Dodge & Cox Q4 Letter To InvestorsVW Staff
The Dodge & Cox Stock Fund had a total return of 11.8% for the fourth quarter of 2013, compared to 10.5% for the S&P 500 Index. For 2013, the Fund had a total return of 40.6%, compared to 32.4% for the S&P 500. At year end, the Fund had net assets of $54.8 billion with a cash position of 1.7%.
U.S. equity markets continued to rally during the fourth quarter and rose to an all-time high on December 31. Every sector of the S&P 500 generated positive returns. Investors were encouraged by Chairman Ben Bernanke’s announcement on December 18 that the U.S. Federal Reserve (the Fed) will begin measured tapering of its quantitative easing program amid improved economic conditions in the United States. As a first step toward normalizing U.S. monetary policy, the Fed will reduce its current $85 billion-a-month asset purchase program by $10 billion starting in January. Recent economic statistics show that the U.S. economy is growing at a moderate pace, the job market is improving, and consumer wealth is continuing to increase as home prices and other assets trend higher. Corporate balance sheets and cash flows are robust. Despite significant fiscal headwinds, we remain optimistic about the long-term prospects for corporate earnings growth.
U.S. equity market valuations have continued to increase, yet are still reasonable. At quarter end, the S&P 500 traded at 16.7 times forward earnings with a 2.0% dividend yield. The Fund’s holdings (14.0 times forward earnings) still trade at a meaningful discount to the S&P 500, and we believe the Fund’s portfolio is well positioned to benefit from long-term global growth opportunities. Acknowledging that markets can be volatile over the short term, we encourage our fellow shareholders to remain focused on the long term.
FOURTH QUARTER PERFORMANCE REVIEW
The Fund outperformed the S&P 500 by 1.3 percentage points during the quarter.
KEY CONTRIBUTORS TO RELATIVE RESULTS
Relative returns from holdings in the Financials sector (up 14% compared to up 10% for the S&P 500 sector) helped results. Notable contributors included Aegon (up 28%), Charles Schwab (up 23%), and Bank of New York Mellon (up 16%).
Strong returns for the Fund’s holdings in the Telecommunication Services sector (up 40% compared to up 5% for the S&P 500 sector) contributed to results. Sprint (up 73%) was particularly strong.
The Fund’s holdings in the Consumer Discretionary sector (up 13% compared to up 11% for the S&P 500 sector) aided results. DISH Network (up 29%), Liberty Interactive (up 25%), Time Warner Cable (up 22%), and Comcast (up 16%) all performed well.
Relative returns from holdings in the Information Technology sector (up 14% compared to up 13% for the S&P 500 sector), combined with a higher average weighting (22% versus 18%), benefited results. Hewlett-Packard (up 34%), Nokia (up 25%), and Corning (up 23%) contributed meaningfully. Additional contributors included Forest Laboratories (up 40%), FedEx (up 26%), General Electric (up 18%), and Baker Hughes (up 13%).
Before investing in any Dodge & Cox Fund, you should carefully consider the Fund’s investment objectives, risks, management fees, and other expenses. To obtain a Fund’s prospectus and summary prospectus, which contain this and other important information, visit www.dodgeandcox.com or call 800-621-3979. Please read the prospectus and summary prospectus carefully before investing.
12/13 SF FS KEY DETRACTORS FROM RELATIVE RESULTS The Fund’s holdings in the Health Care sector (up 7% compared to up 10% for the S&P 500 sector) detracted from results. Boston Scientific (up 2%) and Roche (up 4%) lagged.
Weak relative returns from holdings in the Energy sector (up 4% compared to up 8% for the S&P 500 sector) hurt results. Apache and Weatherford, both up 1%, performed poorly.
Additional detractors included Maxim Integrated Products (down 6%), Symantec (down 4%), NetApp (down 3%), and CarMax (down 3%).
2013 PERFORMANCE REVIEW
The Fund outperformed the S&P 500 by 8.1 percentage points in 2013.
KEY CONTRIBUTORS TO RELATIVE RESULTS
The Fund’s overweight position and holdings in the Information Technology sector (up 54% compared to up 29% for the S&P 500 sector) significantly contributed to results. Nokia (up 105%), Hewlett-Packard (up 101%), Xerox (up 83%), and Molex (up 78% to date of acquisition by Koch Industries) were among the strongest contributors.
Strong returns for the Fund’s holdings in the Financials sector (up 42% compared to up 36% for the S&P 500 sector) and a higher average weighting (22% versus 16%) helped results. Notable contributors included Charles Schwab (up 83%), and insurance companies Genworth (up 74% to date of sale) and MetLife (up 67%).
Relative returns from holdings in the Telecommunication Services sector (up 94% compared to up 12% for the S&P 500 sector) contributed to results. Vodafone (up 64%) and Sprint (up 27% to date of merger with Softbank and up 71% post-merger) performed well.
The Fund’s holdings in the Consumer Discretionary sector (up 46% compared to up 43% for the S&P 500 sector), combined with a higher average weighting (15% versus 12%), aided results. Panasonic (up 93%), DISH Network (up 59%), Twenty-First Century Fox (up 57%), and Time Warner (up 49%) were among the best performers.
Additional contributors included Boston Scientific (up 110%), FedEx (up 58%), and Roche (up 43%).
KEY DETRACTORS FROM RELATIVE RESULTS
Relative returns from holdings in the Health Care sector (up 34% compared to up 41% for the S&P 500 sector) detracted from results. UnitedHealth (up 15% since date of purchase) and Sanofi (up 16%) were relatively weak. Additional detractors included J.C. Penney (down 21% to date of sale) and ADT Corp. (down 12%). The Fund’s total returns include the reinvestment of dividend and capital gain distributions, but have not been adjusted for any income taxes payable by shareholders on these distributions or on Fund share redemptions. Index returns include dividends but, unlike Fund returns, do not reflect fees or expenses. The S&P 500 Index is a market capitalization-weighted index of 500 large capitalization stocks commonly used to represent the U.S. equity market.