The Dodge & Cox Stock Fund had a total return of 20.9% for the fourth quarter of 2020, compared to 12.1% for the S&P 500 Index and 16.3% for the Russell 1000 Value Index. For 2020, the Fund had a total return of 7.2%, compared to 18.4% for the S&P 500 and 2.8% for the Russell 1000 Value.
Investment Commentary
The U.S. equity market was extremely volatile in 2020. During the first quarter, concerns about the coronavirus (COVID-19) pandemic abruptly ended the longest stock market bull run in U.S. history. U.S. equities fell sharply in the first quarter, but from the low point in late March, rebounded strongly for the remainder of the year, due to a combination of depressed valuations, substantial fiscal and monetary stimulus, and a robust recovery in corporate earnings. After the successful development of effective COVID -19 vaccines in the fourth quarter, segments of the markets that had previously lagged (e.g., Energy, Financials, Industrials) outperformed as the U.S. stock market surged to an all-time high in December. This market reversal illustrates the importance of having a long-term view and staying the course with one's convictions because markets can turn quickly.
As a result of the COVID-19 pandemic, the market has bifurcated: businesses that are largely immune to the economic impact of the pandemic (we describe them as "COVID defensive") and those that have been hit hard by the economic consequences of the pandemic ("COVID cyclical"), largely in the Financials, Energy, Industrials, and Real Estate sectors. In 2020, Energy was the worst-performing sector of the S&P 500 (down 34%), reflecting an unprecedented demand decline due to worldwide stay-at-home orders and the global economic slowdown.
Over the past decade, U.S. value stocks2 have underperformed growth stocks by 218 percentage points.The Fund is value-oriented and outperformed the Russell 1000 Value by 38 percentage points,3 but underperformed the broad-based S&P 500. In September 2020, the market started to shift in value's favor, but it is too soon to know whether this could be the beginning of a major reversal in market leadership. Increasingly, we believe a strong case can be made for investing in value stocks going forward.
First, the valuation differential between value and growth stocks remains wide by historical standards, which creates ample opportunities for value-oriented investors like Dodge & Cox. The Fund trades at a significant discount to the broad-based market: 13.7 times forward earnings compared to 23.7 times for the S&P 500.4 Historically, lower starting valuations have produced more attractive long-term returns.
Second, we are encouraged by the approval of effective COVID-19 vaccines. The COVID-cyclical areas of the market should continue to recover as more of the population becomes vaccinated. There is also the possibility that U.S. interest rates increase as the economy recovers, which would further benefit many of the Fund's holdings.
Third, history has indicated it is hard to stay a market leader. Several very large, high-valuation technology companies have had a large influence on market returns. We believe many of them are overvalued and face significant challenges, not only in justifying their valuations but also because of mounting competitive and regulatory threats. In addition, they would be disadvantaged by higher interest rates.
We have strong conviction in our portfolio positioning. The Fund leans heavily toward COVID-cyclical and value sectors, with notable overweights in Financials and Energy. The portfolio is composed mostly of companies with strong franchises that would benefit from long-term economic growth.
We believe patience, persistence, and a long-term investment horizon are essential to investment success. We encourage our shareholders to take a similar long-term view. Thank you for your continued confidence in Dodge & Cox.
Fourth Quarter Performance Review
The Fund outperformed the S&P 500 by 8.7 percentage points during the quarter.
Key Contributors to Relative Results
In Financials, the Fund's holdings (up 32% versus up 23% for the S&P 500 sector) and overweight position both had a positive impact. Charles Schwab and Capital One Financial performed well.
The Fund's overweight position and holdings in Energy (up 44% versus up 28% for the S&P 500 sector) contributed, notably Occidental Petroleum (OXY, Financial) and Baker Hughes (BKR, Financial). The Fund's Information Technology holdings (up 19%) outpaced the S&P 500 sector (up 12%). Microchip Technology (MCHP, Financial) and HP Inc. (HPQ, Financial) contributed significantly.
Key Detractors from Relative Results
In Health Care, the Fund's holdings (up 6% versus up 8% for the S&P 500 sector) and overweight position hurt results. Sanofi and GlaxoSmithKline were weak.
The Fund outperformed the Russell 1000 Value (R1000V) by 4.6 percentage points during the quarter.
Key Contributors to Relative Results
Relative returns in the Financials sector (up 32% versus up 26% for the R1000V sector), combined with a higher average weighting, had a positive impact. Charles Schwab (SCHW, Financial) and Capital One Financial (COF, Financial) were notable contributors.
In Energy, the Fund's overweight position and holdings (up 44% versus up 28% for the R1000V sector) contributed, notably Occidental Petroleum and Baker Hughes.
Key Detractors from Relative Results
Returns from holdings in the Industrials sector (up 14% versus up 20% for the R1000V sector) hurt results.
The Fund's holdings in Health Care (up 6% versus up 9% for the R1000V sector) and overweight position in the sector detracted. Sanofi (SNY, Financial) and GlaxoSmithKline (GSK, Financial) lagged.
2020 Performance Review
The Fund underperformed the S&P 500 by 11.2 percentage points in 2020.
Key Detractors from Relative Results
Relative results were hurt by strong returns from a small group of large internet- and technology-related companies not held by the Fund.
Returns from holdings in the Information Technology sector (up 22% versus up 44% for the S&P 500 sector) detracted. Hewlett Packard Enterprise (HPE, Financial) was weak.
In Energy, the Fund's overweight position and holdings (down 41% versus down 34% for the S&P 500 sector) hindered performance. Occidental Petroleum lagged.
A higher average weighting and weaker returns from holdings in the Financials sector (down 7% versus down 2% for the S&P 500 sector) hurt results. Wells Fargo (WFC, Financial) and Bank of America (BAC, Financial) performed poorly.
Key Contributors to Relative Results
The Fund's holdings in Industrials (up 34% versus up 11% for the S&P 500 sector) had a positive impact. FedEx (FDX, Financial) performed well.
The Fund's lack of exposure to Real Estate and Utilities helped results as these sectors were weak (down 2% and unchanged, respectively). Microchip Technology and Dell Technologies (DELL) also contributed.
The Fund outperformed the Russell 1000 Value by 4.4 percentage points in 2020.
Key Contributors to Relative Results
In Information Technology, the Fund's holdings (up 22% versus up 10% for the R1000V sector) and overweight position had a positive impact. Microchip Technology was strong.
Returns from holdings in the Communication Services sector (up 27% versus up 10% for the R1000V sector). Charter Communications (CHTR) and Alphabet (GOOG)(GOOGL) performed well. The Fund's holdings in Industrials (up 34% versus up 12% for the R1000V sector) helped results. FedEx was a standout performer.
Key Detractors from Relative Results
The Fund's overweight position and holdings in Energy (down 41% versus down 33% for the R1000V sector) hurt results, notably Occidental Petroleum and Apache (APA). In Consumer Staples, the Fund's only holding—Molson Coors (TAP)—was weak.
- 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. The Russell 1000® Value Index is composed of those Russell 1000® companies with lower price-to-book ratios and lower forecasted growth values.
- Value stocks are the lower valuation portion of the equity market, and growth stocks are the higher valuation portion.
- The Russell 1000 Value Index had a total return of 171.3% from December 31, 2010 through December 31, 2020 compared to 389.3% for the Russell 1000 Growth Index and 209.4% for the Stock Fund.
- Unless otherwise specified, all weightings and characteristics are as of December 31, 2020.
S&P 500® is a trademark of S&P Global Inc. Russell 1000® is a trademark of the London Stock Exchange Group plc. For more information about these indices, visit dodgeandcox.com.
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.
Before investing in any Dodge & Cox Fund, you should carefully consider the Fund's investment objectives, risks, and charges and expenses. To obtain a Fund's prospectus and summary prospectus, which contain this and other important information, visit dodgeandcox.com or call 800-621-3979. Please read the prospectus and summary prospectus carefully before investing.
