Payable for capital stock redeemed........................... 62,484
Accrued expenses............................................. 98,691
-----------
Total liabilities................................... 161,175
-----------
NET ASSETS ....................................................... $74,804,194
===========
Net assets consist of:
Par value of shares of capital stock......................... $ 381,635
Additional paid-in capital................................... 75,714,719
Undistributed net investment income.......................... 225,562
Net unrealized depreciation on investments................... (1,517,722)
-----------
Net assets.......................................... $74,804,194
===========
CLASS A SHARES
Net assets............................................... $49,714,724
Shares outstanding....................................... 5,068,938
Net asset value and redemption price per share .......... $ 9.81
========
Maximum offering price per share (100/95.25 of $9.81).... $ 10.30
========
CLASS B SHARES
Net assets............................................... $19,571,220
Shares outstanding....................................... 1,999,916
Net asset value and redemption price per share .......... $ 9.79
========
CLASS C SHARES
Net assets............................................... $ 5,512,153
Shares outstanding....................................... 563,226
Net asset value and redemption price per share .......... $ 9.79
========
CLASS Y SHARES
Net assets............................................... $ 6,097
Shares outstanding....................................... 621
Net asset value and redemption price per share .......... $ 9.82
========
</TABLE>
See Notes to Financial Statements.
14
<PAGE>
DAVIS GROWTH & INCOME FUND
STATEMENT OF OPERATIONS
For the period from May 1, 1998 (commencement of operations) to July 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Investment Income:
Income:
Dividends ................................................... $ 163,310
Interest .................................................... 291,192
--------------
Total income ........................................ 454,502
Expenses:
Management fees (Note 3) .................................... $ 102,832
Custodian fees .............................................. 3,519
Transfer agent fees
Class A ................................................ 4,962
Class B ................................................ 5,747
Class C ................................................ 1,458
Class Y ................................................ --
Audit fees .................................................. 8,000
Legal fees .................................................. 1,500
Accounting fees (Note 3) .................................... 1,500
Reports to shareholders ..................................... 4,300
Directors' fees and expenses ................................ 2,005
Registration and filing fees ................................ 30,587
Miscellaneous ............................................... 2,073
Payments under distribution plan (Note 4)
Class A ................................................ 25,387
Class B ................................................ 28,141
Class C ................................................ 6,973
----------
Total expenses ..................................... 228,984
Expenses paid indirectly (Note 6) .................. (44)
--------------
Net expenses ....................................... 228,940
--------------
Net investment income .......................... 225,562
--------------
Realized and Unrealized Loss on Investments:
Net increase in unrealized depreciation of
investments ................................................. (1,517,722)
--------------
Net realized and unrealized loss on investments .... (1,517,722)
--------------
Net decrease in net assets resulting from operations $ (1,292,160)
==============
</TABLE>
See Notes to Financial Statements.
15
<PAGE>
DAVIS GROWTH & INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period ended
July 31,
1998(1)
-------
<S> <C>
OPERATIONS:
Net investment income ........................................ $ 225,562
Increase in unrealized depreciation of investments ........... (1,517,722)
------------
Net decrease in net assets resulting
from operations ..................................... (1,292,160)
CAPITAL SHARE TRANSACTIONS (NOTE 5) ............................. 76,096,354
------------
Total increase in net assets ............................. 74,804,194
NET ASSETS:
Beginning of period .......................................... --
------------
End of year (including undistributed net income of $225,562).. $ 74,804,194
============
</TABLE>
(1) The Fund commenced operations on May 1, 1998.
See Notes to Financial Statements.
16
<PAGE>
DAVIS GROWTH & INCOME FUND
NOTES TO FINANCIAL STATEMENTS
July 31, 1998
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Fund is a separate series of Davis New York Venture Fund, Inc., which
is registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company. The Fund's investment
objective is both capital growth and income. The Fund commenced operations on
May 1, 1998. The Fund offers shares in four classes, Class A, Class B, Class C
and Class Y. The Class A shares are sold with a front-end sales charge and the
Class B and Class C shares are sold at net asset value and may be subject to a
contingent deferred sales charge upon redemption. Class Y shares are sold at net
asset value and are not subject to any contingent deferred sales charge. Class Y
shares are only available to certain qualified investors. Income, expenses
(other than those attributable to a specific class) and gains and losses are
allocated daily to each class of shares based upon the relative proportion of
net assets represented by each class. Operating expenses directly attributable
to a specific class are charged against the operations of that class. All
classes have identical rights with respect to voting (exclusive of each Class's
distribution arrangement), liquidation and distributions. The following is a
summary of significant accounting policies followed by the Fund in the
preparation of its financial statements.
Security Valuation - Portfolio securities traded on national securities
exchanges are valued at the published last sales prices on the exchange, or, in
the absence of recorded sales, at the average of closing bid and asked prices on
such exchange. Over-the-counter securities are valued at the average of closing
bid and asked prices. If no quotations are available, the fair value of the
investment is determined by or at the direction of the Board of Directors.
Investments in short-term securities (maturing in sixty days or less) are valued
at amortized cost unless the Board of Directors determines that such cost is not
a fair value. The valuation procedures are reviewed and subject to approval by
the Board of Directors.
Federal Income Taxes - It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to shareholders. Therefore,
no provision for federal income or excise tax is required.
Securities Transactions and Related Investment Income - Securities transactions
are accounted for on the trade date (date the order to buy or sell is executed)
with realized gain or loss on the sale of securities being determined based upon
identified cost. Dividend income is recorded on the ex-dividend date and
interest income is recorded on the accrual basis. Discounts and premiums on debt
securities are amortized over the lives of the respective securities in
accordance with the requirements of the Internal Revenue Code.
Dividends and Distributions to Shareholders - Dividends and distributions to
shareholders are recorded on the ex-dividend date. The character of the
distributions made during the year from net investment income may differ from
its ultimate characterization for federal income tax purposes. Also, due to the
timing of distributions, the fiscal year in which amounts are distributed may
differ from the fiscal year in which income or gain was recorded by the Fund.
The Fund adjusts the classification of distributions to shareholders to reflect
the differences between financial statement amounts and distributions determined
in accordance with income tax regulations.
17
<PAGE>
DAVIS GROWTH & INCOME FUND
NOTES TO FINANCIAL STATEMENTS - Continued
July 31, 1998
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Use of Estimates in Financial Statements - In preparing financial statements in
conformity with generally accepted accounting principals, management makes
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, as well as the reported amounts of income and expenses
during the reporting period. Actual results may differ from these estimates.
NOTE 2 - PURCHASES AND SALES OF SECURITIES
Purchases of investment securities (excluding short-term securities) for
the three months ended July 31, 1998, were $60,825,692. No investment securities
were sold during the three months ended July 31, 1998.
NOTE 3 - INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Advisory fees are paid to Davis Selected Advisers, L.P. (the "Adviser") at
the annual rate of 0.75% of the average net assets for the first $250 million,
0.65% of the average net assets on the next $250 million and 0.55% of the
average net assets in excess of $500 million.
The Adviser is paid for registering Fund shares for sale in various
states. The fee for the three months ended July 31, 1998 amounted to $3,249.
Boston Financial Data Services is the Fund's primary transfer agent. The Adviser
is also paid for certain transfer agent services. The fee for the these services
for the three months ended July 31, 1998 amounted to $1,649. State Street Bank &
Trust Co. is the Fund's primary accounting provider, fees for such services are
included in the custodian fee. The Adviser is also paid for certain accounting
services. The fee amounted to $1,500 for the three months ended July 31, 1998.
Certain directors and the officers of the Fund are also directors and officers
of the general partner of the Adviser.
Davis Selected Advisers-NY, Inc. ("DSA-NY"), a wholly-owned subsidiary of
the Adviser, acts as sub-adviser to the Fund. DSA-NY performs research and
portfolio management services for the Fund under a Sub-Advisory Agreement with
the Adviser. The Fund pays no fees directly to DSA-NY.
The Fund has adopted procedures to treat Shelby Cullom Davis & Co. ("SCD")
as an affiliate of the Adviser. During the three months ended July 31, 1998, SCD
received $13,500 in commissions on the purchases of portfolio securities in the
Fund.
NOTE 4 - DISTRIBUTION AND UNDERWRITING FEES
CLASS A SHARES
Class A shares of the Fund are sold at net asset value plus a sales charge
and are redeemed at net asset value (without a contingent deferred sales
charge).
18
<PAGE>
DAVIS GROWTH & INCOME FUND
NOTES TO FINANCIAL STATEMENTS - Continued
July 31, 1998
- --------------------------------------------------------------------------------
NOTE 4 - DISTRIBUTION AND UNDERWRITING FEES - Continued
CLASS A SHARES-Continued
During the three months ended July 31, 1998, Davis Distributors, LLC, the
Fund's Underwriter (the "Underwriter" or "Distributor") received $360,457 from
commissions earned on sales of Class A shares of the Fund, of which $57,054 was
retained by the Underwriter and the remaining $303,403 was re-allowed to
investment dealers. The Underwriter paid the costs of prospectuses in excess of
those required to be filed as part of the Fund's registration statement, sales
literature and other expenses assumed or incurred by it in connection with such
sales.
The Underwriter is reimbursed for amounts paid to dealers as a service fee
with respect to Class A shares sold by dealers which remain outstanding during
the period. The service fee is paid at the annual rate of 1/4 of 1% of the
average net assets maintained by the responsible dealers. The Underwriter is not
reimbursed for accounts for which the Underwriter pays no service fees to other
firms. The service fee for Class A shares of the Fund for the three months ended
July 31, 1998 was $25,387.
CLASS B SHARES
Class B shares of the Fund are sold at net asset value and are redeemed at
net asset value less a contingent deferred sales charge if redeemed within six
years of purchase.
The Fund pays a distribution fee to reimburse the Distributor for
commission advances on the sale of the Fund's Class B shares. The National
Association of Securities Dealers, Inc., ("NASD") limits the percentage of the
Fund's average annual net assets attributable to Class B shares which may be
used to reimburse the Distributor. The limit is 1%, of which 0.75% may be used
to pay distribution expenses and 0.25% may be used to pay shareholder service
fees. The NASD rule also limits the aggregate amount the Fund may pay for
distribution to 6.25% of gross Fund sales since inception of the Rule 12b-1
plan, plus interest, at 1% over the prime rate on unpaid amounts. The
Distributor intends to seek full payment (plus interest at prime plus 1%) of
distribution charges that exceed the 1% annual limit in some future period or
periods when the plan limits have not been reached.
During the three months ended July 31, 1998, Class B shares of the Fund
made distribution plan payments which included distribution fees of $21,106 and
service fees of $7,035.
Commission advances by the Distributor during the three months ended July
31, 1998 on the sale of Class B shares of the Fund amounted to $664,318, of
which $655,352 was re-allowed to qualified selling dealers.
The Distributor intends to seek payment from Class B shares of the Fund in
the amount of $651,671, representing the cumulative commission advances by the
Distributor on the sale of the Fund's Class B shares, plus interest, reduced by
cumulative distribution fees paid by the Fund and cumulative contingent deferred
sales charges paid by redeeming shareholders. The Fund has no contractual
obligation to pay any such distribution charges and the amount, if any, timing
and condition of such payment are solely within the discretion of the Directors
who are not interested persons of the Fund or the Distributor.
A contingent deferred sales charge is imposed upon redemption of certain
Class B shares of the Fund within six years of the original purchase. The charge
is a declining percentage starting at 4% of the lesser of net asset value of the
shares redeemed or the total cost of such shares. During the three months ended
July 31, 1998 the Distributor received $704 in contingent deferred sales charges
from Class B shares of the Fund.
19
<PAGE>
DAVIS GROWTH & INCOME FUND
NOTES TO FINANCIAL STATEMENTS - Continued
July 31, 1998
- --------------------------------------------------------------------------------
NOTE 4 - DISTRIBUTION AND UNDERWRITING FEES - Continued
CLASS C SHARES
Class C shares of the Fund are sold at net asset value and are redeemed at
net asset value less a contingent deferred sales charge of 1% if redeemed within
one year of purchase. The Fund pays the Distributor 1% of the Fund's average
annual net assets attributable to Class C shares, of which 0.75% may be used to
pay distribution expenses and 0.25% may be used to pay shareholder service fees.
During the three months ended July 31, 1998, Class C shares of the Fund
made distribution payments of $6,973. During the three months ended July 31,
1998, the Distributor received $258 in contingent deferred sales charges from
Class C shares of the Fund.
NOTE 5 - CAPITAL STOCK
At July 31, 1998, there were 3,000,000,000 shares of capital stock ($0.05
par value per share) authorized, 1,000,000,000 of which shares are classified as
Davis Growth & Income Fund. Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
Class A
May 1, 1998
(Commencement of
operations) through
July 31, 1998
------------------------------
Shares Amount
------ ------
<S> <C> <C>
Shares subscribed.............................. 5,091,097 $ 50,824,732
Shares redeemed................................ (22,159) (219,149)
------------ ---------------
Net increase.............................. 5,068,938 $ 50,605,583
============ ===============
</TABLE>
<TABLE>
<CAPTION>
Class B
May 4, 1998
(Inception of class)
through
July 31, 1998
------------------------------
Shares Amount
------ ------
<S> <C> <C>
Shares subscribed.............................. 2,022,615 $ 20,110,464
Shares redeemed................................ (22,699) (227,492)
------------ ---------------
Net increase.............................. 1,999,916 $ 19,882,972
============ ===============
</TABLE>
20
<PAGE>
DAVIS GROWTH & INCOME FUND
NOTES TO FINANCIAL STATEMENTS - Continued
July 31, 1998
- --------------------------------------------------------------------------------
NOTE 5 - CAPITAL STOCK - Continued
<TABLE>
<CAPTION>
Class C
May 4, 1998
(Inception of class)
through
July 31, 1998
------------------------------
Shares Amount
------ ------
<S> <C> <C>
Shares subscribed.............................. 580,058 $ 5,766,073
Shares redeemed................................ (16,832) (164,417)
------------- --------------
Net increase.............................. 563,226 $ 5,601,656
============= ===============
</TABLE>
<TABLE>
<CAPTION>
Class Y
May 4, 1998
(Inception of class)
through
July 31, 1998
------------------------------
Shares Amount
------ ------
<S> <C> <C>
Shares subscribed.............................. 622 $ 6,153
Shares redeemed................................ (1) (10)
------------- --------------
Net increase ............................. 621 $ 6,143
============= ==============
</TABLE>
NOTE 6 - CUSTODIAN FEES
Under an agreement with the custodian bank, custodian fees are reduced for
earnings on cash balances maintained at the custodian by the Fund. Such
reductions amounted to $44 during the three months ended July 31, 1998.
21
<PAGE>
DAVIS GROWTH & INCOME FUND
FINANCIAL HIGHLIGHTS
Class A, B, C & Y
- --------------------------------------------------------------------------------
Financial Highlights for a share of capital stock outstanding throughout each
period.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
May 1, 1998 May 4, 1998 May 4, 1998 May 4, 1998
(Commencement (Inception (Inception (Inception
of operations) of class) of class) of class)
through through through through
July 31, 1998 July 31, 1998 July 31, 1998 July 31, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ....... $ 10.00 $ 10.00 $ 10.00 $ 10.00
---------- ---------- ---------- ----------
Income(Loss) From Investment Operations
Net Investment Income ................. 0.03 0.01 0.01 0.04
Net Realized and Unrealized Loss ...... (0.22) (0.22) (0.22) (0.22)
---------- ---------- ---------- ----------
Total From Investment Operations .... (0.19) (0.21) (0.21) (0.18)
Net Asset Value, End of Period ............ $ 9.81 $ 9.79 $ 9.79 $ 9.82
========== ========== ========== ==========
Total Return(1) ............................ (1.90)% (2.10)% (2.10)% (1.80)%
Ratios/Supplemental Data
Net Assets, End of Period (000
omitted) ............................ $ 49,715 $ 19,571 $ 5,512 $ 6
Ratio of Expenses to Average Net
Assets .............................. 1.44%* 2.32%* 2.32%* 1.14%*
Ratio of Net Investment Income to
Average Net Assets .................. 1.87%* 0.99%* 0.99%* 2.17%*
Portfolio Turnover Rate(2) ............ 0% 0% 0% 0%
</TABLE>
(1) Assumes hypothetical initial investment on the business day before the
first day of the fiscal period, with all dividends and distributions
reinvested in additional shares on the reinvestment date, and redemption
at the net asset value calculated on the last business day of the fiscal
period. Sales charges are not reflected in the total returns. Total
returns are not annualized for periods of less than one year.
(2) The lesser of purchases or sales of portfolio securities for a period,
divided by the monthly average of the market value of portfolio securities
owned during the period. Securities with a maturity or expiration date at
the time of acquisition of one year or less are excluded from the
calculation.
* Annualized.
22
<PAGE>
Davis Growth & Income Fund
Independent Auditors' Report
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors
of Davis Growth & Income Fund
We have audited the accompanying statement of assets and liabilities of
Davis Growth & Income Fund, including the schedule of investments, as of July
31, 1998, and the related statement of operations, statement of changes in net
assets, and financial highlights for the period from May 1, 1998 (commencement
of operations) to July 31, 1998. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of July
31, 1998, by correspondence with the custodian and brokers; and where
confirmations were not received from brokers, we performed other auditing
procedures. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Davis Growth & Income Fund as of July 31, 1998, and the results of its
operations, the changes in its net assets, and the financial highlights for the
period from May 1, 1998 (commencement of operations) to July 31, 1998, in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Denver, Colorado
August 28, 1998
23
<PAGE>
DAVIS GROWTH & INCOME FUND
124 East Marcy Street, Santa Fe, New Mexico 87501
Directors Officers
Wesley E. Bass, Jr. Jeremy H. Biggs
Jeremy H. Biggs Chairman
Marc P. Blum Shelby M. C. Davis
Andrew A. Davis President
Christopher C. Davis Kenneth C. Eich
Jerry D. Geist Vice President
D. James Guzy Sharra L. Reed
G. Bernard Hamilton Vice President,
LeRoy E. Hoffberger Treasurer & Assistant Secretary
Laurence W. Levine Thomas D. Tays
Christian R. Sonne Vice President & Secretary
Christopher C. Davis
Vice President
Andrew A. Davis
Vice President
Carolyn H. Spolidoro
Vice President
Investment Adviser
Davis Selected Advisers, L.P.
124 East Marcy Street
Santa Fe, New Mexico 87501
Distributor
Davis Distributors, LLC
124 East Marcy Street
Santa Fe, New Mexico 87501
Transfer Agent & Custodian
State Street Bank and Trust Company
c/o The Davis Funds
P.O. Box 8406
Boston, Massachusetts 02266-8406
Counsel
D'Ancona & Pflaum
30 North LaSalle Street
Chicago, Illinois 60602
Auditors
KPMG Peat Marwick LLP
707 Seventeenth Street
Suite 2300
Denver, Colorado 80202
- --------------------------------------------------------------------------------
For more information about Davis Growth & Income Fund including management fees,
charges and expenses, see the current prospectus which must precede or accompany
this report.
- --------------------------------------------------------------------------------
24
