Dodge & Cox: Persistence Pays

Dan Culloton: Hello, I'm Dan Culloton, associate director of fund analysis with Morningstar. I'm here today with Diana Strandberg, a portfolio manager with Dodge & Cox International (DODFX) and Dodge & Cox Global (DODWX). Thank you very much for being here today, Diana.

Diana Strandberg: It's my pleasure.

Culloton: It seems like this year, at least in the last three months, a lot of the things that hurt funds--including Dodge & Cox last year--have been helping them tremendously, particularly in the financial sector. We've seen a number of companies, a number of big companies in the financial sector, who really took it on the chin last year rally by 50%-100%. Have valuations gotten a little stressed in this rally? What do you make of valuations going forward in the financial sector?

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Strandberg: I think if I could broaden out the question, I think you're observing a very important point. This is were we point to, particularly in our process of being very research-driven, very long-term in our thinking, and very valuation-focused, that persistence matters. And this year to date has shown that in spades. As we look at valuations, while they've come up off the bottom, they're still very attractive looking out 3-5 years, particularly for companies that, in our estimation, have strong franchises and an ability to capitalize on the current problems that many of their competitors face.

Culloton: Has the firm in general started to look at or add anything to their process to assess financials? Have they changed how they look at financials at all as a result of what happened in the last 18-24 months?

Strandberg: Process is very important at Dodge & Cox. When we think about our process, we start with rigorous research into each of our individual holdings. I mentioned our long-term view and the mind-set of thinking like an owner of individual businesses. Valuation matters to us. And we bring a team, now, of battle-tested veterans to the table in the form of an investment policy committee, to bring broad perspective to our decision-making on individual holdings. So from that stance, our process has been in place for over 80 years, and will reward our investors in the long run.

Some things that we've done to enhance our process in the past year: We've been teaming up our fixed-income analysts and our equity analysts to evaluate a company's short-term funding needs, with an eye to we don't know how long this downturn might last. And we want to make sure that the companies we own are able to withstand in the short term a pretty unfavorable external environment.

We focused on CDS spreads as an indicator of what other investors or customers or suppliers might be thinking about this business. Not as end-all, but as an input into questions we would be asking.

And we have had a series of reviews and re-reviews, and re-re-reviews of each of our existing holdings, asking ourselves the question--as we always do--would we buy this company in the portfolio today if we didn't already own it?

And so to the extent that we say yes, we will remain very persistent.