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Choosing a Dodge & Cox Fund Is Just the Start

Patience and commitment are also required for shareholders to succeed.

Gregg Wolper, 09/10/2013

It might be tough to have confidence in an actively managed fund whose portfolio in recent years has featured J.C. Penney JCP, Nokia NOK, Hewlett-Packard HPQ, and Dell DELL. Portfolio managers are supposed to select winners, not amass a collection of troubled companies with sketchy prospects and painful stock performance. One might guess that this was the portfolio of a struggling stock-picker who should find a different career, or perhaps that of an attention-seeking hedge-fund giant, gambling that he can force shakeups in management or strategy and then profit from a quick pop in the stock price.

Neither is the case. Instead, the manager in question is Dodge & Cox, a very successful firm hardly considered one of the investment world's daredevils, and certainly not an attention seeker. Its portfolio managers aren't hoping for rapid turnarounds; they aim to produce solid returns over decades. In spite of owning challenged companies which, in some cases, have been disappointing investments, the long-term performance of Dodge & Cox's stock funds has been strong. But the ride has not been easy--the funds suffered even more than most rivals in the devastating bear market from late 2007 to early 2009 and again in 2011's rough conditions.

Investors can draw three useful lessons from this. They apply not just to this firm, but to other prominent funds as well.

1) Dodge & Cox Is Not Conservative
In some ways this shop can come across as a bastion of staid, cautious investing. Its managers are soft-spoken and avoid controversial statements. Although they own substantial chunks of prominent firms, you won't see them quoted in the media hectoring company managements. They're not much interested in expansion, either: After 80-plus years, the firm's lineup consists of just five funds. The managers--who tend to stay at Dodge & Cox throughout their careers--focus on buying stocks at what they consider cheap prices and then holding them a long time.

But appearances can be deceiving. When it comes to their funds' portfolios, these managers are not conservative. Companies exhibiting strong and steady growth, with few obvious issues or problems, tend to cost more than these managers are willing to pay. So they often buy firms facing distinct and well-chronicled challenges.

Dodge & Cox doesn't scoop up every downtrodden company, of course. They look for those whose troubles are overblown or should ease in a reasonable amount of time, in the managers' opinion, and those that have solid long-term prospects overall. That said, sometimes their choices can leave you scratching your head, asking "What the heck do they see in that one?"

Their boldness doesn't stop there. For years, the firm's foreign-focused fund, Dodge & Cox International DODFX, has stashed a much higher percentage of assets in emerging-markets stocks than most peers have. Not every company based in an emerging market is inherently risky, of course, but emerging markets do tend to be more volatile and can fall more sharply when global fears rise. In a similar vein, Dodge & Cox Balanced DODBX, which tempers its exposure to the stock market with a fixed-income component, has long devoted a much higher percentage of its assets to equities than balanced-fund investors typically expect.

With all this in mind, it's not surprising that Dodge & Cox Stock DODGX, Dodge & Cox International, Dodge & Cox Global DODWX, and Dodge & Cox Balanced all lagged well behind their peers in the 2007-09 bear market and in 2011's weakness.

Gregg Wolper is an editorial director and senior mutual-fund analyst at Morningstar.

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