We asked Dodge & Cox's Dana Emery to answer our 10 Questions.
View the video version of this interview here.
Dodge & Cox managers tend to stick around for a while. You've been a manager there for 20 years. What is it about Dodge & Cox that makes it a great place to work?
The integrity of the firm. The interest is always on what's best for our shareholders. That type of focus makes it a high-integrity place to work.
What's the biggest challenge of being a fixed-income manager in today's environment?
Staying constantly alert to the various things that can affect your investments. Our strategy is to be careful about the securities we put into our portfolio in the first place and then have a lot of eyes watching that investment and looking at various changes not only in the bond prices but how the issuers are trading in different marketplaces. Also, we pay a lot of attention to what's going on in the regulatory framework.
Have you had to adapt your strategy to the volatile environment of the past 24 months?
We had to hunker down and do even more in-depth work and make sure that we were doing even more rigorous downside analyses.
How have you taken advantage of the volatility?
There was tremendous volatility in corporate yield premiums. We added about 10 percentage points to our corporate securities in our Income fund through very high-quality issuers. It was an unusual environment where we could add companies that typically would not trade at the yield premiums that they were at.
How do you mitigate the risk of having so much in corporates?
The way we manage risk is having a thorough understanding of the underlying securities. We wanted to look at the liquidity profile of the company, the funding profile, any kind of debt maturities, and make sure the issuer could weather this liquidity crisis.
What concerns you the most in the near term?
The markets have come very far very fast. I worry about a bump in the road-further write-offs, for example, or more problems in the banking industry.
What is your long-term worry?
Inflation, and that it will catch investors by surprise.
What's the biggest mistake most fixed-income investors make?
As we saw in this latest cycle, they focus too much on ratings as an indicator of investment quality. There is no substitute for doing your own work.
Who has influenced you the most as an investor?
My colleagues. It's a real team approach at Dodge & Cox. We are constantly exchanging ideas, and the ideas are put to the jury of your peers. You have to go out and defend them.
What is the best book you've read in the past year?
In Fed We Trust, by David Wessel, to better understand what happened and what might we do differently in the future.