The Dodge & Cox Global Stock Fund had a total return of 10.8% for the fourth quarter of 2019, compared to 8.6% for the MSCI World Index. For 2019, the Fund had a total return of 23.8%, compared to 27.7% for the MSCI World Index.
Investment Commentary
Global equity markets experienced strong performance in 2019, with the MSCI World delivering a 28% return. Improving sentiment surrounding the same macro factors that dragged markets down in 2018—sluggish economic growth, the direction of monetary policy, and trade wars—propelled markets in 2019.
In the United States, the S&P 500 Index reached an all-time high, delivering its strongest annual return since 2013 (up 31%), as every sector posted double-digit returns. Information Technology surged 50% and was the best-performing sector of the S&P 500, while Energy (up 12%) was the worst-performing sector. International equity markets also rebounded sharply in 2019 (MSCI EAFE Index up 22%), more than offsetting the decline in 2018. And every sector of the MSCI EAFE also posted positive returns.
We believe this is an extremely compelling time to be invested in the value part of the market, given the enormous valuation disparity between value and growth stocks.2 History has shown that starting valuation is a major factor in long-term returns, and the current valuation disparity is exceptional: the MSCI World Growth Index now trades at 23.1 times forward earnings, while the MSCI World Value Index trades at 13.4 times.3 This relative disparity in valuation places us in the 94th percentile of historic experience, and represents the largest gap we have seen since 2000.4
Four sectors encapsulate the current spread between value and growth stocks. On the value end of the spectrum, Financials and Energy are the two largest overweights in the MSCI World Value compared to the overall market. Conversely, Information Technology and Consumer Discretionary are the two largest overweights of the MSCI World Growth compared to the overall market. As a result of our bottom-up approach, the Fund is overweight Financials, Health Care, and Energy and underweight Information Technology, Consumer Discretionary, and Consumer Staples.
Given the wide valuation spread, we are finding compelling investment opportunities. For example, we leaned further into Energy in 2019, with new positions in Hess (HES, Financial) and Encana (ECA, Financial). Hess is an independent oil and gas exploration and production company, investing its strong cash flows from existing assets into a new project with significant economic potential in Guyana.5 The Guyana oil discovery is one of the largest in recent decades. Encana is one of the largest shale oil producers in North America, with the ability to grow production at mid-single-digit rates over our investment horizon, trading at an attractive high single- digit free cash flow yield. Additionally, we added to Apache (APA, Financial), an existing holding with attractive exposure to a potentially lucrative new discovery off the coast of Suriname. We believe the valuations of the Fund’s energy holdings, combined with compelling new opportunities, represent attractive investments. The Fund also continues to be overweight Financials, which contributed to relative performance in the fourth quarter.
We believe the Fund is well positioned to benefit over the long term, especially if and when this large valuation gap compresses. We remain optimistic about the outlook for the Fund and encourage our fellow shareholders to focus on the long term. Thank you for your continued confidence in Dodge & Cox.
Fourth Quarter Performance Review
The Fund outperformed the MSCI World Index by 2.2 percentage points during the quarter.
Key Contributors to Relative Results
- The Fund’s strong stock selection in the Financials sector (up 15% compared to up 9% for the MSCI World sector), combined with a higher average weighting (32% versus 16%), was the primary driver of outperformance. UniCredit, Societe Generale, BNP Paribas, ICICI Bank, and Barclays were strong performers.
- Relative returns in the Health Care sector (up 17% compared to up 14% for the MSCI World sector) and the Fund’s average overweight position (18% versus 13%) also helped performance. Cigna (CI, Financial) and Bristol-Myers Squibb (BMY, Financial) performed well. Baidu (BIDU, Financial) was an additional contributor.
Key Detractors from Relative Results
- The Fund’s average underweight position in the Information Technology sector (10% versus 17%), the best-performing sector in the MSCI World, combined with weaker relative returns (up 8% compared to up 14% for the MSCI World sector), hurt results.
- In the Energy sector, the Fund’s average overweight position (9% versus 5%), combined with weak relative returns (up 3% compared to up 5% for the MSCI World sector), hindered performance. Occidental Petroleum (OXY, Financial) and Apache lagged. Johnson Controls International (JCI, Financial) was an additional detractor.
2019 Performance Review
The Fund underperformed the MSCI World Index by 3.8 percentage points in 2019.
Key Detractors from Relative Results
- Information Technology was the best-performing sector in the MSCI World. The Fund’s weaker relative returns (up 27% compared to up 48% for the MSCI World sector) and average underweight position (10% versus 16%) detracted from returns.
- The Fund’s average overweight position in the Energy sector (8% versus 6% for the MSCI World), the worst-performing sector of the market, hurt results. Occidental Petroleum and Apache performed poorly.
- Additional detractors included Qurate Retail (QRTEA, Financial), FedEx (FDX, Financial), Baidu, and Banco Santander.
Key Contributors to Relative Results
- The Fund’s strong stock selection in the Health Care sector (up 28% compared to up 23% for the MSCI World sector), contributed to results.
- Relative returns in Communication Services (up 30% compared to up 28% for the MSCI World sector), combined with a higher average weighting (14% versus 8%), had a positive impact. Charter Communications (CHTR, Financial) and Altice Europe were strong performers.
- Additional contributors included Anadarko Petroleum (APC, Financial), JD.com (JD), and Johnson Controls International.
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 Value stocks are the lower valuation portion of the equity market, and growth stocks are the higher valuation portion.
3 Unless otherwise specified, all weightings and characteristics are as of December 31, 2019.
4 The MSCI World Value Index and MSCI World Growth Index were formed in 1997. The 94th percentile was calculated using monthly data from FactSet for 1997-2003 and MSCI for 2003-present.
5 Hess is a 30% partner with Exxon Mobile in the Stabroek block in Guyana.
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 above. Performance is updated and published monthly. Visit the Fund’s website at dodgeandcox.com or call 800-621-3979 for current month-end performance figures.
