Dodge & Cox Stock Fund commentary for the fourth quarter ended December 31, 2015.

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Objectives

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

Strategy

The Fund invests primarily in a diversified portfolio of equity securities. 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

The Fund is subject to market risk, meaning holdings 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.

Dodge & Cox Stock Fund

Dodge & Cox Stock Fund

The Dodge & Cox Stock Fund had a total return of 4.6% for the fourth quarter of 2015, compared to 7.1% for the S&P 500 Index. For 2015, the Fund had a total return of –4.5%, compared to 1.4% for the S&P 500.

Dodge & Cox Stock Fund – Market Commentary

Despite a significant selloff in August and September, U.S. equity markets rebounded during the fourth quarter of 2015 to finish the year up over 1%. In December, the U.S. Federal Reserve raised its target range for the federal funds rate for the first time in nine years. This action, a 0.25% increase, ended a historic seven-year period of a nearly 0% federal funds rate aimed at stimulating the economy.

In 2015, U.S. economic activity continued to expand at a moderate pace: household spending and business investment increased, and the housing market strengthened. Labor market conditions also continued to improve, with solid job gains and reduced unemployment. Nevertheless, the stronger U.S. dollar and weaker demand for U.S. exports tempered growth. China’s slowing economic growth contributed to depressed commodity prices and weighed on the global economy. More broadly, global oil prices fell more than 30% during the year.

Across equities, value stocks (the lower valuation portion of the market) underperformed growth stocks (the higher valuation portion of the market) by one of the widest spreads since the global financial crisis. The Fund, which is value-oriented, was significantly affected by this performance divergence; many of the S&P 500’s higher-valuation growth companies, not held by the Fund, outperformed significantly. In addition, some individual holdings (identified below) meaningfully detracted from results for the year, including energy holdings, which were negatively impacted by falling oil prices.

During the year, we intensively revisited and retested our thinking on many of the Fund’s holdings. As part of our bottom-up fundamental research process, a broad cross section of our team thoroughly investigated individual company holdings, which included traveling to conduct on-the-ground due diligence.

This comprehensive process led us to reaffirm our view that the Fund’s holdings have attractive valuations and favorable growth prospects over our three- to five-year investment horizon. Moreover, we continue to find attractive long-term investment opportunities. On December 31, the Fund’s portfolio of 63 equity securities traded at 13.8 times forward estimated earnings, a significant discount to the S&P 500 (17.4 times forward estimated earnings). We believe the portfolio is positioned to benefit from long-term global growth opportunities.

Our experienced and stable team has weathered past periods of market turbulence by remaining steadfast in our investment approach. We continue to invest with a long-term horizon, guided by our belief that owning companies at attractive valuations can generate solid returns over time.

Dodge & Cox Stock Fund – Fourth Quarter Performance Review

The Fund underperformed the S&P 500 by 2.5 percentage points for the quarter.

Key detractors from Relative Results

  • Returns from holdings in the Health Care sector (up 2% compared to up 9% for the S&P 500 sector) detracted from results, especially Sanofi (down 10%) and Novartis (down 6%).
  • The Fund’s holdings in the Consumer Discretionary sector (flat compared to up 6% for the S&P 500 sector) hurt returns. Media holdings Time Warner (down 5%) and Comcast (flat) performed poorly.
  • Wal-Mart, the Fund’s only holding in the Consumer Staples sector (down 5% compared to up 8% for the S&P 500 sector) hurt returns.
  • The Fund’s holdings in the Energy sector (down 2% compared to flat for the S&P 500 sector) detracted from results. Oil services companies Baker Hughes (down 11%) and National Oilwell Varco (down 10%) were weak.
  • Additional detractors included NetApp (down 10%), HP Inc. (down 4%), and Capital One (a large position that was flat).

Key contributors to Relative Results

  • Returns from holdings in the Information Technology sector (up 12% compared to up 9% for the S&P 500 sector) helped results. Key contributors included Microsoft (up 26%), Alphabet (up 25%), and Hewlett Packard Enterprise (up 5% from the date of Hewlett-Packard’s split into two companies).
  • The Fund’s underweight position in the Utilities sector (no holdings versus 3% for the S&P 500 sector) aided performance since this area of the market was relatively weak (up 1%).
  • Additional contributors included Charles Schwab (up 16%) and Apache (up 14%).

Dodge & Cox Stock Fund – 2015 Performance Review

The Fund underperformed the S&P 500 by 5.9 percentage points in 2015.

Key detractors from Relative Results

  • The Fund’s holdings in the Consumer Discretionary sector (down 6% compared to up 10% for the S&P 500 sector) hindered performance. Media holdings Twenty-First Century Fox (down 29%) and Time Warner (down 23%) were particularly weak.
  • Wal-Mart, the Fund’s only holding in the Consumer Staples sector (down 27% compared to up 7% for the S&P 500 sector), hurt returns.
  • The Fund’s holdings in the Information Technology sector (flat compared to up 6% for the S&P 500 sector) detracted from results. HP Inc. (down 37%) and NetApp (down 35%) performed poorly.
  • The Fund’s holdings in the Energy sector (down 26% compared to down 21% for the S&P 500 sector) hurt results. National Oilwell Varco (down 47%), Apache (down 28%), and Schlumberger (down 16%) were key detractors. Capital One (down 11%) was also a detractor.

Key contributors to Relative Results

  • The Fund’s average overweight position (6% versus 3%) and holdings in the Health Care Providers & Services industry (up 18% compared to up 12% for the S&P 500 industry) helped returns. Cigna (up 42%) and UnitedHealth Group (up 18%) were particularly strong.
  • In the Materials sector (up 14% compared to down 9% for the S&P 500 sector), the Fund’s only holding, Celanese, and lack of holdings in the Metals & Mining industry (down 39%) contributed to results.
  • Additional contributors included Alphabet (up 45%), Time Warner Cable (up 25%), Maxim Integrated Products (up 23%), Microsoft (up 23%), and Charles Schwab (up 10%).