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Dodge & Cox Balanced Sees Benefits in Holistic Approach

Management’s efforts to reduce the strategy’s risks continue in earnest, and early results are promising.

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The management team overseeing Dodge & Cox Balanced DODBX continues to make sound tweaks to the fund’s process to reduce drawdowns and make it easier for investors to stick with over the long haul. Although the progress is encouraging, finding solid footing would help boost our confidence in the strategy going forward.

In May 2022, a newly formed balanced fund committee, which features a well-rounded mix of the firm’s equity, fixed-income, and quantitative veterans, officially took over the management of the fund. The committee started as a working group following the fund’s sharp losses during the 2020 coronavirus-driven bear market. The U.S. equity committee and rotating members of the fixed-income team previously managed the fund. This new structure should drive a more holistic approach, as portfolio decisions will span multiple departments with less reliance on one team.

The committee has already made several tangible changes to the portfolio that should help reduce the fund’s volatility; over the trailing 10 years ended June 2023, its 12% annualized standard deviation was one of the highest in the moderate allocation Morningstar Category. That’s been a boon when stock markets have charged upward, but it’s been painful when stock markets crash and bond markets rally, making it hard for investors to stay invested and capture the strategy’s long-term stellar returns.

To increase diversification, the underlying stock and bond sleeves no longer fully mimic Dodge & Cox Stock DODGX and Dodge & Cox Income DODIX. For example, the fund now holds non-U.S. stocks, such as Alibaba Group Holding BABA, which is owned in the international and global stock funds. The goal is to further diversify the portfolio by adding stocks whose drivers of returns should be different from U.S. stocks. At the end of March 2023, the portfolio had a 16% allocation to non-U.S. stocks, more than double the weight at the end of March 2020. Other changes the new committee has enacted since 2020 include allowing a small short position in the S&P 500 to counter potential market selloffs. There have also been small bumps along the way, like selling covered calls on energy stocks heading into 2022 right before oil prices skyrocketed. Investors shouldn’t expect covered calls to play a significant role going forward.

The increased focus on managing risk is a welcome improvement, but a longer track record of execution would increase our confidence that the changes will lead to a smoother ride going forward.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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