Dodge & Cox Leader’s Personal Trading Unlikely to Have Been Unethical

A recent investigative news report alleging unethical trading at Dodge & Cox overstates lapses at the firm.

ProPublica, a nonprofit that does investigative journalism, said that Dodge & Cox’s chief investment officer, David Hoeft, had traded certain stocks around the same time as its funds. Both ProPublica and Dodge & Cox note that the trades cleared Dodge & Cox’s compliance procedures and personal trading policies.

It isn’t unusual for investment firms to allow employees—even investment professionals—to invest outside the firm’s funds in their personal accounts. Dodge & Cox says such freedom is necessary to attract the best investors, adding that having “skin in the game” gives its investment staff greater incentives to make good calls while more closely aligning themselves with clients.

Even so, allowing fund managers to trade personally in individual stocks runs risks. A manager of a multibillion-dollar mutual fund could get into a stock before his fund begins buying it and sell before the fund exits, thereby benefiting in both situations from his knowledge of his fund’s plans.

But ProPublica’s data doesn’t clearly show Hoeft engaged in such abuses. Using Hoeft’s tax records, ProPublica could pinpoint when Hoeft bought or sold a stock, but Dodge & Cox’s mutual funds report their holdings quarterly. Such reports do not disclose when the funds traded those holdings. At most, we know Hoeft personally traded some stocks around the same time as his firm’s funds.

Dodge & Cox has a code of ethics and insists Hoeft’s trades met the code’s standards. According to the firm, Hoeft sought and obtained preapproval for his activities. Employees cannot trade stocks that any of the firm’s strategies are formally considering buying. A compliance team monitors all employees’ trading activity and can flag issues or take disciplinary action—neither of which occurred in the instances noted by ProPublica.

Given Dodge & Cox’s compliance policies and investment ethos, it’s unlikely that Hoeft’s trading was unethical. Many investors who “front-run” stocks do so for a quick profit, but Hoeft held the stocks featured in the exposé for longer periods. In the two stocks cited by ProPublica, VMware BZF1 and NetApp NTAP, Hoeft held his investments for at least two to three years before beginning to sell them. These trades were consistent with the firm’s long-term investment mindset; indeed, they easily surpassed a firmwide prohibition on taking short-term profits, defined as gains realized within 60 days of purchase.

It’s a stretch to call Hoeft’s trading activity front-running. For example, Hoeft and Dodge & Cox, in an interview with Morningstar, admitted Hoeft bought VMware before the funds but said he did not break the firm’s ethics policy. Hoeft began researching the stock, and it was put on the firm’s restricted list; he pitched it to one of the firm’s investment committees, which initially passed on the idea; this resulted in the stock’s removal from the restricted list, and Hoeft subsequently bought the stock in his own account after getting permission from the firm. Hoeft later reproposed the idea to the investment committee, disclosing to colleagues at the time that he owned the stock. The second pitch was successful, and Dodge & Cox began buying VMware shares for its portfolios.

There is no reason to change Dodge & Cox’s High Parent rating or its strategies’ Morningstar Medalist Ratings.