The Dodge & Cox Stock Fund had a total return of 0.9% for the third quarter of 2014, compared to 1.1% for the S&P 500 Index. For the nine months ended September 30, 2014, the Fund had a total return of 8.0%, compared to 8.3% for the S&P 500. At quarter end, the Fund had net assets of $58.7 billion with a cash position of 1.4%.

Dodge & Cox: Market Commentary

During the third quarter, U.S. equity markets appreciated slightly and the S&P 500 posted its seventh consecutive quarter of gains. Health Care and Information Technology were the best performing sectors of the market; Energy was the weakest sector as global oil demand forecasts decreased. In the United States, economic activity expanded at a moderate pace: household spending rose, businesses continued to invest more in fixed assets, and labor market conditions improved. However, the housing recovery remains slow and fiscal policy continues to restrain U.S. economic growth.

Dodge & Cox

Our long-term outlook for equities remains positive and U.S. equity market valuations are reasonable: the S&P 500 traded at 15.1 times forward estimated earnings with a 2.0% dividend yield at quarter end. We are optimistic about the long-term prospects for corporate sales growth, earnings growth, and cash returned to shareholders. Corporate balance sheets and cash flows continue to be robust. In our opinion, 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: Third Quarter Performance Review

The Fund underperformed the S&P 500 by 0.2 percentage points during the quarter.

Dodge & Cox

Dodge & Cox: Key Detractors From Relative Results

The Fund’s holdings in the Health Care sector (flat compared to up 5% for the S&P 500 sector) hurt results. Key detractors included GlaxoSmithKline plc (ADR) (NYSE:GSK) (down 13%) and the Fund’s lack of holdings in the Biotechnology industry (3% of the S&P 500), which was significantly stronger than the overall market.

A weak return from Sprint Corporation (NYSE:S) (average 0.4% position), the Fund’s only holding in the Telecommunication Services sector (down 26% compared to up 3% for the S&P 500 sector), hindered performance.

Additional detractors included Schlumberger Limited. (NYSE:SLB) (down 13%), Baker Hughes Incorporated (NYSE:BHI) (down 12%), Corning Incorporated (NYSE:GLW) (down 11%), and TE Connectivity Ltd (NYSE:TEL) (down 10%).

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Dodge & Cox: Key Contributors To Relative Results

Returns from holdings in the Industrials sector (up 2% compared to down 1% for the S&P 500 sector) contributed to results. FedEx Corporation (NYSE:FDX) (up 7%) performed well.

The Fund’s average overweight position (23% versus 16%) and holdings in the Financials sector (up 3% compared to up 2% for the S&P 500 sector) helped performance. Notable contributors included Bank of America Corp (NYSE:BAC) (up 11%), Goldman Sachs Group Inc (NYSE:GS) (up 10%), and Charles Schwab Corp (NYSE:SCHW) (up 9%).

The Fund’s average overweight position in the Information Technology sector (23% compared to 19% for the S&P 500 sector) aided results since the sector outpaced the overall market. NetApp Inc. (NASDAQ:NTAP) (up 18%), eBay Inc (NASDAQ:EBAY) (up 13%), and Microsoft Corporation (NASDAQ:MSFT) (up 12%) were especially strong.

The Fund’s underweight position in the Utilities sector (no holdings compared to 3% for the S&P 500 sector) helped results since the sector lagged the overall market.

Dodge & Cox: Year-to-date Performance Review

The Fund underperformed the S&P 500 by 0.3 percentage points year to date.

Dodge & Cox: Key Detractors From Relative Results

Within the Health Care sector (up 9% compared to up 17% for the S&P 500 sector), GlaxoSmithKline (GSK) (down 11%) and the Fund’s lack of holdings in the Biotechnology industry (3% of the S&P 500, up 28%) detracted from results.

Weak returns from holdings in the Telecommunication Services sector (down 34% compared to up 7% for the S&P 500 sector) detracted from results. Sprint (S) (down 41%), a small position in the Fund, performed poorly.

The Fund’s underweight position in the Utilities sector (no holdings compared to 3% for the S&P 500 sector) hurt returns since the sector was stronger than the overall market.

Additional detractors included Coach (COH) (down 35%), ADT Corp. (ADT) (down 11%), and Aegon (AEG) (down 11%).

Dodge & Cox

Dodge & Cox: Key Contributors To Relative Results

Returns from holdings in the Energy sector (up 13% compared to up 3% for the S&P 500 sector) contributed significantly to results. Oil services companies Weatherford International (WFT) (up 34%), Baker Hughes (BHI) (up 19%), and Schlumberger (SLB) (up 14%) were strong.

Selected holdings in the Consumer Discretionary sector (up 3% compared to up 1% for the S&P 500 sector) helped relative results. Time Warner (TWC) (up 14%) performed well.

The Fund’s holdings in the Financials sector (up 9% compared to up 7% for the S&P 500 sector) contributed to results, especially Wells Fargo (WFC) (up 17%) and Charles Schwab (SCHW) (up 14%).

Additional contributors included Forest Laboratories (up 52% to date of sale), Hewlett-Packard (HPQ) (up 29%), Microsoft (MSFT) (up 26%), Merck (MRK) (up 21%), and Novartis (NVS) (up 20%).

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