The Dodge & Cox Global Stock Fund had a total return of 7.1% for the fourth quarter of 2016, compared to 1.9% for the MSCI World Index. For 2016, the Fund had a total return of 17.1%, compared to 7.5% for the MSCI World.
Investment Commentary
2016 has been an extraordinary year. We would like to express sincere appreciation to our fellow shareholders for your patience and confidence in Dodge & Cox. The Fund’s strong performance in 2016, in both absolute and relative terms, was achieved with largely the same portfolio that produced weak results in 2015. In some cases, we leaned even further into areas of investor pessimism as valuations declined. Many of the biggest contributors in 2016 were the largest detractors in 2015. The longer-term results for the Fund have improved significantly with this year’s strong performance rebound.
The Fund benefited from two broad market factors. First, in 2015, value stocks underperformed growth stocks globally; in the United States, this underperformance was by one of the widest margins since the global financial crisis. The trend reversed across global equities in 2016 as value stocks outperformed growth stocks by ten percentage points,2 benefiting the Fund’s value-oriented portfolio. The more economically sensitive, cyclical sectors of the market (e.g., Energy, Financials) account for a larger portion of the value category than stocks in the more defensive, stable sectors (e.g., Consumer Staples, Telecommunication Services, Utilities). Each group’s equity returns have been highly correlated with interest rate movements. As interest rates declined to historically low levels and investors searched for yield in the equity market, defensive stocks with “bond -like” characteristics outperformed the more cyclical stocks. Conversely, as U.S. Treasury yields rose during the second half of 2016, especially after the U.S. election, economically sensitive holdings outperformed considerably. The Fund’s performance in 2016 mirrored this shift: flat in the first half and up 18% in the second half.
Second, as emerging markets lagged developed markets on a multi-year basis through 2015, valuations had become increasingly attractive and the Fund found more investment opportunities. After a dramatic 15% drop in 2015, the MSCI Emerging Markets Index was up 11% in 2016, significantly outpacing the 1% return for developed markets stocks. Many of the Fund’s largest emerging market detractors in 2015 turned out to be the biggest contributors in 2016. For example, Petrobras (PZE, Financial) and Itau Unibanco (ITUB, Financial) in Brazil were down 55% and 41%, respectively, in 2015, but were up 159% and 81% in 2016.
Performance results over the past few years reaffirm that a single quarter or year is too short an interval over which to judge the success of our strategy. Our bottom-up, value-oriented, active investment approach requires independent thinking to build the level of conviction required to invest in companies that are out of favor and the persistence to stick with those convictions in the face of market volatility. It often takes time for a company’s operations to improve and to be recognized by the market. Accordingly, maintaining a long-term investment horizon and staying the course are essential for our investment team, as well as for our fellow shareholders.
Looking forward, we continue to see attractive investment opportunities throughout the world. While valuations have increased, especially in the United States, the portfolio trades at a discount to the overall global equity market (14.5 times forward earnings compared to 16.3 times for the MSCI World). We believe the Fund is well positioned, and we remain optimistic about the long-term outlook for the portfolio.
Fourth Quarter Performance Review
The Fund outperformed the MSCI World by 5.2 percentage points during the quarter.
Key Contributors to Relative Results
Strong returns in the Financials sector (up 21% compared to up 15% for the MSCI World sector), combined with a higher average weighting (27% versus 17%), had a positive impact. Goldman Sachs (GS, Financial) (up 49%), Bank of America (BAC, Financial) (up 42%), Barclays (up 27%), Charles Schwab (SCHW, Financial) (up 25%), and Capital One (COF, Financial) (up 22%) were strong performers.
The Fund’s average underweight position in the Consumer Staples sector (1% versus 10% for the MSCI World sector) helped performance because this was the second weakest sector of the market (down 6%).
Relative returns in the Health Care sector (flat compared to down 5% for the MSCI World sector), especially in the Health Care Providers & Services industry (up 7% compared to up 2%), contributed to results.
Additional contributors included Baker Hughes (up 29%), Sprint (up 27%), and Time Warner, Inc. (up 22%).
Key Detractors From Relative Results
Within the Consumer Discretionary sector, weak relative returns from holdings in the Media industry (up 2% compared to up 5% for the MSCI World industry) hurt results. Grupo Televisa (down 19%) and Naspers (down 15%) were notable detractors.
Additional detractors included Alnylam Pharmaceuticals (down 45%), AstraZeneca (down 16%), and Baidu (down 10%).
2016 Performance Review
The Fund outperformed the MSCI World by 9.6 percentage points in 2016.
Key Contributors to Relative Results
Strong returns from the Fund’s holdings in emerging markets (up 23%), specifically in Brazil, contributed to performance. Petrobras (up 159%) and Itau Unibanco (up 81%) were particularly strong.
Relative returns in the Financials sector (up 16% compared to up 10% for the MSCI World sector), combined with a higher average weighting (26% versus 17%), had a positive impact. Goldman Sachs (up 35%) and Bank of America (up 33%) performed well.
Strong returns from the Fund’s holdings in the Information Technology sector (up 22% compared to up 11% for the MSCI World sector) bolstered results. Hewlett Packard Enterprise (up 54%) and Samsung Electronics (up 29%) were notable contributors.
Additional contributors included Teck Resources (up 201% to date of sale), Sprint (up 133%), and Time Warner, Inc. (up 52%).
Key Detractors From Relative Results
The Fund’s average overweight position in the Health Care sector (15% versus 13% for the MSCI World sector) hindered results because this was the weakest sector of the market (down 7%). Express Scripts (down 21%), Roche (down 15%), and Novartis (down 14%) performed poorly.
Additional detractors included Saipem (down 43%) and Credit Suisse (down 30%).
1. 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 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.
2. The MSCI World Value Index outperformed the MSCI World Growth Index by 10.0 percentage points during 2016. Generally, stocks that have lower valuations are considered “value” stocks, while those with higher valuations are considered “growth” stocks.
