The Dodge & Cox Global Stock Fund had a total return of 24.1% for the fourth quarter of 2020, compared to 14.0% for the MSCI World Index. For 2020, the Fund had a total return of 6.0%, compared to 15.9% for the MSCI World.
Investment Commentary
In 2020, global equity markets were extremely volatile. Global stocks fell sharply in the spring as the coronavirus (COVID-19) pandemic evolved, then rebounded quickly off of March lows and performed well during the second and third quarters. After the successful development of effective COVID-19 vaccines, markets rebounded sharply again in November as investors looked forward to the potential for an economic recovery in 2021.
The market reversals this year illustrate the importance of having a long-term view and staying the course with one's convictions. Markets can turn quickly, and history shows us that major market moves are episodic and unpredictable. Thus, missing even a few days in the market can make a big difference to overall returns.
In the fourth quarter, the Fund significantly outperformed. The Fund is overweight in Energy and Financials, market laggards which became market leaders as global equities surged. However, while the MSCI World Value Index outperformed the MSCI World Growth Index for the quarter,2 value still lagged growth significantly for the year: the MSCI World Value was down 1% compared to up 34% for the MSCI World Growth. The Fund, with its value-oriented positioning, similarly lagged the market for the year. We believe we are still in the early innings of a reversal between value and growth performance and a strong case can be made for investing in value stocks going forward.
First, starting valuations matter, and 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: 13.2 times forward earnings compared to 21.0 times for the MSCI World.3 Historically, lower starting valuations have produced more attractive long-term returns.
Second, we are encouraged by the approval of COVID-19 vaccines. The areas of the market impacted by COVID-19 should continue to recover as more of the population becomes vaccinated. There is also the possibility that 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. Even after the rebound, many stocks that were hit hard by the economic consequences of the pandemic, for example in the Financials, Energy, Industrials, and Real Estate sectors, are still down significantly for the year. The Fund leans toward value and continues to have notable overweights in Financials and Energy.
The portfolio overall is composed mostly of companies with strong franchises that benefit from long-term economic growth. We continue to assess relative valuation opportunities, weighing long-term fundamentals against current prices. For example, while we added to Financials and Energy earlier in the year at depressed valuations, in the fourth quarter we trimmed various Financials holdings that had outperformed and added to several of the Fund's holdings in Health Care.
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 MSCI World by 10.1 percentage points during the quarter.
Key Contributors to Relative Results
Relative returns in the Financials sector (up 41% compared to up 24% for the MSCI World sector), combined with a higher average weighting (29% versus 12%), had a positive impact. Banco Santander (XMAD:SAN, Financial), ICICI Bank (ICICIBANK, Financial), Itau Unibanco (ITUB, Financial), and BNP Paribas (XPAR:BNP, Financial) were strong performers.
The Fund's average overweight position in the Energy sector (6% versus 3%), and strong relative returns (up 50% compared to up 27% for the MSCI World sector), helped results. Occidental Petroleum (OXY, Financial) contributed to results. Glencore (LSE:GLEN, Financial) was an additional contributor.
Key Detractors from Relative Results
Weaker relative returns from holdings in the Health Care sector (up 5% compared to up 7% for the MSCI World sector) hurt results. Sanofi (SNY, Financial), GlaxoSmithKline (GSK), and Alnylam Pharmaceuticals (ALNY) detracted.
Additional detractors included Alibaba (BABA), Charter Communications (CHTR), and Dell Technologies (DELL).
2020 Performance Review
The Fund underperformed the MSCI World by 9.9 percentage points in 2020.
Key Detractors from Relative Results
The Fund's average overweight position in the Financials sector (28% versus 13% for the MSCI World sector), combined with weaker relative returns (down 11% compared to down 3%), hurt results. Societe Generale (XPAR:GLE), UniCredit (MIL:UCG), Standard Chartered (LSE:STAN), and Wells Fargo (WFC) detracted from results.
Stock selection (up 27% compared to up 44% for the MSCI World sector), combined with the Fund's average underweight position in the Information Technology sector (12% versus 20%), detracted from results.
Additional detractors included Occidental Petroleum and Suncor Energy (TSX:SU).
Key Contributors to Relative Results
Relative returns in the Industrials sector (up 37% compared to up 12% for the MSCI World sector) had a positive impact. FedEx (FDX) outperformed.
Strong returns in the Consumer Staples sector (up 55% compared to up 8% for the MSCI World sector) helped results.
Additional contributors included JD.com (JD), Dell Technologies (DELL), Microchip Technologies (MCHP), Sprint (prior to its merger with T-Mobile US (TMUS)), Charter Communications, and Qurate Retail (QRTEA).
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.
