Dodge Cox: High-Risk Investment Gamble Or Safe Bet?

Dodge & Cox is a well-known, actively managed mutual fund company that was founded in 1930. The company has a long track record of success and its management team tends to take a collaborative approach with a wide idea-generation process. Dodge & Cox's investment-committee structure has been recognised as exemplary by Morningstar. The company's funds have a history of outperforming their peers and benchmarks. However, Dodge & Cox Stock Fund has an overall risk score of 8.2/10, with risks including the possibility of the managers' picks underperforming or losing money, liquidity risk, and risks arising from non-U.S. investments.

Dodge & Cox Stock Fund's high-risk profile

Dodge & Cox Stock Funds have a high-risk profile, with an overall score of 8.2/10. The fund's managers look for opportunities in large-cap stocks, focusing on companies that appear undervalued but have strong long-term growth potential. This strategy can be risky, as it relies on the managers' ability to identify and capitalise on these opportunities. If their picks underperform or the timing of their investments is wrong, there is a chance of losing money.

The fund also faces general risks associated with investing in stocks, including liquidity risk and the challenges of selling certain investments promptly. Additionally, non-US investments introduce currency risks and other uncertainties. Dodge & Cox's investment approach has historically delivered impressive long-term results, but the returns can be lumpy over shorter periods.

The fund's volatility is reflected in its performance over the years. As of November 27, 2023, the fund held assets totalling $89.23 billion, with total returns in the first percentile of Morningstar's large-value category for the trailing 12 months, the 13th percentile for three years, the first percentile for five years, and the 35th percentile for ten years. The fund's expense ratio is 0.52%, and it requires a minimum investment of $2,500.

Dodge & Cox Stock Fund's risk level compared to other funds in the large-value peer group is considered high for the trailing three and ten-year periods, with the trailing five-year period deemed above average by Morningstar. The level of return is above average for the trailing three years, high for the trailing five years, and average for the trailing ten years relative to its peers.

The fund's volatility measurements

Volatility measures reflect the uncertainty or risk of change in a security's value. Dodge & Cox Stock Fund has an overall score of 8.2/10, with Morningstar deeming its risk high compared to other funds in the large-value peer group for the trailing three and 10-year periods, and the trailing five-year period considered above average. The fund's volatility is reflected in the risk that the managers' picks might underperform or even lose money, the general risks associated with investing in stocks, liquidity risk, and risks arising from non-U.S. investments, including currency risks.

Dodge & Cox has improved its risk management in recent years, building in-house tools to help its investment teams better understand portfolio traits and risks facing their holdings. Managing risks hasn’t necessarily tempered the fund’s returns—they’re typically quite lumpy over short periods—but the managers’ calm demeanor and the analysts’ vigilance often turn that volatility to investors’ advantage over time.

Dodge & Cox Stock Fund's volatility measurements are reflected in its Modern Portfolio Theory Statistics, calculated from a comparison of a fund's excess returns and its benchmark's excess returns, based on three years of monthly returns:

• 76.18 Standard Index (S&P 500 TR USD)
• 94.44 Best Fit Index (Russell 1000 Value TR USD)
• 0.99 Standard Index (S&P 500 TR USD)
• 1.1 Best Fit Index (Russell 1000 Value TR USD)
• 5.38 Standard Index (S&P 500 TR USD)
• 4.52 Best Fit Index (Russell 1000 Value TR USD)

Dodge & Cox's risk management tools

Dodge & Cox has improved its risk management in recent years, building in-house tools to help its investment teams better understand portfolio traits and risks facing their holdings.

Bottom-up Research

Dodge & Cox conducts intensive bottom-up research with a focus on valuation. They undertake extensive research on individual companies and securities to find solid investments whose true long-term value has not yet been recognized by the market. Their analysts monitor publicly available information, talk to management, visit company facilities, and talk to vendors, customers, competitors, and industry experts to develop a complete picture of a company. They create scenarios and model the financial results the company might generate in various circumstances, paying close attention to the downside.

Overall Portfolio Risk Exposures

Dodge & Cox's investment committees carefully consider risk at the portfolio level. They analyze the combination of independent risk exposures to determine whether they are likely to diversify or magnify the portfolio's overall risk profile. They also pay particular attention to portfolio diversification and quantitative estimates of aggregate risk.

Long-term Investment Horizon

Dodge & Cox evaluates each potential investment based on a three- to five-year investment horizon. They approach their investments from the long-term perspective of being part owners of a business, constantly monitoring each investment and taking advantage of short-term price volatility.

Fixed Income: Managing Credit Risk

Dodge & Cox applies the same bottom-up approach to the construction of fixed-income portfolios. They conduct in-depth fundamental credit analysis, assessing the merits of lending to an issuer at a given valuation. They also closely follow analyses generated by the sell side and independent providers of credit, macroeconomic, industry, and policy research.

Committee-Based Decision Making and Portfolio Construction

Global industry and credit analysts make formal recommendations to the Credit Sector Committee (CSC) and U.S. Fixed Income Investment Committee (USFIIC) for investment consideration. The USFIIC manages all of Dodge & Cox's U.S. fixed-income strategies and is responsible for portfolio-level oversight within their bottom-up investing framework. This team-based approach ensures that they leverage the collective judgment of their experienced team of investment professionals in the construction of diversified client portfolios.

The fund's performance highlights

Dodge & Cox Stock Fund has an impressive long-term record. From the longest-tenured manager David Hoeft’s start in January 2002 through April 2024, the fund’s I share class gained 9.2% annualised. This beat 97% of peers in the fund’s large-value Morningstar Category, as well as the 7.8% gain of the Russell 1000 Value Index category benchmark.

Stock-picking, rather than allocations to certain sectors or geographies, typically defines performance. That was true in the three years through April 2024, when the fund’s 7.2% annualised return outpaced the Russell 1000 Value Index by 2 percentage points. Although the portfolio invested more in technology stocks than the index during the period, it was picks such as Microsoft and financial technology firm Fiserv that made the difference.

In one of their boldest calls, the managers traded energy firm Occidental Petroleum, sticking with it through the company’s expensive acquisition of Anadarko in 2019 and the lows of the coronavirus pandemic to see a huge rally in the share price in ensuing years.

Dodge & Cox Stock Fund has returned 4.70% over the past year, 15.85% over three years, 9.15% over five years and 9.79% over the past decade. The fund has assets totalling almost $89.23 billion invested in 82 different holdings as of November 27, 2023.

The fund's total returns fall in the first percentile of Morningstar’s large-value category for the trailing 12 months, the 13th percentile for the trailing three years, the first percentile for the trailing five years and the 35th percentile for the trailing 10 years as of late March 2017.

The fund's risk compared to other large-value funds

Dodge & Cox Stock Fund is considered a high-risk investment compared to other funds in the large-value peer group. The fund's overall risk score is 8.2/10, with a volatility measurement that reflects the uncertainty of change in the security's value. The fund's managers look across a spectrum of large-cap stocks, investing in companies that they believe are temporarily undervalued but have favourable long-term growth prospects.

The fund's largest holdings include Bank of America Corp., Wells Fargo & Co., and Capital One Financial Corp. As of November 27, 2023, the fund held assets totalling almost $89.23 billion invested in 82 different holdings. The fund's total returns fall in the first percentile of Morningstar's large-value category for the trailing 12 months, the 13th percentile for the trailing three years, the first percentile for the trailing five years, and the 35th percentile for the trailing 10 years as of late March 2017.

The fund's expense ratio is 0.52%, and it requires a minimum investment of $2,500. The fund cites several risks, including the possibility of underperformance or loss, general risks associated with investing in stocks, liquidity risk, and risks arising from non-US investments, including currency risks.

Compared to other large-value funds, Dodge & Cox's investment approach has resulted in higher returns over the years. The fund's long-term record is impressive, with a 9.2% annualized return from January 2002 to April 2024, beating 97% of peers in the large-value Morningstar Category. The fund's performance is defined by stock-picking rather than allocations to specific sectors or geographies. This strategy has paid off, with a 7.2% annualized return over three years, outperforming the Russell 1000 Value Index by 2%.

Dodge & Cox's investment-committee structure has been recognised as "exemplary" by Morningstar. The firm's collaborative decision-making and gradual personnel changes promote long-term consistency and stability. The fund has a consistent investment approach that matches or outperforms major indexes such as the S&P 500 Index and the Russell 1000 Value Index over time. Dodge & Cox's active management and relatively low expense fees make it a compelling option for long-term investors.

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