The Dodge & Cox Global Stock Fund had a total return of –1.3% for the first quarter of 2016, compared to –0.3% for the MSCI World Index.
Market Commentary
During a volatile first quarter, global equity markets declined. However, the U.S. dollar’s depreciation against developed market currencies (e.g., British pound, euro, Japanese yen) provided a tailwind to performance. Consequently, the MSCI World Index was down 2% in local currency but down a smaller 0.3% in U.S. dollars.
Japan (down 13% in local currency) was the worst- performing region of the market. Faced with a flagging economy, the Bank of Japan lowered its interest rates into negative territory for the first time, more than a year and a half after the European Central Bank became the first major institution of its kind to venture below zero. With low and even negative interest rates in major economies around the globe, there were pervasive concerns about the future profitability of financial services firms. As a result, Financials (down 6%) was one of the weakest sectors of the MSCI World. Fears of a global economic slowdown and the possibility of the United Kingdom leaving the European Union also weighed on the markets.
The U.S. equity market was volatile during the first quarter: after declining 10% through February 11, the S&P 500 rebounded to end the quarter up 1%. U.S. economic activity continued to expand at a moderate pace: household spending increased, the housing market strengthened, and there were significant gains in employment.
After a challenging 2015, emerging equity markets outperformed their developed market counterparts during the first quarter: the MSCI Emerging Markets Index increased 3% in local currency and 6% in U.S. dollars. Equity markets in Latin America were particularly strong in local currency, especially Brazil (up 15%). After depreciating 33% against the U.S. dollar in 2015, the Brazilian real strengthened 10% during the first quarter.
During 2015, growth stocks (the higher valuation portion of the market) in the United States and around the world outperformed value stocks (the lower valuation portion of the market) by one of the widest margins since the global financial crisis. As 2016 began, growth had become more expensive than at any time in the recent past, while value languished. This valuation differential remains significantly wide by historical standards, even though global value stocks outperformed global growth stocks by 0.8% during the first quarter.2 The historical record suggests that long-term returns to value investing have been highest after periods with wide valuation disparities. In our opinion, these market forces are creating considerable opportunities for value investors like us. We remain optimistic about the long-term outlook for the portfolio and continue to find compelling new long-term investment opportunities. Global equity valuations are attractive: the MSCI World traded at 15.8 times forward estimated earnings on March 31, close to its 20-year average of 16.1 times.
Our experienced and stable team has weathered past periods of market turbulence by remaining steadfast in our investment approach. We believe having patience and persistence with our convictions, and retaining a long-term investment horizon, are essential to investment success. We encourage our shareholders and clients to take a similar long-term view of investing.
First Quarter Performance Review
The Fund underperformed the MSCI World by 1.0 percentage point during the quarter.
Key Detractors From Relative Results
The Fund’s holdings in the Financials sector (down 9% compared to down 6% for the MSCI World sector), combined with a higher average weighting (25% versus 20%), detracted from results. Europe and UK holdings—Credit Suisse (CS, Financial) (down 34%), Barclays (down 32%), and Standard Chartered (LSE:STAN, Financial) (down 18%)— were especially weak. Bank of America (BAC, Financial) (down 19%) and Charles Schwab (down 15%) also detracted.
Weak returns from the Fund’s holdings in the Energy sector (down 4% compared to up 5% for the MSCI World sector) also detracted. Saipem (down 72%) was a notable detractor.
The Fund’s underweight position in the Utilities sector (no holdings versus average 3% for the MSCI World sector), the best performing sector of the market (up 9%), detracted from results.
Additional detractors included Express Scripts (down 21%), Honda Motor (down 15%), and Novartis (down 14%).
Key Contributors to Relative Results
The Fund’s average overweight position in emerging markets (18% versus no holdings for the MSCI World), a region with strong performance (up 9%), contributed to results. BR Malls (up 48%), Itau Unibanco (ITUB, Financial) (up 36%), Petrobras (PZE, Financial) (up 33%), and Kasikornbank (up 20%) were contributors.
The Fund’s holdings in the Information Technology sector (up 5% compared to up 1% for the MSCI World sector) also helped. Hewlett-Packard Enterprise (HPE, Financial) (up 17%) was a notable contributor.
Returns in the Materials sector (up 18% compared to up 4% for the MSCI World sector) had a positive impact. Teck Resources (up 97%) was a strong performer.
Additional contributors included Time Warner (up 13%), Schneider Electric (up 11%), Time Warner Cable (up 11%), and UnitedHealth Group (up 10%).
1The 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 MSCI World Index is a broad-based, unmanaged equity market index aggregated from 23 developed market country indices, including the United States and Canada. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. All returns are stated in U.S. dollars, unless otherwise noted.
- The MSCI World Value Index outperformed the MSCI World Growth Index by 0.8% during the quarter.
