Davis International Series, Inc.
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501
=============================================================================
Dear Shareholder:
I couldn't help but notice an article in the Wall Street Journal's
September-quarter review on mutual funds. Quoting portfolio managers
and strategists from prestigious international firms, it mentioned Japan
as "a big plus...a big minus...[and] a big question mark." It also suggested a
general consensus that the United Kingdom posed the best opportunities--
as long as one avoided bank and utility stocks. Switzerland received "low
grades" because of its strong currency, while many managers expressed a
need to hedge currencies against the U.S. dollar. And Asia was described
as a "major letdown" where lagging performance in the markets can be
tied to a single factor: a fall-off in the price of semiconductor chips.
These insights into the state of the international markets struck me
for a number of reasons. I wondered how you as a fellow shareholder
would react to the news that your fund owned UK bank and utilities stocks.
I have purchased no Japanese stocks for the portfolio, though the portfolio
is largely concentrated in Asian markets (76.6% of total assets). And I did
not hedge the Fund's various holdings.
A Matter of Philosophy
For the one-year period ended September 30, 1996, the Davis International
Total Return Fund generated a total return of 7.87% (Class A shares at net
asset value), compared to an average total return for international funds
of 9.36%.*
I am neither surprised nor concerned that the Fund is slightly out of
step with Wall Street, in terms of recent returns or holdings, since my
philosophy is to build wealth over time. In pursuit of this, I buy individual
securities--not markets--that represent growth opportunities and can be
had at very reasonable prices. I do not focus on particular markets except
in the sense that, should I identify an interesting company or industry, I
will ask whether the country and its market also represent an interesting
opportunity at that time. If the answer is "yes," we may add the stock to
the portfolio and search for other similar possibilities in that locale. If
the market in that country later changes, I will likely retain the Fund's
holdings as long as the fundamental reasons to own them are intact.
In my view, those reasons are four. The first is superior company
management. Solid, in-depth fundamental research is the very core of our
investment approach. I spend several months of the year making on-site
visits to companies around the world and interview many senior
management teams in person, to ascertain whether the company is being
guided by savvy, visionary individuals. I do not believe there is any
reasonable substitute for such face-to-face research.
The second reason to own a stock is predictable earnings. This is
important to managing downside risk. The stock of a company with
steady, predictable earnings may hold its value better in a down market.
During my 30 years as an investment manager, I have established
very close relationships with a number of highly reputable,
research-oriented investment banks and stockbrokers worldwide. They
supply outstanding reports on earnings and other data, as well as a fair
number of invaluable investment ideas.
Third, I generally look for a price/earnings ratio well below the
company's growth rate and the average P/E for its industry (locally and/or
globally). The portfolio comprises primarily stocks that represent good
value--a low price for the stock's dividend yield and growth potential.
Finally, I want some additional reason to
* Source: Lipper Analytical Services, Inc., based on NASD-reporting funds
through 10/1/96.
Davis International Series, Inc.
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501
=============================================================================
believe that the stock price will rise--a catalyst, if you will. Stocks
with these four characteristics may be less volatile, with less to lose and
more to gain than traditional growth stocks.
One such stock was Southern Water PLC. We bought the first shares
of this UK water utility in November 1995. Selling at a price-earnings
ratio (P/E) of 8 and offering a dividend yield of 5%, it was in line with
other water utility companies. However, there were recurring rumors of a
takeover, which in fact came to pass. We sold our shares to the new
owners, Scottish Power, at a healthy profit in September 1996.
I believe the four factors just discussed are far more important to
the long-term creation of wealth than short-term market fluctuations. At
best, the latter inconsistently reflect the strengths or weaknesses of a
nation. For instance, the touted UK market was up 12.7% for the year
ended September 30, though the economy there is barely advancing at a 2%
annual rate. Meanwhile, Asian countries with gross domestic product
(GDP) growth rates of 7.5% or more per year gained or lost as much as
26%.
In keeping with this long-term, company-first approach, the Fund
continues to be heavily invested in Southeast Asian stocks, including
issues from two countries which took some hard knocks: Thailand and
South Korea. The individual companies still show promise, and I see clear
reasons to believe that the current problems in that region are cyclical,
not secular. More about that later.
Recovery in Europe?
Europe has been slow to follow the U.S. out of recession and real rates of
growth in GNP are minimal (2% to 3% at best), if not negative. However,
the markets there are closely correlated with the U.S. securities markets.
As goes Wall Street, so go London, Paris and Milan--eventually. The UK
Financial Times FT 100 Index rose 12.7% in the past year. The French CAC
40 Index advanced 19.3%, while the German, Italian and Spanish indices
moved up 21.3%, 4.6% and 24.8%, respectively.
As of September 30, approximately one-fifth of the Fund's assets
were invested in developed Europe, partly as a counterweight to a large
commitment to emerging Asia, but mostly because of the good values
represented by the respective stocks.
Two UK holdings are Royal Bank of Scotland and Standard Chartered,
financial institutions I describe as "too small to be big...and too big to be
small." At this stage they lack the problems of some larger UK banks but
have enough critical mass to stay mobile and competitive. Profits are
good, earnings growth is consistently positive, and dividends have
increased annually. Standard Chartered's stock price has risen more than
130% since we purchased it in February 1995, largely due to heavy
investments outside Europe. Yet its P/E is just 14. This is a stock poised
for appreciation.
In Switzerland, we invested in two of the world's largest
pharmaceuticals companies, Ciba-Geigy and Sandoz, before they announced
plans to merge. Each was selling at a P/E in line with the overall Swiss
market and had growth projections of 12% or more, very respectable for
an international drug company. After the merger was announced, analysts
revised their growth projections to 17.5%. At September 30, 1996,
Ciba-Geigy and Sandoz were trading at S.F. 16.04 and S.F. 15.06,
respectively, up 39% and 38% since our purchases in November 1995.
Since the end of September, we have boosted investments in Europe
slightly, purchasing positions in
Davis International Series, Inc.
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501
=============================================================================
Ente Nazionale Idrocarburi, a major Italian oil-and-gas concern, and
Incentive, a Swedish company. Though the
European markets have performed well of late, I see no fundamental
reason for this to continue and many reasons to believe that the growth
prospects remain strongest in Asia.
Asia, Good and Bad
The Fund was invested in eight Asian nations at the fiscal year-end, with
the largest concentrations in Hong Kong (16.9%) and the Philippines
(22.0%). The markets in both countries performed extremely well during
the 12-month period, though for different reasons. Hong Kong's Hang Seng
Exchange rose 23.4%, while the market in Manila chalked up a 20.6% gain.
The Philippines present a classic case of the early stages of a
rapidly emerging market. Held back by the dictatorship of Ferdinand
Marcos, the Philippines came late to the dance but have joined in with
incredible vigor, building in about three years what took others four or
five. Only recently attracting foreign capital, Philippine stocks are still
quite inexpensive compared to other Asian issues.
I particularly like Far East Bank & Trust, the largest position in the
portfolio, which we purchased initially in April. Adjusted for a rights
issue and a ten-for-one stock split, those initial shares rose by 26.8%
through September 30. The market for the shares had been quite narrow
until the announcement of the rights issue and the subsequent stock split,
and they were trading at a P/E ratio of 14, compared to an average of at
least 20 for major banks that had better liquidity. We consider the shares
to be a core financial holding in the Philippines.
At the other end of the Asian growth phenomenon is liquidity-driven
Hong Kong. Much larger and better organized than the emerging markets
and steadily advancing, Hong Kong is receiving cash that 18 months ago
might have been directed to Singapore or Indonesia.
From a broader perspective, the most significant factor for Hong
Kong is its enormous neighbor to the north. Closely tied to the business
climate in China, Hong Kong presents the only efficient way for
investment to enter and exit the People's Republic. Lately, business
conditions on the mainland are looking better; interest rates and inflation
are steadily falling, and the mood is good.
What's more, June 30, 1997 no longer looms as doomsday for free
enterprise on the island. Mainland China has made a commitment to
maintain capitalism in the zone after it assumes possession next year and
seems more inclined to emulate Hong Kong than to destroy it. Any
downside of the transformation is already priced into the market.
If Hong Kong represents the potential advantages of investing in
Southeast Asia, recent events in Thailand and South Korea exemplify the
complications.
Like many portfolio managers, I have been very enthusiastic about
Thailand since the mid-'80s. The country went through an amazing period
of growth, averaging a GDP growth rate of 9.8% (1986-1995). Corporate
profits increased massively in the past 10 years, making the Thai market
the darling of international portfolio managers.
Davis International Series, Inc.
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501
=============================================================================
Focused on these positives, I did not notice until recently a number
of ills that beset the country. After years of rapid industrialization and
economic growth, the Thai economy has slowed. One result was that the
banks, the linchpins of the Bangkok stock market, corrected sharply when
developers were reported to default on loan payments, prompting lower
earnings assumptions for banks and finance companies. For the year ended
September 30, the Bangkok exchange dropped 14.2%.
Meanwhile, exports have fallen off, though the Thais must continue
to pay for hefty imports of the equipment and machinery needed for
industrialization. The balance of payments has turned negative, creating
inflationary pressures.
Added to these were concerns about the health of the Thai monarch
and heavy floods that ruined the rice crop and temporarily pushed up
prices of this major staple by 70%. On the political front, a vote of no
confidence forced resignation of the prime minister and the dissolution of
Parliament in September.
South Korea, too, had political problems and a weakening balance of
payments this year, which contributed to a 10.6% decline in the composite
index for the Seoul exchange. In addition, the market there still has
constraints that make it difficult for foreigners to deal freely. Foreign
equity ownership is subject to a 20% limit, and many leading South Korean
securities are actually closed to foreigners. To purchase them, we often
had to trade in a secondary market for foreigners and pay a premium.
(However, under SEC guidelines, we must report them to you at their stock
exchange price, without the premium. For this reason, some of our South
Korean holdings may be listed in this report at less than we paid for them,
even though it is possible that we could sell them for the same amount or
more than our original investment.)
Despite the complications, I see promise in South Korea. The
economy remains robust; interest rates and inflation are trending
downward. Corporate profits should show healthy year-over-year gains in
1997. And Seoul will gradually open its market further to non-Koreans
(the foreign ownership limit is likely to be increased to 29% by 1999).
The Fund owned five south Korean securities at year-end. One that
truly exemplifies our approach is Korea Electric Power, which generates
over 95% of Korea's gross electric power and has a monopoly on
electricity transmission and distribution. Despite a lackluster
performance (due to concerns about increased fuel bills, which are
denominated in U.S. dollars), the company is believed to be the cheapest
utility stock in the region.
The More Things Change...
I do not believe "the game is over" in Asia. The driving forces for
progress--booming populations, globalization, and consumerism--are as
powerful as ever. GNPs are still 7.5% or higher, well above those of the
developed world. In addition, the Asian nations lack the social welfare
systems of the West and so give their citizens a strong incentive to be
productive.
Thailand and South Korea, like Malaysia and Singapore, are
simply experiencing a phase of adjustment and stabilization. This is not
the opposite of growth, but the result of it--the necessary "breather"
before the next sprint. Earlier in the `90s, their blazing economies
produced some major exaggerations of values. We are about through
digesting those overvaluations. My dilemma is whether to keep my
positions, or concede my losses. I will probably do a bit of both in
Thailand and South Korea, while keeping a close watch on Manila,
Davis International Series, Inc.
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501
=============================================================================
which experienced a sizable correction in October (for much the same
reasons as other Asian nations endured downturns two or three years ago).
What's Missing?
Following the surge in prices south of your border this summer, I have
been asked why there are no Latin American companies in the portfolio.
The answer is that I see no real long-term value in Latin America. Wealth
remains highly concentrated, there is little or no middle class, and
sociopolitical struggles are frequent--not exactly ideal circumstances for
nurturing capitalism. The governments in some Latin American countries
are undoubtedly committed to progress, though it will come slowly.
Markets are improving as the Mexican peso debacle fades, but I attribute
this mostly to an influx of North American capital. If anything, stocks in
some Latin American countries may be overvalued, not undervalued.
Nor have I found it necessary to use currency hedges in the portfolio.
Most Asian currencies are closely monitored so that they do not stray far
in relation to the U.S. dollar. Many of the Fund's holdings are international
companies or exporters that could benefit if their local currencies were
devalued. Last but not least, actively managing risk is an important
aspect of my investment approach. Hedging the Fund's positions could
protect against currency-related losses. On the other hand, it could
double the impact of any loss if I were to misjudge and hedge the wrong
way.
Finally, I want to thank you for your continued support of the Fund.
In this first full fiscal year, the Fund has accumulated some solid core
holdings. I believe it is well-positioned for what it is meant to be: a
relatively conservative, long-term approach to diversifying U.S. portfolios
and building long-term wealth.
Respectfully submitted,
/s/ Edouard F. Iselin
Eduoard F. Iselin
October 14, 1996
Davis International Total Return Fund - Class A shares
Comparison of Davis International Total Return Fund and Europe Australia
Far East Index
=============================================================================
Average annual total return for the year ended September 30, 1996 and for
the period February 1, 1995 through September 30, 1996 (life of Fund)
was 2.76% and 12.56%, respectively. (This calculation includes an initial
sales charge of 4 3/4%.)
$10,000 invested over the life of Class A shares of the Fund. Let's say you
invested $10,000 in Class A shares of Davis International Total Return
Fund on February 1, 1995. As the chart shows, by September 30, 1996 the
value of your investment would have grown to $12,174 - a 21.74% increase
on your initial investment. For comparison, look at how the Europe
Australia Far East Index did over the same period. With dividends
reinvested, the same $10,000 investment would have grown to $12,134 - a
21.34% increase.
Graph omitted. Details of graph are as follows:
<TABLE>
<CAPTION>
Measurement period Davis International EAFE Index
Total Return Fund
------------------ ------------------- ----------
<S> <C> <C>
February 1, 1995 $ 9,525 $10,000
September 30, 1995 11,285 11,138
September 30, 1996 12,174 12,134
</TABLE>
Europe Australia Far East Index is an unmanaged index and has no specific
investment objective. The index used does not take into account any sales
charges and has no expenses.
The performance data for Davis International Total Return 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.
Davis International Total Return Fund - Class B shares
Comparison of Davis International Total Return Fund and Europe Australia
Far East Index
Average annual total return for the year ended September 30, 1996 and for
the period February 1, 1995 through September 30, 1996 (life of Fund)
was 4.10% and 13.41%, respectively. (This calculation includes
applicable contingent deferred sales charges.)
$10,000 invested over the life of Class B shares of the Fund. Let's say you
invested $10,000 in Class B shares of Davis International Total Return
Fund on February 1, 1995. As the chart shows, by September 30, 1996 the
value of your investment would have grown to $12,327 - a 23.27% increase
on your initial investment. For comparison, look at how the Europe
Australia Far East Index did over the same period. With dividends
reinvested, the same $10,000 investment would have grown to $12,134 - a
21.34% increase.
Graph omitted. Details of graph are as follows:
<TABLE>
<CAPTION>
Measurement period Davis International EAFE Index
Total Return Fund
------------------ ------------------- ----------
<S> <C> <C>
February 1, 1995 $10,000 $10,000
September 30, 1995 11,390 11,138
September 30, 1996 12,327 12,134
</TABLE>
Europe Australia Far East Index is an unmanaged index and has no specific
investment objective. The index used does not take into account any sales
charges and has no expenses.
The performance data for Davis International Total Return 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.
Davis International Series, Inc.
Davis International Total Return Fund
Portfolio Holdings as of September 30, 1996
==============================================================================
Chart omitted. Details of chart are as follows:
<TABLE>
<CAPTION>
Portfolio Makeup % of Fund Assets
------------------ -----------------
<S> <C>
Cash & Equivalents 1.90%
Common Stocks 94.30%
Warrants/Rights 3.80%
</TABLE>
Chart omitted. Details of chart are as follows:
<TABLE>
<CAPTION>
Sector Weightings % of Portfolio
------------------ --------------
<S> <C>
Aviation 3.70%
Banking 21.90%
Building Materials 4.90%
Consumer Products 6.20%
Diversified Financial Services 13.30%
Manufacturing 5.70%
Other 7.60%
Pharmaceuticals 11.60%
Property Development 5.80%
Real Estate 5.00%
Telecommunications 4.10%
Utilities 10.40%
</TABLE>
Top 10 Holdings Sector % of Fund Assets
- -----------------------------------------------------------------------------
Far East Bank & Trust Co. Banking 5.23%
Hong Kong Land Holdings Ltd. Real Estate 4.68%
Krung Thai Bank Public Co. Ltd. Banking 4.30%
British Biotech PLC Pharmaceuticals 3.96%
Ciba - Geigy Ltd., Registered Pharmaceuticals 3.85%
Hutchison Whampoa Ltd. Diversified Financial Services 3.67%
Sandoz Ltd., Registered Pharmaceuticals 3.61%
Swire Pacific Ltd. - A Aviation 3.59%
Centennial City Inc. Property Development 3.52%
BSES Ltd., GDR Utilities 3.46%
<TABLE>
Davis International Series, Inc.
Davis International Total Return Fund
Portfolio Activity - October 1, 1995 through September 30, 1996
=================================================================================================================================
New Positions Added (10/1/95-9/30/96)
(Highlighted positions are those greater than 0.99% of 9/30/96 total net assets.)
<CAPTION>
Date of 1st % of 9/30/96
Security Sector Purchase Fund Assets
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Acer Inc., GDR Computer Products 10/20/95 2.65%
PT Astra International Automotive 10/20/95 1.18%
Bank of Ayudhya Public Co. Ltd. Banking 1/23/96 1.14%
Bank of East Asia Ltd. Banking 1/4/96 2.95%
British Biotech PLC. Pharmaceuticals 5/17/96 3.96%
BSES Ltd., GDR Utilities 2/28/96 3.46%
Centennial City Inc. Property Development 5/14/96 3.52%
Chemical Company of Malaysia Bhd. Chemicals 3/7/96 1.47%
Ciba - Geigy Ltd., Registered Pharmaceuticals 11/22/95 3.85%
Clarins SA Consumer Products 7/10/96 1.58%
Compton Greaves Ltd., GDR Manufacturing 7/1/96 2.04%
Davao Union Cement Corp. - "B" Building Materials 3/6/96 2.94%
Empire East Land Holdings Inc. Property Development 6/6/96 2.14%
Far East Bank & Trust Co. Banking 4/29/96 5.23%
HSBC Holdings PLC (Robert Fleming warrants
expiring 6/27/97) Banking 1/18/96 2.05%
Hutchison Whampoa Ltd. (Robert Fleming warrants
expiring 09/26/97) Diversified 1/10/96 0.97%
JG Summit Inc. - B Diversified 4/25/96 2.54%
Kumpulan Jetson Bhd. Building Materials 9/20/96 1.84%
Malaysia British Assurance Bhd. Insurance 7/22/96 0.76%
Pilipino Telephone Corp. Telecommunications 1/15/96 2.75%
Royal Bank of Scotland PLC Banking 11/30/95 1.54%
Samsung Electronics Co. Ltd. Electronics 11/28/95 0.41%
Samsung Electronics Co. Ltd., GDR Electronics 11/1/95 0.78%
Samsung Fire & Marine Insurance Inc. Insurance 4/1/96 0.51%
Securities One Public Co. Ltd. Finance 4/17/96 3.08%
Seoul City Gas Co. Ltd. Utilities 1/26/96 3.15%
Solid Group Inc. Retail 8/22/96 1.42%
Swire Pacific Ltd. - A Aviation 3/28/96 3.59%
United Overseas Land Ltd. (warrants expiring
06/09/97) Real Estate 1/31/96 0.23%
Xeikon NV, ADR Manufacturing 3/19/96 2.03%
YTL Corp. Bhd. Utilities 6/26/96 2.27%
</TABLE>
<TABLE>
Davis International Series, Inc.
Davis International Total Return Fund
Portfolio Activity - October 1, 1995 through September 30, 1996
=================================================================================================================================
Positions Closed (10/1/95-9/30/96) (Gains or losses greater than $250,000 are highlighted.)
<CAPTION>
Date of Final
Security Sector Sale Gain/(Loss)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aboitiz Equity Ventures Inc. Diversified 5/15/96 27,643
Asia Satellite Telecommunications Holdings Ltd. Media 7/11/96 31,329
Ayala International Finance, Conv.
Bds., 3.00% 06/08/00 - Cayman Islands Finance 4/17/96 141,250
C & P Homes Inc. Real Estate 3/21/96 254,718
Cable & Wireless PLC Telecommunications 3/19/96 72,320
Cheung Kong Infrastructure Holdings Ltd. Construction 8/7/96 (52,813)
Cheung Kong (Holdings) Ltd. (Morgan Stanley
warrants expiring 02/10/97) Real Estate 4/26/96 146,464
CITIC Pacific Ltd. Diversified 4/30/96 241,512
Dao Heng Bank Group Ltd. Banking 5/15/96 65,834
Dharmala Sakti Sejahtera Finance 7/23/96 591,365
Far East Levingston Shipbuilding, Conv.
Bds., 1.50%, 04/05/01 Shipping 5/22/96 -
Filinvest Land Inc. Real Estate 9/18/96 493,397
HI Cement Corp.Building Materials 7/11/96 8,736
Hotel Properties Ltd. Hotels & Lodging 5/14/96 180,398
HSBC Holdings PLC (Morgan Stanley
warrants expiring 02/10/97) Banking 3/5/96 81,976
Leader Universal Holdings Bhd. Diversified 5/22/96 (26,705)
Loxley, Conv. Bds., 2.50% 04/04/01 - Thailand Diversified 5/21/96 13,125
Mandarin Oriental International Ltd. Hotels & Lodging 3/5/96 82,137
Metrobank, Conv. Bds., 2.75% 09/10/00
- Cayman Islands Finance 4/17/96 85,000
New World Development Co. Ltd.
(warrants expiring 04/05/96) Real Estate 1/23/96 35,741
Orange PLC Telecommunications 4/24/96 32,618
Shinawatra Satellite Public Co. Ltd. Telecommunications 5/30/96 39,247
Southern Water PLC Utility 8/29/96 768,483
Swire Pacific Ltd. - A (Peregrine warrants
expiring 03/28/96) Aviation 3/28/96 -
Swire Pacific Ltd. - B Aviation 5/2/96 35,848
P. T. Tambang Timah GDR Mining 3/4/96 197,110
Tingyi (Cayman Islands) Holdings Corp. Food 6/26/96 153,594
Total Access Communication Public Co. Ltd. Telecommunications 2/2/96 71,838
Uniwide Holdings, Inc. Retail 9/18/96 23,468
</TABLE>
<TABLE>
Davis International Series, Inc.
Davis International Total Return Fund
Schedule of Investments
At September 30, 1996
=================================================================================================================================
<CAPTION>
Value
Shares (Note 1)
------ ------
COMMON STOCKS - (94.34%)
BELGIUM - (2.03%)
<S> <C> <C>
100,000 Xeikon NV, ADR <F2><F3>......................................................................... $ 1,012,500
-------------
FRANCE - (1.58%)
5,625 Clarins SA...................................................................................... 785,137
-------------
HONG KONG - (13.92%)
400,000 Bank of East Asia Ltd........................................................................... 1,471,615
1,000,000 Hong Kong Land Holdings Ltd..................................................................... 2,330,000
200,000 Hutchison Whampoa Ltd........................................................................... 1,344,886
200,000 Swire Pacific Ltd. - A.......................................................................... 1,791,025
-------------
6,937,526
-------------
INDIA - (5.50%)
100,000 BSES Ltd., GDR.................................................................................. 1,725,000
200,000 Crompton Greaves Ltd., GDR<F3>.................................................................. 1,015,000
-------------
2,740,000
-------------
INDONESIA - (2.99%)
300,000 PT Astra International <F4>..................................................................... 587,602
60,000 PT Unilever Indonesia........................................................................... 904,003
-------------
1,491,605
-------------
MALAYSIA - (8.19%)
200,000 Chemical Company of Malaysia Bhd................................................................ 622,407
300,000 DCB Holdings Bhd................................................................................ 1,029,365
200,000 Kumpulan Jetson Bhd.917,651
100,000 Malaysia British Assurance Bhd.................................................................. 379,030
200,000 YTL Corp. Bhd................................................................................... 1,133,099
-------------
4,081,552
-------------
PHILIPPINES - (21.74%)
10,000,000 Centennial City Inc............................................................................. 1,753,383
4,000,000 Davao Union Cement Corp. - B.................................................................... 1,463,694
2,000,000 Empire East Land Holdings Inc. <F2><F3>......................................................... 1,067,277
700,000 Far East Bank & Trust Co........................................................................ 2,454,736
4,000,000 JG Summit Inc. B................................................................................ 1,265,485
1,000,000 Pilipino Telephone Corp. <F3>................................................................... 1,372,213
3,000,000 Republic Glass Holdings Corp.................................................................... 743,282
3,157,000 Solid Group Inc<F2><F3>......................................................................... 709,979
-------------
10,830,049
-------------
Davis International Series, Inc.
Davis International Total Return Fund
Schedule of Investments
At September 30, 1996
==================================================================================================================================
Value
Shares (Note 1)
------ ------
COMMON STOCKS - CONTINUE
SINGAPORE - (0.49%)
50,000 Jurong Shipyard Ltd............................................................................. $ 243,218
-------------
SOUTH KOREA - (7.24%)
20,000 Korea Electric Power Corp....................................................................... 661,017
30,000 LG Electronics Inc.............................................................................. 523,002
2,060 Samsung Electronics Co. Ltd..................................................................... 161,608
620 Samsung Electronics Co. Ltd..................................................................... 46,688
1,816 Samsung Electronics Co. Ltd., GDR<F2>........................................................... 90,800
6,026 Samsung Electronics Co. Ltd., GDR<F2>........................................................... 301,300
480 Samsung Fire & Marine Insurance Inc............................................................. 255,690
20,000 Seoul City Gas Co. Ltd.......................................................................... 1,569,007
-------------
3,609,112
-------------
SWITZERLAND - (9.91%)
1,000 ABB Ltd., Bearer................................................................................ 1,222,116
1,500 Ciba - Geigy Ltd., Registered................................................................... 1,916,826
1,500 Sandoz Ltd., Registered......................................................................... 1,799,713
-------------
4,938,655
-------------
TAIWAN - (2.65%)
175,000 Acer Inc., GDR.................................................................................. 1,321,250
-------------
THAILAND - (10.42%)
125,000 Bank of Ayudhya Public Co. Ltd.<F4>............................................................. 570,171
100,000 Jasmine International Public Co. Ltd............................................................ 322,441
500,000 Krung Thai Bank Public Co. Ltd. <F4>............................................................ 2,143,054
300,000 National Petrochemical Public Co. Ltd........................................................... 312,611
200,000 Securities One Public Co. Ltd................................................................... 1,533,561
30,000 United Communication Industry Public Co. Ltd.................................................... 311,431
-------------
5,193,269
-------------
UNITED KINGDOM - (7.68%)
600,000 British Biotech PLC <F3>........................................................................ 1,972,140
100,000 Royal Bank of Scotland PLC...................................................................... 765,378
100,000 Standard Chartered PLC.......................................................................... 1,090,155
-------------
3,827,673
-------------
TOTAL COMMON STOCKS (identified cost $47,511,055)..................................... 47,011,546
-------------
Davis International Series, Inc.
Davis International Total Return Fund
Schedule of Investments
At September 30, 1996
=================================================================================================================================
Value
Units/Principal (Note 1)
- --------------- ------
WARRANTS -(3.47%)
100,000 Chemical Company of Malaysia Bhd. (expiring 11/07/00) <F3>...................................... $ 107,724
2,000,000 HSBC Holdings PLC (Robert Fleming expiring 06/27/97)<F3>........................................ 1,021,596
3,000,000 Hutchison Whampoa Ltd. (Robert Fleming expiring 09/26/97)<F3>................................... 484,934
207,765 United Overseas Land Ltd. (expiring 06/09/97)<F3>............................................... 113,605
-------------
Total Warrants (identified cost $2,553,736)........................................... 1,727,859
-------------
RIGHTS -(0.30%)
37,500 Far East Bank & Trust Co., (expiring 12/27/96) <F3>............................................. 50,314
37,500 Far East Bank & Trust Co., (expiring 07/01/97) <F3>............................................. 50,314
37,500 Far East Bank & Trust Co., (expiring 12/01/97) <F3>............................................. 50,314
-------------
Total Rights (identified cost $147,132)............................................... 150,942
-------------
SHORT-TERM INVESTMENTS - (1.81%)
$ 900,000 State Street Bank and Trust Company Repurchase Agreement, 5.20%,
10/02/96, dated 09/30/96, repurchase value of $900,260 (collateralized
by $915,000 par value U.S. Treasury Notes, 5.875%, 08/15/98,
market value $918,431) - (identified cost $900,000).......................................... 900,000
-------------
TOTAL INVESTMENTS (identified cost $51,111,923)-
(99.92%) <F1>49,790,347
OTHER ASSETS LESS LIABILITIES - (0.08%)............................................... 37,984
-------------
NET ASSETS - 100%..................................................................... $ 49,828,331
=============
<FN>
<F1> Aggregate cost for Federal income tax purposes is $51,111,923.
<F2> This security is subject to Rule 144A. The Board of Directors of the Fund has determined that there is sufficient
liquidity in this security to realize its current valuation.
<F3> Non income-producing security.
<F4> Foreign registry.
</FN>
At September 30, 1996, unrealized appreciation (depreciation) of
securities for Federal income tax purposes was as follows:
Unrealized appreciation......................................................................... $ 4,276,109
Unrealized depreciation......................................................................... (5,597,685)
-------------
Net unrealized depreciation..................................................................... $ (1,321,576)
=============
</TABLE>
<TABLE>
DAVIS INTERNATIONAL SERIES, INC.
STATEMENT OF ASSETS AND LIABILITIES _ At September 30, 1996
DAVIS INTERNATIONAL TOTAL RETURN FUND
=================================================================================================================================
<S> <C>
ASSETS:
Investments in securities, at value (identified cost _ $51,111,923) (Note 1)................................ $ 49,790,347
Cash........................................................................................................ 1,079,105
Receivables:
Dividends and interest.................................................................................... 53,890
Capital stock sold........................................................................................ 102,085
Prepaid expenses............................................................................................ 35,642
Due from advisor............................................................................................ 64,693
Other assets................................................................................................ 17,432
-------------
Total assets........................................................................................... 51,143,194
-------------
LIABILITIES:
Payables:
Capital stock reacquired.................................................................................. 163,394
Investments purchased..................................................................................... 988,082
Accrued expenses............................................................................................ 139,069
Other liabilities........................................................................................... 24,318
-------------
Total liabilities...................................................................................... 1,314,863
-------------
NET ASSETS....................................................................................................... $ 49,828,331
CLASS A SHARES
Net assets................................................................................................ $ 41,545,377
Shares outstanding........................................................................................ 3,426,962
Net asset value and redemption price per share (net assets/shares outstanding)............................ $12.12
======
Maximum offering price per share (100/95.25 of $12.12).................................................... $12.72
======
CLASS B SHARES
Net assets................................................................................................ $ 8,282,954
Shares outstanding........................................................................................ 690,424
Net asset value, offering and redemption price per share (net assets/shares outstanding).................. $12.00
======
Net assets consist of:
Undistributed net investment income............................................................................ $ 39,983
Unrealized depreciation on investments and translation of assets and liabilities
in foreign currencies........................................................................................ (1,319,389)
Accumulated net realized gains from investments and foreign currency transactions.............................. 3,805,997
Paid-in capital................................................................................................ 47,301,740
-------------
Net assets..................................................................................................... $ 49,828,331
=============
</TABLE>
See Notes to Financial Statements.
<TABLE>
DAVIS INTERNATIONAL SERIES, INC.
STATEMENT OF OPERATIONS _ For the year ended September 30, 1996
DAVIS INTERNATIONAL TOTAL RETURN FUND
=================================================================================================================================
<S> <C> <C>
Investment Income:
Income:
Dividends (net of foreign taxes withheld of $85,874)......................................................... $ 647,940
Interest..................................................................................................... 100,678
-------------
Total income........................................................................................... 748,618
-------------
Expenses:
Management fees (Note 3)..................................................................... $ 390,629
Custodian fees............................................................................... 170,030
Transfer agent fees (Note 3)................................................................. 39,761
Audit fees................................................................................... 11,002
Legal fees................................................................................... 15,486
Accounting fees (Note 3)..................................................................... 8,004
Reports to shareholders...................................................................... 16,568
Directors fees and expenses.................................................................. 71,360
Registration and filing fees................................................................. 55,194
Miscellaneous................................................................................ 6,197
Distribution plan payments (Note 3)
Class A.................................................................................... 79,591
Class B.................................................................................... 48,581
-------------
Total expenses......................................................................................... 912,403
Reimbursement of expenses by adviser (Note 3)................................................................ (210,028)
Fee Reductions (Note 6)...................................................................................... (2,639)
-------------
Net expenses................................................................................................. 699,736
-------------
Net investment income.................................................................................. 48,882
-------------
Realized and Unrealized Gain (Loss) on Investments and Foreign Currency:
Net realized gain(loss) from:
Investment transactions...................................................................................... 3,953,933
Foreign currency transactions................................................................................ ( 21,334)
Net increase (decrease) in unrealized appreciation on:
Investments.................................................................................................. (1,436,659)
Translation of assets and liabilities denominated in foreigncurrencies....................................... 2,186
Foreign taxes on gains on investments (including deferred taxes of $17,091).................................... (16,733)
-------------
Net realized and unrealized gain on investments and foreign currency................................... 2,481,393
-------------
Net increase in net assets resulting from operations................................................. $ 2,530,275
=============
</TABLE>
See Notes to Financial Statements.
<TABLE>
DAVIS INTERNATIONAL SERIES, INC.
STATEMENT OF CHANGES IN NET ASSETS
DAVIS INTERNATIONAL TOTAL RETURN FUND
=================================================================================================================================
<CAPTION>
Eight
Year Ended Months Ended
September 30, September 30,
1996 1995
---- ----
OPERATIONS:
<S> <C> <C>
Net investment income.............................................................. $ 48,882 $ 59,094
Net realized gain from investments and foreign currency transactions............... 3,932,599 1,389,492
Increase (decrease) in unrealized appreciation on
investments and translation of assets and liabilities in
foreign currencies............................................................... (1,434,473) 115,084
Foreign taxes on gains on investments.............................................. (16,733) (69,678)
----------- ----------
Net increase in net assets resulting from operations............................. 2,530,275 1,493,992
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A ($0.03 per share)........................................................ (67,993) -
Realized gains from investment transactions
Class A ($0.58 per share)........................................................ (1,314,536) -
Class B ($0.58 per share)........................................................ (115,147) _
CAPITAL SHARE TRANSACTIONS (NOTE 5).................................................. 33,366,163 13,935,577
----------- ----------
Total increase in net assets..................................................... 34,398,762 15,429,569
NET ASSETS:
Beginning of period................................................................ 15,429,569 _
----------- ----------
End of period (including undistributed net investment income
of $39,983 and $59,094, respectively)............................................ $49,828,331 $5,429,569
=========== ==========
</TABLE>
See Notes to Financial Statements.
DAVIS INTERNATIONAL SERIES, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 1996
===============================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company is registered under the Investment Company Act of
1940, as amended, as a diversified, open-end management investment
company. The Company currently offers one series, Davis International
Total Return Fund ("Fund"). The Fund offers shares in two classes, Class
A and Class B. The Class A shares are sold with a front-end sales charge
and the Class B shares are sold at net asset value and may be subject to a
contingent deferred sales charge upon redemption. Both classes have
identical rights with respect to voting (exclusive of each Class'
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 are normally valued using
current market valuations: either the last reported sales price, or in the
case of securities for which there is no reported last sale, the closing bid
price. Debt securities maturing in 60 days or less are usually valued at
amortized cost and longer term debt securities may be valued by an
independent pricing service. Securities for which market quotations are
not readily available and other assets are appraised at fair value as
determined in good faith in accordance with methods that are authorized
by the Board of Directors. Because of the difference in times of closing of
markets in which the Fund's securities are traded, events affecting
portfolio values that occur between the time their prices are determined
and the time the Fund's shares are priced will generally not be reflected
in the Fund's share price.
Foreign Currency - Amounts denominated in or expected to settle in
foreign currencies (FC) are translated into United States dollars (US$) at
current exchange rates computed by State Street Bank & Trust Company,
the Fund's custodian bank. Investment securities, other assets, and
liabilities are valued at the closing rate of exchange at the balance sheet
date. Purchases and sales of investment securities, income and expenses
are valued at the rate of exchange prevailing on the respective dates of
such transactions (or at an average rate if significant rate fluctuations
have not occurred). The Fund does not isolate that portion of the results of
operations resulting from changes in foreign exchange rates on
investments from the fluctuations arising from changes in market prices
of securities held. Such fluctuations are included with the net realized
and unrealized gain or loss from investments.
Reported net realized foreign exchange gains or losses arise from
sales and maturities of short-term securities, sales of FCs, currency
gains or losses realized between the trade and settlement dates on
securities transactions, the difference between the amounts of dividends,
interest, and foreign withholding taxes recorded on the Fund's books, and
the U.S. dollar equivalent of the amounts actually received or paid. Net
unrealized foreign exchange gains and losses arise from changes in the
value of assets and liabilities other than investments in securities at
fiscal year end, resulting from changes in the exchange rate.
Forward Currency Contracts _ The Fund may enter into forward purchases
or sales of foreign currencies to hedge certain foreign currency
denominated assets and liabilities against declines in market value
relative to the U.S. dollar. Forward currency contracts are
marked-to-market daily and the change in market value is recorded as an
unrealized gain or loss equal to the difference between the value of the
forward currency contract at the time it was opened and value at the time
it was closed. Investments in forward currency contracts may expose the
company to risks resulting from unanticipated movements in foreign
currency exchange rates or failure of the counterparty to the agreement to
perform in accordance with the terms of the contract.
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 tax is
required.
DAVIS INTERNATIONAL SERIES, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
September 30, 1996
===============================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
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 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.
Dividends and Distributions to Shareholders - Dividends and distributions
to shareholders are recorded on the ex-dividend date.
NOTE 2 - PURCHASES AND SALES OF SECURITIES
Purchases and sales of investment securities (excluding short-term
securities) for the year ended September 30, 1996, were $60,336,982 and
29,078,116 respectively.
NOTE 3 - INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH
AFFILIATES
Advisory fees are paid monthly to the investment adviser, Davis
Selected Advisers, L.P., at the annual rate of 1.00% of the first $250
million of average net assets, 0.90% on the next $250 million of average
net assets, and 0.80% of average net assets in excess of $500 million.
Pursuant to applicable state Blue Sky requirements, the adviser will
re-imburse expenses (including the advisory fee but excluding interest,
taxes, brokerage fees and fees paid under any Rule 12b-1 Distribution
Plan) in excess of the most restrictive applicable expense limitation
prescribed by any statute or regulatory authority of any jurisdiction in
which the Fund's shares are qualified for offer and sale. The Adviser
believes that the most restrictive expense limitations presently
applicable are 2 1/2% for the first $30 million of average net assets, 2%
for the next $70 million of average net assets and 1 1/2% for any
additional average net assets. The Adviser is paid for registering Fund
shares for sale in various states. The fee for the year ended September
30, 1996 amounted to $12,000. The Adviser is paid for certain transfer
agent services. The fee for the year ended September 30, 1996 amounted
to $3,208. The Adviser is also paid for certain accounting services. The
fee amounted to $8,004 for the year ended September 30, 1996. Certain
directors and the officers of the Fund are also directors and officers of
the general partner of the Adviser.
Atlantic Advisers Limited (the "Sub-Adviser") acts as the
Sub-Adviser of the Fund. The Sub-Adviser manages the day-to-day
investment operations for the Fund. The Fund pays no fees directly to the
Sub-Adviser. The Sub-Adviser receives from the Adviser 50% of the total
annual investment advisory fees paid by the Fund to the Adviser.
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).
During the year ended September 30, 1996, the Fund's Underwriter,
Davis Selected Advisers, L.P., received $251,871 from commissions earned
on sales of Class A shares of the Fund, of which $32,221 was retained by
the Underwriter and the remaining $219,650 was reallowed to investment
dealers. Davis Selected Advisers, L.P. 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.
DAVIS INTERNATIONAL SERIES, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
September 30, 1996
===============================================================================
NOTE 4 - DISTRIBUTION AND UNDERWRITING FEES
The Underwriter is reimbursed for amounts paid to dealers as a
maintenance fee with respect to Class A shares sold by dealers and
remaining outstanding during the period. The maintenance 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 in
which the Underwriter pays no service fees to other firms. The
maintenance fee for Class A shares of the Fund for the year ended
September 30, 1996 was $79,591.
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 compensates the Distributor with a 4% commission on the
proceeds from the sale of the Fund's Class B shares (subject to the limits
described below) and the Distributor pays 4% to the qualified dealer
responsible for the sale of the shares. A rule implemented by the National
Association of Securities Dealers, Inc., ("NASD") limits the percentage of
the Fund's annual average net assets attributable to Class B shares which
may be paid to the Distributor in connection with the distribution of its
shares. 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-related services 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 year ended September 30, 1996, Class B shares of the
Fund made distribution plan payments which included commissions of
$36,259 and maintenance fees of $12,322.
Commissions earned by the Distributor during the year ended
September 30, 1996 on the sale of Class B shares of the Fund amounted to
$221,349 of which $210,311 was reallowed to qualified selling dealers.
The Distributor intends to seek payment from Class B shares of the
Fund in the amount of $269,474, representing the cumulative commissions
earned by the Distributor on the sale of the Fund's Class B shares, plus
interest, reduced by cumulative commissions 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 year ended September 30, 1996 the Distributor
received $1,710 in contingent deferred sales charges from Class B shares
of the Fund.
DAVIS INTERNATIONAL SERIES, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
September 30, 1996
===============================================================================
NOTE 5 - CAPITAL STOCK
At September 30, 1996, there were 5 billion shares of capital stock
($0.001 par value per share) authorized.
Transactions in capital stock were as follows:
<TABLE>
Class A
Year Ended Eight Months Ended
September 30, 1996 September 30, 1995
------------------ ------------------
<CAPTION>
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Shares subscribed...................... 2,552,141 $30,265,971 1,191,010 $12,666,427
Shares issued in reinvestment
of distributions................... 121,746 1,357,471 _ _
--------- ----------- --------- -----------
2,673,887 31,623,442 1,191,010 12,666,427
Shares reacquired (379,953) (4,608,330) (57,982) (681,560)
--------- ----------- --------- -----------
Net increase....................... 2,293,934 $27,015,112 1,133,028 $11,984,867
========= =========== ========= ===========
</TABLE>
<TABLE>
Class B
Year Ended Eight Months Ended
September 30, 1996 September 30, 1995
------------------ ------------------
<CAPTION>
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Shares subscribed...................... 540,809 $6,608,287 170,015 $1,953,436
Shares issued in reinvestment
of distributions................... 10,289 114,212 _ _
------- ---------- ------- ----------
551,098 6,722,499 170,015 1,953,436
Shares reacquired...................... (30,461) (371,448) (228) (2,726)
------- ---------- ------- ----------
Net increase...................... 520,637 $6,351,051 169,787 $1,950,710
======= ========== ======= ==========
</TABLE>
NOTE 6 - CUSTODY FEES
Under an agreement with the custodian bank, custody fees are
reduced by credits for cash balances. Such reductions amounted to $2,639
during the year ended September 30, 1996.
<TABLE>
DAVIS INTERNATIONAL SERIES, INC.
FINANCIAL HIGHLIGHTS
DAVIS INTERNATIONAL TOTAL RETURN FUND
==================================================================================================================================
The following represents financial highlights for a share of capital stock outstanding throughout each period.
----------CLASS A---------- ----------CLASS B----------
<CAPTION>
Eight Eight
Year Months ended Year Months ended
ended September 30, ended September 30,
9/30/96 1995 9/30/96 1995
------- ---- ------- ----
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period........................................... $ 11.85 $ 10.00 $ 11.79 $ 10.00
------- ------- ------- -------
Income From Investment Operations
- ---------------------------------
Net Investment Income......................................... .03 .05 (.03) (.01)
Net Gains on Securities
(both realized and unrealized).............................. .85 1.80 .82 1.80
------- ------- ------- ------
Total From Investment
Operations................................................ .88 1.85 .79 1.79
------- ------- ------- ------
Less Distributions
- ------------------
Dividends (from net
investment income).......................................... (.03) _ _ _
Distributions From
Realized Capital Gains...................................... (.58) _ (.58) _
------- ------- ------- ------
Total Distributions......................................... (.61) _ (.58) _
------- ------- ------- ------
Net Asset Value,
End of Period................................................ $ 12.12 $ 11.85 $ 12.00 $ 11.79
======= ======= ======= =======
Total Return <F1>............................................... 7.87% 18.50% 7.10% 17.90%
- ------------
Ratios/Supplemental Data
- ------------------------
Net Assets, End of
Period (000 omitted)........................................ $ 41,545 $ 13,427 $ 8,283 $ 2,002
Ratio of Expenses
to Average Net Assets...................................... 1.70% 1.72% 2.47% 2.46%
<F2><F3> <F2><F3><F4> <F2><F3> <F2><F3><F4>
Ratio of Net Income
to Average Net Assets....................................... .23% .95% (.54)% (.09)%
<F4> <F4>
Portfolio Turnover
Rate........................................................ 78% 85% 78% 85%
Average commission rate per share............................. $ .0050 _ $ .0050 _
<FN>
<F1> Sales charges are not reflected in calculation.
<F2> Had the Adviser not absorbed certain expenses, the ratio of expenses
for the year ended September 30, 1996 would have been 2.24% and 3.01%
for Class A shares and Class B shares, respectively. Had the Adviser not
absorbed certain expenses, the ratio of expenses for the eight months
ended September 30, 1995 would have been 2.88% and 3.62% for Class A
shares and Class B shares, respectively.
<F3> Ratio of expenses to average net assets after the reduction of
custodian fees under a custodian agreement were 1.69% and 2.46% for
1996. Prior to 1996, such reductions were reflected in the expense
ratios.
<F4> Annualized.
</FN>
</TABLE>
DAVIS INTERNATIONAL SERIES, INC.
Davis International Total Return Fund
Report of Independent Certified Public Accountants
==============================================================================
To the Shareholders and Board of Directors
of Davis International Series, Inc.
We have audited the accompanying statement of assets and
liabilities of Davis International Total Return Fund, a series of Davis
International Series, Inc., including the schedule of investments, as of
September 30, 1996, the related statement of operations for the year then
ended, and the statement of changes in net assets and the financial
highlights for the year then ended and for the eight months ended
September 30, 1995. These financial statements and financial highlights
are the responsibility of the Company'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 September 30, 1996, by
correspondence with the custodian and brokers. An audit also includes
assessing the accounting principles used and signifi-cant 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 International Total Return Fund as of September 30,
1996, and the results of its operations for the year then ended, and the
changes in its net assets and the financial highlights for the year then
ended and for the eight months ended September 30, 1995, in conformity
with generally accepted accounting principles.
Tait, Weller & Baker
Philadelphia, Pennsylvania
November 1, 1996
==============================================================================
DAVIS INTERNATIONAL SERIES, INC.
DAVIS INTERNATIONAL TOTAL RETURN FUND
124 East Marcy Street Santa Fe, New Mexico 87501
Directors Officers
Jeremy H. Biggs Jeremy H. Biggs
Shelby M.C. Davis Chairman
Keith R. Kroeger Shelby M.C. Davis
The Very Reverend President
James R. Leo Carl R. Luff
Richard M. Murray Vice President, Treasurer,
Theodore B. Smith Jr. & Assistant Secretary
Raymond O. Padilla
Vice President, Secretary,
& Assistant Treasurer
Carolyn H. Spolidoro
Vice President
Andrew A. Davis
Vice President
Eileen R. Street
Assistant Treasurer
& Assistant Secretary
Investment Adviser & Distributor
Davis Selected Advisers, L.P.
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
Tait, Weller & Baker
Two Penn Center, Suite 700
Philadelphia, Pennsylvania 19102-1707
==============================================================================
For more information about Davis International Series, Inc., Davis
International Total Return Fund including management fee, charges and
expenses, see the current prospectus which must precede or accompany
this report.
==============================================================================
9611-05 DISI70
