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Dodge & Cox Stock Comes Roaring Back

The trick to making money with this Kiplinger 25 veteran is sticking by it.

The title of our story in January 2014 couldn’t have been more spot-on: Why Sticking With Dodge & Cox Stock Pays Off. The 51-year-old fund (symbol DODGX), which has a history of alternating periods of good performance with so-so stretches, had just come off two sterling years. Stock then reversed course and trailed Standard & Poor’s 500-stock index in 2014 and 2015. But now, once again, patience has paid off for this long-time member of the Kiplinger 25. Over the past year, Stock trounced the index by 8.5 percentage points and topped 96% of large-company value funds.

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The story behind the past year’s results has two chapters. In the first half of the year, Stock lagged. With more than half of its assets in financial and technology stocks, the fund was positioned to benefit from a strong economy and higher interest rates, says Charles Pohl, one of Stock’s eight managers. But concerns about the tepid expansion and persistently low rates, among other things, plagued those sectors in early 2016.

After June, however, the stock market’s leadership flipped. “The stocks that hurt us in the first half helped us in the second half,” says Pohl. Bank of America and Goldman Sachs, two financial holdings, each rose more than 30% between June and November 30. The election outcome helped: A Trump administration may ease off on banking regulation. Plus, the rise in bond yields after Trump’s win bodes well for bank profits.

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Stock’s managers are known for their consistent, research-intensive approach to identifying large, undervalued firms. They look at the quality of a business, the potential for growth in earnings and cash flow over time, and how well a company’s leaders reinvest profits. When the managers buy, they typically end up holding a stock for years.

Occasionally, says Pohl, the managers step back and ask, “If we were starting from scratch, would we own the same securities?” They revisited the portfolio in just that way in early 2016 and decided to lift their stakes in some battered financials, including BofA, American Express, Goldman Sachs and MetLife.

Aided by low fees of 0.52% a year, the process has delivered exquisite long-term results. The trick for investors is to sit tight when Stock is out of sync with the rest of the market.

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