Value Investing

Dodge & Cox Stock Fund Q1 Letter: WFC Largest Position

Dodge & Cox Stock Fund letter to investors for the first quarter ended March 31, 2015.

The Dodge & Cox Stock Fund had a total return of –1.2% for the first quarter of 2015, compared to 1.0% for the S&P 500 Index. At quarter end, the Fund had net assets of $59.4 billion with net cash of 0.4%.

Dodge & Cox Stock Fund

Dodge & Cox Stock Fund: Market Commentary

U.S. equity markets continued to rise during the first quarter: the S&P 500 posted its ninth consecutive quarter of gains. Interest rates remained low in the United States and around the world. Oil prices continued to decline, which aided U.S. household purchasing power. In the United States, labor market conditions improved, evidenced by lower unemployment and job gains, and businesses invested more in fixed assets. Despite these positive economic developments, overall U.S. economic growth moderated slightly as the recovery in the housing sector remained slow and export growth weakened. The U.S. dollar continued to strengthen (e.g., up 13% versus the euro during the quarter), which devalued the foreign earnings of large, U.S.-based multinational firms. We believe U.S. equity market valuations are reasonable, although they have increased and are above the long-term average. The S&P 500 traded at 17.5 times forward estimated earnings with a 2.0% dividend yield at quarter end.

Dodge & Cox Stock Fund

Corporate balance sheets and cash flows continue to be strong despite modest earnings growth expectations for 2015. We continue to have a positive, albeit more modest, outlook for equities over our three- to five-year investment horizon and remain optimistic about the long-term prospects for corporate sales growth and earnings growth. In our opinion, the Fund’s portfolio is well positioned to benefit from long-term global growth opportunities. Acknowledging that markets can be volatile in the short term, we encourage shareholders to remain focused on the long term.

Dodge & Cox Stock Fund: First Quarter Performance Review

The Fund underperformed the S&P 500 by 2.2 percentage points for the quarter.

Dodge & Cox Stock Fund

Key Detractors From Relative Results

  • The Fund’s holdings in the Information Technology sector (down 6% compared to up 1% for the S&P 500) hurt returns. Key detractors included Hewlett-Packard (down 22%), NetApp (down 14%), Microsoft (down 12%), and Symantec (down 8%).
  • The Fund’s holdings in the Consumer Discretionary sector (down 1% compared to up 5% for the S&P 500 sector) detracted from results. Twenty-First Century Fox (down 12%) performed poorly.
  • Returns from holdings in the Financials sector (down 3% compared to down 2% for the S&P 500 sector), combined with a higher average weighting (24% versus 16%), hindered performance. Bank of America (down 14%) and Capital One (down 4%) were particularly weak.
  • Energy equipment and services company National Oilwell Varco (down 23%) was also a key detractor.

Key Contributors To Relative Results

  • The Fund’s average overweight position (18% versus 15%) and holdings in the Health Care sector (up 9% compared to up 7% for the S&P 500 sector) aided performance. Key contributors included Cigna (up 26%), UnitedHealth Group (up 17%), Novartis (up 9%), and Sanofi (up 8%).
  • The Fund’s underweight position in the Utilities sector (no holdings compared to average 3% for the S&P 500 sector), the weakest sector of the market (down 5%), contributed to results.
  • Selected additional contributors included ADT Corp. (up 15%), TE Connectivity (up 14%), and Baker Hughes (up 14%).

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