To Our Shareholders (unaudited)
The Dodge & Cox Global Stock Fund—Class I had a total return of 20.26% for the year ended December 31, 2023, compared to a return of 22.20% for the MSCI ACWI Index.1
Market Commentary
In a reversal of 2022's declines, global equity markets finished 2023 with strong returns, as markets reacted to easing inflation and the potential for lower interest rates. The S&P 500 Index2 returned 26.3%, MSCI EAFE Index3 appreciated 18.2%, and the MSCI Emerging Markets Index4 rose 9.8%. Emerging Markets were weighed down by China, which declined 11.2%.5 The MSCI Emerging Markets ex China Index6 returned 20.0%.
Strong global returns were in large part driven by the outsized performance of the “Magnificent Seven”7 and their respective sectors: Information Technology (Microsoft, Apple, and NVIDIA), Communication Services (Alphabet and Meta), and Consumer Discretionary (Amazon and Tesla). These seven stocks rose 75.8%,8 contributed 41.8% to the MSCI ACWI's 2023 return, and increased from 11.6% to 16.9% of the MSCI ACWI's market capitalization over the year.
Not surprisingly, growth stocks also outperformed value stocks9 in 2023 (the MSCI ACWI Growth Index10 and MSCI ACWI Value Index11 were up 33.2% and 11.8%, respectively). The MSCI ACWI Value now trades at 12.6 times forward earnings12 compared to 24.0 times for the MSCI ACWI Growth. The valuation gap between value and growth stocks remains wide at 1.6 standard deviations.13
Strong performance from these seven stocks in the United States also contributed to the wide valuation differential between international and U.S. equities. The MSCI EAFE trades at 13.2 times forward earnings, versus the MSCI USA Index14 at 20.1 times, a meaningful valuation gap that is 2.2 standard deviations outside historic averages.
Investment Strategy
At Dodge & Cox, we are active, value-oriented investors, focused on long-term results. We conduct independent research on individual companies, and look for opportunities that are not already well appreciated by the market. This disciplined, fundamentals-driven, long-term investment approach has helped the Fund outperform the MSCI ACWI over our longer measured time periods: 3-, 5-, 10-year, and since inception.
In 2023, we reduced exposures to holdings that outperformed and added to areas that underperformed. We trimmed selected holdings in Financials and Communication Services—two key overweight positions in the Fund that outperformed—as well as a significant holding in Information Technology. In Communication Services, trims included Meta (META, Financial) and Alphabet (GOOG, Financial).15 In Information Technology, we reduced the Fund's exposure to Broadcom and VMware. In contrast, the Fund added exposure to Health Care, a more defensive part of the portfolio that underperformed. Below we discuss activity in Financials, as well as several new holdings.
Portfolio Changes in Financials
Financials—the largest area of overweight for the Fund—was the Fund's top-contributing sector for the full year (up 23.8% compared to up 16.3% for the MSCI ACWI sector), and thus became the second-largest area of trims in the fourth quarter.
The Fund trimmed several holdings that performed strongly, including UBS Group (UBS, Financial), a leading global asset manager that appreciated 70.3% to become one of the Fund's top contributors to performance. UBS has an attractive mix of market-leading, capital-efficient, and geographically diversified businesses. The company has created significant shareholder value in recent years through its high return on invested capital and strong capital allocation. Last year, returns were driven in large part by their acquisition of Credit Suisse, which helped restore confidence in the stability of the Swiss economy and banking system. Through this deal, UBS acquired nearly $58 billion in book value from Credit Suisse for $3 billion, a substantial discount. After strong performance, we trimmed UBS.
The Fund's Financials holdings with exposure to Brazil were also top performers: XP (XP, Financial) and Itau Unibanco (ITUB, Financial) were up 79.6% and 53.6%, respectively, while Banco Santander (SAN, Financial) was up 44.3%. Hence, we trimmed Banco Santander and XP during 2023.
Despite these trims, the Fund remains overweight Financials (30.6% versus 15.9% in the MSCI ACWI), an area that offers favorable risk/reward profiles due to attractive capital return, resilient balance sheets, improved profitability, and inexpensive valuations. Importantly, the Fund's holdings are also widely diversified across business segments and geographies.
A New Holding in Financials: Truist Financial (TFC, Financial)
In the first half of 2023, U.S. regional banks became widely discounted after the failures of three U.S. regional banks, which had significant concentrations of uninsured deposits and large unrealized losses on their balance sheets. Truist Financial was one of the U.S. regional banks that got caught in the ensuing downdraft. Our global Financials team carefully reviewed Truist, and we started a position based upon the company's different deposit profile, compelling valuation, and downside protection in the form of potential asset sales.
A New Holding in Health Care: Baxter International (BAX, Financial)
Investor enthusiasm for Information Technology, artificial intelligence, and the Magnificent Seven dampened interest in more stable, defensive areas like Health Care, which underperformed the major indices during 2023. In addition, regulatory concerns weighed on the sector, and the increased use of GLP-1 inhibitors,16 like Ozempic, created uncertainty regarding potential shifts in demand for certain health care procedures and services as well as certain consumer-related products.
During the third quarter, we initiated a position in Baxter International, a leading medical supply firm. Baxter holds a large market share in its major markets but has faced considerable headwinds recently. Issues include inflationary cost pressures, the acquisition of hospital bed company Hillrom (and the increase in debt related to the purchase), and concerns about GLP-1's potential to reduce demand for dialysis supplies. These factors contributed to a share price decline of more than 50% over the last two years.
We think the company has strong underlying businesses and will be able to maintain stable growth, increase margins, and pay down its debt. Moreover, dialysis demand from chronic kidney patients is unlikely to drastically change over our three- to five-year investment horizon, despite GLP-1's potential to reduce obesity. Based on these factors, the company's valuation at 13.0 times forward earnings and dividend yield of 3.0% presented an attractive opportunity to start a position.
International Flavors & Fragrances (IFF, Financial)
IFF is good example of a company with near-term challenges that provided us an opportunity to buy a strong franchise at depressed levels. As the names suggests, IFF sells flavors, scents, and other key ingredients to food, beverage, and consumer products companies. The company operates in an oligopolistic industry with high barriers to entry, low economic sensitivity, and provides mission-critical inputs that are a small percentage of product costs. The business is very defensive, with attractive growth and historically stable margins. 2022 and 2023, however, were challenging years for IFF.
The company's margins and valuation fell to their lowest levels in over a decade due to merger integration challenges. But, management is cutting costs to boost margins, and activist investors are focused on keeping management disciplined and shareholders as a top priority. We think it presents an interesting long-term opportunity, so we started a position in the fourth quarter. IFF was a 0.9% position in the Fund at year end.
In Closing
We continue to be optimistic about the long-term outlook for the Fund, which is diversified across a broad range of sectors and investment themes. The Fund's portfolio trades at an attractive 11.0 times forward earnings, which is a discount not only to the MSCI ACWI at 16.6 times, but also to the MSCI ACWI Value at 12.6 times. Markets can be volatile and overreact to near-term developments and headline news. However, volatility creates opportunities for investors with a long-term perspective and valuation discipline. We encourage our investors to focus on that longer-term opportunity.
Thank you for your continued confidence in our firm. As always, we welcome your comments and questions.
For the Board of Trustees,
Dana M. Emery
Chair and President
January 31, 2024
Returns represent past performance and do not guarantee future results. Investment return and share price will fluctuate with market conditions, and investors may have a gain or loss when shares are sold. Fund performance changes over time and currently may be significantly lower than stated. Performance is updated and published monthly. Visit the Fund's website at dodgeandcox.com or call 800-621-3979 for current performance figures.
