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Dodge & Cox Is a Model Fund Family

Recent changes at Dodge & Cox serve to underscore continuity of management at the firm.

Laura Lallos, 12/03/2013

Morningstar recently issued a new Stewardship Grade for Dodge & Cox. The firm's overall grade--which considers corporate culture, fund board quality, fund manager incentives, fees, and regulatory history--is an A. What follows is Morningstar's analysis of the firm's corporate culture, for which Dodge & Cox receives an A. This text, as well as analytical text on the other four Stewardship Grade criteria, is available to subscribers of Morningstar's software for advisors and institutions: Morningstar Principia®, Morningstar Advisor Workstation(SM), Morningstar Office(SM), and Morningstar Direct(SM).

In May 2013, Dana Emery was named CEO and president, and Charles Pohl became chairman. The two had been co-presidents since 2011, and they have spent their careers at the firm. (Emery joined in 1983 and Pohl in 1984.) Emery continues to serve as director of fixed income, and Pohl remains the firm's chief investment officer. Chairman emeritus Kenneth Olivier, who was named CEO in 2010 and chairman in 2011, remains chairman of the funds' board of trustees. Meanwhile, former chairman John Gunn remains a member of three of Dodge & Cox's four investment policy committees.

There are plenty of experienced people advancing up the ranks after Emery and Pohl. The median tenure of the firm's equity and fixed-income analysts and managers is more than 10 years. Among members of the four investment policy committees that manage the funds, the average tenure at the firm ranges from 18 to 25 years.

More important, all of the top executives began their careers as analysts or managers at the firm and are still involved in the investment process. Just as they invest with a three- to five-year time frame in mind, they take a long-term view in running their business, planning transitions several years in advance, and keep their clients' interests in mind. Although assets under management have declined since 2007, Dodge & Cox has continued to add to its investment team and build its compliance and operations staff to handle an increasingly complex regulatory environment. The firm now has more than 55 portfolio managers and analysts, and its staff overall has grown from 176 at the end of 2007 to 232 at the end of 2013's third quarter.

A key to Dodge & Cox's success has been its ability to attract and retain qualified people who share the same investing temperament and ability to work as part of a team. The firm has a five-year manager-retention rate of 98%, among the highest rates in the mutual fund industry, according to Morningstar data. Because of its strong reputation and track record, the firm has been able to increase its staff over the years with minimal recruiting. Even in the throes of the financial crisis and bear market of 2007-09, when the firm's funds suffered poor performance and outflows, it was able to attract and keep people. Dodge & Cox has kept hiring one or two new graduates a year from top business schools and has given newcomers time to imbibe the firm's approach ethos. The firm also supports its analysts and tracks prospective talent via an extensive research assistant program: Every analyst has an assistant who works on a two-year contract between college and business school. Some of these assistants return to join the analyst staff after graduate school.

Investment personnel can be invited to become owners of the firm after several years and only rarely is someone not extended an invitation--a rigorous recruiting process, often beginning with an internship, ensures that new hires fit comfortably within the firm's consensus-driven investment culture. Equity in the firm, which partners buy and sell at book value (which is based on firm revenue and profits and is independently calculated and audited by PricewaterhouseCoopers), can become a big portion of compensation and an incentive to stick around.

No firm keeps everybody. As Dodge & Cox has grown, people have been able to make more money faster. Some of them might feel secure enough to break off on their own. It has happened at least once--when Kouji Yamada, a veteran analyst and manager of Dodge & Cox International Stock DODFX, left in 2007 to start his own firm. But even if Dodge & Cox's employee turnover increases in the future, it's still likely to be below average and anomalous. For example, Yasha Gofman, another experienced member of the investment policy committee running International Stock, resigned in 2011 for personal reasons requiring him to relocate.

Dodge & Cox has learned that it will do well if its clients do well. The firm was founded near the beginning of the Great Depression, and patience is ingrained in its culture. Its regulatory disclosures and shareholder communications are clear and consistent. For instance, even before Dodge & Cox Stock DODGXDodge & Cox Balanced DODBX, and Dodge & Cox Income DODIX slipped into slumps in 2007, the funds' managers cautioned investors against believing that the offerings' previous decade of strong absolute and relative returns could continue uninterrupted. That didn't prevent some shareholders from feeling angry and frustrated with the shop's travails, but at least the firm tried to manage expectations.

Laura Lallos is a former Morningstar analyst and editor, and a frequent contributor to Morningstar Advisor magazine.

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