The Dodge & Cox Stock Fund had a total return of –1.3% for the third quarter of 2021, compared to 0.6% for the S&P 500 Index and –0.8% for the Russell 1000 Value Index (R1000V). For the nine months ended September 30, 2021, the Fund had a total return of 24.4%, compared to 15.9% for the S&P 500 and 16.1% for the R1000V.
Investment Commentary
After posting five quarters of positive returns, U.S. value stocks2 declined and underperformed growth stocks during the third quarter of 2021. Concerns about the COVID-19 Delta variant, rising inflation, slowing growth, and looming monetary tightening by the Federal Reserve weighed on the U.S. stock market. On a positive note, successful vaccination efforts have advanced the timeframe for easing the impact of the COVID-19 pandemic. Longer term, variants will likely be more manageable due to vaccine efficacy, novel therapies, and high immunity levels.
The U.S. equity market appears fully valued. The Fund’s portfolio continues to be very different from the market, trading at a meaningful discount to both the broad-based and value indices (13.1 times forward earnings compared to 20.8 times for the S&P 500 and 16.6 times for the R1000V).3 The valuation gap between value and growth stocks remains wide, with the Russell 1000 Growth Index trading at 29.2 times forward earnings.
The Fund is overweight low-valuation stocks that stand to benefit from accelerating economic growth, and underweight growth stocks, which we believe are more at risk due to their high valuations and lofty expectations for future performance. During the third quarter, we added to the Fund’s holdings in the Health Care sector based on their attractive valuations, durable business models, and several company-specific factors. Our two largest adds in the sector were to our positions in Sanofi and Cigna.4
Sanofi (SNY, Financial) (3.5% position) is a diversified, global pharmaceuticals company with leading positions in vaccines, consumer health products, rare diseases, and emerging markets. Despite a favorable business mix, Sanofi has underperformed its peers in new product development, commercial execution, and profit growth. A new management team, recruited in 2018-19, has made progress turning the company around. Its drug pipeline is improving, targets for higher margins are being met, and earnings per share are growing. Sanofi also pays a 4% dividend yield, maintains a strong balance sheet, and has relatively low exposure to potential pressures from U.S. drug pricing.
Cigna (CI, Financial) (2.5% position) is one of the largest and most diversified health care services organizations in the United States. The stock has underperformed recently due to weak financial results, which included higher than expected medical costs. Nevertheless, the company continues to work towards its 10-13% annual earnings growth target, generates significant cash flow, and has plans to deploy capital to shareholders through debt repayments, share buybacks, and a newly announced dividend program. Cigna trades at an attractive valuation of nine times forward earnings.
Going forward, we remain optimistic about the long -term outlook for the Fund’s portfolio. We believe interest rates could be higher in the coming years, and the Fund’s portfolio should benefit from its overweight position in Financials. Even if interest rates don’t rise, the Fund could still benefit from wide valuation spreads returning to more historically normal levels. While Financials is an important component of the portfolio, the Fund is diversified and well balanced with various investment themes.
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.
Third Quarter Performance Review
The Fund underperformed the S&P 500 by 1.9 percentage points during the quarter.
Key Detractors from Relative Results versus the S&P 500
- Returns from holdings in the Health Care sector (down 6% versus up 1% for the S&P 500 sector), combined with a higher weighting, hurt results. Cigna, Sanofi, Novartis (NVS, Financial), and Incyte (INCY, Financial) lagged.
- FedEx (FDX, Financial), HP Inc. (HPQ, Financial), Gap (GPS, Financial), and Occidental Petroleum (OXY, Financial) were also key detractors.
Key Contributors to Relative Results versus the S&P 500
- The Fund’s overweight position in Financials helped results. Capital One Financial (COF, Financial) and Wells Fargo (WFC, Financial) performed well.
- Other key contributors included Fox Corp. (FOX, Financial) and Dell Technologies (DELL, Financial).
The Fund underperformed the R1000V by 0.5 percentage points during the quarter.
Key Detractors from Relative Results versus the R1000V
- Stock selection in Health Care was negative (holdings down 6% versus flat for the R1000V sector). Cigna, Sanofi, Novartis, and Incyte were particularly weak.
- FedEx, HP Inc., and Gap were also key detractors.
Key Contributors to Relative Results versus the R1000V
- The Fund's holdings combined with higher weighting in the Communication Services sector (up 2% versus down 3% for the R1000V sector) helped performance. Alphabet (GOOG, Financial) and Fox Corp. were key contributors.
- Returns from holdings in Information Technology (up 1% versus down 2% for the R1000V sector), combined with a higher weighting in the sector, added to results. Dell Technologies and Microsoft (MSFT, Financial) performed well.
- The Fund’s holdings and overweight position in Financials (up 3% versus up 2% for the R1000V sector) had a positive impact. Capital One Financial and Wells Fargo were particularly strong.
Year-to-Date Performance Review
The Fund outperformed the S&P 500 by 8.5 percentage points year to date.
Key Contributors to Relative Results versus the S&P 500
- A higher weighting and returns from holdings in the Financials sector (up 42% versus up 29% for the S&P 500 sector) added significantly to results. Notable contributors included Capital One Financial, Wells Fargo, Charles Schwab (SCHW, Financial), and MetLife (MET, Financial).
- The Fund's overweight position and holdings in Energy (up 47% versus up 43% for the S&P 500 sector) helped results. Occidental Petroleum was a standout performer.
- Stock selection in the Information Technology sector was positive (up 18% versus up 15% for the S&P 500 sector). Dell Technologies and Hewlett Packard Enterprise (HPE, Financial) performed well.
Key Detractors from Relative Results versus the S&P 500
- The Fund's holdings and overweight position in Health Care (up 5% versus up 13% for the S&P 500 sector) hurt results. Novartis, Sanofi, and Cigna were especially weak.
- Other key detractors included FedEx, Microsoft, and Cognizant Technology Solutions (CTSH, Financial).
The Fund outperformed the R1000V by 8.3 percentage points year to date.
Key Contributors to Relative Results versus the R1000V
- The Fund's holdings and overweight position in Financials (up 42% versus up 30% for the R1000V sector) added significantly to results. Top contributors included Capital One Financial, Wells Fargo, Charles Schwab, and MetLife.
- Returns from holdings in Communication Services (up 26% versus up 6% for the R1000V sector), combined with a higher weighting in the sector, contributed. Alphabet and Fox Corp. were strong.
- The Fund’s overweight position and holdings in Energy (up 47% versus up 44% for the R1000V sector) had a positive impact. Occidental Petroleum was a standout performer.
Key Detractors from Relative Results versus the R1000V
- The Fund’s Health Care holdings (up 5%) lagged the R1000V sector (up 12%). Novartis, Sanofi, and Cigna performed poorly.
- Other key detractors included FedEx and Cognizant Technology Solutions.
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. The Russell 1000® Value Index is composed of those Russell 1000® companies with
lower price-to-book ratios and lower forecasted growth values.
2 Generally, stocks that have lower valuations are considered “value” stocks, while those with higher valuations
are considered “growth” stocks.
3 Unless otherwise specified, all weightings and characteristics are as of September 30, 2021.
4 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.
