Dodge & Cox Second Quarter 2014 Commentary
The Dodge & Cox Stock Fund had a total return of 4.5% for the second quarter of 2014, compared to 5.2% for the S&P 500 Index. For the six months ended June 30, 2014, the Fund had a total return of 7.0%, compared to 7.1% for the S&P 500. At quarter end, the Fund had net assets of $58.4 billion with a cash position of 0.8%.
MARKET COMMENTARY
In the second quarter, U.S. equity markets continued to rise: the S&P 500 posted its sixth consecutive quarter of gains. While every sector of the index generated positive returns, Energy and Utilities were the strongest. In the United States, growth in economic activity rebounded, which assuaged concerns the economy was losing momentum after a slow start to the year. The labor market and household spending showed further signs of improvement, and businesses invested more in fixed assets. However, the housing recovery remained slow and turmoil in the Middle East modestly increased oil prices. Corporate balance sheets and cash flows continue to be robust; we remain optimistic about the long-term prospects for corporate earnings growth.
Despite strong returns in recent years, we believe U.S. equity market valuations remain reasonable relative to long-term averages: the S&P 500 traded at 15.6 times forward estimated earnings with a 2.0% dividend yield at quarter end. The Fund’s holdings (14.2 times forward earnings) continue to 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.
SECOND QUARTER PERFORMANCE REVIEW
The Fund underperformed the S&P 500 by 0.7 percentage points during the quarter.
KEY DETRACTORS FROM RELATIVE RESULTS The Fund’s average overweight position (19% versus 13%) and holdings in the Health Care sector (up 1% compared to up 5% for the S&P 500 sector) hurt relative results. Express Scripts (down 8%), Pfizer (down 7%), and Roche (down 1%) performed poorly. Weak returns from holdings in the Information Technology sector (up 4% compared to up 7% for the S&P 500 sector) hindered performance, especially eBay (down 9%). The Fund’s average overweight position in the Financials sector (23% compared to 16% for the S&P 500 sector), the worst performing sector of the market (up 2%), hurt returns. Bank of America (down 11%) and Charles Schwab (down 1%) were weak. Coach (down 31%) was also a detractor.
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KEY CONTRIBUTORS TO RELATIVE RESULTS
Strong returns from holdings in the Energy sector (up 19% compared to up 12% for the S&P 500 sector) contributed to results. Weatherford International (up 32%), Apache (up 22%), and Schlumberger (up 21%) were notable contributors. The Fund’s holdings in the Industrials sector (up 8% compared to up 4% for the S&P 500 sector) aided returns. ADT Corp. (up 17%) and FedEx (up 14%) performed well. The Fund’s average overweight position in the Media industry (11% compared to 4% for the S&P 500 industry), which outperformed the overall market, helped returns. Time Warner (up 13%) was particularly strong. Symantec (up 15%) was also a contributor.
YEAR-TO-DATE PERFORMANCE REVIEW
The Fund paced the S&P 500 year to date.
KEY DETRACTORS FROM RELATIVE RESULTS
The Fund’s underweight position in the Utilities sector (no holdings compared to 3% for the S&P 500 sector), the strongest sector of the market (up 19%), hurt results. The Fund’s holdings in the Industrials sector (flat compared to up 4% for the S&P 500 sector) hindered performance. ADT Corp. (down 13%) was especially weak. Returns from holdings in the Information Technology sector (up 8% compared to up 9% for the S&P 500 sector) modestly detracted from results. NetApp (down 11%), eBay (down 9%), and Symantec (down 1%) lagged. Selected additional detractors included Coach (down 38%) and Goldman Sachs (down 5%).
KEY CONTRIBUTORS TO RELATIVE RESULTS
The Fund’s holdings in the Energy sector (up 25% compared to up 13% for the S&P 500 sector) contributed significantly to results. Oil Services holdings, Weatherford International (up 48%), Baker Hughes (up 35%), and Schlumberger (up 32%), were particularly strong. The Fund’s holdings in the Materials sector (up 17% compared to up 8% for the S&P 500 sector) helped returns. Dow Chemical (up 18%) and Celanese (up 17%) performed well. Selected additional contributors included Forest Laboratories (up 52% to date of sale), Hewlett-Packard (up 22%), and Wells Fargo (up 17%).
