Dodge & Cox 4Q14 Commentary

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Dodge & Cox’s market commentary for the fourth quarter 2014.

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Objectives

Dodge & Cox Fund seeks long-term growth of principal and income. A secondary objective is to achieve a reasonable current income.

Strategy

Dodge & Cox Fund invests primarily in a diversified portfolio of common stocks. In selecting investments, the Fund invests in companies that, in Dodge & Cox’s opinion, appear to be temporarily undervalued by the stock market but have a favorable outlook for long-term growth. The Fund focuses on the underlying financial condition and prospects of individual companies, including future earnings, cash flow, and dividends. Various other factors, including financial strength, economic condition, competitive advantage, quality of the business franchise, and the reputation, experience, and competence of a company’s management are weighed against valuation in selecting individual securities.

Risks

Dodge & Cox Fund is subject to stock market risk, meaning stocks in the Fund may decline in value for extended periods due to the financial prospects of individual companies or due to general market and economic conditions. Please read the prospectus for specific details regarding the Fund’s risk profile.

The Dodge & Cox Stock Fund had a total return of 2.2% for the fourth quarter of 2014, compared to 4.9% for the S&P 500 Index. For 2014, the Fund had a total return of 10.4%, compared to 13.7% for the S&P 500. At year end, the Fund had net assets of $60.3 billion with a cash position of 1.2%.

Dodge & Cox: Market Commentary

U.S. equity markets were strong during the fourth quarter: the S&P 500 posted its eighth consecutive quarter of gains and closed on December 31 near its record high. Utilities and Consumer Discretionary were the best performing sectors in the S&P 500. Energy was the weakest sector as global oil prices collapsed approximately 40% during the quarter due to lower-than-expected demand growth and modestly higher-than-expected supply growth. In the United States, economic activity continued to expand at a moderate pace amid improved labor market conditions (e.g., solid job gains, lower unemployment rate). Consumer sentiment reached a seven-year high; household wealth and spending rose while the housing recovery remained slow.

Dodge & Cox

Despite concerns about global economic growth, our long-term outlook for equities continues to be positive. The U.S. equity market remains reasonably valued: the S&P 500 traded at 15.2 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 and earnings growth, and believe cash returned to shareholders can continue to increase. Corporate balance sheets and cash flows continue to be strong. 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: Fourth Quarter Performance Review

Dodge & Cox Fund underperformed the S&P 500 by 2.7 percentage points during the quarter.

Dodge & Cox: Key Detractors From Relative Results

  • Returns from holdings in the Health Care sector (flat compared to up 7% for the S&P 500 sector) detracted from results. Pharmaceuticals holdings Sanofi (down 19%), Roche (down 8%), and Novartis (down 2%) hindered performance.
  • The Fund’s holdings in the Energy sector (down 19% compared to down 11% for the S&P 500 sector) were particularly weak. Key detractors included Weatherford International (down 45%), Apache (down 33%), and Schlumberger (down 16%).
  • The Fund’s holdings in the Financials sector (up 4% compared to up 7% for the S&P 500 sector) hurt relative returns. Laggards included AEGON (down 9%) and Capital One (up 2%).
  • Returns from holdings in the Industrials sector (up 3% compared to up 7% for the S&P 500 sector) detracted from results. Philips (down 9%) performed poorly.
  • Sprint (down 35%) and Google (down 9%) were also key detractors.

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Dodge & Cox: Key Contributors To Relative Results

  • Dodge & Cox Fund’s average overweight position (15% versus 12%) and holdings in the Consumer Discretionary sector (up 12% compared to up 9% for the S&P 500 sector) contributed to results. CarMax (up 43%), Target (up 22%), and Time Warner (up 14%) were strong.
  • The Fund’s lack of holdings in the Metals & Mining industry, a weaker area of the market (down 16%), helped performance.
  • Selected additional contributors included Express Scripts (up 20%), Corning (up 19%), UnitedHealth (up 18%), and Hewlett-Packard (up 14%).

Dodge & Cox: 2014 Performance Review

Dodge & Cox Fund underperformed the S&P 500 by 3.3 percentage points in 2014.

Dodge & Cox

Dodge & Cox: Key Detractors From Relative Results

  • Dodge & Cox Fund’s holdings in the Health Care sector (up 9% compared to up 25% for the S&P 500 sector) hurt results. GlaxoSmithKline (down 16%) and Sanofi (down 13%) lagged.
  • Returns from holdings in the Financials sector (up 13% compared to up 15% for the S&P 500 sector) hindered performance. Key detractors included AEGON (down 18%) and the Fund’s lack of holdings in the Real Estate Investment Trusts industry, which outpaced the overall market (up 31%).
  • The Fund’s underweight position in the Utilities sector (no holdings compared to 3% for the S&P 500 sector) detracted from results as it was the best performing sector of the market (up 29%).
  • Returns from holdings in the Industrials sector (up 4% compared to up 10% for the S&P 500 sector) hurt performance. Philips (down 19%), ADT Corp. (down 8%), and General Electric (down 7%) were weak.
  • Selected additional detractors included Sprint (down 61%), Coach (down 31%), Apache (down 26%), and Weatherford International (down 26%).

Dodge & Cox: Key Contributors To Relative Results

  • Dodge & Cox Fund’s holdings in the Consumer Discretionary sector (up 16% compared to up 10% for the S&P 500 sector) helped returns. CarMax (up 42%), Target (up 31% since date of purchase), and Time Warner (up 30%) were strong.
  • Returns from holdings in the Materials sector (up 14% compared to up 6% for the S&P 500 sector) aided performance. Dow Chemical (up 22% to date of sale) and the Fund’s lack of holdings in the Metals & Mining industry, a weaker area of the market (down 14%), were relative positives.
  • The Fund’s average underweight position in the Energy sector (9% compared to 10% for the S&P 500 sector) slightly contributed to results since the sector lagged the overall market.

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