Dodge & Cox's Playbook through a Rough 2008

Dan Culloton: Dana, your firm just went through a very unique period and the Income Fund went through a unique period where it underperformed its benchmark by a significant amount in 2008, and now it's outperforming by a significant [margin].

What were the unique challenges that you and your firm have faced in this period?

Dana Emery: I think this type of environment really fed into the strength of Dodge & Cox. We didn't really change anything that we were doing in the sense that we still did very in-depth fundamental research, and we focused on the long term.

While the downturn was difficult, it created many, many investment opportunities that we were able to take advantage, and gain confidence through the in-depth research effort that we make at Dodge & Cox.

Culloton: Going forward, what's the most important thing for a fixed income investor or for an investor who's thinking of adding a fixed income fund to their portfolio to keep in mind?

Emery: We think it's important to really take a look at the fund's goals and objectives and how they go about achieving their results. So making sure you're comfortable with the risk profile as well as the earnings that can be made off of fixed incomes securities at this point.

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It's very important to remember that you're starting with a fairly low starting yield right now, so the double-digit numbers that we've seen on a year-to-date basis are going to be difficult to sustain. So it's going to be very important to understand that you're making a conscious decision to go into a bond fund because of the safety and ongoing income stream that you want, but it will be a lower type of return than you've seen in the recent past.

Culloton: Over the last decade or even longer, a lot had been made of the performance of bonds versus equity, and that bonds in many cases have done a lot better. Is that the sort of thing that investors should expect going forward?

Emery: I guess our opinion would be that the equity markets would probably produce better returns than bonds over the long run, but that there are periods in time when bonds look very attractive on a relative basis.

And we just went through one of those periods where you started with such attractive yields and as the economy started to improve, the price appreciation that you earned on corporate bonds in particular helped drive the return numbers.

Culloton: Dana, thank you very much for your time today. Appreciate it.

Emery: Thank you. Appreciate it.