The Dodge & Cox Stock Fund’s total return was 5.8% for the fourth quarter of 2021, compared to 11.0% for the S&P 500 Index and 7.8% for the Russell 1000 Value Index (R1000V). For the twelve months ended December 31, 2021, the Fund generated a total return of 31.7%, compared to 28.7% for the S&P 500 and 25.2% for the R1000V.
Investment Commentary
In 2021, the broad-based U.S. equity market posted an exceptionally strong return: the S&P 500 was up 29%. For value versus growth stocks, however, it was a tale of two halves.2 During the first half of the year, U.S. value stocks appreciated significantly and outperformed growth stocks. In the second half, however, value stocks underperformed as COVID-19 variants disrupted the economic reopening in the United States. While absolute returns were positive, investors have expressed concerns about rising prices and wages, fading fiscal stimulus, and looming monetary tightening by the Federal Reserve. Inflation is now at levels last seen in the 1980s, and the Fed has accelerated plans to raise interest rates in 2022. Strong consumer balance sheets and easy access to credit have
supported consumer demand, but supply chain bottlenecks and labor market frictions have constrained supply and propelled prices higher. The U.S. equity market appears to be fully valued.
The Fund’s portfolio continues to look very different from its benchmarks, trading at a meaningful discount to both the broad-based and value indices (13.3 times forward earnings compared to 22.1 times for the S&P 500 and 16.9 times for the R1000V).3 With the Russell 1000 Growth Index trading at 31.6 times forward earnings, the valuation gap between U.S. value and growth stocks is exceptional and widened further during the fourth quarter.
The Fund is overweight low-valuation stocks, which we believe are positioned 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 2021, as the Fund’s holdings in the Financials and Energy sectors performed strongly, we sold JPMorgan Chase and trimmed other positions based on their valuations.4 We also added significantly to the Fund’s holdings in the Health Care and Communication Services sectors based on their attractive valuations and durable business models, as well as several company-specific factors. In Health Care, we started two new positions—Regeneron Pharmaceuticals (REGN, Financial) and Elanco Animal Health (ELAN, Financial)—and added to Cigna (CI, Financial), Gilead Sciences (GILD, Financial), GlaxoSmithKline (GSK, Financial), Incyte (INCY, Financial), Novartis (NVS, Financial), Roche Holding (XSWX:ROG, Financial), and Sanofi (SNY, Financial). In Communication Services, we added meaningfully to Charter Communications (CHTR, Financial), Comcast (CMCSA, Financial), and T-Mobile (TMUS, Financial) U.S., among others.
We are encouraged by the Fund’s absolute and relative returns in 2021. Going forward, we continue to be optimistic about the long-term outlook for the Fund. Value has been out of favor for over a decade and could take more than a year to recover, supported by still-wide valuation spreads. In the coming years, we believe interest rates may be higher, and the Fund’s portfolio is positioned to potentially benefit from its overweight position in Financials. Even if interest rates do not rise, the Fund could still benefit if currently wide valuation spreads return to more historically normal levels. While Financials holdings are an important component of the portfolio, the Fund is diversified and well balanced across a range of sectors and 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.
Fourth Quarter Performance Review
The Fund underperformed the S&P 500 by 5.2 percentage points during the quarter.
Key Detractors from Relative Results versus the S&P 500
- Returns from holdings in the Communication Services sector (down 5% versus flat for the S&P 500 sector), combined with a higher weighting in the Fund, detracted. Charter Communications, Comcast, DISH Network, and Fox Corp. were weak.
- The Fund’s overweight position in Financials hurt results. Capital One Financial and Wells Fargo performed poorly during the quarter.
- In Information Technology, the Fund’s holdings (up 14% compared to up 17% for the S&P 500 sector) and lower weighting hindered performance. VMware and Microsoft detracted.
Key Contributors to Relative Results versus the S&P 500
- The Fund’s holdings in the Industrials sector (up 12% versus up 9% for the S&P 500 sector) added to results. Johnson Controls International and FedEx performed well.
- Other key contributors included HP, Inc., Charles Schwab, and Juniper Networks.
The Fund underperformed the R1000V by 1.9 percentage points during the quarter.
Key Detractors from Relative Results versus the R1000V
- The Fund’s overweight position in Communication Services hurt results. Charter Communications, DISH Network, and Comcast lagged.
- Stock selection in the Consumer Discretionary sector was negative (holdings down 7% versus up 9% for the R1000V sector).
- In Energy, the Fund’s holdings (up 1% versus up 8% for the R1000V sector) and overweight position detracted. Occidental Petroleum was weak.
Key Contributors to Relative Results versus the R1000V
- The Fund’s holdings in Information Technology (up 14% versus up 7% for the R1000V sector), combined with an overweight position in the sector, added to results. HP, Inc. and Microsoft were main contributors.
- The Fund’s holdings in the Industrials sector (up 12% versus up 7% for the R1000V sector) added to results. Johnson Controls International and FedEx performed well.
2021 Performance Review
The Fund outperformed the S&P 500 by 3.0 percentage points in 2021.
Key Contributors to Relative Results versus the S&P 500
- In Financials, the Fund’s overweight position and holdings (up 48% versus up 35% for the S&P 500 sector) contributed significantly to results. Top performers included Wells Fargo, Capital One Financial, Charles Schwab, and Bank of America.
- The Fund’s higher weighting in Energy added to results. Occidental Petroleum performed well.
- Stock selection in the Industrials sector was positive (holdings up 33% versus up 21% for the S&P 500 sector). Johnson Controls International was particularly strong.
Key Detractors from Relative Results versus the S&P 500
- In Health Care, the Fund's holdings (up 15% versus up 26% for the S&P 500 sector) and higher weighting detracted. Sanofi, Novartis, and Cigna lagged.
- In Communication Services, the Fund’s overweight position and holdings (up 19% versus up 22% for the S&P 500 sector) hurt performance. Comcast and Charter Communications lagged.
The Fund outperformed the R1000V by 6.5 percentage points in 2021.
Key Contributors to Relative Results versus the R1000V
- In Financials, the Fund’s overweight position and holdings (up 48% versus up 36% for the R1000V sector) contributed significantly to results. Top performers included Capital One Financial, Wells Fargo, and Charles Schwab.
- The Fund’s holdings in Information Technology (up 36% versus up 17% for the R1000V sector), combined with a higher weighting, had a positive impact. HP Inc., Dell Technologies, and Microsoft performed well.
- Returns from holdings in Communication Services (up 19% versus up 1% for R1000V sector), combined with a higher weighting in the sector, benefited results. Alphabet was strong.
Key Detractors from Relative Results versus the R1000V
- In Health Care, the Fund's overweight position and holdings (up 15% versus up 24% for the R1000V sector) detracted. Novartis and Sanofi lagged.
- Returns from holdings in the Consumer Discretionary sector (up 2% versus up 27% for the R1000V sector) hurt results.
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 December 31, 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.
