Dodge & Cox Stock Remains Best in Class
This gutsy fund retains its Gold rating.
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Dodge & Cox Stock's many strengths earn it a Morningstar Analyst Rating of Gold.
Dodge & Cox's investment-committee structure is exemplary. Here, the firm's eight-member U.S. equity committee mixes veteran investors with rising talent. Collaborative decision-making and gradual, well-telegraphed personnel changes promote long-term consistency and stability. The firm draws this committee from a deep research pool of more than 60 equity and fixed-income managers and analysts. Most have spent their entire careers immersed in the firm's time-tested approach.
That approach is thoroughly contrarian. The managers look to invest in businesses they believe have competitive edges, good growth prospects, and capable leaders, but whose shares have suffered because of bad news or temporary economic headwinds. Such investments might take time to work out, but the Dodge & Cox team has shown it is patient and opportunistic. In early 2020, for example, shares of Occidental Petroleum (OXY) fell sharply amid investors' concerns about its solvency, yet the Dodge & Cox team added aggressively after its analysts studied Occidental's cash flows and debt structure.
Such gusty investing has its risks, but the managers have proved effective at it. They have stuck to their principles through tough markets, and as a result, the fund's long-term record is solid. From January 1992 (when its most-senior managers started here) through May 2020, its 10.6% annualized return topped the S&P 500's 9.4%, the Russell 1000 Value Index's 9.2%, and the 7.7% large-value Morningstar Category average. Granted, the fund's investment style can lead to above-average volatility of returns, and rough stretches do occur. One happened in early 2020, when the coronavirus pandemic and the economic shutdown hammered its financial and energy names. The 2007-09 global financial crisis also hit the fund hard. Yet the strategy tends to reward patient investors, in both absolute and risk-adjusted terms, and it charges relatively modest fees.
Process | High
Intensive research, collaborative decision-making, and a patient contrarianism earn a High Process rating.
Dodge & Cox analysts do thorough, bottom-up research. They look for opportunities to go against the consensus view yet invest in businesses they believe have competitive advantages, good growth potential, and talented executives. Sector committees vet ideas, and an experienced, eight-member U.S. equity investment committee builds the portfolio. The managers aim to pick up stocks on the cheap, often taking advantage of bad news or a tough economic environment to start or add to positions. They'll follow fundamental research where it leads, leaning into sectors that look attractive. The committee constantly reassesses, challenges, and defends holdings.
With so many against-the-grain picks, the managers give ample time for investments to play out. They prefer to hold stocks for three to five years, but they are often more patient than that. Annual turnover averaged 16% in the five years through 2019. The managers generally stick to their valuation discipline, selling when holdings get pricey, fundamentals deteriorate, or better opportunities arise. They have made mistakes, such as betting on financials in the 2007-09 global financial crisis or sticking with energy stocks such as Occidental more recently. But they have been right more often than not.
Bottom-up research on individual companies drives stock selection here. The 60- to 90-stock portfolio can concentrate in a few sectors: As of March 2020, 79% of its assets were in technology, healthcare, financials, and communication-services stocks. The latter included two top-10 holdings: Comcast (CMCSA) and Charter Communications (CHTR). Financials and healthcare were its largest sector overweightings relative to the S&P 500. Those included long-standing investments in broker Charles Schwab (SCHW), Wells Fargo (WFC), and two non-U.S. drugmakers: Novartis (NVS) and Sanofi (SNY).
True to their contrarian style, the managers used the collapse in oil prices in early 2020 to add to their energy holdings. They increased share counts by 33% or more in four names in 2020's first quarter: Occidental, Concho Resources (CXO), Schlumberger (SLB), and Hess (HES). These moves followed comprehensive stress-testing by the firm's equity and credit analysts to ensure the companies can pay their debts amid low oil prices.
Given the team's attention to valuation, the portfolio often looks cheap on key metrics. Its average trailing 12-month price/earnings ratio was 12 in March 2020, well below the S&P 500's 18, and its average price/book value was also relatively low. By those two metrics, the portfolio's valuation was at its lowest ebb since late 2011.
People | High
Dodge & Cox's investment committees reduce key-person risk and help ensure consistent execution, earning a High People rating.
The firm's talented eight-member U.S. equity investment committee manages this strategy. Recent personnel moves fit with Dodge & Cox's long-standing, gradual approach to succession planning. Analyst Ben Garosi joined the team in 2019 and pushed it to an unusually high 10 members, but in 2020 longtime member Wendell Birkhofer stepped aside before his retirement at year's end and Diana Strandberg left to focus on her duties as director of international equity. Veterans such as CIO Charles Pohl and director of research Bryan Cameron still anchor the team. Its members average 22 years' tenure at the firm.
The firm draws the investment committee from its deep, stable equity research team. As of March 2020, that unit had 36 analysts and managers, and most had at least six years' experience at Dodge & Cox. A cadre of 27 fixed-income analysts and about two dozen research associates provide support. Most investment staff members hail from top business programs and have spent their entire careers immersed in the firm's culture.
The managers' investment in the strategy is impressive. As of December 2019, all but one invested more than $1 million in the mutual fund; the other invested between $500,001 and $1 million.
Parent | High
Dodge & Cox is a standard bearer in asset management, earning the firm a High Parent rating.
Many of the 89-year-old firm's strengths are deeply entrenched. Its measured lineup consists of only six strategies: three in equities, two in fixed income, and a balanced fund. All are rooted in the firm's patient, contrarian, and value-oriented investment philosophy. Five committees, made up of senior leaders and rising stars, make portfolio decisions in a structure that minimizes key-person risk. The investment staff is steeped in the firm's culture, with most members having spent their entire careers at Dodge & Cox after training at some of the nation's most prestigious business schools. The employee-owned firm puts fundholders first, offering only no-load share classes with competitive fees and closing funds to protect their investment style.
A generational leadership change is likely in the next few years, but Dodge & Cox has its house in order. Key leaders, such as chairman and CIO Charles Pohl and director of research Bryan Cameron, are in their early 60s, and the firm's owners must begin cashing out their stakes at age 65. As it has in the past, the firm has named capable successors who have plenty of time to learn the ropes. Such transparency and foresight are reassuring. Dodge & Cox remains an exemplary firm.
This fund boasts a strong long-term record over multiple market cycles. From January 1992 (when managers Charles Pohl and Bryan Cameron started here) through May 2020, its 10.6% annualized return beat the S&P 500's 9.4%, the Russell 1000 Value Index's 9.2%, and the 7.7% large-value category average.
The team's contrarian style and patience while theses play out contributed to the fund's success but added volatility. After poor relative showings in the 2007-09 financial crisis and choppy markets in 2011 and 2015, it rebounded well in 2009, 2012, and 2016. As a result, the standard deviation of the fund's returns (a measure of volatility) over Pohl and Cameron's tenure ranked higher than most peers and either index. The managers' patience helped turn this apparent instability to their advantage. The fund's Sharpe and Sortino ratios, two gauges of risk-adjusted returns, topped the typical peer and both indexes over the period.
The fund has been in a funk lately. It entered 2020 with sizable stakes in financials and energy stocks, and the economic shutdown caused by the novel coronavirus hurt both sectors. The fund dropped nearly 40% and trailed more than three fourths of its cohort from the S&P 500's Feb. 19 peak through its March 23 trough. Sharp drops in oil firm Occidental and consumer-financial stock Capital One (COF) weighed on results.
It's critical to evaluate expenses, as they come directly out of returns. The share class on this report levies a fee that ranks in its Morningstar Category's cheapest quintile. Based on our assessment of the fund's People, Process, and Parent Pillars in the context of these fees, we think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Analyst Rating of Gold.
Tony Thomas does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.