Dodge & Cox traces its roots back to 1930 and the Great Depression. That longevity provides a perspective that many firms simply can’t offer. To put it more precisely, it means that the company has seen the markets reach extremes many times over, has dealt with the volatility inherent in such markets, and has survived. The company’s core stock offering is Dodge & Cox Stock Fund (DODGX). It seeks long-term growth of principal and income, with a secondary goal of providing a reasonable level of current income.
The fund is managed by Dodge & Cox’s Investment Policy Committee. This nine member committee sits in the company’s only office in San Francisco. The company believes that physical proximity is important to the idea generation and vetting process. In committee meetings, individual analysts advocate their investment ideas, with each recommendation subjected to group scrutiny. These debates cover both the investment merits of a specific investment idea and its role in the overall portfolio. Dodge & Cox believes that this system enhances the decision-making process, and, perhaps equally as important, reduces the dependence on any single person.
Like all of the fund family’s offerings, Dodge & Cox Stock Fund uses a value approach. The management team seeks out companies that it believes to be temporarily undervalued but that have favorable long-term outlooks. A bottom up approach is used, focusing on such factors as future earnings potential, cash flow, dividends, financial strength, competitive advantages, quality of the business franchise and reputation, and the quality of the company’s management. Holding meetings with a company’s management and conferring with its competitors, customers, and suppliers are also key aspects of the research process.
The team focuses on the long term by asking the question, “Based on what we know now, how would we invest an “all-cash” portfolio today assuming we could not trade for the next three-to-five years?” This forces the team to reaffirm its rationale for each holding. This is critical for a fund that often invests in out of favor industries and stocks—a fact that leads to performance that is out of sync with the broader markets.
The last few years have been such a period, where the fund has experienced largely lagging performance. For example, the fund has trailed Value Line’s Growth and Income objective group over the tailing one- and five-year periods through June, while only just edging out the group over the trailing three-year period. Despite this middling showing, however, the fund’s longer-term trailing performance remains fairly impressive, with solid outperformance over the trailing 15- and 20-year periods.
Looking at Dodge & Cox Stock Fund’s year by year performance provides some insight. Its performance has often resided in the top 20% of the groups, with occasional periods where it is at the bottom. In 2007, 2008, and 2011, the fund resided on the bottom rungs performancewise. However, from 2000 to 2006, the fund was atop the performance ladder. Value investing can clearly be very rewarding, but at times it requires great fortitude. The fund’s exceptionally low turnover rate, below 10% of late, is a visible display that management has the inner strength to stick with its convictions.
The fund’s minimum investment is $2,500 ($1,000 for IRAs). Its expense ratio is an impressively low 0.52%, which is less than half the objective group’s average.
Investors seeking a fund with a value bias would do well to consider Dodge & Cox Stock Fund. Although the fund is prone to stretches of underperformance when its value investment approach is out of favor, management has the wherewithal to stay the course so that investors will benefit from the periods when value is in favor.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.