Dodge & Cox Video transcript:
Charles Pohl: Diana, we were excited to launch our Global Bond Fund in 2014. Since 1931, when we introduced the Balanced Fund, we’ve introduced six mutual funds, and Dodge & Cox remains a highly focused organization with just six investment strategies.
Diana Strandberg: We also decided to close the International Stock Fund to new investors effective January 16, 2015. We continue to build our investment capabilities so that we can deliver strong long-term returns and a high level of client service.
Charles Pohl: And we were honored to have received Morningstar’s Fund Manager of the Year Award for the International Stock Fund.
Diana Strandberg: Charles, there were some big moves in the macro picture in 2014, particularly in the second half of the year. Oil prices plunged about 50% in response to slightly weaker demand, slightly higher supply and in a surprise to investors, Saudi Arabia decided not to cut production in response.
Charles Pohl: And interest rates fell around the world. In a number of the European countries, the shorter term rates actually went negative, as well as in Japan, and they reached levels that are quite low in the longer term historic perspective.
Diana Strandberg: The U.S. dollar also had a big move. The trade-weighted dollar was up about 10% for the year, and while equity markets were positive in local currency terms, it was a significant headwind for foreign markets when translated into dollars.
Charles Pohl: And we continue to find interesting opportunities around the world based on our bottom-up research, and we continue to try to understand how some of these macroeconomic changes affect the risks and opportunities that are created for some of these companies that we’re investing in. The U.S. equity market was a standout performer in 2014.
Diana Strandberg: Yeah, it was up almost 14% and the S&P 500 ended the year at a record level.
Charles Pohl: And every sector, except for Energy, was in positive territory.
Diana Strandberg: Against that market backdrop, the Stock Fund was up 10% compared to a 14% return for the S&P 500.
Charles Pohl: And much of that underperformance occurred in the fourth quarter of 2014, and the Stock Fund was and remains positioned fairly aggressively for global growth, and it was hurt by the sharply rising dollar in the fourth quarter.
Diana Strandberg: That’s true. The Pharma industry was a detractor from performance and in particular, Sanofi (SNY) and GlaxoSmithKline (GSK), while they had some company-specific factors around pricing pressure on major drugs, for example, the stronger dollar was a headwind to those foreign-domiciled firms in the Stock Fund portfolio.
Charles Pohl: And the fact that the firm had no holdings in the Utilities sector also hurt its performance as well as the underperformance of a couple of individual names: Coach (COH), which had some problems unique to the company, and Apache, an energy company that was hurt by the sharply declining oil prices.
Diana Strandberg: Charles, as you know, patience and persistence are a hallmark of our long-term investment approach. Hewlett-Packard (HPQ) was the largest contributor of performance for the second year in a row.
Charles Pohl: And Hewlett also was a very strong contributor to the performance of the International Stock Fund.
Diana Strandberg: That’s true, Charles. In fact, the International Stock Fund had one of its best years of relative performance. It outperformed its benchmark by five percentage points for the year. It was modestly positive while the MSCI EAFE was down 5%. The fourth quarter was also a difficult quarter for the International Stock Fund for many of the factors that we already discussed with the Stock Fund. Falling interest rates, a stronger dollar, and plunging oil prices impacted many of the Fund’s holdings. Broadly, emerging market holdings in the Fund were up 14% and as you’ll remember, we were building positions in a number of these holdings in the last half of 2013 and the beginning of 2014, and they helped the Fund’s performance considerably. ICICI Bank in India, Kasikornbank in Thailand, Baidu, and China Mobile were strong contributors to the Fund’s performance.
Charles Pohl: And now let’s shift to where we’re finding opportunities in the investment universe. Those of you who know us well will know that we are attracted by declining valuations.
Diana Strandberg: That’s true. Our approach tends to look contrarian because we become more skeptical as other investors become overly optimistic and we tend to have greater interest when investors are pessimistic.
Charles Pohl: And one area that has declined sharply and has thus attracted our attention is the Energy sector, and one company in particular of interest to us is Schlumberger (SLB), which has been a significant holding across all the portfolios for some time. Schlumberger is especially interesting to us not only because of its lower valuation now but also because it remains the leading company in the Oil Services industry, and most importantly, the technological leader in the industry, spending twice as much on R&D as its next nearest competitor. Schlumberger also has some very strong positions in some of the most interesting energy markets around the world, particularly the Middle East and Russia, and it earns higher margins in these markets than it does in the United States.
Diana Strandberg: No, it’s true. Schlumberger is an industry leader and they enjoy excellent relationships with leading oil companies and oil producing nations. When we look at a company like Schlumberger, rather than trying to predict exactly what the outlook will be over the next three to five years, we think about a range of scenarios to evaluate the risks and opportunities that we face making the investment. And so we are making forecasts of the world cost curve and how that might change over time, as well as different oil price scenarios to assess how Schlumberger’s revenues and earnings might be affected in different pricing scenarios. So we have to recognize a key risk for our investment is if oil prices stay lower for longer.
Charles Pohl: And of course we continue to investigate the impact that the lower oil prices have on all the names in the portfolio.
Diana Strandberg: Charles, another area that we were adding to in 2014 was in the Financials sector. Standard Chartered, in particular, was a meaningful add in the International Stock Fund.
Charles Pohl: Our long-term approach leads us to tend to increase positions very gradually when we see declining valuations, more attractive situations. These attractive situations often occur as a result of turmoil in particular markets and uncertainty that cause other investors to shun them. And, you know, we’ve seen, with respect to Standard Chartered (LSE:STAN), a lot of uncertainty in the emerging markets and particularly caused by sharp declines in global commodity prices.
Diana Strandberg: No, that’s true. Standard Chartered is domiciled in the UK. It has a local presence in over 70 countries around the world and in particular, an unparalleled footprint in the emerging markets. In fact, about a third of its deposits come from Greater China. So falling commodity prices, lower interest rates, more regulatory uncertainty around capital levels have all weighed on the share price and the valuation of the company. It’s among one of the least expensive banks in the world. It trades below