The Dodge & Cox Stock Fund had a total return of 20.0% for the second quarter of 2020, compared to 20.5% for the S&P 500 Index. For the six months ended June 30, 2020, the Fund had a total return of –15.0%, compared to –3.1% for the S&P 500.
Investment Commentary
During the first half of 2020, the spread of the coronavirus (COVID-19) evolved into a global pandemic that disrupted major economies, increased financial market volatility, and abruptly ended the longest stock market bull run in U.S. history. The U.S. equity market performed strongly in the second quarter recovering off March lows, despite the continuing public health crisis and current economic downturn. Every sector of the S&P 500 posted positive returns.
With the economy performing so poorly, why has the stock market recovered so dramatically? The U.S. government’s massive fiscal and monetary stimulus programs, coupled with optimism regarding anticipated health care solutions and some corporate earnings recovery, have bolstered investor confidence. Not insignificantly, almost 70% of the S&P 500 is comprised of businesses that are largely immune to the economic impact of the pandemic (we think of them as “COVID defensive”); the vast majority of these companies are in the Information Technology, Consumer Staples, Utilities, and Health Care sectors. The other 30% of the S&P 500 has been hit hard by the economic consequences of the pandemic (“COVID cyclical”), mostly in the Financials, Energy, Industrials, Materials, Consumer Discretionary (ex-internet retail), and Real Estate sectors. Market movements and valuation changes can happen swiftly and without warning, as evidenced by the strong rebound in Energy and Materials, two of the hardest hit areas of the market in the first quarter. These sectors were among the top performers in the second quarter, beating the S&P 500’s return.
Over the last decade, U.S. growth stocks have outperformed value stocks2 by an astounding cumulative 221 percentage points.3 During this challenging period for value investors, the Fund has underperformed the broad-based S&P 500, but outperformed the U.S. value investment universe by 33 percentage points.4 The valuation differential between value- and growth-oriented stocks has created ample opportunities for valueoriented investors like Dodge & Cox.
Our investment team has been highly productive in these volatile markets, reviewing existing portfolio holdings and recommending new investments. This analysis has helped the U.S. Equity Investment Committee shift the portfolio based on COVID-impacted fundamentals and valuations. During the second quarter, we trimmed higher valuation areas of the portfolio that had performed strongly, such as Pharmaceuticals and more expensive technology-related companies, and leaned further into value portions of the market such as Financials, Energy, Materials, Industrials, and low-valuation technology companies. We recently added to existing holdings such as American Express (AXP, Financial), Carrier (CARR, Financial), Celanese (CE, Financial), Hewlett Packard Enterprise (HPE, Financial), HP Inc. (HPQ, Financial), MetLife (MET, Financial), VMware (VMW, Financial), and Wells Fargo (WFC, Financial).5 We also started four new positions in the Fund, including LyondellBasell (LYB, Financial) (one of the world’s largest commodity chemical companies) and Williams Companies (WMB, Financial) (a nationwide energy processing and transporting company with approximately 30% of all U.S. natural gas volumes).
While the portfolio remains tilted toward Financials (25.5%6 of the portfolio versus 10.1% of the S&P 500), Health Care (17.7% versus 14.6%), and Energy (9.3% versus 2.8%), the Fund remains diversified and has exposure to various investment drivers. We have strong conviction in our value-oriented, active investment approach and continue to believe now is an opportune time to be invested in value stocks.
We remain optimistic about the long-term outlook for the Fund, which trades at a significant discount to the overall market: 13.4 times forward earnings compared to 24.2 times for the S&P 500. Patience, persistence, and a long-term investment horizon are essential to long-term investment success. We encourage our shareholders to take a similar view. Thank you for your continued confidence in Dodge & Cox.
Our thoughts are with all the individuals and families of those who have suffered from COVID-19 and also with the dedicated health care workers and first responders battling on the front lines. We wish everyone all the best during these challenging times.
Second Quarter Performance Review
The Fund underperformed the S&P 500 by 0.5 percentage points during the quarter.
Key Detractors from Relative Results
- Strong performance by a few large technology and internet related companies not held in the Fund hurt relative results. The impact was substantial in Information Technology and Consumer Discretionary (two of the strongest S&P 500 sectors), where the Fund was underweight throughout the period.
- The Fund’s holdings within Information Technology lagged (up 25% versus up 31%), especially HP Inc. and Hewlett Packard Enterprise.
- A higher average weighting in Financials (26% versus 11%) hurt performance since the sector continued to lag the market. Wells Fargo and Charles Schwab (SCHW, Financial) were key detractors.
- In the Consumer Discretionary sector, the Fund’s average underweight position (3% versus 10%) hurt relative results.
- In Health Care, the Fund’s lower returns (up 12% versus up 14%) and higher average weighting (20% versus 15%) had a negative impact. Cigna (CI, Financial) and Novartis (NVS) were weak.
- Molson Coors (TAP) and FedEx (FDX) also detracted.
Key Contributors to Relative Results
- The Fund’s higher average weighting (9% versus 3%) and strong performance in the Energy sector (up 54% versus up 31%) contributed. Occidental Petroleum (OXY), Apache (APA), Baker Hughes (BHI), and Halliburton (HAL) appreciated substantially.
- The Fund’s underweight position in Consumer Staples and Utilities helped results since these were the weakest areas of the Index (up 8% and up 3% respectively for the S&P 500).
- Microchip Technology (MCHP) and DISH Network (DISH) were also strong contributors.
Year-to-Date Performance Review
The Fund underperformed the S&P 500 by 11.9 percentage points year to date.
Key Detractors from Relative Results
- Strong performance by a few large technology and internet related companies not held in the Fund hurt relative returns, especially in the Information Technology (down 3% versus up 15%) and Consumer Discretionary (down 19% versus up 7%) sectors.
- Within Information Technology, Hewlett Packard Enterprise lagged. The Fund’s underweight position in the sector (averaging 18% versus 25%) also had a negative impact.
- In Financials, the Fund’s average overweight position (26% versus 11%) and lower returns (down 31% versus down 24%) detracted. Wells Fargo, Capital One Financial (COF), and Charles Schwab were the biggest detractors.
- Energy was the weakest sector of the Fund and the Index (down 47% versus down 35%). The Fund’s higher average weighting (9% versus 3%) and weaker returns from holdings hurt results. Occidental Petroleum, Apache, and Schlumberger (SLB) performed poorly.
Key Contributors to Relative Results
- The Fund’s average overweight position (21% versus 15%) and better returns in the Health Care sector (up 1% versus down 1%) aided results. Roche (XSWX:ROG), AstraZeneca (LSE:AZN), and Alnylam Pharmaceuticals (ALNY) were particularly strong.
- The Fund’s lack of holdings in the Utilities and Real Estate sectors contributed since these segments of the Index lagged (down 11% and down 9%, respectively).
- Sprint was exceptionally strong as its merger with T-Mobile US (TMUS) was approved.
- Microchip Technology, Dell Technologies (DELL), and Charter Communications (CHTR) also contributed.
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 S&P 500 Index is a market capitalization-weighted index of 500 large-capitalization stocks commonly used to represent the U.S. equity market.
2 Value stocks are the lower valuation portion of the equity market, and growth stocks are the higher valuation portion.
3 The Russell 1000 Growth Index had a total return of 390.3% from June 30, 2010 through June 30, 2020 compared to 169.1% for the Russell 1000 Value Index.
4 The Dodge & Cox Stock Fund had a total return of 202.5% from June 30, 2010 through June 30, 2020 compared to 169.1% for the Russell 1000 Value Index.
5 The use of specific examples does not imply that they are more or less attractive investments than the portfolio’s other holdings.
6 Unless otherwise specified, all weightings and characteristics are as of June 30, 2020
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.
Also check out:
