Christopher C. Davis has financial stocks in his blood.
His grandfather, Shelby Cullom Davis, made millions investing in insurance stocks. His father, Shelby M.C. Davis, became a legend with his $7 billion money management firm, Davis Selected Advisers LP.
And his motorcycle-riding grandmother, whose photo is prominently displayed on his office windowsill, holds a seat on the New York Stock Exchange.
But some investors wonder if the 32-year-old, who two weeks ago was handed the reins of the family's flagship Davis New York Venture Fund by his father, has the experience necessary to carry on the tradition.
"I am worried about the transition," said one investor who declined to be identified. "Clearly we don't know if Chris will do as well as his father and it will be hard to know what is luck and what is performance."
The younger Davis may lack his father's lengthy experience as a portfolio manager, but he does have a track record managing the Davis Financial Fund-a smaller, newer offering consisting primarily of bank stocks.
So it's surprising when the boyish-looking Christopher Davis opens up his American Banker interview with:
"Banking is not a great business." And after that remark was greeted by stunned silence, he insisted, "It just isn't."
Have Federal Reserve Chairman Alan Greenspan's comments, which sent the stocks of banks and other financial companies into a tailspin last week, caused the young Davis to question his legacy?
Hardly. For one thing, trading on the rise and fall of interest rates goes against everything Grandfather Davis pounded into the heads of his son and grandchildren around the dinner table. The 59-year-old Davis strategy, which the family describes as the "Double Play Effect," is to pick growing companies at bargain prices and hold on.
That doesn't prevent the young Davis from noting the disadvantages of banks and financial companies in general, however.
Banks have many competitors, and are heavily regulated and highly leveraged, said Mr. Davis. "Those certainly are not the characteristics to describe a great business."
But for every negative characteristic there is a positive corollary, he said. Mr. Davis describes bank and financial companies as commodity businesses, meaning everyone is a customer. Because "making a spread on money is about the oldest business there is, it is not a business that goes obsolete tomorrow," he said.
The Davises must be on to something. The funds they manage have consistently left the returns of the Standard & Poor's 500 in the dust.
Their $3.5 billion New York Venture Fund, which has more than 45% of its money in bank and financial stocks, has ranked in the top 10% of growth funds-as measured over 1, 5, 10, 15, 20, and 25 years. It has outperformed the S&P index in 21 out of the last 28 years.
The fund's one-year return was 30.72%, while its return over its lifetime has averaged 14.64%, according to Morningstar Inc.
The $116 million Davis Financial Fund, which Christopher Davis has managed since its inception six years ago, has also been a consistent performer. The fund, which invests 80% of its money in the stock of banks and other financial companies, has had a one-year return of 36.70%, and its return over its lifetime is an annualized 25.86%, according to Morningstar.
The $1.4 billion Selected American Shares, which invests 45% of its money in the stocks of banks and other financial companies, has had a one- year return of 35.72%. The Davises have been managing the fund for two years.
The company's largest holdings include Wells Fargo & Co., American Express Co., First Bank System Inc., BankAmerica Corp., Citicorp, Banc One Corp., and Morgan Stanley & Co.
The three funds weighted toward financial services stocks are among 14 managed by New Mexico-based Davis Selected Advisers.
To Christopher Davis the secret to steady performance is not a secret at all, but "just common sense."
"Our average holding is more than seven years and our turnover is only 15%," he said. "We have spent a lot time courting and getting to know the companies. We don't sell on a disappointing quarter and we don't buy with some short-term goal in mind. We try to buy good businesses with great managements."
Mr. Davis also favors companies with dominant or growing market shares.
Bank and financial stocks may be in Christopher Davis's blood, but that does not mean the industry gets a blanket seal of approval.
He tends to steer away from specialty financial companies, particularly subprime auto lenders like Mercury Finance.
High growth is often a red flag in banking, he notes, and another is a single product focus.
Finally there is the lack of common sense behind the concept of used-car lending.
"Already you're going to have adverse selection on the customer base," said Mr. Davis. "And I think the danger with a used-car loan is that you imagine that you have collateral. But a used car is pretty crappy collateral, for one thing. ... And your collateral is going down in value every day."
Mr. Davis acknowledges that his approach to single-product specialty finance companies is not without flaws.
"Now there has been a fortune made with some of these great credit card companies like MBNA," he said. "We didn't own that either and for some of the same reasons that we didn't own Mercury Finance.
"We were 100% wrong," he said.
That however, has not stopped others from singing the praises of Christopher Davis and his father. Four years ago their company was hired by the board of directors of the Select Funds, which was dissatisfied with the advice it had been getting from Kemper Securities.
The board hired Davis Selected Advisers after Kemper insisted on turning the 64-year no-load funds into load funds.
"We were told by Kemper we would regret (hiring another company) as long as we lived," said Select chairman Robert J. Greenebaum. "Our regret lasted a week; since then we have been very well satisfied with what they (the Davises) have accomplished."
Since the Davis company has taken over the fund has grown three times bigger and Selected American has been the No. 1 or No. 2 two growth income fund for the three year period, said Mr. Greenebaum.
"It is very fashionable among money managers want to be at the right place at the right time," he said. Unlike the Davises, he said most money managers "do in-and-out trading to make sure that their portfolios have the latest buzzwords and great names. There is too much trading and not enough sticking to the good reasons that had (them) buying a stock in the first place."
Floyd A. Brown, host of a financial talk show on WGN in Chicago agrees, and also points to the company's long tradition of successfully picking bank stocks.
"The grandfather was legendary and the father was a superstar," said Mr. Brown. "And the son has even beaten the dad's record."