VALUE ADDED


Two Great Value Funds Reopen

Steven Goldberg

This is a great time to begin investing a little every month in either Dodge & Cox Stock or Longleaf Partners -- or both.



Warren Buffett once likened investing to batting in baseball. The only difference: In investing, there's no penalty for watching strikes whiz by. The trick is to wait for a truly fat pitch, then swing away.

In Dodge & Cox Stock and Longleaf Partners, which both just reopened to new investors, I think you have two of the fattest pitches in mutual fundom. I don't think there are any better value funds.

What's more, the decisions by their sponsors to reopen tell you something about the market. Neither fund is making a market call, and I don't expect this lousy market to hit bottom until spring or summer. But plainly the managers see bargains.

This is a great time to begin investing a little bit every month in either or both of these two funds. In the case of Longleaf, in particular, there is a bit more urgency because it is unlikely to stay open long.

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Dodge & Cox Stock (symbol DODGX) has all the attributes I look for in a fund. The San Francisco firm launched its first fund in 1931 and has stayed focused since then on doing one thing well: buying stocks of large, undervalued companies.

Instead of growing into a fund giant, the company has kept its product lineup small. It just filed plans with the Securities and Exchange Commission to create its fifth fund, Dodge & Cox Global Stock, which, as the name indicates, will invest in U.S. and foreign companies. (Dodge & Cox Balanced (DODBX) also reopened recently; it's a fine choice if you want a fund that has about 30% of its assets in bonds.)

With Dodge & Cox, the phrase "long term" is paramount. The managers typically hold stocks for seven or eight years, sometimes much longer. The fund's nine managers are themselves long-termers; their average tenure at Dodge & Cox is 22 years.

Dodge & Cox shows a genuine commitment to shareholders. Annual expenses are just 0.52%, about as low as you'll find at any actively managed fund that's not sponsored by Vanguard, the low-cost leader. Dodge & Cox Stock closed in 2004 when investors were clamoring to get in. It reopened this month when investors were leaving after the fund finished flat in 2007.

Cast '07 aside, however, and Stock's returns have been superb. The fund has beaten Standard & Poor's 500-stock index by an average of four percentage points a year over the past 15 years, six percentage points over the past ten years and three percentage points over the past five years.

It ranks in the top 2% among large-company value funds over the past ten years, according to Morningstar, and has finished above average against its peers in every year but two since 1992. The fund's 15-year annualized return is 14%. What's more, the fund has exhibited low volatility versus its peers.

Stock is hefty, with assets of $59 billion. But I don't think that's too much for the managers to handle because they invest almost exclusively in stocks of large companies and because they spread their bets among almost 100 stocks. Infrequent trading also mitigates some of the disadvantages of largeness.

"We're patient and persistent," John Gunn, chairman of Dodge & Cox and a co-manager of the fund since 1977, told Kiplinger's Andrew Tanzer in a recent interview. "We do a lot of work before we become a part owner of a company. We usually buy more when the stock price goes against us."

Dodge & Cox managers are finding values today in areas that historically have been associated with growth stocks. More than half of the fund's assets are in media, drug, technology and telecommunications stocks.

Normally, stocks in those sectors would be too pricey for value investors, "but today the valuation range in equities is really compressed and narrow," says Gunn. The managers are especially bullish on pharmaceutical firms, which Gunn says are "selling at a 20-year low in valuation."

Longleaf Partners (LLPFX) is a similar story. For more than 30 years, the Memphis-based firm has focused on doing just one thing well: identifying undervalued stocks. Longleaf, too, has shown a willingness to close funds when they grow too big. And its managers are also long-term investors. They typically hold a stock at least five years, sometimes much longer.

There are notable differences, though. Partners is much smaller, with $12 billion in assets. Annual expenses, at 0.90%, are higher but still reasonable. The fund owns just 26 stocks.

At the end of 2007, 8% of assets were in computer maker Dell (DELL), 6.5% in media giant Liberty Capital A (LCAPA) and 6% in natural gas producer Chesapeake Energy (CHK).

Partners is also much more likely to buy stocks of different shapes and sizes than is Dodge & Cox. As far back as you look, Dodge & Cox has specialized in large companies. Longleaf roams more freely. Morningstar currently classifies the fund as large-company blend, but the fund rater has previously labeled Partners a midsize value fund, as well as a large-cap value fund.

Over the past ten years, the fund has returned an annualized 9%, putting it in the top 6% among large-company blend funds. It has beaten the S&P 500 by an average of four percentage points per year. Its 15-year annualized return is 13%.

Between the two funds, Dodge & Cox seems the better pick. Dodge & Cox has better returns, slightly lower volatility and lower expenses. But Longleaf is different enough and invests in so many more midsize companies, that it could make sense to own both.

Steven T. Goldberg (bio) is an investment adviser and freelance writer.




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