Dodge & Cox: Value investing for 80 years

by Walter Frank, editor MoneyLetter

Dodge & Cox Stock (DODGX) is a classic, quality value fund run by a company that has been investing since 1930; over more than 80 years, it has navigated every market environment including the Great Depression.

Throughout that time, their investment philosophy has remained the same -- the team at Dodge & Cox identifies stocks selling at good values and offering good long-term growth prospects.

Annual portfolio turnover here is miniscule -- typically less than 10%. That because the managers take a three to five year time horizon when selecting stocks.

They use a team approach. The Stock Fund is run by an investment policy committee of nine (with an average tenure of 27 years at the firm) supported by more than 20 industry analysts.

Managers and analysts regularly visit companies, and confer with competitors, customers and suppliers. The team focuses on the financial condition and prospects of each company, including the outlook for future earnings, cash flow, and dividends.

They consider numerous factors including financial strength, economic condition, competitive advantage, quality of the business franchise, and experience and competence of management. Overlying all of that is the valuation consideration.

Since the portfolio is constructed from the bottom up, sector weighting derive from stock picks. And because the fund is invested in out-of-favor stocks, its portfolio can vary significantly from its large value peers and the major stock indexes.

The fund can venture overseas, and recently had about 18% of assets invested internationally, primarily in developed Europe.

Recently, the fund was significantly overweight in the financials, health care, and consumer discretionary sectors, and underweight in energy and consumer staples. Its top five holdings as a percentage of net assets are Comcast, Capital One, Wells Fargo, Merck and General Electric.

The fund is in the top 1% of its large value peer group in year-to-date performance with a 19% gain. It also leads 95% of its peers for the trailing year.

The fund does stumble from time to time, no unusual for a fund that invests in out-of-favor fare. In the late 1990s, it lagged its peers that chased after tech and telecom (only to lead in the year following the bust of the tech bubble).

More recently, the fund lagged in 2007 and 2008 when the managers started buying financial stocks as prices crumbled.

Despite the bumps along the way, investors have been well rewarded for sticking with the fund. Its average annual return of 7.1% for the trailing 15 years trounces that of the S&) (4.6%) and bests 97% of its peers.

Learn more about this financial newsletter at Walter Frank's MoneyLetter.

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