Dodge & Cox Income’s DODIX skilled investment team, robust long-term investment approach, and low fees support a Morningstar Analyst Rating of Gold on both of its share classes.
This strategy’s success owes to its relatively patient and at-times contrarian approach to investing. The eight managers, who average more than two decades of experience, start with an investment horizon of three to five years. They tend to favor corporates, noting that the yield advantage these securities offer is an important contributor to total returns over time, and they run a fairly compact, mostly cash-bond portfolio.
The team’s value-driven approach has led to adjustments to its corporate credit stake over time. As credit markets sold off and corporate valuations plunged in the first quarter of 2020, the team quickly took advantage, ramping up corporate credit exposure to 45% of assets by June 2020, from 34% in December 2019. As credit subsequently rebounded, the team scaled back on corporates, reducing exposure to 32% by September 2021. True to form, as corporate valuations grew more attractive over 2022′s rocky first half, the managers increased the stake to 40% by June 2022. The team finds banks (14%) particularly attractive, in part because of their high capital and liquidity levels and the sector’s strong regulatory backdrop. Agency mortgage passthroughs (39%) and U.S. Treasuries (14%) provide ballast and make up the bulk of the remainder of the portfolio.
This tilt toward corporates has made this strategy more sensitive than peers to credit market swings, and its at-times contrarian approach can be a drag on relative performance. For instance, during the 2020 credit selloff from Feb. 20 through March 23, the I shares’ 6.9% loss lagged its Bloomberg U.S. Aggregate Bond Index and its typical intermediate core-plus bond Morningstar Category peer by 67 basis points and 592 basis points, respectively. However, the team has demonstrated strong security-selection skills, and its willingness to take advantage of market corrections has served investors well: The strategy’s 4.0% 15-year annualized gain through August 2022 topped over two thirds of its distinct peers and its volatility-adjusted return (as measured by Sharpe ratio) landed in the best quintile of its category.
Key Proprietary Morningstar Metrics for Dodge & Cox Income I
Morningstar Analyst Rating: Gold
Process Pillar: High
People Pillar: High
Parent Pillar: High
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The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.