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Dodge & Cox Stock Fund 2nd-Quarter Commentary

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The Dodge & Cox Inventory Fund had a total return of twenty.% for the second quarter of 2020, as opposed to twenty.5% for the S&P 500 Index. For the six months finished June 30, 2020, the Fund had a total return of –15.%, as opposed to –3.1% for the S&P 500.

Investment decision Commentary

Through the to start with 50 percent of 2020, the spread of the coronavirus (COVID-19) advanced into a worldwide pandemic that disrupted major economies, improved fiscal sector volatility, and abruptly finished the longest inventory sector bull run in U.S. background. The U.S. equity sector carried out strongly in the second quarter recovering off March lows, despite the continuing general public health and fitness disaster and current financial downturn. Every single sector of the S&P 500 posted positive returns.

With the financial system accomplishing so poorly, why has the inventory sector recovered so dramatically? The U.S. government’s huge fiscal and financial stimulus programs, coupled with optimism relating to predicted health and fitness treatment alternatives and some corporate earnings recovery, have bolstered investor confidence. Not insignificantly, pretty much 70% of the S&P 500 is comprised of firms that are mostly immune to the financial impression of the pandemic (we assume of them as “COVID defensive”) the broad majority of these providers are in the Information Engineering, Buyer Staples, Utilities, and Well being Treatment sectors. The other 30% of the S&P 500 has been hit really hard by the financial effects of the pandemic (“COVID cyclical”), mainly in the Financials, Energy, Industrials, Materials, Buyer Discretionary (ex-web retail), and Genuine Estate sectors. Industry movements and valuation improvements can take place swiftly and with out warning, as evidenced by the sturdy rebound in Energy and Materials, two of the toughest hit places of the sector in the to start with quarter. These sectors had been amongst the top rated performers in the second quarter, beating the S&P 500’s return.

In excess of the last ten years, U.S. advancement stocks have outperformed worth stocks2 by an astounding cumulative 221 proportion factors.three Through this hard interval for worth investors, the Fund has underperformed the broad-dependent S&P 500, but outperformed the U.S. worth financial investment universe by 33 proportion factors.4 The valuation differential amongst worth- and advancement-oriented stocks has developed enough prospects for valueoriented investors like Dodge & Cox.

Our financial investment group has been extremely productive in these volatile marketplaces, examining existing portfolio holdings and recommending new investments. This evaluation has helped the U.S. Fairness Investment decision Committee shift the portfolio dependent on COVID-impacted fundamentals and valuations. Through the second quarter, we trimmed higher valuation places of the portfolio that had carried out strongly, these types of as Prescribed drugs and more highly-priced technological know-how-related providers, and leaned further into worth portions of the sector these types of as Financials, Energy, Materials, Industrials, and low-valuation technological know-how providers. We lately additional to existing holdings these types of as American Express (NYSE:AXP), Carrier (NYSE:CARR), Celanese (NYSE:CE), Hewlett Packard Company (NYSE:HPE), HP Inc. (NYSE:HPQ), MetLife (NYSE:Satisfied), VMware (NYSE:VMW), and Wells Fargo (NYSE:WFC).5 We also started 4 new positions in the Fund, like LyondellBasell (NYSE:LYB) (one particular of the world’s premier commodity chemical providers) and Williams Providers (NYSE:WMB) (a nationwide electrical power processing and transporting corporation with around 30% of all U.S. purely natural gas volumes).

Even though the portfolio stays tilted towards Financials (25.5%six of the portfolio versus ten.1% of the S&P 500), Well being Treatment (17.7% versus 14.six%), and Energy (9.three% versus 2.8%), the Fund stays diversified and has exposure to numerous financial investment drivers. We have sturdy conviction in our worth-oriented, energetic financial investment strategy and continue to consider now is an opportune time to be invested in worth stocks.

We continue being optimistic about the prolonged-time period outlook for the Fund, which trades at a major lower price to the in general sector: 13.4 situations forward earnings as opposed to 24.2 situations for the S&P 500. Endurance, persistence, and a prolonged-time period financial investment horizon are critical to prolonged-time period financial investment good results. We persuade our shareholders to choose a identical look at. Thank you for your continued confidence in Dodge & Cox.

Our feelings are with all the folks and people of those people who have suffered from COVID-19 and also with the dedicated health and fitness treatment employees and to start with responders battling on the front strains. We would like every person all the most effective all through these hard situations.

2nd Quarter Functionality Overview

The Fund underperformed the S&P 500 by .5 proportion factors all through the quarter.

Vital Detractors from Relative Results

  • Potent efficiency by a couple of massive technological know-how and web related providers not held in the Fund hurt relative effects. The impression was sizeable in Information Engineering and Buyer Discretionary (two of the strongest S&P 500 sectors), exactly where the Fund was underweight all through the interval.
  • The Fund’s holdings in Information Engineering lagged (up 25% versus up 31%), in particular HP Inc. and Hewlett Packard Company.
  • A higher regular weighting in Financials (26% versus 11%) hurt efficiency given that the sector continued to lag the sector. Wells Fargo and Charles Schwab (NYSE:SCHW) had been vital detractors.
  • In the Buyer Discretionary sector, the Fund’s regular underweight posture (three% versus ten%) hurt relative effects.
  • In Well being Treatment, the Fund’s decrease returns (up 12% versus up 14%) and higher regular weighting (twenty% versus fifteen%) had a damaging impression. Cigna (NYSE:CI) and Novartis (NVS) had been weak.
  • Molson Coors (Tap) and FedEx (FDX) also detracted.

Vital Contributors to Relative Results

  • The Fund’s higher regular weighting (9% versus three%) and sturdy efficiency in the Energy sector (up fifty four% versus up 31%) contributed. Occidental Petroleum (OXY), Apache (APA), Baker Hughes (BHI), and Halliburton (HAL) appreciated significantly.
  • The Fund’s underweight posture in Buyer Staples and Utilities helped effects given that these had been the weakest places of the Index (up 8% and up three% respectively for the S&P 500).
  • Microchip Engineering (MCHP) and DISH Community (DISH) had been also sturdy contributors.

Year-to-Date Functionality Overview

The Fund underperformed the S&P 500 by 11.9 proportion factors calendar year to date.

Vital Detractors from Relative Results

  • Potent efficiency by a couple of massive technological know-how and web related providers not held in the Fund hurt relative returns, in particular in the Information Engineering (down three% versus up fifteen%) and Buyer Discretionary (down 19% versus up 7%) sectors.
  • Inside of Information Engineering, Hewlett Packard Company lagged. The Fund’s underweight posture in the sector (averaging 18% versus 25%) also had a damaging impression.
  • In Financials, the Fund’s regular over weight posture (26% versus 11%) and decrease returns (down 31% versus down 24%) detracted. Wells Fargo, Funds 1 Financial (COF), and Charles Schwab had been the largest detractors.
  • Energy was the weakest sector of the Fund and the Index (down forty seven% versus down 35%). The Fund’s higher regular weighting (9% versus three%) and weaker returns from holdings hurt effects. Occidental Petroleum, Apache, and Schlumberger (SLB) carried out poorly.

Vital Contributors to Relative Results

  • The Fund’s regular over weight posture (21% versus fifteen%) and improved returns in the Well being Treatment sector (up 1% versus down 1%) aided effects. Roche (XSWX:ROG), AstraZeneca (LSE:AZN), and Alnylam Prescribed drugs (ALNY) had been significantly sturdy.
  • The Fund’s deficiency of holdings in the Utilities and Genuine Estate sectors contributed given that these segments of the Index lagged (down 11% and down 9%, respectively).
  • Dash was exceptionally sturdy as its merger with T-Cellular US (TMUS) was authorised.
  • Microchip Engineering, Dell Technologies (DELL), and Constitution Communications (CHTR) also contributed.

1 The Fund’s total returns include the reinvestment of dividend and capital acquire distributions, but have not been altered for any income taxes payable by shareholders on these distributions or on Fund share redemptions. Index returns include dividends but, compared with Fund returns, do not mirror service fees or fees. The S&P 500 Index is a sector capitalization-weighted index of 500 massive-capitalization stocks usually utilised to symbolize the U.S. equity sector.

2 Value stocks are the decrease valuation portion of the equity sector, and advancement stocks are the higher valuation portion.

three The Russell 1000 Progress Index had a total return of 390.three% from June 30, 2010 through June 30, 2020 as opposed to 169.1% for the Russell 1000 Value Index.

4 The Dodge & Cox Inventory Fund had a total return of 202.5% from June 30, 2010 through June 30, 2020 as opposed to 169.1% for the Russell 1000 Value Index.

5 The use of precise illustrations does not suggest that they are more or fewer appealing investments than the portfolio’s other holdings.

six Unless in any other case specified, all weightings and features are as of June 30, 2020

Returns symbolize past efficiency and do not warranty long run effects. Investment decision return and share price will fluctuate with sector disorders, and investors could have a acquire or reduction when shares are bought. Fund efficiency improvements above time and at present could be substantially decrease than mentioned previously mentioned. Functionality is current and posted month-to-month. Go to the Fund’s web site at dodgeandcox.com or simply call 800-621-3979 for current thirty day period-finish efficiency figures.

About the writer:

Sydnee Gatewood

I am the editorial director at GuruFocus. I have a BA in journalism and a MA in mass communications from Texas Tech College. I have lived in Texas most of my life, but also have roots in New Mexico and Colorado. Observe me on Twitter! @gurusydneerg

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