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In the sales-driven mutual fund world, there's a lot to like about Dodge & Cox, the sedate San Francisco fund manager. The firm keeps a low profile. It doesn't advertise, market products or chase fads.
Instead, its long-tenured managers focus on running just five low-cost funds. The managers and other Dodge & Cox employees own the firm and invest their wealth side by side with outside shareholders.
Over the years, D&C's disciplined and long-term-oriented investment process has handsomely rewarded loyal shareholders. For instance, during the 20 years through November 30, 2008, Dodge & Cox Stock (symbol DODGX returned an annualized 10.2%.
That was an average of two percentage points per year better than Standard & Poor's 500-stock index, an impressive feat, and good enough to land Stock among the top 10% of all funds, according to Morningstar.
Recently, though, Dodge & Cox has seemed almost accident-prone, and all of its funds have posted weak results. D&C Stock, for example, lost 46% in the first 11 months of 2008, seven points worse than even the execrable performance of the S&P 500 and a basket of large-company value funds.
Dodge & Cox Stock has been mired in slumps before. From 1995 through 1999, the fund trailed the S&P index by an average of seven points a year (by contrast, the fund beat the index by a resounding 11 points a year from 2000 through 2006).
But in many ways today's slump is more painful. Not only are the actual losses of wealth severe, but the money invested in financial companies that collapsed is gone for good. This sin of commission is much worse than its sin of omission (no sin at all, really) in the late 1990s, when D&C managers stuck to their value-investing principles and declined to chase Internet and other ridiculously frothy stocks at the height of America's epic stock-market bubble.
Measured Process
So what's gone wrong at Dodge & Cox, and can it and its funds rebound? Before conducting a postmortem of Dodge & Cox's disastrous foray into the minefield of financial stocks, let's review the firm's disciplined, research-intensive investment process.
Most investment ideas (and stock-sale decisions) percolate up from the firm's analysts and are then carefully weighed by various investment-policy committees, which consist of seasoned portfolio managers. It's a collegial, consensus-driven, bottom-up process.
D&C analysts and managers, says the firm's chairman, John Gunn, focus on financial measures, such as com-panies' sales, earnings, cash flows and dividends, as well as qualitative aspects, such as strength of business franchise and management. They assess growth prospects over five years (considering a range of outcomes and risks), look at the current stock price and decide whether to strike.
When Dodge & Cox people say they invest for the long term, they really mean it. Vice-president Diana Strandberg speaks of investing in stocks that can be locked up in a safe-deposit box for five years (an average holding period). "It's a tremendous advantage to have a long-term compass in periods of intense volatility," she says.
Over the years, the rigorous research efforts and long-term horizon have paid off. For instance, D&C Stock has reaped large gains over the long run in stocks such as FedEx, Hewlett-Packard and Wells Fargo. Clearly, the professionals at Dodge & Cox are thoughtful, patient and sober investors. So where did they come unstuck? Their main error was to gravely underestimate the risks in financial stocks -- such as American International Group, Fannie Mae and Wachovia -- that its funds loaded up on.
At the end of 2006, Stock actually held a below-average weighting in financial stocks: 14%, compared with the sector's 22% weighting in the S&P 500. After the subprime-mortgage and credit crisis began to erupt in mid 2007, financial stocks started to tumble. As prices of financial stocks plunged in the second half of 2007 and the first half of 2008, Dodge & Cox was buying. By June 2008, Stock was overweight in financials, with a 17% allocation, compared with 14% in the index. In the letter to Stock shareholders reporting on the second quarter of 2008, the managers wrote: "We have selectively expanded the Fund's financials weighting because in our opinion their valuations have declined more than their underlying long-term fundamentals have deteriorated."
Just a few months later, the roof caved in on financial stocks.
POSTED BY: Got Smarter (May 26, 2009 05:15 PM)
American Funds, Vanguard, Fidelity, etc. We all lost in this one! Retirement for most, is all but a ...dream!
POSTED BY: daughter of winner (May 29, 2009 10:56 AM)
How smart was my dad when 2 years before he died (Spring 2007) he cashed out all his investments so upon his death there was quite a legacy.
POSTED BY: AK DJ (June 30, 2009 05:25 PM)
We lost several hundred thousand dollars in D&C, but will keep buying and hoping for the best. Still have 20 years before retiring, got to take the downs to enjoy the ups!
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