Video Reports

Embed this video

Copy Code

Link to this video

Get LinkEmbedLicenseRecommend (-)Print
Bookmark and Share

By Sarah Bush | 04-02-2014 03:00 PM

Dodge & Cox Income Playing Defense Against Rates

Management's foresight to have less rate sensitivity in the portfolio allowed the Gold-rated fixed-income fund to generate a positive return in 2013.

Sarah Bush: Hello, my name is Sarah Bush. I'm an analyst with Morningstar, and today I'm here with Tom Dugan, who is associate director of fixed income at Dodge & Cox and a member of the investment policy committee there.

Thanks very much for joining me today, Tom.

Tom Dugan: Nice to be here, Sarah.

Bush: We're in a challenging environment for bond investors. Absolute yields are very low. We have just seen a huge rally in risk assets coming off of 2008 lows. In that context, we will talk just a little bit about where you're finding opportunities today, and I thought interest-rate risk and yield-curve positioning might be a good place to start.

Dugan: Interest-rate risk really rose to that fore in 2013. That may be the primary story about bond markets. People have talked about it for a long time: "When will interest rates finally go up?" And in 2013, they finally went up. We had a negative return for the broad bond market in 2013, the first since 1999 and the worst calendar-year returns since 1994. Overall, the bond market was down 2%.

The Dodge & Cox Income fund came out of 2013 with actually a positive return, slightly above zero. We managed those challenges pretty well, and the biggest factor in that was how we managed interest-rate risk. We came into the year defensively positioned, which is to say a portfolio that had less interest-rate risk and a lower portfolio duration than the broad bond market. And that protected the portfolio on average from the price declines that the index had, so it was very beneficial.

What is interesting, and of course, our interest-rate risk and duration strategy is an evolving thing, and as 2013 evolves--and rates did rise primarily in the middle part of the year--we always revisit that positioning. What we did was with rates higher, and in effect the yield give-up associated with featuring generally shorter, fewer interest-rate-risky securities in the portfolio became even higher, we thought was appropriate to move out our duration somewhat.

We remained defensively positioned overall. We're concerned about interest-rate increases from here even though we are quite a bit higher than where we were, for instance, in the summer of 2012 and in the spring of 2013.

Nevertheless on an unhistorical basis, interest rates remain quite low. We remain worried about it, and we're positioned for it. But there is less significance of a discrepancy between the Income fund's duration and the index duration that had lower levels of rates.

Read Full Transcript
{0}-{1} of {2} Comments
{0}-{1} of {2} Comment
  • This post has been reported.
  • Comment removed for violation of Terms of Use ({0})
    Please create a username to comment on this article