Market Commentary
Global equity markets increased in the fourth quarter of 2023, as markets anticipated lower interest rates on the back of decelerating inflation. As a result, both U.S. and international markets posted strong returns for the full year, with the S&P 500 Index2 up 26.3% and the MSCI ACWI ex USA Index3 up 15.6%.
The return for the MSCI ACWI was bolstered by the dramatic rise of the “Magnificent Seven” stocks and their respective sectors: Information Technology (Microsoft, Apple, and NVIDIA), Communication Services (Alphabet and Meta), and Consumer Discretionary (Amazon and Tesla). These seven stocks accounted for 16.9% of the MSCI ACWI's market capitalization at year end, but contributed 41.8% of the MSCI ACWI's 2023 return, after appreciating 75.8%.
As a result, global growth stocks4 outperformed value stocks in the fourth quarter and year.5 The valuation disparity between value and growth stocks remains wide, with the MSCI ACWI Value Index6 ending the year at 12.6 times forward earnings7, a significant discount to the MSCI ACWI Growth Index8 at 24.0 times.
Portfolio Strategy
The Fund delivered strong absolute returns of 20.3% for the year, despite being underweight the Magnificent Seven, as our positioning in other parts of the market also delivered strong results.
At Dodge & Cox, we focus on researching individual companies with strong business fundamentals and attractive valuations. Our experienced investment team's long-term orientation and deep institutional knowledge enable us to look past near-term pessimism— or optimism—to unearth opportunities that may not be already well appreciated by the market. We believe this combination provides a compelling foundation for long-term returns.
For example, during the U.S. regional banking crisis and concerns about global financial contagion in the first half of 2023, we added to the Fund's Financials holdings. Financials then became the Fund's top-contributing sector for the full year (up 23.8% versus up 16.3% for the MSCI ACWI sector). Significant holdings and contributors included UBS Group and Banco Santander (up 70.3% and 44.3%, respectively), while Brazilian holdings XP and Itau Unibanco also performed strongly (up 79.6% and 53.6%, respectively).9 Earlier in the year, the Fund also started a position in Truist Financial, a regional bank that trades at an attractive valuation for a highly profitable bank with strong franchises in fast growing U.S. geographies. On strength in the sector, we subsequently trimmed several Financials holdings—including UBS Group, Banco Santander, and Jackson Financial—and redeployed the proceeds into other areas of the portfolio. The Fund continues to have an overweight in Financials (30.6% versus 15.9% in the MSCI ACWI), where we believe risk/reward profiles look attractive, supported by resilient balance sheets, improved profitability, attractive capital return, and inexpensive valuations.
We also found opportunities in more defensive parts of the market. The Health Care sector received the biggest adds in both the fourth quarter and year, including new positions in Avantor, Baxter, Zimmer Biomet, and Neurocrine Biosciences. Outside of Health Care, we initiated a position in International Flavors & Fragrances (IFF), a global leader in selling flavors, scents, and other key ingredients to food, beverage, and consumer products companies. In contrast, the Fund reduced exposure to companies such as Broadcom, VMware, Microsoft, Alphabet, and Meta during the year, based on our assessment of relative prospects.
We remain enthusiastic about the Fund's portfolio, which trades at 11.0 times forward earnings and is diversified by sector, geography, and investment thesis. We encourage shareholders to remain focused on the long term. Thank you for your continued confidence in Dodge & Cox.
Performance Review (Fund's Class I Shares vs. MSCI ACWI) Fourth Quarter
Key contributors to relative results included the Fund's:
- Financials holdings, including Charles Schwab (SCHW, Financial), Itau Unibanco (ITUB, Financial), Jackson Financial (JXN, Financial), and Capital One (COF, Financial);
- Consumer Staples holdings and underweight position in the sector; and
- Position in VMware (VMW, Financial).
Key detractors from relative results included the Fund's:
- Communication Services holdings, including Charter Communications (CHTR, Financial);
- Health Care holdings—particularly Sanofi (SNY, Financial)—and overweight position in the sector; and
- Positions in Occidental Petroleum (OXY, Financial), Suncor Energy (SU, Financial), and Standard Chartered (LSE:STAN, Financial).
2023
Key contributors to relative results included the Fund's:
- Financials holdings—including UBS Group (UBS, Financial) and XP (XP, Financial);
- Holdings and underweight position in Consumer Staples10;
- and Positions in VMware, General Electric (GE, Financial), and FedEx (FDX, Financial).
Key detractors from relative results included the Fund's:
- Underweight position in Information Technology, the best-performing sector of the market, and selected holdings, such as Microsoft (MSFT, Financial);
- Consumer Discretionary holdings, including JD.com (JD, Financial); and
- Positions in Occidental Petroleum (OXY, Financial), Charles Schwab, Ovintiv (OVV, Financial), and Sanofi.
The information provided is not a complete analysis of every material fact concerning any market, industry or investment. Data has been obtained from sources considered reliable, but Dodge & Cox makes no representations as to the completeness or accuracy of such information. The information provided is historical and does not predict future results or profitability. This is not a recommendation to buy, sell, or hold any security and is not indicative of Dodge & Cox's current or future trading activity. Any securities identified are subject to change without notice and do not represent a Fund's entire holdings. Dodge & Cox does not guarantee the future performance of any account (including Dodge & Cox Funds) or any specific level of performance, the success of any investment decision or strategy that Dodge & Cox may use, or the success of Dodge & Cox's overall management of an account.
The Fund invests in securities and other instruments whose market values fluctuate within a wide range so your investment may be worth more or less than its original cost. International investing involves more risk than investing in the U.S. alone, including currency risk and a greater risk of political and/or economic instability; these risks are heightened in emerging markets. The Fund may use derivatives to create or hedge investment exposure, which may involve additional and/or greater risks than investing in securities, including more liquidity risk and the risk of a counterparty default. Some derivatives create leverage.
