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By Laura Lallos | 04-01-2014 05:00 PM

Low Turnover Creates High Marks for Dodge & Cox Stock

Long security-holding periods and high retention of in-house personnel have contributed to this Gold-rated fund's category-leading performance.

Laura Lallos: Hi, I'm Laura Lallos, a fund analyst here at Morningstar. I cover Dodge & Cox, a fund company that's earned a number of Gold ratings in our Analyst Rating system. We are pleased to have with us here today Charles Pohl and Diana Strandberg, to talk about the strategy that Dodge & Cox has used to such success for many years.

Maybe we could start by just talking about your primary approach to picking stocks. What are you looking for in general?

Charles Pohl: Our process is a combination of valuation and fundamentals. And we have a team of analysts. Their coverage is split up by industry, and they spend a lot of time looking at individual companies and trying to really understand a few key things about them. The strength of the business franchise; the quality of the management, in particular, the interest that the management has in building long-term shareholder value; and the potential for growth in future earnings and cash flow.

And then we take those fundamentals, and we weigh that against the valuations that we see in the marketplace. We are very attracted to low valuations. We are value buyers. We like to buy things that are cheap, but we want to buy things with good fundamentals at unreasonably low prices.

Lallos: What are some of the risks of this process? I imagine one of them would be buying too soon or needing to have patience.

Diana Strandberg: We do have to have a lot of patience and persistence, as a long-term investor, and our outlook is typically three to five years, as we are evaluating the merits of a particular investment. When you look at our turnover, our holding periods are typically more on the order of seven to 10 years. But patience and persistence are a hallmark of what we bring to the table.

Particularly, when you are buying companies that are inexpensive, there are usually reasons that other investors are concerned and that those concerns have depressed the valuation. And so, we have to dig in and do research so that we understand the fundamentals, what's priced in, and what might not be priced in. We want to bring that into a group decision-making process. That's where we bring some judgment and experience into the room. That helps us build conviction and where we have conviction, then we have the ability to remain persistent if the thesis remains intact.

The way that we try to mitigate about being too early is, we nudge positions, so that we are not trying to pick the absolute bottom or the absolute top. We will start typically with let's say a 50-basis-point position and then we'll have a series of analyst reviews with policy committee discussion, as we are building the position typically in 30- to 50-basis-point moves.

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