Dodge & Cox International Stock Fund commentary for the second quarter ended June 30, 2015.
The Dodge & Cox International Stock Fund had a total return of –0.3% for the second quarter of 2015, compared to 0.6% for the MSCI EAFE (Europe, Australasia, Far East) Index. For the six months ended June 30, 2015, the Fund had a total return of 3.9%, compared to 5.5% for the MSCI EAFE. At quarter end, the Fund had net assets of $69.7 billion with net cash of 1.7%.
Dodge & Cox International Stock - Market Commentary
During the second quarter, developed equity markets modestly declined in local currency terms. However, the U.S. dollar’s depreciation against developed market currencies (e.g., euro, British pound) was a tailwind to performance: the MSCI EAFE Index was down 2% in local currency versus up 1% in U.S. dollars. Japan (up 5% in local currency)—the strongest region of the market—showed signs of economic progress supported by its aggressive stimulus program, increased capital expenditures, and improving business sentiment. Eurozone manufacturing activity strengthened to its highest level in four years, yet Europe was down 4% in local currency as Greece’s sovereign debt crisis escalated. Concerns about Greece could continue to create volatility for markets and the euro.
Emerging equity markets outperformed their developed market counterparts: the MSCI Emerging Markets Index increased 1% in both local currency and U.S. dollars. China was one of the best-performing emerging market countries for the quarter (up 6% in local currency), benefiting from stimulus measures (e.g., rate cuts, liquidity initiatives) and the government’s efforts to further liberalize capital markets. The Chinese equity market, however, has declined meaningfully from its peak in mid-June.
While international equity valuations have trended higher, we believe they remain reasonable: the MSCI EAFE traded at 15.0 times forward earnings on June 30, close to its 20-year historical average of 16.0 times. As we look for long-term investment candidates in both developed and emerging markets, we continue to see attractive opportunities. Corporate balance sheets and cash flows remain strong. However, we have a more tempered outlook for long-term equity returns given higher valuations today. The Fund is invested in companies that we believe have favorable prospects over our three- to five-year investment horizon. Acknowledging that both share prices and currencies can be volatile in the short term, we encourage shareholders to remain focused on the long term.
Dodge & Cox International Stock - Second Quarter Performance Review
The Fund underperformed the MSCI EAFE by 0.9 percentage points for the quarter.
Key Detractors From Relative Results
- The Fund’s average overweight position (16% versus 5%) and holdings in the Information Technology sector (down 7% compared to down 1% for the MSCI EAFE sector) significantly hurt performance. Ericsson (down 16%), Samsung Electronics (down 12%), and TE Connectivity (down 10%) were among the detractors.
- Weak returns from the Fund’s emerging market Financials holdings (down 5%) hindered results, especially Kasikornbank (down 20%) and BR Malls (down 9%).
- The Fund’s holdings in the Industrials sector (down 3% compared to flat for the MSCI EAFE sector) detracted from results. Tyco International (down 10%), Schneider Electric (down 9%), and Philips (down 8%) were particularly weak.
- Additional detractors included Teck Resources (down 27%) and Bayerische Motoren Werke (down 11%).
Key Contributors To Relative Results
- In Europe & UK Financials, certain holdings helped performance, especially Lloyds Banking Group (up 16%) and Barclays (up 14%).
- The Fund’s overweight position and holdings in the Media industry (up 4% compared to up 3% for the MSCI EAFE industry) contributed to results. Grupo Televisa (up 18%) performed particularly well.
- Strong returns from the Fund’s holdings in the Consumer Staples sector (up 8% compared to flat for the MSCI EAFE sector) aided performance, especially Imperial Tobacco Group (up 10%).
- Additional contributors included Petrobras (up 34%), Nintendo (up 14%), and MTN Group (up 11%).
Dodge & Cox International Stock - Year-To-Date Performance Review
The Fund underperformed the MSCI EAFE by 1.6 percentage points year to date.
Key Detractors From Relative Results
- The Fund’s average overweight position (16% versus 5%) and holdings in the Information Technology sector (down 3% compared to up 6% for the MSCI EAFE sector) meaningfully detracted from performance. Hewlett-Packard (down 24%), Baidu (down 13%), and Samsung Electronics (down 6%) were notable detractors.
- Weak returns from the Fund’s emerging market Financials holdings (down 14%) negatively impacted results. Yapi Kredi (down 28%), Kasikornbank (down 19%), Itau Unibanco (down 13%), and ICICI Bank (down 12%) performed poorly.
- The Fund’s holdings in the Industrials sector (down 2% compared to up 6% for the MSCI EAFE sector), particularly Tyco International (down 12%) and Philips (down 11%), hindered results.
- Additional detractors included Royal Dutch Shell (down 13%) and Lafarge (down 5%).
Key Contributors To Relative Results
- The Fund’s average overweight position (7% versus 2%) and holdings in the Media industry (up 14% compared to up 9% for the MSCI EAFE industry) aided performance. Naspers (up 19%) and Grupo Televisa (up 14%) were particularly strong.
- In Europe & UK Financials, certain Fund holdings contributed to results, especially Lloyds Banking Group (up 14%), Credit Suisse (up 12%), Standard Chartered (up 11%), and Barclays (up 10%).
- The Fund’s lack of holdings in the Utilities sector, the weakest sector of the market (down 3%), helped performance.
- Additional contributors included Nintendo (up 60%), Nissan Motor (up 20%), and Infineon Technologies (up 18%).
