The Dodge & Cox Stock Fund had a total return of 2.4% for the first quarter of 2014, compared to 1.8% for the S&P 500 (INDEXSP:.INX) Index. At quarter end, the Fund had net assets of $55.6 billion with a cash position of 2.3%.

Dodge & Cox Stock Funds market commentary

After exceptionally strong returns in 2013, the S&P 500 (INDEXSP:.INX) posted a modest gain during the first quarter of 2014 and remained near record highs at March 31. Investors responded favorably to the U.S. Federal Reserve’s statement that its low interest-rate policy is still needed to support U.S. economic growth. Such acknowledgement eased concerns that interest rates might be increased sooner than expected. U.S. economic data was generally positive; the U.S. labor market exhibited marginal improvement, household spending increased, and businesses invested more in fixed assets. Corporate balance sheets continue to be robust. However, the U.S. economy still faces hurdles, including modest economic growth, an elevated unemployment rate, and a slowing recovery in the housing market.

Dodge & Cox

Despite recent gains, we continue to believe U.S. equity market valuations are reasonable: the S&P 500 (INDEXSP:.INX) traded at 15.2 times forward estimated earnings with a 2.0% dividend yield at quarter end. The Fund’s holdings (14.0 times forward earnings) trade at a discount to the S&P 500, and we believe the Fund’s portfolio is well positioned to benefit from long-term global growth opportunities. Acknowledging that markets can be volatile over the short term, we encourage shareholders to remain focused on the long term.

Dodge & Cox Stock Funds first quarter performance review

The Fund outperformed the S&P 500 by 0.6 percentage points during the quarter.

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Dodge & Cox Stock Funds key contributors to relative results

The Fund’s average overweight position (20% versus 13%) and holdings in the Health Care sector (up 8% compared to up 6% for the S&P 500 sector) contributed to results. Forest Laboratories, Inc. (NYSE:FRX) (up 54%) agreed to be acquired by Actavis plc (NYSE:ACT). Merck & Co., Inc. (NYSE:MRK) (up 14%) also performed well.

The Fund’s average overweight position (22% versus 19%) and holdings in the Information Technology sector (up 4% compared to up 2% for the S&P 500 sector) aided performance. Corning Incorporated (NYSE:GLW) (up 17%) and Hewlett-Packard Company (NYSE:HPQ) (up 16%) were strong.

Relative returns from holdings in the Energy sector (up 5% compared to up 1% for the S&P 500 sector) helped performance. Baker Hughes Incorporated (NYSE:BHI) (up 18%) and Schlumberger Limited. (NYSE:SLB) (up 9%) were meaningful contributors.

Selected additional contributors included financial services companies, Bank of America Corp (NYSE:BAC) (up 11%) and Wells Fargo & Co (NYSE:WFC) (up 10%).

Dodge & Cox Stock Funds key detractors from relative results

Weak returns from holdings in the Industrials sector (down 8% compared to flat for the S&P 500 sector) detracted from results. ADT Corp (NYSE:ADT) (down 26%) and FedEx Corporation (NYSE:FDX) (down 8%) performed poorly.

The Fund’s underweight position in the Utilities sector (no holdings versus average 3% for the S&P 500 sector), the strongest sector of the market (up 10%), hurt performance.

Selected additional detractors included Symantec Corporation (NASDAQ:SYMC) (down 15%), Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) (down 9%), and Time Warner Inc (NYSE:TWX) (down 6%).