Kip 25 Update: Dodge & Cox International Fund

Patience and value investing often go hand in hand. That’s because it can take time for bargain-priced stocks to pay off, as the managers of Dodge & Cox International Stock (DODGX) know well.

Consider their investments in Nokia and Hewlett-Packard. Diana Strandberg, one of the fund’s nine managers, says these holdings were “extremely painful for a long time” because the stocks continued to fall after they entered the fund (Nokia in 2005 and HP in 2011). But over the past year, Nokia and HP have surged, and they were big drivers of International Stock’s excellent results. The fund outpaced all but six large-company international stock funds over the past year.

You may be wondering how California-based HP ended up in International Stock. The fund may invest up to 20% of its assets in U.S. companies as long as the firms have significant business overseas and no comparable foreign peers. HP derives about 65% of its sales abroad, and the managers considered the stock deeply undervalued when they first bought it.

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The managers build International’s portfolio stock by stock, homing in on firms with good balance sheets, attractive growth prospects and executives who act like owners—and shares that trade at cheap prices, of course. Lately, Strandberg and her colleagues have been finding bargains in emerging markets. After emerging-markets stocks stumbled in mid 2013, the fund added to its existing holdings and bought a few new ones, including South Korean giant Samsung Electronics. At last report, about 20% of the fund’s $57 billion in assets was in developing nations.

Web plays. One recent addition, Baidu, a Chinese Internet search-engine company, made an impact almost immediately. The managers had been studying Internet firms for a while. They hold Naspers, a South African media company that owns about one-third of the Chinese Internet portal Tencent. So they were already familiar with Baidu when its price dipped below $100 last year amid concerns that China’s growth was slowing. They pounced, and the stock promptly reversed course; it now trades at $154. “Normally, things take three to five years to pay off. This happened very quickly,” says Strandberg. The fund still owns Baidu, but the managers sold some shares as the price ran up.