The Dodge & Cox Global Stock Fund had a total return of 11.6% for the first quarter of 2021, compared to 4.9% for the MSCI World Index.
Investment Commentary
From the beginning of 2017 through September 2020, the MSCI World Growth Index outperformed the MSCI World Value Index by 81 percentage points,2 as growth stocks benefited from an increasing valuation premium.3 This premium increased even further after the COVID-19 pandemic resulted in greater macro uncertainty, record low interest rates, and a collapse in oil prices. By the summer of 2020, investors were asking whether value investing was still a viable strategy. As value investors, we believed patience and persistence would be rewarded in the long term given the extremely attractive valuation gap between growth and value stocks.
Value has seen a meaningful recovery over the last two quarters. In the first quarter of 2021, the MSCI World Value was up 10%, versus the MSCI World Growth which was essentially flat. Combined with the strong outperformance seen in the fourth quarter of 2020, the MSCI World Value is now up 27% over the last two quarters, versus the MSCI World Growth which was up 13%. Interest rates and oil prices have risen sharply, as the successful development and rollout of COVID-19 vaccines have created optimism around an economic rebound. Segments of the market that had previously lagged (e.g., Energy, Financials, Industrials, Materials) have outperformed significantly. The overall market has also surged, with the MSCI World hitting an all-time high in March, and finishing the six-month period up 20%.
The Fund is overweight economically sensitive sectors such as Financials, Energy, and Materials. Hence, over the past two quarters, the Fund outperformed both the MSCI World (by 19 percentage points) and the MSCI World Value (by 12 percentage points).4
Going forward, we believe recent trends have significant room to continue. First, while the recent recovery in value's performance has narrowed the valuation gap between value and growth stocks, that gap remains significant, at almost three standard deviations above historic averages. Perhaps more importantly, the Fund's holdings continue to trade at a meaningful discount to both the broad-based market and value universe: 13.3 times forward earnings compared to 20.3 times for the MSCI World and 15.5 times for the MSCI World Value.5 Lower starting valuations have historically been followed by attractive long-term returns.
Second, the current backdrop of high consumer savings rates, pent-up demand, rising interest rates, and higher energy prices is very encouraging. As more of the world population becomes vaccinated, economic activity could accelerate much more than expected. Our portfolio is comprised mostly of companies with strong franchises that would benefit from long-term economic growth. While we recently trimmed the Fund's Financials and Energy holdings as share prices increased, the Fund remains significantly overweight these economically sensitive sectors: 27.2% in Financials (compared to 13.7% in the MSCI World) and 7.0% in Energy (compared to 3.2% in the MSCI World).
Third, we believe that many of the high-valuation technology companies that have influenced overall equity market returns have extreme valuations reflecting high expectations. They have benefited from lower interest rates and COVID-19 tailwinds, both of which look likely to change from here. Expectations could also reset in the face of mounting competitive, technological, and regulatory threats.
Lastly, we would be remiss not to point out that as active value investors, we define value on an individual stock investment basis, weighing fundamentals against valuation. While the wide valuation gaps we are witnessing in value versus growth indices suggest plenty of ongoing opportunity for value investors, these benchmark categories do not define our investable universe. Instead, we optimize the portfolio based on relative valuation opportunities available in the market. It is for this reason that Information Technology, for example, was the second-largest contributor to the Fund's outperformance in the first quarter of 2021. The Fund's Information Technology holdings returned 14% against the benchmark sector return of 1%, resulting in meaningful contribution from within an expensive sector. It also explains the Fund's holdings in high-growth companies such as Microsoft (MSFT, Financial), Alphabet (GOOG, Financial), Facebook (FB, Financial), Alnylam (ALNY, Financial), Charter Communications (CHTR, Financial), and Alibaba (BABA, Financial).6 In fact, about half of the Fund is invested in innovation-driven areas of the market, including Technology, Internet, Media, and Biotechnology; but importantly, through the lens of attractive valuations relative to fundamentals evaluated on a stock by stock basis. This is active stock selection.
We believe patience, persistence, and a long-term investment horizon are essential to investment success. We encourage our shareholders to take a similar view. Thank you for your continued confidence in Dodge & Cox.
First Quarter Performance Review
The Fund outperformed the MSCI World by 6.7 percentage points during the quarter.
Key Contributors to Relative Results
- The Fund's average overweight position (8% versus 3%) and holdings in the Energy sector (up 38% compared to up 22% for the MSCI World sector), the MSCI World's best-performing sector, had a positive impact. Occidental Petroleum (OXY, Financial), Ovintiv (OVV, Financial), and Suncor Energy (TSX:SU, Financial) were strong performers.
- In Information Technology, the Fund's strong stock selection (up 14% compared to up 1% for the MSCI World sector) also helped relative performance.
- The Fund's average overweight position in the Financials sector (29% versus 13% for the MSCI World sector) also helped. Wells Fargo (WFC, Financial) and Capital One Financial (COF, Financial) were among the contributors.
- Glencore was an additional contributor.
Key Detractors from Relative Results
- In Health Care, the Fund's average overweight position (15% versus 13% for the MSCI World sector) was a modest detractor from results. Novartis (NVS) and GlaxoSmithKline (GSK) lagged.
- Additional detractors included Itau Unibanco (ITUB), Credit Suisse (CS), Charter Communications, and Credicorp (BAP).
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 The MSCI World Growth Index had a total return of 89.78% from December 31, 2016 to September 30, 2020 compared to 8.63% for the MSCI World Value Index.
3 Generally, stocks that have lower valuations are considered "value" stocks, while those with higher valuations are considered "growth" stocks.
4 The Dodge & Cox Global Stock Fund had a total return of 38.45% from September 30, 2020 to March 31, 2021 compared to 19.57% for MSCI World Index and 26.80% for the MSCI World Value Index.
5 Unless otherwise specified, all weightings and characteristics are as of March 31, 2021.
6 The use of specific examples does not imply that they are more or less attractive investments than the portfolio's other holdings.
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.
