The Dodge & Cox Global Stock Fund had a total return of 20.3% for the second quarter of 2020, compared to 19.4% for the MSCI World Index. For the six months ended June 30, 2020, the Fund had a total return of –17.0%, compared to –5.8% for the MSCI World.
Investment Commentary
In the first quarter of 2020, the coronavirus (COVID-19) pandemic evolved into a global threat that disrupted major economies and greatly increased volatility in the financial markets. After declining sharply in the first quarter, the MSCI World rebounded strongly in the second quarter, with every sector and region posting positive returns. Not surprisingly, some of the hardest hit sectors in the first quarter—traditional value sectors such as Energy, Materials, and Industrials— were among the better-performing sectors in the second quarter. Meanwhile, Information Technology, a longtime leader that has helped fuel the “growth” side of the market, regained its position as the best-performing sector of the MSCI World. Market sentiment benefited from massive government fiscal and monetary stimulus programs, as well as optimism around potential health care solutions, even before earnings recovery materialized.
Over the last decade, the MSCI World Value Index2 has underperformed the MSCI World Growth Index by an astounding 142 percentage points cumulatively.3 During this challenging period for value investors, the Fund has underperformed the broad-based MSCI World, but outperformed the MSCI World Value Index by 31 percentage points and MSCI ACWI Value Index by 44 percentage points.4 The valuation differential between value- and growth-oriented stocks remains extremely wide by historical standards: the MSCI World Value trades at 15.1 times forward earnings compared to 29.4 times for the MSCI World Growth.5 This valuation disparity is almost four standard deviations below the historic average and has created ample investment opportunities for value-oriented investors like Dodge & Cox.
Our team of global industry analysts has been highly productive in these volatile markets, reviewing existing portfolio holdings and presenting many new opportunities. This analysis has helped the Global 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 (e.g., Health Care, more expensive technology-related companies) and Energy holdings that had rebounded, while leaning further into value opportunities in the market such as in Materials, Financials, and lower valuation TMT. We added to existing holdings including Axis Bank (BOM:532215, Financial), Banco Santander (XMAD:SAN, Financial), Comcast (CMCSA), Itau Unibanco (ITUB, Financial), and VMWare (VMW, Financial).6 We also started five new positions in the Fund, including Facebook (FB, Financial) (a social media conglomerate), LyondellBasell (LYB, Financial) (one of the world’s largest commodity chemical companies), and Nutrien (TSX:NTR, Financial) (the largest agricultural fertilizer producer in the world).
While the portfolio remains tilted toward Financials, Energy, Communication Services, and Health Care, 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.
Overall, we remain optimistic about the long-term outlook for the Fund, which trades at a significant discount to the overall market: 13.1 times forward earnings compared to 20.2 times for the MSCI World. 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 outperformed the MSCI World by 0.9 percentage points during the quarter.
Key Contributors to Relative Results
- Relative returns in the Energy sector (up 56% compared to up 17% for the MSCI World sector), combined with a higher average weighting (8% versus 3%), had a positive impact. Ovintiv (TSX:OVV), Apache (APA), Occidental Petroleum (OXY), Hess (HES), and Baker Hughes (BHI) were strong performers.
- The Fund’s average underweight position in the Consumer Staples sector (1% versus 9%) and stock selection (up 44% compared to up 9%) contributed to results.
- Microchip Technology (MCHP), JD.com (JD), and Dell Technologies (DELL) were additional contributors.
Key Detractors from Relative Results
- The Fund’s average underweight position in the Information Technology sector (13% versus 20%), combined with stock selection (up 26% compared to up 31%), detracted from results. HP Inc. (HPQ) lagged.
- The Fund’s higher average weighting in the Financials sector (28% versus 13%) hurt results. Standard Chartered (LSE:STAN), Banco Santander, Wells Fargo (WFC), and Charles Schwab (SCHW) detracted from results.
- Mitsubishi Electric (TSE:6503) and Grupo Televisa (MEX:TLEVISACPO) were additional detractors.
Year-to-Date Performance Review
The Fund underperformed the MSCI World by 11.2 percentage points year to date.
Key Detractors from Relative Results
- The Fund’s average overweight position in the Financials sector (29% versus 14% for the MSCI World sector), combined with stock selection (down 35% compared to down 23%), hurt results. ICICI Bank (NSE:ICICIBANK), Societe Generale (XPAR:GLE), UniCredit (MIL:UCG), and Banco Santander lagged.
- In the Information Technology sector, the Fund’s holdings (down 4% compared to up 14% for the MSCI World sector) and average underweight position (12% versus 19%) detracted from results.
- Occidental Petroleum and Grupo Televisa also detracted from results.
Key Contributors to Relative Results
- Stock selection in the Industrials sector (down 9% compared to down 13%) as well as the Fund’s average underweight position (7% versus 10%) helped results.
- The Fund’s average underweight position in the Real Estate sector (<1% versus 3%) contributed to results.
- Additional contributors included JD.com, Sprint (S), Dell Technologies, Microchip Technology, Roche (XSWX:ROG), Prosus (XAMS:PRX), Naspers (JSE:NPN), and Charter Communications (CHTR).
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.
