The Dodge & Cox Stock Fund had a total return of 6.2% for the six months ended June 30, 2006, compared to a total return of 2.7% for the Standard & Poor’s 500 Index (S&P 500). The valuations of a number of the Fund’s holdings in the Industrials, Energy and Materials sectors have increased significantly during these recent years of economic expansion. On a price-to-sales measure, several companies were selling at or near their five-year highs during the first half of 2006, and we made the decision to sell Fluor, Rio Tinto and Amerada Hess.
Many of the Fund’s new purchases and additions were in Technology, Media and Health Care. For example, we started positions in Dell Computer and Echostar Communications, and added to the Fund’s holdings in Pfizer and Sanofi-Aventis. These companies are in sectors which have had some of the most dramatic re-valuations since the speculative equity market peaked in 2000. It has taken some years for those high valuations to decline to attractive levels, but we now believe that the lower investor expectations are more reasonable for some of these former “growth” companies.
Going forward, we are encouraged by the long-term economic prospects for both the United States and the developing world. Currently, the U.S. consumer represents about 20% of global GDP. Given the many years of high spending and consumption, the U.S. consumer clearly is not a source of “pent up” purchasing power, yet some of the worries about consumer spending appear to be exaggerated. While we expect the domestic consumer to continue spending apace, we believe that the incremental purchasing power gains of the consumer in the developing world will be even more conspicuous over the coming years. The developing world is home to roughly 5.5 billion people, many of whom enjoy increasing individual economic freedoms, often leading to growing per capita income and increasing prosperity. In our view, the consumer in the developing world is a powerful source of future economic growth, and many of the Fund’s holdings are positioned to take advantage of this opportunity.
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Many of the Fund’s new purchases and additions were in Technology, Media and Health Care. For example, we started positions in Dell Computer and Echostar Communications, and added to the Fund’s holdings in Pfizer and Sanofi-Aventis. These companies are in sectors which have had some of the most dramatic re-valuations since the speculative equity market peaked in 2000. It has taken some years for those high valuations to decline to attractive levels, but we now believe that the lower investor expectations are more reasonable for some of these former “growth” companies.
Going forward, we are encouraged by the long-term economic prospects for both the United States and the developing world. Currently, the U.S. consumer represents about 20% of global GDP. Given the many years of high spending and consumption, the U.S. consumer clearly is not a source of “pent up” purchasing power, yet some of the worries about consumer spending appear to be exaggerated. While we expect the domestic consumer to continue spending apace, we believe that the incremental purchasing power gains of the consumer in the developing world will be even more conspicuous over the coming years. The developing world is home to roughly 5.5 billion people, many of whom enjoy increasing individual economic freedoms, often leading to growing per capita income and increasing prosperity. In our view, the consumer in the developing world is a powerful source of future economic growth, and many of the Fund’s holdings are positioned to take advantage of this opportunity.
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