Davis Real Estate Fund 2025 Year-End Analysis

The average yearly total returns for the Class A shares of the Davis Real Estate Fund, calculated through December 31, 2025, and factoring in the highest possible 4.75% sales charge, stand at: 1 year, -10.20%; 5 years, 1.77%; and 10 years, 3.61%. Please note that the performance data shown here reflects past results and does not assure future outcomes. Total return figures incorporate the reinvestment of dividends and capital gain distributions. The investment returns and principal amounts will fluctuate, meaning that upon redemption, an investor’s shares could be valued higher or lower than their initial purchase price. To access the latest month-end performance figures, individuals can check the Davis Funds website or dial 800-279-0279. Current performance might differ, potentially being lower or higher than the quoted numbers. As detailed in the most recent prospectus, the total annual operating expense ratio for Class A shares was 1.02%. This expense ratio could change in subsequent years. Returns and costs for other share classes will differ accordingly.

This document contains forthright comments and insights about investment approaches, specific securities, and prevailing economic and market dynamics. Nevertheless, no assurance exists that these comments, views, or projections will ultimately prove accurate. All fund performance metrics referenced here pertain to Class A shares without a sales charge and are current as of December 31, 2025, except where indicated otherwise. This content does not constitute a suggestion to purchase, sell, or retain any particular security. Once again, past performance offers no promise of future success. There is absolutely no assurance that the fund will deliver positive returns, given the inherent volatility of equity markets, where investors face the real possibility of capital loss.

For the year concluding on December 31, 2025, the Class A shares of the Davis Real Estate Fund (DREF) delivered a total return based on net asset value of -5.72%. In comparison, over this identical timeframe, the Wilshire U.S. Real Estate Securities Index achieved a return of +3.47%. Looking at the latest one-year, five-year, and ten-year spans, an initial $10,000 investment in the Davis Real Estate Fund would have grown to $9,428, $11,464, and $14,965, respectively.

As long-term oriented investors, we tend to interpret the fund’s 2025 performance, despite its underwhelming nature, as a natural fluctuation within the broader context of cultivating impressive long-term results. Regrettably, this marked the third consecutive year in which the fund trailed its benchmark, substantially eroding our extended performance history. This sequence of events has compelled us to dedicate significant effort to reassessing our strategies and objectives. It has been a rigorous endeavor, centered on rigorously questioning our longstanding beliefs about the types of real estate enterprises we aim to hold in our portfolio.

How Did We Arrive at This Point?

Prior to delving into the outcomes of our introspection, it is essential to outline how the performance disparity emerged and why it intensified so markedly in 2025. In straightforward terms, this can be attributed to two primary errors: one of exclusion and one of retention. To illustrate effectively, we will reference Welltower, a real estate investment trust (REIT) specializing in senior housing, and Alexandria Real Estate, a REIT that owns and develops properties in the life sciences sector. This comparison proves particularly apt, considering our insufficient allocation to Welltower and excessive commitment to Alexandria—concepts that will clarify shortly. Collectively, these two entities represent the predominant factors behind our underperformance not only in 2025 but across recent years.

The benchmark for DREF, known as the Wilshire U.S. Real Estate Securities Index, has consistently exhibited a concentrated structure at its upper levels. Dating back to 2005, its top 10 holdings have accounted for more than 40% of the index’s overall market capitalization. In the present day, this figure approaches 50%, and it has remained stably within the 40-50% range throughout the last two decades.

Historically, we have not devoted extensive attention to macro-level aspects such as index makeup, since we do not operate as covert index trackers. That said, following this latest stretch of subpar results, we expanded our analytical scope. Our investigation into historical performance trends revealed that sheer size—and particularly rapid expansion in size—carries far greater weight than we had previously recognized. Moreover, we observed that this dynamic has gained even more momentum in recent years. This is precisely where Welltower fits into the narrative as our error of exclusion.

At the peak of the COVID-19 crisis, Welltower and similar healthcare real estate equities endured severe setbacks. Within just two years, Welltower’s earnings declined by one-third, coinciding with a sharp drop in occupancy rates across its portfolio. Its stock valuation tumbled in tandem, and in our assessment, it overshot to an excessive degree. Welltower maintained a modest stake in the fund as the pandemic reached its zenith, at which point we started incrementally increasing our holding. As the health crisis subsided, Welltower demonstrated remarkable recovery, restoring occupancy levels from a deeply depressed starting point. Investors responded positively, leading to an expansion in valuation multiples.

With its equity cost diminishing, access to capital markets improved, enabling Welltower to secure funding for acquiring senior housing properties that few others were willing to touch. This initiative spurred superior earnings expansion, surpassing gains solely from occupancy rebounds. A self-reinforcing loop emerged, wherein Welltower leveraged favorable spread investments to ascend into one of the largest publicly traded real estate firms. Presently, it dominates our benchmark as the largest single constituent, comprising nearly 9% of the index’s total market capitalization. This is a stark contrast to 2022, when it ranked fifth and represented only 4%. However, such favorable developments have boundaries. Welltower has persistently commanded the highest valuation in our investment domain by a wide margin, even after adjusting for strong growth projections.

What escaped our full consideration was the profound influence of capital inflows into the sector and how this has elevated the premium on scale to unprecedented levels. Across the last decade, passive investment vehicles have attracted substantial new capital. In contrast, actively managed funds such as DREF have grappled with persistent redemptions. The implication is clear: when passive inflows overpower active outflows, it generates a valuation-insensitive demand that disproportionately benefits fast-scaling entities. In the specific context of 2025, passive strategies captured $1.5 billion in inflows, while active strategies hemorrhaged $2.8 billion. Consequently, each dollar of passive capital entering the sector necessitated an allocation of nearly nine cents to Welltower, despite its trading at peak valuations unseen in the REIT landscape. As the company swells further, its portion of every passive investment dollar grows accordingly. It comes as little surprise, then, that Welltower emerged as the top-performing REIT in our coverage universe—and by a substantial lead. Unfortunately, we had fully divested from the position by early January 2025.

From our vantage point, the most sensible reinvestment prospect was—and continues to be—Alexandria Real Estate, which entered 2025 as one of our most substantial overweight holdings. We have frequently highlighted this REIT in previous communications to investors, often crediting it with supporting fund returns. That narrative no longer holds for this year. Alexandria suffered a 50% evaporation in market value over the course of 2025, evoking memories of the Great Financial Crisis. This capped off disappointing showings in 2024 and 2023 as well. In essence, Alexandria’s path relative to DREF’s benchmark mirrored Welltower’s in reverse. Back in 2023, it ranked seventh in the index, marginally trailing Welltower in size. Now, it has slipped to the 42nd position, accounting for a mere 57 basis points—or just over half a percentage point for the uninitiated—of our benchmark weight.

Because Alexandria has been steadily contracting in scale over time, passive funds have systematically trimmed their stakes, exerting downward pressure on its share price. Describing this as a challenging predicament would be a gross understatement.

The sharp and substantial decline in Alexandria’s stock price during the final quarter of 2025 appeared to be an exaggerated response. It positioned at a historically low discount a business we regard as among the nation’s premier real estate operators.

Our steadfast commitment to Alexandria over recent years, consistently underpinned by excessively harsh pricing, faced severe strain in 2025 amid escalating complexities. Like many observers, we had presumed that demand resurgence in life sciences was at least a biennial horizon away from turning positive. That served as our baseline modeling assumption. However, insights from Alexandria’s third-quarter earnings discussion indicated that positive momentum might materialize in three years or potentially beyond. This revelation proved disheartening.

Compounding the issue, Alexandria’s expansive development pipeline relies in part on robust leasing within its stabilized assets. Should leasing pace decelerate substantially—as now seems probable—the firm must seek alternative funding sources. And that is exactly the path it chose. During its investor day in December, Alexandria disclosed plans to expedite sales of non-core properties and reduce its dividend payout, measures that profoundly shift the profile, timing, and magnitude of future cash generation. Neither adjustment had been incorporated into our forecasts. Even if anticipated, the stock’s deep undervaluation would probably have kept our position intact entering the event.

It goes without saying that Alexandria’s share price reacted negatively, rapidly, and intensely in the fourth quarter of 2025. From every angle, this seems like an overblown response, consigning to a record low multiple what we consider an elite real estate enterprise. What explains this? Our conviction—and certainly what we underappreciated—is the extent to which investment community timeframes have contracted dramatically.

We have consistently anticipated that Alexandria’s pathway back to earnings acceleration would encounter headwinds from excess life science supply in its key markets. Unlike the Great Financial Crisis era, when leverage strained its finances, Alexandria now boasts investment-grade status and what we deem one of the strongest balance sheets across our investable universe. It embodies the profile of a high-quality operator steering through a temporary cycle, yet it is being valued akin to a troubled entity besieged by enduring structural challenges. We reject that characterization, but it is evident that earnings trajectory has eclipsed all other fundamentals in dictating price action. For the moment, investors appear willing to sideline Alexandria, and we anticipate limited near-term price appreciation.

To a degree, we merit criticism for our retention error. Persisting with Alexandria amid intensifying fundamental strains might appear misguided. In prior instances, we have witnessed premium-priced firms shed substantial multiples merely from decelerating growth. Arguably, we ought to have heeded initial indicators of a cycle shift for Alexandria. While that critique holds some validity, we eschew short-term trading in favor of a long-term value orientation. Alexandria’s eroding price has diverged sharply from our computed intrinsic value, rendering it today one of the standout bargains in our scope.

True to form, we leverage adversity to refine our methodology, and the current episode is no outlier. We have addressed these paired deficiencies by augmenting our research framework. This entails more regular examinations of the benchmark to discern shifts in constituent weightings. Additionally, we have broadened uncertainty bands around pivotal inputs to our fair value models, including core operational metrics like market rents and occupancy rates, plus timelines for development completions. We expect this enhanced rigor will equip us better to gauge plausible scenarios for firms traversing downturns.

Performance Review

Under- and Over-Ownership Dynamics

As prior remarks likely suggest, the paramount drag on our 2025 performance stemmed from insufficient exposure to Welltower. To clarify our usage of ‘under-ownership,’ note that prior to our full exit in January 2025, the fund had held Welltower continuously since pre-pandemic times. Indeed, as COVID ravaged senior housing, we augmented stakes in Welltower and Ventas, the latter remaining a fund holding. Consequently, these senior housing names rank among the foremost performance drivers over the trailing three years. For 2025 specifically, Ventas topped our contributors, while Welltower—despite a minimal stake for merely one month—still placed in the top 10. From a value investor’s lens, however, their soaring valuations created a conundrum. This was aggravated by plummeting prices elsewhere in real estate, creating an unignorable valuation gulf that prompted us to pare senior housing in pursuit of superior opportunities.

Aggravating this was DREF’s sizable Alexandria stake. Its chronically subdued valuation offered scant shield against a momentum-obsessed market. Furthermore, Alexandria’s multi-year slump has diminished its benchmark relevance, as previously noted. Yet, through a enduring value prism, its discount defies rationality. The forthcoming years may remain turbulent, but as life sciences sentiment brightens, Alexandria’s stock stands poised for a sharp initial rebound.

Supply overhangs plagued the multifamily sector, where DREF maintains pronounced overweight positioning. None of our selections bolstered returns amid persistent doubts over rent recovery timing, even as supply growth peaked and began easing. Our leading multifamily name, AvalonBay, underperformed notably, attributable in part to its development emphasis, which investors disfavored across categories. We surmise disappointment arose from unmet expectations that ebbing supply would ignite rent acceleration in 2025. The prolonged delay tempered recovery optimism, yet it does not diminish our constructive outlook for apartments.

Amid these headwinds, 2025 yielded several bright spots, reaffirming the efficacy of our thorough underwriting discipline. The industrial segment, derided for years due to swelling supply and ebbing growth, exhibited revival signals. With supply growth contracting sharply nationwide, rents stabilized at supportive levels. Prologis, our premier industrial exposure though not the most overweight, delivered strong results.

Opportunities in U.K. office REITs surpass those in U.S. counterparts, thanks to profoundly steeper discounts. The sole constraint on expanding our U.K. allocation is the benchmark’s restriction to U.S.-listed entities.

EastGroup Properties and Rexford Industrial Realty echoed this positivity, the latter aided by activist involvement. We favor a sector trading at sensible discounts, with potential for select assets to convert into data centers—a topic to expand upon shortly. Our zeal is tempered by eroding valuation appeal and macroeconomic frictions like tariffs and immigration. We anticipate maintaining current weightings.

It was gratifying to witness continued strength from our London office REIT investments. Great Portland’s submarkets have demonstrated resilience rivaling America’s strongest. Valuation-wise, U.K. offices eclipse U.S. peers in appeal. Benchmark confines alone cap our U.K. commitment.

Positioning for Future Success

We have long reflected internally that portfolio management entails navigating ebbs and flows between appearing prescient and, conversely, misguided. DREF has lingered in the latter phase, introducing a distinct hazard we strive to mitigate: decision-making from a deficit position risks impulsive gambles. A prime temptation is pursuing prior winners, now that we better grasp scale advantages in our domain. Bluntly stated, our subdued senior housing stance aligns with our principles.

We remain assured that multifamily overweight will bear fruit as rent inflection—delayed yet imminent—crystallizes through 2026. This holds especially for Sunbelt specialists Camden Property Trust and Mid-America Apartment Communities, our preferred plays. Earnings stagnation may persist this year, but market dynamics often presage fundamentals; thus, multiples could rerate toward a 2027 rebound, potentially ahead of consensus.

Office recovery faces employment softness risks, yet our conviction endures for BXP Inc. and Cousins Properties. Our office rationale never hinged on relentless job gains but on prevailing in lease renewals. Recent leasing by our holdings reveals market share gains over inferior assets. In an era favoring in-office norms, premium-space owners like BXP and Cousins should thrive. Their discounts, paired with catalysts, fortify our commitment.

While most office bets progressed favorably, conviction softens on select West Coast names. Two minor stakes operate in sluggishly recovering markets. We have retained Hudson Pacific and Douglas Emmett for years, drawn by discounts and recovery faith. Though Hudson Pacific spans markets, shared Los Angeles vulnerability hampers both. Southern California’s entertainment reliance fuels demand across offices and studios, where Hudson Pacific participates notably.

An extraordinary production drought over two years has throttled leasing more than conservatively projected. 2025 earnings repeatedly deferred substantive upticks, dooming share prices. Catalysts loom for each, but 2026 serves as a decisive proving ground.

Our faith in Alexandria persists. Complications mounted beyond expectations, yet a trajectory exists toward earnings revival—spanning years, perhaps. Trading at nadir valuations, patience suits us. Development and leasing capex will stress the balance sheet, but extended debt maturities and robust coverage position it resiliently.

Closely Monitored Data Centers

Any 2025 review demands addressing AI’s ripple effects. Data center demand surges at record levels. Whether overbuild risks loom awaits future judgment. Meanwhile, Digital Realty and Equinix reap rewards from prior leases and builds, as does Prologis.

Certain industrials may repurpose for data centers. Sector-wide, 2026 demand growth seems assured, though risks abound. Beyond stretched valuations for Digital Realty and Equinix, power constraints will throttle monetization. Occupier returns and tech disruptions pose further uncertainties.

We align data center weightings with benchmark norms, as near-term fundamentals appear insulated—bolstered by investment-grade lessees. Sentiment volatility warrants vigilance, alongside chip advances, energy shifts, and regulations. We hold steady for now.