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Bank of America Has a New Fan: Dodge & Cox

BlackRock hopes new hire will help fix Total Return Bond fund and more.

Morningstar Fund Analysts, 10/20/2011

True to form, Dodge & Cox DODGX is embracing the unloved and the controversial. According to its recently released third-quarter holdings, the fund added almost 77 million shares of Bank of America BAC in the third quarter, just as fears about the bank's capital position sent the stock into a tailspin. The fund had added the banking giant to its holdings in the second quarter with just about one million shares. Meanwhile, the fund continued its 2011 trend of increasing its Hewlett-Packard HPQ position even as investor doubt about the firm's growth prospects built to a fever pitch.

Dodge & Cox has a record of success with contrarian bets. For example, it bought Motorola in 2003, before the firm's split into Motorola Mobility and Motorola Solutions. The stock experienced a deep decline after 2006, but the fund held on to its stake, which paid off earlier this year when Motorola Mobility was acquired by Google at a 63% per-share premium.

Meanwhile, the stock of Bank of America, which is 1.4% position in the fund, has lost more than 50% for the year to date. The firm's 2008 acquisition of Countrywide Financial entangled it in billions of dollars of mortgage-related liabilities. Hewlett-Packard, which is a 3.8% position in the fund, has lost 40% for the year to date amid investor uncertainty about the future of the firm's computer business.

While the managers of Dodge & Cox Stock do not invest based on sector calls, their decisive move into Bank of America corresponded with the fund's adding to its positions in several other financial stocks in the third quarter. A number of financial institutions are still trading below book value after being punished in 2008 even though they have more capital, fewer bad loans, and more secure sources of funding than they did three years ago. As is the case with the Bank of America, however, the fund added to positions in financial firms that continue to grab negative headlines, like Goldman Sachs GS and Bank of New York Mellon BK.

The case of Hewlett-Packard demonstrates a particularly long-term horizon and strong conviction. It has owned the stock through multiple iterations of the firm's management-related turmoil, buying it at times during its darkest hours and trimming following rallies. For now, the stock is a drag on fund performance, but the fund's army of veteran analysts still see competitive advantages at the tech giant.

Is a New Manager Really the Answer for BlackRock Total Return?
BlackRock Total Return MAHQX is getting a new manager--again. A Bank of America veteran is joining a team that already has three skippers, continuing the fund's string of management changes. The changes reflect BlackRock's ongoing attempts to improve performance of the fund, which has floundered since its December 2001 inception. The revolving door of managers at the fund hasn't helped, and the fund's returns since its inception rank near the bottom of its intermediate-term bond category.

The latest recruit is Bob Miller, whose last position at Bank of America was managing an internal multiasset fund for several years. He left in 2007 to help start Round Table Investment Management, a hedge fund firm, where he managed global macro and long/short strategies until 2009. He had been out of the investment business since then. Returns were not made available for the funds that he managed at Bank of America and Round Table.

While there is no hard evidence yet that Miller's addition will help the fund's performance, it's clear that BlackRock wanted to make sure that Miller worked well with the team and understood the fund's strategy before officially naming him manager. BlackRock hired Miller in July with the intention of making him a comanager of Total Return, but he has since spent that time working with the team until being named manager this week.

Morningstar fund analysts cover more than 1,700 mutual funds and write regular commentary covering fund industry news, fund investing trends, picks, portfolio planning, international investing, and more.
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